The Option Investor Newsletter Thursday 01-11-2001 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/011101_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 01-11-2001 High Low Volume Advance/Decline DJIA 10609.50 + 5.20 10638.00 10552.60 1.36 bln 1640/1255 NASDAQ 2640.57 +116.39 2661.93 2495.01 2.84 bln 2757/1163 S&P 100 693.40 + 8.62 696.47 679.45 totals 4397/2418 S&P 500 1326.82 + 13.55 1332.19 1300.80 64.5%/35.5% RUS 2000 483.86 + 8.41 484.53 474.45 DJ TRANS 3051.30 - 18.83 3073.72 3045.53 VIX 28.69 - 1.46 31.98 28.41 Put/Call Ratio 0.48 ************************************************************* Nasdaq makes it three in a row? The Nasdaq finally closed positive three days in a row for the first time since Labor Day. Unfortunately it may be very difficult to make it four. The big news after the close was not earnings but warnings. Hewlett-Packard and Gateway pulled drastic earnings warnings out of their hat to hammer stocks in after hour trading. Other than that it was a great day! Stocks were up across the board with the exception of the Dow until late afternoon when even it rallied to close modestly positive. The fast movers on the Nasdaq were breaking out of resistance and starting to form new up trends. Not all is rosy unfortunately. HWP announced a huge earnings warning after the close that reverses a earnings affirmation that they gave just two weeks ago. This is almost unheard of in investing circles. The strong language could have caused severe damage to the PC sector and all the sectors that feed of PC equipment. They cited "significant changes in market conditions." "Customers extremely cautious about IT spending" and "no material improvement until at least April." Three weeks ago that would have knocked the Nasdaq back to 1997. HWP stock got positively hammered after the close for a whopping -$2 drop. -$2 ?? Not to be out done Gateway also announced an earnings warning for all of 2001 citing "serious deterioration of PC demand from retail and commercial customers." Wow, a double whammy! GTW and HWP on the same day. GTW dropped -$3 in after hours! Only -$3, boy I bet that hurt! After the YHOO warning on Wednesday it dropped as expected to a low of $24.12 but bounced off the bottom to close at almost $26 and a loss of only -4.50. On a day you would have expected the Internets to do lousy all the majors rallied. AMZN +.50, EBAY +1.56, CMGI +.50, SFE +.69, SONE +1.35, VRSN +8. B2B, B2C, infrastructure, e-tail all finished higher. Chip stocks and cell phone makers also rallied. Considering the warnings from Motorola you would have expected them to be down. Instead NOK added +2.44, ERICY +1.63 and I won't even go into the chips stocks but all were up strongly. PMCS, AMCC, AMAT, KLAC, AMAT, NVLS all up strong. Strong on a day that Merrill said INTC and AMD estimates were too high. Do you see a trend forming here? CSCO was downgraded by several analysts after CEO Chambers said they were not immune to the slowdown and things could be a little rough going forward. Multiple downgrades after a warning from the CEO would normally have investors running for puts. CSCO gained almost +$3 today as investors decided that all the bad news was already priced in. Investor sentiment is obviously changing from the "take them out and shoot them" feelings from the last month. Nortel announced it was cutting about 4000 jobs after being hit by a slowdown in telecom spending. It gained +2.12 on the news. The fiber optic sector did not crash. DCLK announced earnings after the close and hit estimates but then warned that the rest of the year would be much worse. It gained +1.50 in after hours trading. RMBS reported earnings that were a penny light and the stock dropped over -$4 in after hours. SDRAM chip prices are falling and because of how they account for income on a delayed basis they have yet to feel the pain of the slowdown. This led analysts to forecast that the next couple of quarters would be a problem and that is why they fell. ARBA announced earnings that beat estimates by +150%. OK it was $.05 vs $.02 but that percentage just sounded so good! Even with revenues increasing +625% over the same quarter last year and increased guidance going forward ARBA lost -.31 in after hours trading. It was up over +35% in the last three days so I am sure that was just profit taking. Still ARBA has undoubtedly set the tone for the B2B sector going forward. The SOX closed over resistance that has held since last November. But PC sales are slowing! Did I miss something? This bullish move on a bearish sector comes even after the Motorola warning. Investor sentiment is changing. Investors have decided that PC sales will be better eventually and are scooping up these stocks at bargain prices. The NDX closed over 2500 and is poised to challenge the next resistance at 2627. The highs on tech stocks dating back to Dec-20th are falling left and right. Defensive stocks are heading south at a high rate of speed even when new highs are beating new lows by 10:1. Advance declines have been mostly positive for the last two weeks even though the indexes have been showing losses. The term stealth rally has been abused by talking heads on the networks but that is exactly what has been happening. Have you noticed the new trend of afternoon rallies instead of afternoon selling? Retail traders buy in the morning, institutional traders buy after lunch. Money IS coming into the market. Bulls are coming out of the wood work. Joe Battapaglia said today that he thought the Nasdaq would gain +70% this year. Easy there big fella! Lets don't jinx this three day rally with a Nasdaq 4500 call just yet! To temper this bullishness Phil Roth at Dean Whitter said he expected new lows on the Nasdaq soon. Who do you want to believe? Volume today was outstanding at 2.8 billion on the Nasdaq and 1.36 bil on the NYSE. Stocks are moving up on bad news. Dare we call it a real rally? If it looks like a duck, walks like a duck and quacks like a duck it must be a duck. The confirmation in my opinion is the futures tonight. Currently both the S&P and the Nasdaq futures are UP! Yes, I said up! HWP and GTW both announced horrible warnings and the futures are up! The Nasdaq is up +17% since last Wednesday's low and the futures are still up after a warning. No signs of profit taking and no terrified rush for the exits. Yes, ladies and gentlemen, sentiment has changed. The historical rally for this week started one day late but has finally surfaced in spite of terrible negative news. Funds are putting money to work in the markets and shorts are running for cover. Has investor nirvana arrived? Before selling your kids to raise cash be advised there is likely another dip in our future. I would wait for it and I would buy it. I would not rush out in the morning if the futures hold and buy the open. Friday could provide investors with the incentive to take some of those profits and go home for the weekend gloating. That is fine, let them gloat and we can gloat that we picked up some stocks a little cheaper. Did I mention that we have the PPI Report and Retail Sales Report Friday morning? I can't imagine any numbers that could blunt this incredible bullishness but stranger things have happened. It has been my experience that when things look too good too be true, they probably are and something out of the blue drops the market for a loss. Let's hope that this time it really is our turn to make money and laugh at the bears. The Fed is on our side, at least until the PPI in the morning. Consider any dip a buying opportunity but buy selectively! Bargain hunters are likely to come back into the market at the close expecting a continuation rally next week. That would be a signal to buy if you see that starting to happen. With option expiration Friday next week you can probably pick up some January options slightly out of the money and cheap if we get that dip. Aggressive traders could try some lottery plays there. I love expiration week! Good Luck, Sell too soon! Jim Brown Editor ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.sungrp.com/tracking.asp?campaignid=1345 ************************************************************ **************** MARKET SENTIMENT **************** Exuberance May Prevail By Austin Passamonte NASDAQ markets enjoyed their first three consecutive sessions of daily gains for the first time in 4 1/2 months. The first time! Such is the stuff market bulls have been waiting for. Even multiple surprise warnings from box makers and their kin failed to keep post-market prices down. Nor have futures prices dove in fear, either. We are witnessing a lack of sellers, a new dismissal of bad news and clear bullish fundamental divergence to suggest a powerful rally could emerge at any time. We didn't say it was justified. 