The Option Investor Newsletter Tuesday 02-13-2001 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/021301_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 02-13-2001 High Low Volume Advance/Decline DJIA 10903.30 - 43.50 11012.90 10894.30 1.07 bln 1604/1463 NASDAQ 2427.72 - 61.94 2554.65 2427.47 1.73 bln 1632/2124 S&P 100 684.75 - 7.31 695.96 684.04 totals 3236/3587 S&P 500 1318.80 - 11.51 1336.62 1317.51 47.4%/52.6% RUS 2000 502.57 - 2.78 510.94 502.15 DJ TRANS 3046.46 + 7.23 3068.29 3036.18 VIX 24.62 + 0.07 25.09 24.03 Put/Call Ratio 0.74 ****************************************************************** No Valentine For Greenspan! After gapping up +60 points at the open the Nasdaq bled points the rest of the day after Greenspan failed to stimulate traders hopes for another rate cut. The Dow failed to hold over 11000 for the 11th time since September. Each time the Dow has broken 11000 it was only able to hold for a few minutes before selling off again. Are we having fun yet? This was a depressing day in the markets. Actually I was surprised to see the severity of the drops over the last five days. I left for business in London last week with the Nasdaq hovering just under 2700 and I come back to find a -250 point drop. Now, come on guys, I leave you alone for a week and you let Austin's bearish stance erode what was left of our bullish market sentiment. I guess we need to convince Wendy to start editing his articles. Of course I am just kidding but we actually did get some hate mail about his periodic use of her in his articles. Now back to the markets, this was a depressing day. The bear trap rally which started yesterday afternoon brought back nightmarish memories of the dozen or so we suffered in the last three months. Down 3-4 days, up 1, down again. The major reason for the rally failure was the speech by Greenspan on TV today. Alan was optimistic the economy had bottomed and the worst was behind us. That sounds like good news but for traders it was actually the kiss of death. No "aggressive" Fed, no surprise rate cuts before the end of March meeting. Statements like "not in recession", "economy likely to rise by year end", "2000 year end problems did not continue in 2001" all pointed to a calm Fed chairman with no urgency in his message. This optimistic speech was like pouring water on a struggling campfire. With no surprise rate cut expected from the Fed there is no catalyst to move the markets. The economy is recovering but very slowly. Earnings are almost over. With the Fed meeting still over a month away there is no reason to rally. Volume is wimpy at only 1.69 billion on the Nasdaq and barely a billion on the NYSE. Declines are beating advances and down volume was accelerating into the close. Buyers are on strike and sellers are increasing. Part of the afternoon race to the exits was caused by JDSU. The JDSU/SDLI merger was completed today and both had gapped up at the open due to fund managers having to re-balance their portfolios and buy more stock. Late in the afternoon JDSU said they would issue guidance after the close and the short sellers jumped on both stocks. The guidance turned into an earnings warning that reduced expectations for the full year ending in June to $.74 which is less than the $.82 analysts expected. The decrease was blamed on "continued uncertainty in carrier capital spending prospects and customer inventory adjustments as well as a lower level of near-term sales visibility than the company has experienced in recent periods." Read that as sales are slowing and previously packed channel inventories are not going away. Part of the drop was also from the loss of income from the assets sold to Nortel Networks in order to get the deal approved. In after hours trading JDSU stock was slightly lower and holding on decent volume. It remains to be seen what will happen on Wednesday when retail trading on the combined company commences. The buying by index fund managers could offset any negative sentiment. Adding to the negative sentiment today was a downgrade of INTC, BRCM and TXN by CSFB. Saying that a substantial recovery by INTC in 2001 was not likely they lowered their price target too only $33 and issued a "hold" rating on all three stocks. INTC, at a Robertson Stephens's tech conference maintained its earnings estimates and insisted that chip demand would pickup in the second half of the year. AMAT announced earnings after the close and beat estimates by four cents but then had a horrible conference call which lowered estimates going forward. The stock rallied +$2 on the initial news but dropped to $40.50 after the call. Citing a book to bill ratio of less than 1 on orders going forward and an increase in cancelled orders to $150 million, the call was anything but positive. KLIC also announced a series of cost cutting measures meant to deal with slowing sales. KLIC dropped to $12.56 in