The Option Investor Newsletter Monday 02-05-2001 Copyright 2001, All rights reserved. 1 of 1 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/020501_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 02-05-2001 High Low Volume Advance/Decline DJIA 10965.80 +101.70 10977.70 10851.40 1.01 bln 1630/1443 NASDAQ 2643.21 - 17.29 2656.02 2596.73 1.65 bln 1577/2221 S&P 100 709.66 + 4.18 709.97 703.85 totals 3207/3664 S&P 500 1354.31 + 4.84 1354.56 1344.48 46.7%/53.3% RUS 2000 500.74 - 0.76 501.02 498.43 DJ TRANS 3069.71 - 23.05 3099.68 3056.96 VIX 24.39 - 0.36 25.65 24.34 Put/Call Ratio 0.54 ****************************************************************** Bifurcated, Again Despite triple digit gains in the Dow Jones Industrial Average (INDU), the Nasdaq Composite (COMPX) was shunned by market participants. Perhaps the avoidance of tech stocks Monday had something to do with the Cisco Systems (NASDAQ:CSCO) earnings report tomorrow. The networking giant's earnings reports are always highly watched and much anticipated by fans of technology and the Internet. But Cisco's quarterly report this time around is being viewed as a bit more crucial. Because of its wide ownership and heavy weighting in the COMPX, the potential for collateral damage or relief should concern the majority of market participants this week. We know that Cisco's CEO, John Chambers, informally talked down guidance last month at a tech conference and again at the World Economic Forum. And while many analysts expect Cisco to hit its estimates for the current quarter, or perhaps beat by the usual penny per share, the crucial data point will be the company's guidance going forward. Chambers admitted that visibility into the second-half of 2001 was less clear, when translated, means Cisco is seeing a slowdown in business. So the question tomorrow will be whether the market has already discounted all the bad news into shares of Cisco or whether the worst is yet to come. For our readers with the ability to listen in on the Cisco conference call, I would highly suggest doing so - you can bet I'll be there! It pays to hear the guidance first hand and be able to make your own informed decisions. The nervousness surrounding Cisco and the related impact on the broader tech sector weighed on the COMPX early this morning. The tech-heavy index gapped down this morning, subsequently bounced off the 2600 level, and proceeded to advance into the close of trading - I'll elaborate on the details and reasons for the COMPX's behavior below. But for now, let us look forward. If the bulls return tomorrow, the COMPX will need to clear resistance at 2660 - last Friday's close. An advance above that level accompanied with momentum will probably take the COMPX back up to 2700. Conversely, if the nervousness ahead of Cisco's earnings report prevails again, pay close attention to the 2600 level. A break below will most likely take the COMPX back down to 2500. It's probably best to wait for a break in either direction and trade accordingly, instead of gaming the 60 point range between 2600 and 2660 - unless, of course, you're very nimble in your operations. Along with the Cisco-related event and its ramifications on the COMPX tomorrow, I maintain that our readers should pay close attention to the Philadelphia Semiconductor Index (SOX.X) and its impact on the broader tech sector. In my very humble opinion, the SOX was the primary force behind the COMPX's advance in January. And I believe the SOX will continue to be a leading indicator for the broader tech sector. In order to emphasize my views on a micro level, let me share a few observations I made during today's session. Earlier in the morning, every time the COMPX attempted to rally the SOX acted very heavy - that is, it didn't advance with the magnitude of the COMPX's futile attempts. And once the SOX broke below 650, it was almost certain, in my mind, that the COMPX was headed towards 2600. Sure enough, the COMPX bounced off 2600, but only after buyers stepped into the SOX. Both indexes subsequently rallied into the close on what appeared to be short covering. Getting back to the macro view, I think it's crucial for the SOX to trade above its 50-dma and consolidate some of its recent losses. If the SOX breaks below its 50-dma currently at 634, there exist the possibility of an ugly decline to 600, which will probably drag the COMPX back down to 2500. The heavy trading in the SOX earlier this morning had everything to do with a bearish report from the Semiconductor Industry Association. The chip business monitoring firm reported that worldwide sales of semis were down 3 percent during the fourth-quarter of 2000. On top of that report, the axes at Lehman Brothers and CS First Boston suggested that the chip sector probably hasn't reached bottom yet. The two brokerages firms pointed to the rising inventory levels