2001 earnings will remain bleak at best. The Fed can cut rates at every FOMC meeting until the cows come home but it won't help the first two quarter's results for most companies this year. Too late for that. However, these markets discount future events and traders might just decide that the future looks bright even if it cannot be seen from here. No matter; Market Sentiment does not care which way the markets go or how/why they get there. All we care about is joining them for the ride! There is plenty of overhead resistance to fight through, but all of the big indexes (SPX, NDX & OEX) are above their 10 and 20 DMAs right now. The Dow lies below all meaningful M/As until a break above the 10,725 level once again. Most of these indexes are now approaching or pressing upper trendlines of resistance dating back since early September or before. It will take a break out of these descending channels to confirm bullish conviction. Keep in mind that descending channels are merely "bull flags" waiting to pop. Failure to do so however would post another lower-high and dive the markets down once again. Tomorrow's session will be crucial to near-term strength. If the indexes shrug off such heavy bearish news, we could be off to the races heading into a long holiday weekend. Joe Battapaglia on CNBC predicted the NASDAQ could grow 70% by this year's end. That would be roughly 4,480 on the Comp... a number most bulls would love to see. The few remaining would like to see these levels far sooner and much more besides. Other technical & fundamental analysts believe the ultimate market bottom lies ahead and below levels currently hit. There is a strong case to be made for that point of view. However, option traders operate under the constraints of time. We want premium purchased to hold and premium sold to whither. What happens months from now cannot be our primary concern. Near-term action is threatening to break out of this bearish regime and make a long-suppressed run up the charts. Rational or otherwise, that's the way indications look from here. Sounds good to us - just pick a direction and go. As always, we'll do our very best to tag along and profit either way! ***** VIX Thursday 01/11 close: 28.69 30-yr Bonds Thursday 01/11 close: 5.48% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Thursday (01/11/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 730 - 715 13,744 1,624 8.46 710 - 695 15,498 6,252 2.52 OEX close: 693.40 Support: 690 - 675 18,173 10,139 .56 670 - 655 3,043 9,712 3.19 Maximum calls: 685/11,210 Maximum puts : 640/5,437 Moving Averages 10 DMA 686 20 DMA 688 50 DMA 710 200 DMA 764 NASDAQ 100 Index (NDX/QQQ) Resistance: 71 - 69 70,970 17,314 4.01 68 - 66 85,430 11,121 7.68 65 - 63 64,572 33,746 1.91 QQQ(NDX)close: 61.93 Support: 60 - 58 94,023 53,915 .57 57 - 55 47,819 43,511 .91 54 - 52 9,878 27,237 2.76 Maximum calls: 60/73,049 Maximum puts : 60/38,911 Moving Averages 10 DMA 59 20 DMA 60 50 DMA 67 200 DMA 85 S&P 500 (SPX) Resistance: 1400 16,185 9,174 1.76 1375 10,756 10,330 1.04 1350 37,983 31,340 1.21 SPX close: 1326.82 Support: 1300 6,864 14,724 2.15 1275 465 14,547 31.28 1250 1,720 13,303 7.73 Maximum calls: 1350/37,983 Maximum puts : 1350/31,340 Moving Averages 10 DMA 1315 20 DMA 1314 50 DMA 1348 200 DMA 1425 ***** CBOT Commitment Of Traders Report: Friday 01/05 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 -2008 -818 -2167 -2589 Total Open interest % (-25.35%) (-12.51%) (-9.59%) (-11.60%) net-short net-short net-short net-short NASDAQ 100 (Current) (Previous) (Current) (Previous) Open Interest Net Value -1028 +1428 -1825 -2569 Total Open Interest % (-4.77%) (+8.65%) (-3.45%) (-4.43%) net-short net-long net-short net-short S&P 500 (Current) (Previous) (Current) (Previous) Open Interest Net Value +59586 +67807 -81851 -85776 Total Open Interest % (+29.89%) (+38.16%) (-11.09%) (-11.94%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: The Commercials show a minimal decrease in their net-short positions on the DJIA, NASDAQ 100, and the S&P 500 Small Specs show a dramatic increase their net-short positions on the DJIA. 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/011101_1.asp ************** TRADERS CORNER ************** Shark Attacks, Misquotes, and A Tough Sector By Molly Evans They say that forewarned is forearmed. More seasoned traders had warned me that it's dangerous to take a position in thinly traded markets. Now that I have taken my first losing trade of the new year just this morning, I have learned that lesson. Entering into a trade where there is no open interest puts you against the market maker and you had better know that you're right on the call or you're toast. It's like swimming alone in the ocean amongst sharks. I've survived the bite but am still angry with the whole trade. I've been pretty suspicious about the banking industry. I believe they are suffering just as badly with the rest of corporate America in this troubled economy. It wouldn't surprise me at all to learn that Mr. Greenspan learned of some internal maelstrom in large corporate banks convincing him of the need for an emergency interest rate cut. Of course, that's already been cycled in the news stories for a week now but I had my suspicions prior and was just waiting for the opportune moment to pounce. The banking indices had started to roll over when the rate cut was announced and investors certainly love financials in a lowered interest rate environment, so the index ran right to the top. It was a get in first, ask questions later deal. Consequently, the rally we all know, was broadly sold off. The financial sector was no exception. The pressure mounted when a fast rumor made the rounds last Friday morning that Bank of America was in a jam because of the defaults of utility companies in California. Trading was halted in the stock pending news which was, of course, BAC denying any problems whatsoever. With my negative bias on the sector and then hearing this news, I knew the time had come. I immediately put in the bid on some BIX.X puts as I am trading broader indices and sectors to dodge the bullets of independent equities these days. As I said, there was currently no open interest in the put contract I was eyeing and worse yet, the spread was $4.00. However, I thought I was really right on this call. I would pay the ask and eat the spread afterall it wouldn't matter that much anyway in the coming days. This is what you get for haste. When I punched in the symbol on my Preferred account, I got an ask price and paid it. Upon the fill of the trade, it is posted into a "positions" column and registers how much you're up or down on it. I was immediately down $7.00 per contract because they had already dropped the price of the option $3.00 on my fill and with the spread difference, I was deeply in the hole. I knew it was a very bad omen. The index did continue to fall and I had the chance to get out even and then get out at a small profit but according to my New Year's resolutions I will trade by the charts. My entry was at 653.50. Yesterday, the banking index rose 3% led by an upgrade of JPM and every analyst on CNBC talking about how financials are so robust in reduced interest rate environments and all the garble. They swept those BAC rumors right under the rug and since the Long Term Capital Management fiasco back in the late 90s, we don't talk about derivative problems like that. So, they rose but they didn't take out the preceding day's high or close. "Fine," I thought, "the Dow is looking troubled, the markets will be overbought here soon, and the JPM upgrade will be forgotten quickly." The troubling thing was that the price on my options were deteriorating rapidly even though the index remained below that point. I hated this trade from the moment I got the cheated fill but still I stubbornly held. This morning, my quote for the BIX.X was -10.77 on the open. "Great, glad I didn't blow them out yesterday." I thought. But then I looked in my "positions" on Preferred and saw that the option quote was down a full 25%. I hit the refresh. Down 30%. What? I called the broker. They also had the index as being down 10.77 but what were $30.00 options on the close of yesterday were now options bid at $20.00. Preferred had the same quote on the index as I did on Q charts - 636.52. The broker was as perplexed as I so he called the CBOE on my behalf. Sure enough, it was a misquote on the index, not the options. The index stood at 655.35 which has now taken out the high of yesterday and I am wrong on the call. I now don't really know what the chart looks like but the bid is dropping and the trade has sliced right through my mental stop loss limit. I tell him to sell on the bid. Sick. Finally my quotes updated and I see I sold when the BIX.X was at the high of the day. Isn't that always the case? In mid-day action those puts are now bid $6.00 higher than where I sold. Yeah, I'm mad. What can you do though? They were January puts, they'd gone through my stop limits and had broken the downtrend, if but only for a moment. It was the moment that I had to decide. It could have gone the other way just as easily. The really maddening thing is, I think I'm still right fundamentally (don't we always?). Where there is smoke, there is usually a fire. However, I'm leaving for a vacation this weekend and will be far away from a computer with no access to monitor any market activity next week. I wanted to be without any open positions. It brings to mind what Ed Seykota said to author Jack Schwager in "The New Market Wizards" book, "Everybody gets what they want out of the market." I wanted out and got out. Let this be a lesson to both you and myself: don't trade against the market makers in no open interest contracts. If you don't like the trade from the beginning, get out. I had my chances at even and at profit and I didn't. That's my own fault. It won't happen again. Have a great next week! I know I will! ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1359 ************************************************************** 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: ***** COST $41.31 +0.63 (+0.50) After breaking out from the tight trading range Costco had been trapped in for over six months, the stock is now consolidating in a range from support at the 10-dma of $40.83 to resistance around $43. However, volume is considerably lower than that which drove the stock higher in the last few weeks. Costco has lost momentum for the time being, so we are taking our profits and moving on to new plays. ITW $60.94 -0.69 (-2.31) The rotation into the tech sector over the last three sessions has led to an extended pullback into shares of Illinois Tool Works. Seen as more of a defensive play, ITW has suffered from the flight of capital into the tech sector. That rotation caused ITW to slip below our stop at $61 in today's session while the Nasdaq sailed higher. In light of the stop violation and resurgent tech sector, we're dropping coverage on ITW tonight. Use any bounce early tomorrow to exit existing positions. A bounce in defensive names early Friday is likely given the tech warnings after the bell today. VC $13.75 +0.25 (-0.25) We initially picked up coverage on VC in an attempt to capitalize on a rebound in the automotive sector and because of its low price and cheap options. But a rebound in the auto sector has not yet materialized, which has led to sideways trading in VC. In light of the lack of movement, we're dropping coverage today. Use any advance above $14 to exit positions. NKE $57.75 -0.38 (+2.88) The S&P Retail Index finished today slightly higher, yet NKE finished slightly lower. We don't like the divergence. Moreover, since hitting a near-term peak at $60 on Tuesday, NKE has slid lower for two consecutive sessions despite the strength in the broader markets. Although NKE's two-day slide may be no more than a natural reaction, we're choosing to close positions early tomorrow and lock in our gains. Use a pop above the $58 level to exit any open positions early Friday morning. MAR $44.56 -0.25 (-0.31) Since breaking out to all-time highs last week, MAR has been spending this week in consolidation mode. We're disappointed with the pullback so far this week, but are still encouraged with MAR's strong technical position. Nonetheless, we are dropping coverage this evening and are no longer initiating new positions. Open positions may be exited on any strength early tomorrow. However, if MAR continues to trade above $44, traders may consider holding positions until the stock trades back above $46. ASD $49.94 -0.81 (-3.00) After staging a very impressive run since mid-December, it appears ASD is due for consolidation. The stock nearly reached the $54 level late last week, but has fallen in four consecutive sessions so far this week. Trading activity has remained somewhat active during the pullback this week, which is disconcerting. Instead of hanging around during consolidation, we're dropping coverage on ASD tonight and would exit any open positions on a bounce off the 10-dma at $49.75 early Friday. PPG $44.88 -1.38 (-3.13) Yesterday morning, Salomon Smith Barney cut its fourth quarter and 2001 earnings estimates for PPG. The brokerage firm also lowered its rating to Outperform from Buy, based on a slowdown in auto sales. Although the news didn't have much of an impact yesterday, it appeared the sellers showed up today, and carried PPG below our protective stop at the $45 level. We're dropping coverage on PPG tonight due to the negative press and would exit positions on any bounce or strength presented early tomorrow. USB $30.06 -0.06 (-0.63) Despite strong gains in bellwethers such as Citigroup and J.P. Morgan, several bank issues ended today's session in negative territory. One such issue, was our call play on USB. We didn't like the divergence between the smaller regional banks and the big money centers today. Although USB's pullback today to the $30 level may be a sign of consolidation, we're dropping coverage on the play due to its inability to participate with the larger banks. PUTS: ***** CALP $33.63 +2.25 (+3.06) With the NASDAQ and the Biotech sector putting together a 3-day rally, our play in CALP has taken an upturn, making it look like it has seen its lows for the near term. While our stop at $35 hasn't been triggered yet, the fledgling rally over the past two days has come on strong volume (nearly double the ADV), and with Stochastics poking above the oversold level, it shows signs of continuing and taking out our stop prior to the weekend. Rather than wait for this event to occur, we will gladly take our profits and "sell too soon." *************************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=1382 ************************************************************ 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. 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The Option Investor Newsletter Thursday 01-11-2001 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/011101_2.asp ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.sungrp.com/tracking.asp?campaignid=1346 ************************************************************ ******************** PLAY UPDATES - CALLS ******************** KLAC $42.81 +3.31 (+5.81) A strong rally in the semiconductors helped to push KLAC above the critical resistance level of $42.50 for a nice breakout at the last hour of the trading day on Thursday. After $42.50 was cleared, it was smooth sailing up to the next resistance level at the 200-dma of $43.50. If this level is cleared, the next major resistance levels are found at $45, and $50. If the semiconductor sector continues to recover, KLAC should have no problem moving higher. Traders could take positions at current levels, or at a breakout over $45. Keep stops set at $38. SBC $52.38 +0.00 (+2.38) Three positive days in a row on the NASDAQ have helped to boost SBC gradually higher, and it has spent the past 2 days duking it out with the $52 resistance level. Telecom stocks have been in rally mode on the AT&T on Tuesday, helping SBC to claw its way higher. After moving up on the news Tuesday, our play has seen light volume (half the ADV today) and has been confined to a narrow trading range between $51-52 as investors wait for the next catalyst to help the stock clear current resistance. Earnings on January 25th might be just what will do the trick, so long as we don't get any negative developments in the Telecom sector. Watch the Telecom HOLDR (AMEX:TTH) for indications of sector strength before initiating new positions. The conservative approach will be to wait for a solid move through $52.50 on increasing volume before playing. Note that our stop has been moved up to $50, so while aggressive entries are possible on dips to the $50-51 range, beware of any selling that violates this support level. BRCM $115.81 +5.88 (+28.81) The positive price/volume action that attracted us to this play has not only endured, but has strengthened, with the stock breaking through the psychological $100 and formidable resistance at $105 yesterday, closing up $12.94 or over 13 percent on almost twice the ADV. Today BRCM continued to add to its gains, advancing another 5.34% on over 160% of ADV. With support in increments of $5 at $115, $110, and our new stop price of $105, a bounce off these levels could provide aggressive traders with potential entries on a pullback but as always, confirm a bounce with buying volume before taking a position. Moving average support from the 5 and 10-dma can be found at $100.63 and $96.36 respectively. If buying momentum carries over to tomorrow's session, then a break through $117 would allow more conservative traders to make a play, but be aware of resistance at $120 and the 50-dma looming overhead at $126.94. When initiating a play, make sure that the NASDAQ and Philadelphia Semiconductor (SOX) confirm positive direction. LRCX $21.94 +2.00 (+3.63) A quick dip to support at $17.75 on Wednesday morning allowed nimble traders to enter on what turned out