after hours. SCMR also announced earnings that beat estimates but lost their initial gains after the conference call. See a pattern here? Analysts see increasing competition from CIEN and Alcatel and were surprised the conference call was not more negative. There was doubt about earnings strength going forward. SCMR has been beaten severely recently dropping to $22.50 after a 52-week high of $172. The severity of the beating probably led to the lack of a further sell off. The pattern we see in the news events above is still a negative forecast in earnings going forward. With earnings trending down and the Fed on the fast track investors were induced to buy stocks. With the Fed now saying "we are expecting 2% growth and 2% is ok" there is no rate cut urgency. With no earnings and no rate cut there is no reason to rally. With Moody's forecasting today that defaults on junk bonds from telecoms are likely to double to an 11% rate there appears to be plenty of weakness left in the economy. These are not little companies. Ratings that were cut due to financial worries include Nextel, Global Crossing, Lucent, AT&T. If these companies can't pay on their bonds how can they buy more telecom equipment? That hits fiber optics, switches, routers, chip makers as well as general equipment manufacturers. This may explain the overall weakness in the markets. There is a pile of money still on the sidelines but it is showing no indications of moving into the markets. The buying urge is over and the selling is showing signs of increasing. There is a camp that still expects a rally soon. They are pointing to the market's ability to discount future events well in advance of actual results. The series of higher lows on the Dow has been caused by cyclical stocks which are rallying far in advance of the expected rebound. These investors will be looking for evidence of the continued rebound in the Business Inventory report on Wednesday, Import/Export Prices on Thursday and the PPI and Industrial Production reports on Friday. If these reports show a bottoming or even a slight rebound then the Dow could manage a breakout over 11000. Whether that will cause the Nasdaq to rally is uncertain. With tech earnings still trending down, there is no urgency to buy the dip. Commercial traders are still net short at historically high levels. They have been right for months and show no signs of flinching. What should traders do? For the last two weeks I have suggested that call players stay out of the market under 2700. If you have followed my advice then you are sitting comfortably in cash. If something changes in the market then there is plenty of upside available over 2700. If we continue down then I will revise the number based on what the market gives us. Obviously we are only about +175 points above the 2251 low set on Jan-3rd. There is a possibility of us testing that low again soon. I said possibility! There is a strong sense of denial among traders. CSCO at $28, SUNW $25, DELL $22, GLW $39, CIEN $69, NOK $28. These are prices that the buy and hold community feels cannot go any lower. I caution them to only look at LU, $13.50, when making that decision. My point here is the huge amount of sidelined money is drooling at these prices but still waiting for the starters gun. If something happens to cause the sentiment to swing positive again the money could flow quickly. Until then call players should wait and watch. Put players - you know what to do, just do it carefully! Enter passively, exit aggressively! Jim Brown Editor ************************************ Spring Options Workshop and Bootcamp April 5th-9th, Denver Colorado ************************************ OptionInvestor is proud to announce our third annual Spring option workshop in Denver Colorado. This power packed five-day event is structured to fully educate you on advanced option strategies and will make you a better and more profitable trader. If you attended the March Denver Expo last year and thought it was the best function you had ever attended.. You haven't seen anything yet! Great food, entertainment, education and just plain fun in sunny Denver. The biggest complaint in March was the massive weight gain experienced by the attendees from the gourmet menu. We know how to put on a function. Ask anyone who came last March! Current speakers include: Tom DeMark, author of "Day Trading Options", "Science of Technical Analysis" and "New Market Timing Techniques" and manager of a $4 billion hedge fund. John Najarian, "Doctor J" as he is known on the CBOE Mark Leibovit, Chief Market Strategist of VRTrader.com Richard Arms, inventor of the TRIN, or Arms Index, Equivolume charting and author of "Trading Without Fear." Mark Skousen, Editor of Forecasts and Strategies for over 20 years. Steve Nison, the worlds foremost expert on Candlestick charting. Author of "Japanese Candlestick Charting Techniques" and "Beyond Candlesticks." Jim Crimmins, President of TradersAccounting.com The detailed schedule will be posted in about two weeks. There will not be individual breakout sessions during the day. Each topic will be covered in 1-2 hr general sessions taught by one or more OptionInvestor staff and presented on three giant screens. In the evening we will offer five of our popular chalk talk sessions for that personal question and answer interaction. Unlike other seminars with only two or three instructors, you will get in-depth knowledge from many different instructors who are experts in their field. The cost for the four-day workshop, April 6th to 9th is only $2995 (spouse only $1495). This includes breakfast, lunch and supper each day. All course materials, a CD of all the presentations and a professional video package of the entire seminar so you can review the material at home in the comfort of your living room. There is also a $500 discount if you have attended a prior OIN seminar. This is not a prepackaged presentation that gets repeated over and over with stale information. This is a one-time production and everything is fresh, live and as current as we can make it. The videos will have your real time questions and answers and not some from a prior class. Where else can you get intensive yet personalized options education like this? Do not delay as seating is very limited. We guarantee you will not be disappointed! You can pay for your education one bad trade at a time or you can invest less money one time to learn how to do it right. Click here for more info: https://secure.sungrp.com/workshop/april01/index.asp *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1571 ************************************************************ **************** MARKET SENTIMENT **************** Just Say No By Austin Passamonte That's the emphatic stance Dow Industrial Average is taking with a close above 11,000 any time soon. Over the past couple weeks we've heard more about the Dow's imminent close over 11,000 being a green light to buy than we did about Nasdaq 5,000 exactly one year ago. Well, maybe not quite but there is a similarity; each has taken turns exhausting themselves to break a key mental barrier. The COMPX managed to hold such lofty ground for exactly one session's close and promptly rolled over and died from that pinnacle. Should the Dow manage to close above the vaunted 11,000 it promises to do the same. Market bulls best catalyst to rally between now and who knows when happened to be today, and momentum players were out in full force. The very moment Greenspan's speech was posted to the web a number of exuberant buyers bid the market to session highs before its aged writer ever reached a microphone. These eager players had the dubious distinction of buying the highest tick of the day and most likely the entire February expiration cycle to boot. Al said nothing about cutting rates again by the closing bell, he also mentioned we weren't headed for a recession and that's all she wrote for the rally. Game, set, match and red clay courts instead of green grass were instantly visible on all charts. Red is likely to be the featured color of the week for broad markets but we expect webs of support layered below current levels. Huge disparity ratios of OTM puts against calls are open below us as depicted in the S/R sections and continued decline would inflate their value, cause some holders to sell and prop price levels up. There is further room to run from here, however. The critical test for these markets will begin next week when O/I disparity is cleared and we enter post-expiration sessions historically bearish for at least the first day or two. With earnings season all but over, less hope for a surprise rate-cut and pre-warning season (what did we call this earning's season?) only weeks away the possibility of posting new recent lows is higher now than ever before. Technically Speaking: The Dow sits precariously on its 10-DMA. Next stop is 10,840 and eventually 10,700. A break below there falls to 10,400 before strong arms may possibly be found. The COMPX and NDX are in free-fall with 2,248 and 2,084 being the next points of respective support below. This would represent a 100% retracement of mid-December highs to January lows for each. The SPX and OEX each sit squarely on their long-term descending trendlines dating back from early September 2000. A break and close below today's here leaves them susceptible to 1286 for the SPX and 660 for the OEX in the next week or two. Lest tech bulls feel the urge to slash their hooves and end it all, we also see daily-chart signals buried in oversold and threatening to reverse. A few more sessions of decline would have financial medias all lined heavily to the bearish side. Market Sentiment will be salivating over the prospects of loading the truck once again with QQQ and tech-sector HOLDR