at leading chip firms and the lack of demand to meet the supply. Here again, as is the case with Cisco, it's a question of how much discounting of bad news has already taken place. The market foreshadowed all the bad news we're currently hearing last fall and winter. So the question remains if this is as bad as it gets in the chip business. The only way to filter out the noise from analysts and industry watchers is to give the most credence to price direction. An example of how to filter out the noise and focus on price might be provided by Triquint Semiconductor (NASDAQ:TQNT). After the bell, the high-end chip company beat consensus estimates by 3 cents per share. Shares of Triquint were jumping around in after hours trading at the time of writing, adding $1 to their regular session close. Depending on the guidance given by the company during its conference call, shares of Triquint might provide a good study tomorrow on my mantra of filtering out the noise, especially in light of the bearish news and analyst comments surrounding the chip sector today. Away from the tech sector, it was another nice day for the bulls in the Dow Jones Industrial Average (INDU). The bids in the INDU stemmed from the ongoing, and very dynamic, sector rotations out of tech and into cyclical names. In addition, a mega-merger in the energy sector sparked some interest in the broader sector. Phillips Petroleum (NYSE:P) agreed to acquire Tosco (NYSE:TOS) over the weekend. The INDU's recent relative strength stems from the fact that the Fed is on the offensive in cutting interest rates. As I've said before, the direct and near-immediate beneficiaries of a lower cost of capital are those companies that are most closely tied to the business cycle. And that includes retailers, financials, consumer product makers and deep cyclicals, such as paper and chemical companies. The list of winning sectors today included many of the aforementioned, with the exception of the retail sector, which appeared to pullback on profit taking. Nevertheless, there's a bull market in many sectors of the market away from tech and traders need look no further than the list of industries I previously mentioned. If you're a trader who prefers to operate from the long side, I would suggest trading the sectors of the market whose recent price action suggests the path of least resistance being to the upside. And you won't find many of those names on the Nasdaq - at least for the time being. Keep in mind, however, that the path of least resistance for the tech sector can change in the space of one day - maybe tomorrow, maybe six months from now. Though, don't misconstrue my thoughts with a bearish stance on tech. Instead, I'm only suggesting to look for opportunities in sectors that are working (read: advancing) in the here and now. And if the business cycle-sensitive sectors are going to continue advancing, the INDU needs to break out above the 11,000 level. It inched closer today, but whether the INDU breaks out anytime soon has to do with the amount of conviction the bulls have. If the INDU doesn't breakout above 11,000 soon, the aforementioned sectors I highlighted run the risk of pulling back either on profit taking or disappointment. In either case, the use of stops are crucial - whether mental or hard stops, they both work and aid in discipline. If the INDU does pullback, support at 10,900 appears fairly solid. A breakout above 11,000 in the INDU might be the easiest way to play the tape tomorrow, but be careful of head fakes, which can be countered with stops and discipline. Other than the obvious in the INDU, from where I sit, tomorrow's action is tough to game ahead of Cisco's earnings report. The sector rotations in the current market landscape are fast and furious, which is why I don't necessarily count the COMPX out tomorrow. But to reiterate my stance on the Nasdaq, I think the best way to approach the COMPX is to wait for it to either break below 2600 or above 2660, and trade accordingly. Yes, it's a 60 point range, but I think the risk/reward in that range is tough to game right now. Of course, those who want more confirmation of a trend may want to simply wait for Cisco. If there's one thing I can't emphasize enough, it's that the current market condition requires...no, demands discipline. This bifurcation nonsense in the broader market averages makes the game all the more difficult. And until a discernible trend emerges, the keys to profiting in this market are: nimbleness, quick profit taking and discipline as defined by a strong market thesis and stops. Now, if you'll bare with me, I have a request for the faithful readers of OptionInvestor. As many of you know, I (Eric Utley) write the Market Wrap section on this day (Monday) every week. As you may have noticed, I make market observations and write commentary that is quite different than