to be an ideal entry point, as LRCX spent the rest of the day moving higher to close up $1 or over 5 percent on 150% of ADV, in sympathy with an advancing Chip sector. Today the stock made another show of strength, closing up over 10% on almost twice the ADV. In doing so, shares of LRCX are now back above the 100-dma line (now at $20.16) for the first time since June of 2000. Of course, this does not mean that proper entry points and risk management should be thrown out the window. Aggressive targets to shoot for can be found at the 100-dma, $20.50, the 5-dma at $19.67 and in increments of 50 cents down to our stop price of $18.50, entering only if bounces are accompanied by volume. If the stock takes out today's high of $22.62, this could allow for an entry on strength, but make sure that Merrill Lynch's Semiconductor HOLDR (SMH) is moving in the same direction. MER $73.75 +1.44 (+2.19) Good news was the theme yesterday, as the company was rated the top broker for municipal securities for insurance companies last year. As well, MER announced that they would be selling their energy unit to Allegheny as well as their retail brokerage to Investec. Investors liked the deals, as the move was made so that MER could get out of the volatile energy markets and focus on their core competency in securities. Less risk is always welcome news, as traders bid the stock up $2.06 or almost 3%. Volume was average but the bounce off support at $69 and close back above both the 5 and 10-dma (now at $71.82 and $70.81 respectively) was a welcome sign. Another test of these levels could allow for an aggressive entry. Support at $70, $69 and our stop price of $68 are also possible targets to shoot for. If buying volume increases, allowing MER to take out resistance at $75, this would be the signal for more conservative traders to jump in, but make sure peers GS and LEH are also moving in the same direction. SLR $38.62 +2.57 (+4.59) A more friendly environment, thanks to lower interest rates and analyst support from CIBC and Merrill Lynch were two of the reasons that led us to adding SLR to our call play list. While the stock was up only fractionally in yesterday's trading, we were impressed with its recent technical strength in breaking its long term downtrend line as well as its 50-dma on the backs of the 5 and 10-dma. Today the stock broke through resistance at $36.50 and with that, traders jumped in on mass, with SLR closing up over 7 percent on over 135% of ADV. Positive sector sentiment certainly helped, with competitors CLS, FLEX and JBL also moving strongly higher for the day. Aggressive entries can be found on bounces off support at $38, $36.50, the 5-dma near $36, the 10-dma at $38.40, the 50-dma at $34.27 and our stop price of $34. Continued buying pressure leading to a break above today's high of $36.02 could also be a signal to buy but make sure the NASDAQ and SLR's peers support the move. UBS $170.09 +2.17 (-3.82) Shares of UBS retreated $2.81 or 1.66 percent on Wednesday but after the recent run-up, a pause to refresh before continuing higher would not by surprising. Despite the down day, volume was only half the ADV suggesting that it was just routine profit-taking and the bounce off the 10-dma was also a good sign. Today UBS took back some of yesterday's losses, gaining 1.29 percent. Volume however, was anemic, less than 27% of ADV. At this point we advise caution and recommend entering only when volume picks up to the buy side. Another test of the 10-dma, now sitting at $167.84 is a possibility for entry. There is also support at $170 and more ideally, a successful bounce off our stop price at the $165 level would fill its recent gap. Such entries would be recommended only for high-risk players. For a much safer play, wait for strong buying volume to allow UBS to break through its 5-dma at $171.72, confirming direction with rivals such as BSC, LEH, MWD before taking a position. WCOM $21.94 +0.69 (+3.50) A break from its long-term downtrend line, improving sentiment in the Telecom sector and investor interest in high value low-PE Tech stocks are just three of the many reasons we added WCOM as a call play yesterday, with the stock advancing $1.44 or 7.26 on over 140% of ADV in Wednesday trading. While today's advance was a little more modest, up 3.25 percent on slighter higher than average volume, we'll gladly take the gains. Short term, WCOM can run to as high as $23, filling a gap made late last year, before encountering resistance. A break above $22 on volume could allow the stock to test $23 with a break above this point being a conservative entry point. For entries on pullbacks, look for support at $21, $21.50, the 5-dma near $20, and our stop price at $18.50, as well as the 10-dma at $18.30. In both cases, correlate entries with strength in Merrill Lynch's Telecom HOLDR (TTH). AEOS $48.75 +2.50 (+2.31) Shares of AEOS continued to make significant advances; particularly in today's session. AEOS rose as high as 6.8% on robust volume and lifted our confidence of a breakout through last Thursday's record high of $51.25. The ascending support levels at $48 and $49 offer prime entries into AEOS's impressive recovery. Traders might also consider target shooting intraday for a lower entry near the 5 & 10 DMAs ($47.18, 46.07), in an advancing market. We believe the interest rate easing should result in further appreciation over the short-term and thus; provide the opportunity to lock in gains. The more cautious approach would be to take profits as AEOS approaches the overhead resistance ($50) or simply wait for AEOS to rally through the immediate opposition before taking positions. Our stop is currently set at the $44 level to protect against a negative bias within the sector taking AEOS down for the count. CTXS $29.06 +1.31 (+2.38) CTXS literally rose to the occasion as selective tech stocks showed some spunk in the NASDAQ today. A nice 4.7% overall gain popped CTXS over the $29 mark. The bullish activity further demonstrated that the previous resistance at $28 should emerge as a reliable support level, intraday. Subsequently, we've raised our protective stop to $25 to reflect the higher trading levels. Still, the more cautious types may want to wait for CTXS to rally above the 200-dma line ($30.66) on increasing volume above 500 K. Yesterday, CTXS received a Buy reiteration and $30 price target from Lehman Brothers. Although the issue's technicals remain strong and analysts are upbeat; time is of the essence. Citrix Systems is scheduled to report on January 17th at 5pm EST. Please consider having all positions closed prior to the announcement to avoid any post-earnings' decline. SNPS $51.44 +1.38 (+3.44) We initiated coverage on SNPS on the basis of its strong wedge formation and the tightening consolidation at the $50 mark. The sharp momentum breakout through $48 and subsequent rallying above $50 and $51 offered convincing evidence going forward. Today's persistent flirting at $52 is quite bullish. It now appears there's more upside to come in a cooperating market environment. Traders who have a higher tolerance for risk may consider taking positions on deep pullbacks at the 10-dma ($48.49) or 5-dma ($49.38), but be cautious of a return to $45. If SNPS cannot close above this lower level of support, we'll exit the play in a flash. Being optimistic however, we're anticipating a bullish challenge of the current price level. A high-volume rally through $52 would be the cat's meow for the more cautious types. PLAB $30.50 +1.75 (+3.38) Chalk up another explosive move in the semiconductor sector to launch PLAB through a crucial level. The strong action above the 5-dma ($28.41) and $30 mark sets PLAB up for additional momentum gains in the short-term. As a result of today's 6.1% advance, an entry at the 200-dma, near $25, now poses additional risk - perhaps too much. We continue to maintain our stop at this previous level of resistance. The break through $30 provides some assurance that PLAB can progressive further if the NASDAQ cooperates and the Semiconductor Index (SOX.X) maintains its uptrend. In regard to the SOX.X, a break above 700 would be awesome! Another key factor effecting PLAB's recent advances has been the exceptional volume. In the past three sessions, the issue traded upwards of 3 to 4 times the ADV. Look for continued enthusiasm to generate additional gains. VZ $55.75 -0.44 (+1.19) At this point in the play, we must take a step out of the box and assess the situation. On one hand, a renewed interest in the telecom sector and AT&T's recent coverage certainly aided VZ's rise to a higher trading level. However, the 3 days of consolidation at $56 and $57 leaves us wondering if VZ has the vigor to breakout again. On the bright side, there's still plenty of time to trade VZ before it reports earnings on February 1st. But let's be cautious and pick our entries carefully. It may be wise to consider waiting for a definitive