calls, distant month contracts of course. The next rally will likely emerge from considerably lower levels than we trade at now and could occur within one dramatic session as we've often seen before. Now is not the time to buy calls (we suggest eyeing puts) but that day will arrive in the not-too-far future when all the world believes no hope to the upside exists. Let's keep our collective eyes on daily charts peeled for just such an event, and trade the daily trend until then. ****** VIX Tuesday 02/13 close: 24.62 VXN Tuesday 02/13 close: 66.36 30-yr Bonds Tuesday 02/13 close: 5.42% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Tuesday (02/13/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 725 - 710 12,675 4,532 2.80 705 - 690 14,136 8,835 1.60 OEX close: 684.75 Support: 680 - 665 1,761 13,522 7.68 660 - 645 36 12,791 355.31 Maximum calls: 700/6,549 Maximum puts : 675/5,066 Moving Averages 10 DMA 701 20 DMA 704 50 DMA 699 200 DMA 754 NASDAQ 100 Index (NDX/QQQ) Resistance: 65 - 63 66,975 45,066 1.49 62 - 60 90,846 54,537 1.67 59 - 57 42,140 44,917 .94 QQQ(NDX)close: 55.25 Support: 54 - 52 4,034 25,479 6.32 51 - 49 3,041 20,201 6.64 48 - 46 172 4,604 26.77 Maximum calls: 70/61,056 Maximum puts : 60/32,877 Moving Averages 10 DMA 60 20 DMA 63 50 DMA 62 200 DMA 81 S&P 500 (SPX) Resistance: 1375 8,438 5,825 1.45 1350 15,411 14,496 1.06 1325 10,662 12,910 .83 SPX close: 1318.79 Support: 1300 3,789 11,791 3.11 1275 587 10,339 17.61 1250 924 8,421 9.11 Maximum calls: 1400/15,907 Maximum puts : 1350/14,496 Moving Averages 10 DMA 1343 20 DMA 1348 50 DMA 1334 200 DMA 1412 ****** CBOT Commitment Of Traders Report: Friday 02/09 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 -2903 -467 -4001 -5599 Total Open interest % (-29.87%) (-6.18%) (-16.84%) (-22.99%) net-short net-short net-short net-short NASDAQ 100 Open Interest Net Value +3292 +1810 -6615 -6642 Total Open Interest % (+20.96%) (+11.61%) (-10.93%) (-10.94%) net-long net-long net-short net-short S&P 500 Open Interest Net Value +74142 +73434 -94766 -93215 Total Open Interest % (+41.81%) (+39.86%) (-12.52%) (-12.53%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: The disparity between Commercials and Small Specs remains intact on the S&P 500. Small Specs have greatly increased their net-short positions on the DJIA while Commercials have reduced their net-short positions. Interest Rates: Commercials are short 10-year T-Note futures to a five-year extreme. (Bearish) Currencies: Commercials continue to build heavily short Euro dollar futures while small specs build net long. (Bearish) Metals: Commercials are moving to net-long in Gold, Silver and Copper from short positions. Small specs are at five-year net short positions in silver. (Bullish) COT/CRB: This commodity index measures the entire spectrum of commodities in overall bullish or bearish outlook. It is now at a one-year high for commercial bullishness, meaning the outlook for commodities is long-term positive while equities as a mirror are considered long-term negative. Data compiled as of Tuesday 02/06 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/021301_1.asp *********** OPTIONS 101 *********** Loyalty To A Stock Or To A Strategy By David Popper Read any message board and you will find a lot of banter about the merits of particular stocks. The bulls claim undying love, while bears will talk about excessive PE ratios and other reasons why the stock will go down. Of course, over time both are right. Stocks will go up and down. Traders welcome the natural rhythm of the market because that is where the money is made. As a matter of fact, almost every article appearing in OIN is specifically designed to assist you in interpreting where your stock or the market should go in the short-term. The tacit understanding is that forecasts aren't always precise because the market is not logical. Because forecasts are not always precise, it is foolish to put too much of your equity into any one play. Because forecasts aren't always precise, buying options are risky. Because business is always changing, there is no guarantee that the Wall Street darling of today will still be sought after tomorrow. Remember Priceline(NASDAQ: PCLN)? Loyalty to a stock has its risks. Long-term holding has its risks. There is another way. You can view stock as a trading vehicle within a complete trading system. There may be different systems which fare better in directional markets and others in markets that do not have direction. Loyalty to a system or systems has advantages because when you operate within a sound system, you will not make as many emotional mistakes. I make two common mistakes. First, I have tried to force trades where the odds of success simply were not there. Second, I have expected too much of a return from the markets where the return was not available given my level of expertise. Trading within a system involves