that from Jim Brown and Matt Russ. I try to provide unique, value-added commentary every time I pen a piece of work. But I rarely receive any disagreements, approvals, insights, or general comments from the readers of this column. So what I would like, if you have the time, is let me know what I do well and what I can approve upon. If I can get a better grasp on the needs and demands of my readers, then I can tailor my commentary to add more value. I openly welcome complaints, criticism, suggestions, general ideas...anything that will let me know what you, the audience, wants from me the trader/writer. Please send your comments to the following e-mail address: Contact Support Thank you. Eric Utley Assistant Editor ************************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=1524 ************************************************************** ************* NEW CALL PLAY ************* NEW LOW VOLATILITY CALL PLAY: USB - U.S. Bancorp Piper Jaffray $30.18 +0.50 (+0.50 this week) Minneapolis based U.S. Bancorp, with $86 billion in assets, is the 10th largest financial services holding company in the nation and operates approximately 1000 banking offices in the Midwest and West. The company provides comprehensive banking, trust, investment and payment systems products to customers, businesses, and institutions. It operates a network of 5000 ATMs and provides 24-hour, seven day a week telephone customer service. The company offers full service brokerage services at approximately 100 offices through U.S. Bancorp Piper Jaffray. The company is the largest provider of Visa corporate and purchasing cards in the world, and is one of the largest providers of corporate trust services in the nation. USB has shown a strong chart pattern for the last several months. After clearing the 50 and 200 dma on November 29, USB dipped below the 50 dma of $27 only briefly on January 23, and quickly rebounded. USB announced earnings in line with expectations on January 18, with earnings increasing 11 percent. This is impressive, considering that many banks' lending divisions suffered in the fourth quarter because the rise in interest rates made it more difficult for them to borrow. But USB benefited from a more stable fee-based income structure. USB has agreed to be purchased by FSR in a stock based transaction expected to close in the first quarter of this year. Shareholders of USB will receive 1.265 shares of FSR, which is currently trading at 24. Investors apparently like the deal, and the stocks should respond well to news released on Monday that the Justice Department approved the deal, with the agreement that FSR will sell 11 of its Minneapolis/St. Paul branches to Bremer Financial Corporation. The $30.00 level has been a difficult resistance level for USB since December. However, the stock cleared it on Monday, and appears poised to move to the next resistance level at the 52-week high of $32.75. Traders may want to wait for this level to be cleared, as it could lead to smooth sailing for the shares. Watch the banking index (BIX.X) for an indication of strength, and watch FSR, as the two stocks will trade in tandem at this point. Set stops at $29.00 ***February contracts expire in two weeks*** BUY CALL FEB-30 USB-BF OI=2243 at $1.15 SL=0.25 BUY CALL MAR-30*USB-CF OI= 740 at $1.65 SL=0.75 http://www.premierinvestor.com/oi/profile.asp?ticker=USB ************ NEW PUT PLAY ************ IDTI - Integrated Device Tech. $39.75 -2.81 (-2.81 this week) Integrated Device Technology designs, develops, manufactures and markets a broad range of high-performance semiconductor products. The company serves up products for data networking and telecommunications equipment such as routers, hubs, switches, cellular base stations, storage area networks, networked peripherals, servers, and personal computers. About 70% of sales are from communications and high-performance logic components such as embedded RISC microprocessors, specialty memory, logic and clock management circuits, and networking devices. After bouncing just high enough to violate our stop when we played it a couple weeks ago, IDTI is back, having resumed its downtrend. The bloom seems to be off the rose that we know as Technology stocks. Operating in both sectors, IDTI is being pressured by weakness in the Semiconductors (SOX.X) and the Networkers (NWX.X). Throw in fears of an earnings miss by CSCO tomorrow night, and you can see that even in the absence of any self-created mayhem, IDTI has not gotten the month off to a good start. In just the past 3 sessions, the bears have swiped nearly 19% of IDTI's market value, knocking it down through all of its short-term moving averages, with the closest now being the 50-dma ($40.13) and then the 30-dma ($42). Stochastics have resumed their downward slope, and with the Bollinger bands now expanding again, the bears' path