rally through $57 before taking additional positions. To protect profits, we've tightened our stop and raised it to $53. ******************* PLAY UPDATES - PUTS ******************* CSC $55.13 -0.13 (-2.50) In a true sign of weakness, CSC failed at several attempts to rally on one of the strongest market days we have had in some time. Wednesday's moves consisted of two rollovers from the $55 level, and subsequent sharp spikes down. On Thursday, CSC rolled over from $54.75 twice, and closed down. Considering Thursday's market, CSC should have been able to stage a strong recovery. This does not bode well for the short term action of this stock, and a market with a light rally or profit taking might easily plunge CSC below the $50 level. Consider taking positions on failed rallies from the 5-dma of $55, or a move below support at $52, but remain cognizant of overall market action, as puts can be dangerous in a market which is rallying. Keep stops at $59. PMI $52.25 -2.31 (-5.75) Did you catch that entry point this morning? PMI moved up sharply this morning, only to rollover just as sharply as the day wore on. Briefly moving over $55 before the bears returned, PMI came under heavy selling pressure (more than double the ADV), coming to rest at its lowest point since early July. After falling below the 200-dma (then at $58.63) last Friday, PMI has continued to slide lower, pressured by the sharply declining 5-dma (now at $55.31). Even gains across the board on the major indices couldn't prop up the share price, and despite nearing the lower Bollinger band at $51, it looks destined to continue its slide. The next support should materialize near $50, followed by $45. The bottom line is that as the economic slowdown is settling into our consciousness, concerns of an increase in loan defaults will continue to pressure the share price of PMI, which insures against defaults on mortgage loans, particularly in the secondary market. Earnings are set to be released on January 24th, but in the current environment, we don't expect much of an anticipatory rally ahead of the numbers. Conservative players will want to wait for a break below $52 before opening new positions, while more aggressive entries can be considered on any weak rally that fails to take out our $58 stop. CB $73.75 -0.56 (-1.38) Shares of Chubb continued to consolidate yesterday, after the huge sell-off of last week. Closing up fractionally on light volume, less than 80 percent of ADV, the recent movement has allowed enough time for the 5-dma to catch up with the stock price. Today was more of the same sideways movement in a tight range, with CB giving back yesterday's fractional gains. It is interesting to note that while volume was still below average, it picked up today, with a rally attempt foiled at the 5-dma line, now sitting at $74.73. Technically at this point, CB looks to be at a major crossroad. The proverbial coiling of the spring in shares of CB suggests a large move in one direction or the other forthcoming. A break below its 200-dma at $73.50 on volume would allow for an ideal entry on weakness. Another failed attempt to take out the 5-dma line or overhead resistance at $75 and our stop price at $77 would be a higher risk entry point. Look to peers CI and ALL to provide possible clues to the movement of CB, as sector sentiment could help push this play in our favor. P $54.63 +0.56 (-1.25) Connecting the highs since late December, it can be seen that shares of Phillips have been moving lower in a steeper downtrend channel. With oil prices depressed yesterday, P dropped $1 or 1.82 percent. Volume was light however, less than 75% of ADV. Today with a bounce in oil, the stock managed to squeak by with a fractional gain, closing up a little over 1 percent on 85% of ADV. Aggressive buyers could find potential entry points on failed bounces off the top of its downtrend channel, with resistance at the 5 and 10-dma at $55.11 and $55.81 respectively. Our stop price of $57 should also provide formidable resistance but make sure P continues to close below this level. A break below $54 on volume, confirmed by movement in the AMEX Oil Index (XOI) and rivals TX and XOM could allow for a safer play. IVX $33.01 +0.90 (+2.01) Let's keep a tight leash on IVX until it demonstrates more downside bias. While we continue to see IVX as a viable opportunity, recent action heralds the possibility of a bottom. Since Friday's bearish low of $30.15, IVX hasn't managed to trade below the $31 level. And on Wednesday, IVX managed to crack the 5-dma ($32.08) ceiling; although it has yet to see the topside of the revered 10-dma ($34.09) line or our $35 exit point. Look for convincing rollovers or a breakdown below $31 before you jump into this put play. If you have open positions, keep stops tight while the play unfolds. MMC $102.56 -1.94 (-4.44) Did you rack up the profits today? MMC's dramatic sell-off mid-afternoon saw the issue hit $100.19 before buyers came in off the sidelines. The solid bounce off the century mark does impose resistance limits going forward, but jeez, you can't always have your cake and eat it too (or can we?). The previously supportive $104 level failed to buoy MMC when the majority of insurance stocks saw red early in the session today. As it turned out, $103 and 104 served as upper resistance on an attempted recovery. In response to the strong downtrend line, we've lowered our stop loss significantly. It now stands at $108. Collectively, MMC shouldn't trade much higher than $106 over the near-term; unless there's a huge shift in sentiment. Look for continued weakness in the S&P's Insurance Index (IUX.X) and MMC to challenge that psychological century mark tomorrow. ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1360 ************************************************************** ************** NEW CALL PLAYS ************** AGGRESSIVE: SFA - Scientific Atlanta Inc. $50.06 +4.00 (+12.19 this week) Scientific Atlanta is a leading supplier of transmission networks for broadband access to the home, digital interactive subscriber systems designed for video, high speed internet, and voice over IP networks, and worldwide customer support and service. After reaching a 52-week low of $27.62 on January 12th, SFA's chart shows a stock which is well poised for a strong comeback. SFA rallied today with the communications equipment sector, on heavy volume which lifted the stock above its 50-dma of $47, which had been a resistance level since mid-November. SFA's daily chart shows a clear pivot point at $30, and a very bullish trend developing this week. An added plus to investors is SFA's solid financials, and comparatively low P/E ratio for a stock in a high flying sector. Excellent news released last week regarding the added list of TV applications offered to consumers over SFA's enabled cable systems seems to have stimulated strong interest, and SFA closed higher each day this week. Traders can take positions at current levels, or on a move over $54.31 on high volume. Watch for strength in the communications equipment sector before taking positions, and set stops at $44. ***January contracts expire next week*** BUY CALL JAN-45 SFA-AI OI=1243 at $6.50 SL=4.50 BUY CALL JAN-50*SFA-AJ OI=1159 at $3.38 SL=1.50 BUY CALL FEB-45 SFA-BI OI= 695 at $9.75 SL=6.75 BUY CALL FEB-50 SFA-BJ OI=1468 at $7.00 SL=5.00 http://www.premierinvestor.com/oi/profile.asp?ticker=SFA EMC - EMC Corp. $73.13 +4.44 (+10.13 this week) EMC Corporation and its subsidiaries design, manufacture and support a wide range of hardware and software products and provide services for the storage, management, protection and sharing of electronic information. These integrated solutions enable organizations to create an electronic information infostructure, or what EMC calls the E-Infostructure. EMC's products are sold to customers utilizing a variety of the world's most popular computing platforms for key applications, including electronic commerce, data warehousing, and transaction processing. As a technology leader and one of the top millionaire-making stocks of the 1990s, EMC has weathered many storms in the market. Its five year chart shows a near perfect technical up-trend, and a stock which held above its 200-dma only until the vicious sell-off we experienced last fall. However, EMC's CEO, Michael Ruettgers, gave a very bullish forecast for this year at an interview with analysts this week. Reuttgers predicted sales of $12 billion in 2001, and stated that the company saw no slowdown in information growth, or the need for EMC's products. The confident CEO also shrugged off concerns about competition from other companies, as EMC feels they will maintain the same leading edge going forward which they have been able to maintain in the past. This excellent news, and a bullish market environment pushed EMC above resistance at $68.56 and $70.69. EMC is now positioned to clear the near converged 50 and 200-dma, at $76.75 