a plan. This plan includes a reasonable return expectation in light of current market conditions. For example, when we are in a 1999 type market, your expectations may be justifiably high and you may achieve these lofty goals simply by being a call buyer. On the other hand, in a March 2000 market, simply stepping aside, or a naked call strategy, put butterflies, etc may have been your choice. Yet, given the wide swings in the market within the downtrend, it may have been prudent to limit the amount of money at risk. Of course, limited risk means limited reward. However, if this is all that is reasonably available from the market at that time, so be it. Better a small gain or loss rather than a major hit. In football, they call this taking what the defense will give them. Trading within a system involves a plan. This plan should include the notion of trading only the very best stocks which are the gorillas in the industry. This is necessary because if for some reason your play explodes and you did not bail out soon enough, you will be in a stock that eventually will rise again. Trading a stock that has no earnings and no chance of earnings will eventually leave you owning a two dollar stock. One avenue that I have chosen lately is trading the Nasdaq 100 (AMEX: QQQ). QQQ is the proxy for the Nasdaq 100, which is a weighted index of the top 100 companies in the index, excluding financial institutions. I like to trade this vehicle because it represents many companies, so no one company's surprise bad news can fatally kill you, including the gorillas. It still has reasonable volatility so ATM call or put premiums still are in the 7% to 8% range. It also has tremendous liquidity so exits are easy. Finally, if you are inclined to short the market during a downtrend, you can do so immediately because the down tick rule does not apply. Trading within a system involves a plan. This plan should be implemented in light of at least basic technical analysis and market sentiment analysis. Sometimes I think that limiting myself to a basic analysis works every bit as well because when I get too technical, without the requisite years under my belt, it is easy to begin over analyzing a situation. Most of the time, I have found that sticking to the basics has served me well. Lynda Schuepp's Option 101 article last Sunday provide a good start in the technical analysis area. Austin Passamonte's market sentiment section provides great information on how the commercial traders are reacting. When there is a strong correlation between the technical and sentiment trends, you have a head start in understanding which direction the market will probably move unless changed by new information. When you have a general understanding of the market's probable direction, it is easier to decide which strategy would be potentially profitable. The technical and sentiment analysis are the tools that give us the potential to beat the returns of the mutual funds. Imposing a strategy without regard to these factors is simply employing a hope game that will lose as often as it wins. By understanding the times, and adjusting your strategies and expectations within that framework, you will be exercising the discipline necessary to make reasonable and steady returns. It will also reduce the chances of your account suffering any severe shocks. ************** TRADERS CORNER ************** Is This Any Way To Start The Next Bull? By Scott Martindale Darn, that green on my screen sure looked good for awhile this morning. After the usual pre-Greenspan hype, we still ended up with the all too familiar late-day slide. Hmmm. I suppose it means that he said nothing to foreshadow any change from what the market already has priced in. But despite the modest selloff, there was no big crash today. Encouragingly, the market also didn't crash on the uninspiring Cisco(NASDAQ: CSCO) news last week, so perhaps it won't crash again at all. In fact, the Nasdaq might not retreat back to the downtrend line of lower highs that it burst through during last month's rally. That trendline sits at about 2300, and it has turned into a key level of support. If the index goes through it strongly, it's a bad sign. But it appears to me that even with today's disappointment, the Nasdaq probably won't pierce the trendline. With the Dow, the November and December lows may be tested, but it also might decide to crash right through the formidable resistance at 11,000, never to return. Hey, a guy can dream, can't he? Mr. Greenspan said in his testimony today that, "The exceptional weakness so evident in a number of economic indicators toward the end of last year (perhaps in part the consequence of adverse weather) apparently did not continue in January." This suggests that he is not so worried about the economy as he was a few weeks ago. This doesn't mean there won't be more rate cuts, but the Fed may not be as