is clear all the way down to the $36 support level. If the bears really get determined, they could force a retest of the stock's recent lows near $30. Finally with the Fed's actions known and earnings season winding down, there is simply no motivation to move stocks up, especially taking into account that IDTI missed its own earnings estimates by a nickel. With formidable resistance looming between $43-44 (not to mention the 30-dma and 50-dma), we like the possibilities created by intraday rallies that fail to produce any follow through. Accordingly we will use any such rally as an opportunity to initiate new positions as the stock rolls over, placing our stop right there at $44. More conservative players will want to wait for the $38 support level to fall before playing. In either case, look for confirmation from strong selling volume and weakness in the SOX and/or NWX indices to back up your decision. ***February contracts expire in two weeks*** BUY PUT FEB-45 ITQ-NI OI= 628 at $6.25 SL=4.25 BUY PUT FEB-40*ITQ-NH OI=1374 at $2.88 SL=1.50 BUY PUT FEB-35 ITQ-NG OI= 342 at $0.94 SL=0.00 High Risk! http://www.premierinvestor.com/oi/profile.asp?ticker=IDTI ***************** STOP-LOSS UPDATES ***************** GE - call play Adjust from $43 up to $45 TLAB - call play Adjust from $61 up to $64 SPW - put play Adjust from $102 down to $100 HGSI - put play Adjust from $59 down to $55 JDSU - put play Adjust from $54 down to $53 VRTS - put play Adjust from $94 down to $92 ************* DROPPED CALLS ************* MUSE $77.00 -5.75 (-5.75) After breaking out over $80 a week ago, it looked like MUSE was getting ready for a serious breakout. Alas, it wasn't to be, as resistance near $88 was just too formidable an obstacle for the bulls to scale. Since then, the euphoria has subsided and after dueling with the bulls at the $80 level (also the site of our stop), the bears emerged victorious plunging our play back below this critical level by the close. Despite the strong afternoon bounce, we can't justify keeping the play alive after such as sharp violation of our stop. CNC $15.96 -0.32 (-0.32) Shares of Conseco have had a strong run up since we picked this stock, hitting a high of $18.50 last week. However, the shares have lost momentum in the last two days, and today's action in a strong Dow was not encouraging. While CNC may find strength again, it should have rallied today with the insurance and financial sectors. Thus, we are dropping the play tonight, especially after the close below our protective stop at $16. ************ DROPPED PUTS ************ ADBE $45.38 +1.81 (+1.81) All right boys and girls, it is time to book some profits. ADBE gave us a great ride down after the stock gapped lower on a troubling earnings warning, and those that took our initial entry point are happy with the resulting fattening of their accounts. In the past several sessions however, it has become fairly clear that the stock has a bottom in place near $43. Rather than try to squeeze the last drop out of this turnip, we'll go back to the produce aisle and look for something juicier. ******************************************** Do you like OptionInvestor? Then vote for us as a favorite site: http://www.investorlinks.com/vote.html Thanks for your support! ******************************************** ************** TRADERS CORNER ************** $5,000 And A Dream By Austin Passamonte Last week's article covered the subject of proper trading account allotment. We explored some different ratios to safely balance option investing versus option speculating. Space, time and focus attention (yours and mine) reached the limit at the point of discussing small trading accounts and equally-big dreams. I've had a few of those myself with fairy-tale endings and some others that fell prey to the Grinch. Being an expert on the subject (having gone broke from $5,000 more than once) I'd like to share some observations about what these trading tuitions taught me. But before I do, let me offer the major portion of an email (edited for brevity) I received last Monday afternoon as the finishing touches were put on my article then. A few hours earlier and I'd have plagiarized it sooner! Thomas Frohlich, an OI and IS reader from Denmark provided a witty and enlightening study of our hypothetical results from some trades taken between September and December 2000 at IS. While the examples used here are from there, the message within Tom's extensive study and points I make to follow apply equally to trading equity options, stock, commodities and the next market someone invents as well. Having wrecked trading accounts in all three arenas, I feel highly confident of doing just the same should someone point me towards the next fiscal challenge. Come to think of it, I've never been to Vegas or Atlantic City. Tom gave me his complete written blessing to reprint