and $76.44. If this level is cleared, it could be smooth sailing for the stock all the way up to the next major resistance levels at $80, and $90, as this former stalwart regains its momentum. Watch the data storage area, and others like BRCD and NTAP for an indication of sector movement, and set stops at $67. ***January contracts expire next week*** BUY CALL JAN-70 EMB-AN OI=13044 at $5.68 SL=3.50 BUY CALL JAN-75 EMB-AO OI=20722 at $2.44 SL=1.25 BUY CALL FEB-70 EMB-BN OI= 4535 at $9.75 SL=6.75 BUY CALL FEB-75*EMB-BO OI= 1977 at $6.75 SL=4.75 http://www.premierinvestor.com/oi/profile.asp?ticker=EMC MSFT - Microsoft Corporation $55.00 +2.13 (+5.88 this week) Microsoft Corporation develops, manufactures, licenses and supports a wide range of software products for a multitude of computing devices. Microsoft software includes scalable operating systems for servers, personal computers and intelligent devices, server applications for client/server environments, knowledge worker productivity applications, and software development tools. The Company's online efforts include the MSN network of Internet products and services and alliances with companies involved with broadband access and various forms of digital interactivity. It's been a long time coming but we are pleased to announce that we are adding Microsoft to our call play list. As one of the Four Horsemen of the NASDAQ, MSFT carries a lot of weight in the Tech index. In fact, with today's close, Mr. Softee's market cap of $293.3 billion surpasses Cisco's $281.6 billion, regaining the title of Top Dog in the large cap Techs. It's hard to imagine a rallying market that has conviction without an advancing MSFT and with the slumbering giant appearing to be waking up, this could mean good things for the NASDAQ as a whole. The fundamental backdrop has improved greatly for MSFT recently, with a more sympathetic President-elect soon to take office, easing interest rates and companies such as ARBA, ITWO, PSFT and RATL all providing a bullish outlook for software demand going forward. New products are also bringing new life to the company, with the upcoming release of the Xbox gaming console. Technically the stock looks strong too, with the 5 and 10-dma (at $51.55 and $48.54) providing support so far this New Year. Pullbacks to these levels as well as to support at $50 and our stop price of $51 could allow for aggressive entries while a break through today's high of $55.75 could allow for a more conservative entry. From there MSFT may find resistance overhead from the 50-dma at $58.39 and the 100-dma $60.86. Gauging sector sympathy is challenging for MSFT, since this stock usually leads instead of follows. Nevertheless, keep an eye on Merrill Lynch's Software HOLDR (SWH) for sentiment in the software sector as well as movements in the NASDAQ 100 (QQQ) to ascertain direction of the big cap Tech stocks before taking a position. ***January contracts expire next week*** BUY CALL JAN-50 MSQ-AJ OI=31289 at $5.75 SL=3.75 BUY CALL JAN-55 MSQ-AK OI=37226 at $2.13 SL=1.00 BUY CALL JAN-60 MSQ-AL OI=53236 at $0.63 SL=0.00 High Risk! BUY CALL FEB-55*MSQ-BK OI= 8346 at $4.38 SL=2.75 BUY CALL FEB-60 MSQ-BL OI=33962 at $2.31 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=MSFT BEAS - BEA Systems $61.19 +4.94 (+7.56 this week) As a provider of e-commerce infrastructure software, BEAS helps companies of all sizes extend investments in existing computer systems and provide the foundation for running a successful integrated e-business. The company's products have been adopted in a wide variety of industries, including commercial and investment banking, securities trading, telecommunications, airlines, retail, manufacturing and government. BEAS' products serve as a platform or integration tool for applications such as billing, customer service, electronic funds transfers, ATM networks, Internet sales, supply chain management, and hotel, airline and rental car reservations. A funny thing happened on the to a dismal earnings season. Kicking off earnings with cautionary statements in its conference call yesterday, YHOO posted a big loss today after reporting results in line with estimates, but on declining revenues. The negative sentiment failed to infect the broader Internet sector though. As a matter of fact, the B2B stocks have been in rally mode in advance of ARBA's earnings, which came in very strong this evening. Although initially sold on the news, the stock recovered nicely after the conference call which had a very positive tone. So what does all this have to do with our new play on BEAS? Everything, as it turns out. Remember that the general market/sector accounts for the majority of a stock's movement, and the fact that investors are responding positively to good news in the B2B sector, without punishing all the Internet stocks is encouraging. For its part, BEAS has been doing battle with the 200-dma ($56.88) over the past 6 weeks, and it today's rally brought the stock back over this critical level. After bouncing from the lower Bollinger band earlier this week, Stochastics have moved back out of the oversold zone, putting our new play in a position to continue its recovery in advance of its own earnings on February 13th. Volume has been heavy over the past couple days, and as long as it continues, should help BEAS to clear the first level of resistance near $64. Conservative players will want to wait for this level to fall to the bulls before initiating new positions. One negative factor that materialized this afternoon was an SG Cowen downgrade from Strong Buy to Buy. As long as the stock can shake off this news, it should provide the opportunity for aggressive traders to open new positions on an intraday dip ahead of the weekend. Look for the stock to find support near the 200-dma, or near our stop, currently resting at $53. Confirm positive movement in both the NASDAQ and the B2B sector (Merrill Lynch HOLDR, BHH) before jumping into new positions. ***January contracts expire next week*** BUY CALL JAN-60 BUC-AL OI=3229 at $ 4.88 SL=3.00 BUY CALL JAN-65 BUC-AM OI=1431 at $ 2.56 SL=1.25 BUY CALL JAN-70 BUC-AN OI=2707 at $ 1.38 SL=0.75 BUY CALL FEB-60 BUC-BL OI= 416 at $10.38 SL=7.50 BUY CALL FEB-65*BUC-BM OI= 815 at $ 7.88 SL=5.50 BUY CALL FEB-70 BUC-BN OI=1180 at $ 6.13 SL=4.00 http://www.premierinvestor.com/oi/profile.asp?ticker=BEAS ************* NEW PUT PLAYS ************* AGGRESSIVE: MRK - Merck & Co., Inc. $81.63 -1.56 (-1.69 this week) Merck is a global pharmaceutical company, which specializes in the development of human and animal health products. They are the #1 industry leader in the US and #2 worldwide. Some of its more prominent drugs include Zocor and Meycaor (cholesterol drugs), Pepcid (an anti-ulcerant), top-selling hypertension drugs, Vasotec and Prinivil, and more recently the AIDS medication, Crixivan. The drug maker also provides pharmaceutical benefit services through Merck-Medco Managed Care which it sells to corporations, labor unions, and insurance companies. When it comes to e-commerce Merck won't be left behind either. The company has formed an alliance with CVS to market drugs online. The year 2000 was a banner one for shares of MRK, as the stock gained almost 40 percent, and for good reason. With Tech bears successfully selling NASDAQ stocks with abandon because of high valuations, rising interest rates and threats of an economic downturn, traders became defensive and turned to the good old reliable drug stocks as a haven from the overvalued four-letter issues. But now, an almost complete reversal of the fundamental picture could mean a possible sustained downtrend for the Pharmaceuticals, as money flows out to be put to work in the more sexy parts of the market. A hawkish Fed bent on fighting the specter of inflation has now become a kinder, gentler one, with a bias towards averting further economic slowdown. With dot bomb already detonated, value investors have been picking up the pieces, finding the PE's of fundamentally sound Tech stocks at much more attractive levels while those of Drug stocks are at historical high points. Weak technicals only serve to confirm the bearish sentiment in MRK, with the stock failing to close above resistance from the 5-dma line so far this year. Today, MRK closed below its 100-dma for the first time since last September, suggesting a potential move lower to test its 200-dma near $76. A failed rally off the 100-dma at $82 and the 5-dma at $83.12 could provide for an aggressive entry with additional resistance at our stop price of $85 but make sure selling volume confirms the rollover. If downward momentum increases, causing MRK to plunge below support at $80, this could allow the more risk averse to take a position, but only if Merrill Lynch's Pharmaceutical HOLDR (PPH) is going in the same direction. ***January contracts expire next week*** BUY PUT JAN-90 MRK-MR OI=7944 at $8.63 SL=6.00 BUY PUT JAN-85 MRK-MQ OI=9092 at $4.13 SL=2.50 BUY PUT JAN-80*MRK-MP OI=8628 at $1.44 SL=0.75 http://www.premierinvestor.com/oi/profile.asp?ticker=MRK AIG - American International Grp. $84.31 -2.19 (-3.56 this week) Engaged in a broad range of insurance and insurance-related activities through its subsidiaries, AIG's primary focus is on its general and life insurance businesses. Additionally, the company is growing its presence in financial services and asset management. Other operations include auto insurance, mortgage guaranty, annuities, and aircraft leasing. With operations in 130 countries, AIG generates more than half of its revenues outside the United States. Proving that technical analysis is alive and well, AIG fell off a cliff late last week, completing the head and shoulders formation that had begun to form in early November. Mirroring the action of the broader insurance sector (IUX.X), AIG fell sharply last Thursday, with no apparent catalyst except normal sector rotation. It is about time, as Insurance stocks have been in a solid rally since the lows posted last March. Since then, AIG had rallied from $55 to a high of $105, before beginning to come under pressure from the bears. Concerns about an increase in claims due to rough weather around the country and the possibility of more mortgage defaults due to the slowing economy added to the technical weakness and the selling started picking up steam again 2 weeks ago. This selling came to a head last Thursday, as the stock gave up more than 7% on nearly triple the average daily volume, breaking the head-and-shoulders neckline at $93. Despite penetrating the lower Bollinger band, the decline has continued unabated, with the stock giving up an additional 5% over the past week and violating the 200-dma ($86.44) today. Today's decline has dropped the stock below the $85 support level, and the stock looks vulnerable to the $78-79 support level in the near-term. Beyond that, it is not unreasonable to expect a further decline to longer-term support near $73 before the current bout of selling has run its course. With that being said, AIG will likely see a weak bounce from the lower Bollinger band to provide for a good aggressive entry point in the near term. Our stop is sitting at $88, just above the 200-dma. Look for any rally that fails to penetrate this level as an attractive opportunity to open new positions. Keep an eye on the broader Insurance sector also, as any strength there, is likely to provide an early warning that the selling pressure in AIG is diminishing. ***January contracts expire next week*** BUY PUT JAN-90 AIG-MR OI=3340 at $6.13 SL=4.00 BUY PUT JAN-85*AIG-MQ OI= 500 at $2.63 SL=1.25 BUY PUT JAN-80 AGK-MP OI=1971 at $1.00 SL=0.50 BUY PUT FEB-85 AIG-NQ OI=2791 at $5.13 SL=3.00 BUY PUT FEB-80 AIG-NP OI=1115 at $2.56 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=AIG ********************* PLAY OF THE DAY - PUT ********************* PMI - PMI Group $52.25 -2.31 (-5.75 this week) PMI Group is a holding company that conducts its residential mortgage insurance business through its subsidiaries. PMI provides primary insurance coverage, insuring mortgage lenders and mortgage loan investors against borrower default on individual first mortgage loans. At the end of 1997, PMI began offering a pool insurance product, primarily to Fannie Mae and Freddie Mac, as a part of the company's value-added strategy. This product is also sold to state housing finance authorities, and is generally used as an additional credit enhancement for certain secondary market mortgage transactions to protect against loss on a defaulted mortgage loan which exceed the claim payment under the primary coverage. Most Recent Write-Up Did you catch that entry point this morning? PMI moved up sharply this morning, only to rollover just as sharply as the day wore on. Briefly moving over $55 before the bears returned, PMI came under heavy selling pressure (more than double the ADV), coming to rest at its lowest point since early July. After falling below the 200-dma (then at $58.63) last Friday, PMI has continued to slide lower, pressured by the sharply declining 5-dma (now at $55.31). Even gains across the board on the major indices couldn't prop up the share price, and despite nearing the lower Bollinger band at $51, it looks destined to continue its slide. The next support should materialize near $50, followed by $45. The bottom line is that as the economic slowdown is settling into our consciousness, concerns of an increase in loan defaults will continue to pressure the share price of PMI, which insures against defaults on mortgage loans, particularly in the secondary market. Earnings are set to be released on January 24th, but in the current environment, we don't expect much of an anticipatory rally ahead of the numbers. Conservative players will want to wait for a break below $52 before opening new positions, while more aggressive entries can be considered on any weak rally that fails to take out our $58 stop. Comments Ready for another leg down? After Wednesday's short covering session, the sellers were back today at the $55 level. PMI drifted lower through the session, closing at the low of the day on relatively strong volume. A break below $52 would signal an entry point into this put play and would take PMI to levels not seen since July 7th, 2000. If buyers step in after the open like this morning, look for rollovers at resistance near $53, and then $54 and $55. BUY PUT FEB-55*PMI-NK OI=25 at $4.88 SL=3.25 BUY PUT FEB-50 PMI-NJ OI= 5 at $2.25 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=PMI ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1387 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ When the bad news almost seems good... Technology stocks rallied again today as investors overlooked some disappointing profit reports and company downgrades. Wednesday, January 10 The stock market rallied today as investors finally decided that all of the recent bad news has been factored into equity prices. The Nasdaq closed up 82 points at 2,524 and the Dow industrials finished up 31 points at 10,604. The S&P 500 index finished 12 points higher at 1,313. Volume on the NYSE reached 1.28 billion shares, with winners beating losers 1,875 to 1,057. Activity on the Nasdaq was heavy at 2.4 billion shares traded, with advances doubling declines 2,564 to 1,256. In the bond market, the U.S. 30-year Treasury fell 1, pushing its yield up to 5.49%. Tuesday's new plays (positions/opening prices/strategy): Adelphia ABIZ FEB7C/FEB5P $6.19 debit collar Federated FII JAN25C/JAN25P $1.50 debit straddle Winstar WCII APR20C/JAN20C $0.00 debit calendar Both Adelphia Business Solutions and Federated Investors offered entries at the target prices in our new combination positions. Winstar was less than cooperative, with the best-observed debit slightly higher than our suggested price. If you did not enter the bullish position in separate orders, there was no opportunity to achieve the recommended debit, and the issue gained almost $3 by the end of the day. Portfolio Plays: Stocks moved higher today as investors began to speculate that declining interest-rates will eventually revitalize the sluggish equity markets. Traders sought bargains in the beleaguered tech sectors, with shares of software companies, semiconductors and telecom issues leading the Nasdaq higher. Networking and fiber optic stocks also performed well, even in the wake of negative news from Cisco Systems (CSCO). Cisco CEO John Chambers said the current quarter is more challenging than he had expected and CIBC World Markets downgraded the stock, amid doubts the company will meet the consensus revenue estimates in the second quarter. On the Dow, J.P. Morgan Chase (JPM), Citigroup (C), and United Technologies (UTX) led the gainers while Johnson & Johnson (JNJ), 3M (MMM) and General Motors (GM) were among the blue-chip losers. In the broader market groups, defensive sectors such as energy, pharmaceuticals, retailing and manufacturing fell amid selling pressure while wireless telecom and biotechnology stocks were among the leaders. After the close of regular trading, mobile phone giant Motorola (MOT) and Web media company Yahoo! (YHOO) reported quarterly results. Motorola reported earnings in line with lowered expectations, amid weakness in its semiconductor and handset units. Yahoo reported quarterly earnings that met forecasts but warned that next year's profits and revenues will be below current expectations. YHOO shares, which were halted at the start of after-hours trading, eventually fell to $25 and the warning suggests there will be additional disappointments in the coming weeks. Our portfolio enjoyed advances in almost all of the major groups with technology issues leading the rally. Among the big Nasdaq gainers were Broadcom (BRCM), Bea Systems (BEAS), EMC (EMC), and Emulex (EMLX). In the financial group, Goldman Sachs (GS) was a standout and the top performing