aggressive as investors had hoped -- thus today's slide. But overall, there are more reasons at this point for the markets to begin to strengthen than for them to weaken further. Because of strong commodity and service sector inflation (running at nearly 4%), we might be facing an inflationary economy. But it's apparent that the Fed Chairman has decided to overlook any inflation problem that may arise from the huge monetary stimulus coupled with the imminent tax cut. Although his longstanding position has been that paying down the debt is a greater priority than cutting taxes, recently he has publicly backed the Bush tax cut in fear that monetary policy alone won't be sufficient. Nonetheless, he reiterated today that paying down the national debt to zero is still the best thing for the economy in the long term. Certainly, the "January Effect" points to market strength this year. All major averages advanced, but the performance of small cap stocks is especially encouraging, as evidenced by the strength in the Russell 2000 since early January. Even technology issues seem to be in a position to gain a little footing. Former high-flying tech leaders like CSCO still aren't cheap, but they're no longer wildly valued. As the techs strengthen, so will the big cap averages. Perhaps the most bullish indicator for stocks is the sharp decline in Treasury bill yields resulting from the recent cuts in the federal funds rate. The likelihood of another near-term cut suggests even lower T-bill rates, which is always bullish for stocks. Over the past 20 years, short-term rates have been radically slashed eight times. With the exception of December 1981 (in which stocks failed to advance due to a quick reversal of rates), the average gain in stocks over the ensuing five months was 14%, and the lowest gain was 8%. Also, money supply has been accelerating, which has historically pointed to a recovering economy. And today, companies are more leveraged (high debt load) than ever. Although many investors fret over the prevalence of highly leveraged balance sheets, in fact it's logical to expect a leveraged economy will respond more quickly to monetary stimulus. As a result, recession fears should subside. So prepare to start putting cash to work in mid- and long-term plays like LEAPS and equities for writing OTM covered calls. Good inflation plays can be found in energy, utilities, alternative energy, REITs, and natural resources -- particularly producers of platinum group elements (PGEs) like palladium. In fact, if it weren't for these sectors, along with regular cash injections from covered call writes across all my holdings, my long-term portfolio would be looking pretty grim right now. But even as the economy begins to strengthen, it is likely that only reasonably valued stocks will outperform over the long-term. The big problem with owning highly valued stocks is that there is no tolerance in the market for any disappointments. Although they will continue to provide good short-term option plays, stocks with high valuations may show lesser gains compared with those having more modest valuations relative to earnings and growth (P/E and PEG). For example, we might see a slower ascent this time among the networking darlings, including Juniper (NASDAQ: JNPR), Sycamore(NASDAQ: SCMR), Extreme(NASDAQ: EXTR), Redback(NASDAQ: RBAK), Ciena(NASDAQ: CIEN), JDS Uniphase (NASDAQ: JDSU), and even CSCO. One of these days I'll give you my two cents about valuations in this important sector. ************************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=1585 ************************************************************** 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: ***** RE $61.00 -2.65 (-1.73) After bouncing down from the upper Bollinger band last week, shares of RE have been trading sideways leading up to today's Greenspan testimony. When the Fed Chairman neglected to wave the "Rate Cut" flag early and often during his testimony, the stock followed the broader Insurance sector lower. Although the volume was light again, the fact that the stock fell through our $62 stop and closed at the low of the day, leaves us no choice but to eject RE from the playlist tonight. PUTS: ***** No dropped puts tonight *************************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=1579 ************************************************************ 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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Tuesday 02-13-2001 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/021301_2.asp *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1572 ************************************************************ ******************** PLAY UPDATES - CALLS ******************** IFIN $83.88 -2.13 (-3.12) After consolidating on Monday at the $86 level, IFIN cleared $87 on Tuesday morning as the BIX.X moved up to