this as we see fit and boy, do we ever! Great effort went into what follows on his part and I for one am most grateful for the third-party observations made. As follows from Tom: Dear Austin, Thanks for a great website. Indexskybox has developed into exactly what I hoped it would become, and it is definitely my favorite, favorite source of information and education along with OptionInvestor. In one of your articles in Sunday's newsletter, you wrote about a reader requesting a smaller amount for starting up a Swing Trade account and you said that you would start out with $5,000 account instead of $10,000. After running some of my accounts into the ground during the fall, I recently decided to actually create a Trading Business Plan (for the first time in my 3 years of serious trading!) and did some back-testing on your Swing Trade results from September to December. My idea was to take $5000 of what was left of my total account and use that for Swing Trading. After my backtesting, I decided that this was NOT a good idea. Let me give you some numbers and show you why I believe this to be the case: First, I set up some spreadsheets with all your Sep-Dec Swing Trades just as Bill Kadlec did (Computer Analysis Trading: Hypothetical Backtesting to Analyze a Plan). The only number I changed was the correction in one of the QQQ trades, which you also mentioned in a later article. Then I added calculation formulas for the commission charges. I understand that you do not include these in your results (and maybe you can trade commission free), but for most of us, commissions are real and need to be included. The costs I included were what my broker charges me which is $20 plus $1.75 per contract, minimum $29 US. Here are the results: OEX: The difference between IS and my results on $100,000 initial value is $7,767 of which $6509 were commissions. Using a $10,000 account the profit would be 97% (compared to 150% using $100,000) but falls to "only" 42% using a $5,000 account. Of course, 42% is still good but doubling your initial account from $5,000 to $10,000 would actually earn more than 4 times as much money. A $5,000 account would give you $2,098 in profits (after commissions) but you would also have paid a total of $1,508 in commissions. "Cost of operations" is relatively high as they "ate" more than 40% of the actual option profits achieved. There is a great "economies of scale" in starting with a bigger account. QQQ: Results are very similar to the OEX results. The difference between IS and my results on $100,000 initial value is $25,291 (quite a lot) of which $8,854 were commissions. Because QQQ options are lower priced generally, commissions were higher and had a greater accumulated negative effect. Results dropped from +105% on a $100,000 account to +77% for a $10,000 account and "only" +42% for a $5,000 account. Again, you could make almost 4 times the profit by using $10,000 instead of $5,000. My personal conclusion was that $5,000 was just too small to swing trade. It really doesn't work on the SPX and OEX. Only on the QQQ could it be used as option prices are generally lower, but a few extra dollars gives you significantly better results, and moves you further away from the "gray" area of $4,000 or $3,000 which yields almost nothing or leaves you with a loss (although you might have a good time doing it!). The solution is either not to swing trade until your account has grown in size using other strategies in the meantime or dedicate a larger part (20% instead of 10%) of your total account to swing trading (I don4t need to say that I chose the latter, do I?) There are numerous websites out there with all sorts of inventive systems that claim that they will make you rich if you just follow their advice and when you take it apart and study it, it4s all [bunk]. I certainly don4t count IS in that category, but I really don4t like that you are suggesting that it's possible to take a $5,000 trading account and turn it into $50,000. In "commission reality", that is very difficult. I am not writing this to shamelessly criticize you because I think you are all doing a fantastic job and I am learning continuously but because I am sure that there are traders out there that will believe in whatever new idea you throw at them, without critically testing these ideas. I know because I was one of them until recently! "Waauuw, Austin says it can be done with only 5 grand. I have 5 grand! Hey, now I wannabe a swingtrader." This is what they need to know: Warning: if you have $5,000 or less available for swing trading then swing trading is probably not for you, yet. Sad but true. Build up $10,000 and you stand a much better chance of surviving longer term. If you do attempt it prior (because some of you will), use only QQQ or OEX options. Oh, and choose a trending market when you start trading! :) Let4s hope February