drug shares were Pharmaceutical Products (PPDI) and Laboratory Holdings (LH). Waters (WAT) has also made a surprising comeback, rebounding to $69 after a test of its 180-day low near $60. In the industrial category, oil issues were bullish with Smith International (SII) rallying over $3 to a recent high near $75. Home Depot (HD) and Williams Sonoma (WSM) were among the leading retailers. Our new position in Worldcom (WCOM) is a major success, trading almost $7 higher than our sold strike in the January call-debit spread. In the small-cap section, Speedfam (SFAM) has exceeded all expectations with a 35% gain in just over one week. The Straddles group was also on the move and our new position in Federated (FII) traded through a large range, falling to $23.31 during the session. The drop pushed the straddle (which was opened earlier in the day) to break-even on the bearish side of the play. The neutral position in Cytec Industries also achieved profitability, with a $7 credit after just one week in play. Thursday, January 11 Technology stocks rallied again today as investors overlooked some disappointing profit reports and company downgrades. The Nasdaq closed up 116 points at 2,640 and the Dow finished in the black at 10,609. The S&P 500 closed 13 points higher at 1,326. Volume on the NYSE hit 1.36 billion shares, with winners beating losers 1,660 to 1,253. Activity on the Nasdaq was extreme at 2.82 billion shares traded, with advances beating declines 2,759 to 1,166. In the bond market, the 30-year Treasury fell 24/32, pushing its yield up to 5.54%. Portfolio Plays: Today's rally in technology stocks had far-reaching effects as buyers emerged to breathe new life into many of the beaten-down areas of the market. Among the Nasdaq sectors, almost every group pushed into positive territory, with hardware and software stocks leading the charge. The Dow Industrials also advanced after spending most of the day in the red, driven by gains in its technology components. In the broader market, oil service, brokerage and transportation shares rallied while paper, drug, utility and consumer products issues retreated. Our portfolio enjoyed a number of upside surprises in the technology segment with small-cap stocks experiencing the highest percentage gains. Shares of Adelphia Business Systems (ABIZ), Speedfam (SFAM), Conseco (CNC) and Portal Software (PRSF) rallied substantially while Akysys (AKSY) recovered from a recent sell-off. Williams Sonoma (WSM) and Home Depot (HD) again led the retailers while Worldcom (WCOM) topped the telecom segment and Tektronix (TEK) shined in the Scientific and Technical Instruments sector. The Straddles group enjoyed two new winners with Mips Technologies (MIPS) and Fifth Third Bancorp (FITB)) both reaching early-exit targets. The speculative MIPS position traded as high as $5.00, a $1.50 profit on $3.50 invested in less than one week. Fifth Third Bancorp also provided an excellent return, with a credit of $5.50 on $4.38 invested, a 25% monthly profit. Straddles on British Telecom (BTY) and Federated Investors (FII) also moved well and it appears that these volatile issues will reach both the upside and downside break-even targets before the positions expire. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - Today, we received a request for some new long-term plays (LEAPS with Covered-calls and calendar spreads) and based on the rally in technology issues, now may be a good time to sell premium in near-term options. For those who enjoy time-selling strategies, here is a low-risk candidate that may meet your criteria for risk/reward outlook and portfolio suitability. ****************************************************************** MOT - Motorola $22.13 *** Looking for a bottom! *** Motorola is engaged in providing integrated communications solutions and embedded electronic solutions. These include Software-enhanced wireless telephone, two-way radio, messaging and satellite communications products and systems, as well as networking and Internet-access products, for consumers, network operators, and commercial, government and industrial customers; Embedded semiconductor solutions for customers in networking, transportation, wireless communications and imaging and unique entertainment markets; Embedded electronic systems for automotive, communications, imaging, manufacturing systems, computer and industrial markets; and Digital and analog systems and set-top terminals for broadband cable television operators. Motorola was one of the first companies to report this quarter, announcing earnings of $335 million, or $0.15 a share, for the final three months of 2000, down from $564 million, or $0.25 a share, a year earlier. The results were in line with analysts' lowered forecasts and the company said it is comfortable with a target of $0.12 a share for the first quarter of 2001. Motorola also said that although conditions would be difficult during the first half of the year, it would do better in the latter months because of cost-cutting and a move toward selling more profitable phones. Investors and analysts were tolerant of the revised outlook and MOT shares edged higher during the session. With a relatively well established base near $20, and short-term supply at the sold strike of $25, this position offers good speculation for traders who participate in Covered-calls with LEAPS. PLAY (conservative - bullish/calendar spread): BUY CALL JAN02 - 25 WMA-AE OI=59 A=$4.88 SELL CALL FEB01 - 25 MOT-BE OI=5332 B=$1.00 INITIAL NET DEBIT TARGET=$3.62 TARGET ROI(max)=50% /charts/jan01/charts.asp?symbol=MOT ****************************************************************** AEIS - Advanced Energy $29.38 *** Technicals Only! *** Advanced Energy Industries is a global company that provides the development, marketing and support of integrated technology solutions that are central in the manufacture of semiconductors, data storage products and flat panel displays, as well as other mission-critical power applications. Equipment manufacturers and end-users worldwide depend on the company's products when plasma-based technology plays a key role in their manufacturing process. The company offers a comprehensive suite of subsystems for vacuum process systems including power conversion and control solutions, process monitoring and machine control tools, ion-beam sources, dynamic temperature control products and plasma abatement technologies. The Company's technology solutions are sold and supported globally by direct offices, representatives and distributors. This play is based on the current price or trading range of the underlying issue and the recent technical history or trend. Current news and market sentiment will have an effect on this issue. Review the play thoroughly and make your own decision about the future outcome of the position. Note: Target a higher spread premium initially, to allow for a brief consolidation from today's gains. PLAY (conservative - bullish/credit spread): BUY PUT FEB-20.00 OEQ-ND OI=191 A=$1.19 SELL PUT FEB-22.50 OEQ-NX OI=51 B=$1.69 INITIAL NET CREDIT TARGET=$0.62-$0.75 ROI(max)=32% /charts/jan01/charts.asp?symbol=AEIS ****************************************************************** - STRADDLES - This week we received a number of requests for conservative debit straddles. Unfortunately, with the recent market volatility, the number of theoretically favorable candidates is quite low. That is not to suggest that you can't make money in the strategy, it just means you cannot focus entirely on historical volatility as a method of analysis. In today's research, we have identified a favorable candidate, based on analysis of its historical option pricing and technical background. ****************************************************************** USB - U.S. Bancorp $30.06 *** Earnings Play! *** U.S. Bancorp is a multi-state bank holding company that offers full-service brokerage services at approximately 100 office through a wholly owned subsidiary. The company has various nonbank subsidiaries engaged in financial services and USB provides banking services through its subsidiary banks to both domestic and foreign customers and correspondent banks. These services include consumer banking, commercial lending, a range of financing of import/export trade, foreign exchange and other investment services. The company, through its subsidiaries, also provides services in trust, commercial and agricultural finance, data processing, leasing and brokerage services. The company's quarterly earnings are due on January 18. PLAY (conservative - neutral/debit straddle): BUY CALL FEB-30 USB-BF OI=1083 A=$1.88 BUY PUT FEB-30 USB-NF OI=59 A=$1.62 INITIAL NET DEBIT TARGET=$3.25 TARGET ROI=25% /charts/jan01/charts.asp?symbol=USB *************************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=1383 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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