brings better market conditions! Best wishes, Thomas Frohlich, Denmark .. well Tom, you raise many valid points for us to address. The instruction to choose a trending market being my favorite! We'll begin with the last, first. OI and IS exist for the greater education of option traders who strive to shorten their learning curve. All of us at both sites work very, very hard to save new people from the trials & tribulations we endured. Much like raising children, many listen but few hear. I had to learn my own lessons not once but several times and still fall prey every now & then this very day. Can we really be saved from ourselves by others? The hardest part about long-term successful trading is that it takes the exact opposite action from us that human emotion would normally direct. Trying to fade our own emotions is precisely the degree of difficulty involved, nothing more. One of those being greed. Most if not all of us secretly if not outwardly hope to turn small accounts into massive ones. And soon. Is there a trader alive who wouldn't? The definition of fast is usually in half the actual time it would possibly take to occur and one-tenth the time it reasonably should. Patience is not the small-account option trader's virtue. But enough logic & reasoning, let's get right to the nuts & bolts of turning scant into plenty! First of all as you aptly point out, small accounts cannot take much heat at all. The least little draw down hurts. Cost of doing business as described above is the reason for that. Also, profit returns must be good size... scalping $75 trades while paying $40 commission will not work. The simple answer is to just take trades with the best chance to win. And exactly which ones are those? I've never in my life taken a trade where I felt my odds to win were less than 50/50 at worst. I don't even take "lottery plays" unless I'm pretty sure the markets have a god chance of moving in my favor. Sadly, I lack the clairvoyance needed to pre-screen wins from losses before they are played. I would say there are two diverse camps trading high-risk option strategies. The first group are traders with plenty of money who want to speculate with a little. Win or lose, it's less costly and lasts much longer than a trip to Vegas. The second group are traders who barely managed to scrape $5,000 or so together and have hope up to and including the point of desperation to multiply it many-fold. A lot of hopes and dreams are stacked on top of that and reality is filtered out even though it resonates in the back of their minds. Our attempt to take a $5,000 trading account and follow the same high-risk/high reward swing trade approach I've used for years is designed to serve as a real lesson in actual application of trades. It's one thing to write about theory, could have and should have but a whole other ballgame is doing it in front of all who care to watch. I choose a high-end target of $50,000 or 1000% return in a year not out of hype or false hope, but as a possibility. If year 2001 markets behave like they did in 1999 I like our chances to get there. If they behave like year 2000 I REALLY like our chances, but a continuation of January's sideways chop for several months would give us no chance at all. Now I'm the first to agree that anyone with only $5,000 to trade is much better off with credit spreads or covered calls. I also know that is not what most will or want to do. The fact also remains that favorable market conditions does allow a solid chance to ratchet such an account up many hundreds of percent. A number of traders have done that and more in mere weeks when markets are moving. Timing is everything and hindsight is perfect. At this moment in time we have no idea what the next eleven months will bring. Nothing more than a random guess. All we can do is start right now and do the very best we can to achieve success with what we're given. Some strategy is in order. We need to win early & often to reach the safety of critical mass that $10,000 offers. Sliding backwards below $4,000 and $3,000 makes it much, much harder. At first we will risk 5% of our balance on any given play and be picky as possible about entry & exit points. Early wins will make all the difference for our breathing room. If our account should melt, we will be forced to risk higher percentages, play further OTM contracts while balancing time premium remaining and/or limit ourselves to certain markets only. We might become even more selective about trade selections as well. Just like newly-hatched sea turtles scurrying down the beach through a gauntlet of danger, once we reach the relative safety of sufficient capital (or ocean water in the turtle's case) our chances are much better to thrive. The whole objective of this live lesson is to be exactly that; a lesson in how to survive unknown future conditions with real money on the line. A trader using small accounts for equity options, stocks or e-mini futures must follow the exact-same natural laws that we do. Cost of operation through commissions and slippage on stops can make the difference between profit or loss. Big accounts enjoy the relative safety large numbers naturally offers. We have chosen to begin with less than ideal out of respect and request from many who are trying to do the same. It is possible but difficult and we need to know the pitfalls in order to avoid and survive. I would like to personally thank and commend Thomas Frohlich for taking considerable time and effort to sit down, write a trading plan, analyze the risk/reward and most importantly share it with all of us. I can assure you it has helped me and our fellow peers in the trenches realize what limitations we have and how to avoid them. Anyone who intends to trade small accounts for profit in high-risk methods regardless of target symbol or approach is much more aware from the education you provided us. Permit us some favorable market conditions for our trading approach and I like all of our chances even better than before! Best Trading Wishes, Contact Support *************************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=1511 ************************************************************ ********************** PLAY OF THE DAY - CALL ********************** TLAB - Tellabs, Inc. $67.00 +2.00 (+2.00 this week) TLAB designs, manufactures, markets and services data, voice and video transport, switching/routing and network access systems that are used worldwide by public telephone companies, long-distance carriers, alternate service providers, cellular service providers, cable operators, government agencies and utilities. Through its various acquisitions, the company is also able to offer voice-quality enhancement products for wireless, satellite-based, cable communication and wireline telecommunications, as well as managed high-speed transport solutions which operate in Synchronous Digital Hierarchy and Dense Wavelength-Division Multiplexing (DWDM) environments. Most Recent Write-Up The rally that had stagnated a little over a week ago, received new life when TLAB announced earnings on January 23rd that were in line with analyst estimates. The lack of bad news seemed to cheer the bulls and they continued to bid the price higher, helped out this past Tuesday when Gruntal & Co. initiated coverage of the company with an Outperform rating. The coverage came a day after TLAB announced that they would acquire Future Networks, a voice and data cable modem company, for $181 million cash. The company expects the acquisition to shore up its position in the cable data and telephone markets. Apparently investors liked the deal, despite the fact that it is expected to dilute earnings by 6 cents in 2001 and a nickel in 2002. Technically TLAB is looking a bit overextended, so we need to keep an eye out for profit taking. Stochastics have now flattened out in overbought territory and with the price bumping up against the upper Bollinger band, we are going to need strong buying interest to keep the rally alive. While momentum players might be inclined to buy further strength, they need to play with caution, as they may find themselves in the unfortunate position of buying at the high of the day. But if this fits your style, look to buy a breakout over the $66 resistance level, with an eye to further resistance between $67-68. If you can exercise a bit of patience, look for small pullbacks to support near $63, or the vicinity of our stop at $61. Whatever your entry strategy, monitor the health of the Telecom sector for signs of weakness, by keeping an eye on Merrill Lynch's Telecom HOLDER (AMEX:TTH). Comments TLAB's relative strength continues to impress. Despite a wavering tech sector for the better part of Monday's session, TLAB held strong through mid-day and powered higher in the final half-hour of trading. If the late-day, massive accumulation is a sign of trading Tuesday, TLAB could be set to breakout above near-term highs. Look for an advance on strong volume above $68, or $68.50 for the more conservative traders. From there, it could be a quick pop to $70. Additionally, a pullback to support near $66, on light volume could provide an entry. ***February contracts expire in two weeks*** BUY CALL FEB-60 TEQ-BL OI=3070 at $7.63 SL=5.25 BUY CALL FEB-65*TEQ-BM OI=4077 at $3.88 SL=2.50 BUY CALL FEB-70 TEQ-BN OI=2585 at $1.38 SL=0.75 High Risk! BUY CALL MAR-65 TEQ-CM OI=2901 at $6.50 SL=4.50 BUY CALL MAR-70 TEQ-CN OI=2643 at $4.13 SL=2.50 BUY CALL MAR-75 TEQ-CO OI=7189 at $2.19 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=TLAB ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1499 ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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