its high point of the day. After the Humphrey-Hawkins testimony ended, the banking index and many of the financials sagged amid profit taking, but IFIN held onto its gains in a show of technical strength, until the last hour of the day when heavy selling occurred. However, today’s volume was approximately half of the average daily volume, and the stock is still in its upward channel, and above its major moving averages. Aggressive traders could take positions at current levels if accompanied by strength in the financial sector. More conservative traders might want to wait for IFIN to move above $86 again, which could lead to a move above the next major resistance level at $87.50. If IFIN could clear $90, the stock might be on its way to the 52-week high at $95.25. Monitor the financial sector vigilantly for the continued post Humphrey Hawkins reaction, and keep stops set at $80. AES $57.19 +0.44 (-2.39) Despite a rough start to the week, AES is still in its ascending channel, which began in December. After a sharp dip to $55.68 on Monday afternoon, AES has recovered, and held up well during the post Humphrey Hawkins sell off Tuesday afternoon to close slightly under the nearly converged 5 and 10 dmas at $57.60 and $57.25. In the news today, AES announced that Thermo Electron Corp would sell a power generating unit to AES for $195 million in cash. Aggressive traders could take positions at current levels, or at a move above $58, if it is accompanied by strength in the power producer sector, and others like CPN. Once heavy resistance at $59.25, and then $60 is cleared, AES could be on its way to a high of $65 reached back in November. Continue to set stops at $56. BRCM $75.00 -5.44 (-2.19) We initiated our aggressive call play on BRCM yesterday based on the stock holding key support at $75 and the assumption that the worst has been factored into the stock price. Shares of the broadband chipmaker have been riding down the 5-dma line for the past month. Now at $78.86, a rally above this moving average resistance on volume, ideally backed by buyers pushing up the Philadelphia Semiconductor Index (SOX) and the NASDAQ 100 (QQQ), would allow for an entry on strength. We are keeping our stop price at $75. A close below this level will result in us dropping this play. Today BRCM closed right on its key support price, down 6.76 percent on average volume as CD First Boston downgraded the stock from a Buy to a Hold. An entry at current levels could be an attractive play for high-risk players. As with the conservative entry, wait for sentiment and volume to pick up before jumping in. FDC $62.00 +1.09 (+1.70) Relative strength continues to be the key so far in our successful call play on FDC. When we initiated coverage last week, we mentioned that the stock appeared poised to break out and make a new all time high. With the boarder markets lower on average volume today, shares of the transaction processing giant broke out into blue-sky territory on over 135 percent of ADV. Jolson MP helped in the cause, starting coverage of FDC with a Long Term Buy rating on Monday, while Lehman Brothers came forth today and issued a Buy rating. In order to protect our gains, we are upping our stop price from $58 to $59. Bounces off $61.50, where the 5 and 10-dma are currently converged, as well as $60 and $59 support could allow aggressive traders to enter this play but as always confirm with volume. Continued buying strength carrying FDC above $62.50 would allow for a more conservative play, but make sure sector sisters FISV and PAYX are also moving higher. SDS $56.49 -1.46 (+1.50) Our call play in SDS started the week on the right foot, as an announcement of a new customer in Cessna Finance helped in igniting investor interest, with the stock shooting up 5.38 percent on almost 2.7 times the ADV. Today SDS gave back 2.52 percent on 180% of ADV but considering the dramatic run-up over the course of the last five trading sessions, a pause to refresh is probably a healthy move. Higher risk players looking to enter on pullbacks may find support in increments of $1 at $56, the 5-dma near $55, $54, and our stop price of $53. Volume to the upside recently has been accelerating and if this continues to be the case, look for a break above today's high of $58.50 with conviction for an entry on strength, provided that competitors EDS and KEA confirm upward momentum. ******************* PLAY UPDATES - PUTS ******************* GLW $39.55 -2.15 (-1.41) GLW held the course under the $42 level in yesterday's session with trading activity at just above the norm. But today, traders were given a prime entry. After peaking at $43.37 during amateur hour, the 5-dma ($42.35) failed to keep GLW afloat and the stock rolled over. The increasing volume levels indicated the downward momentum was building. GLW went down for the count and saw the underside of $40 by the close. The bearish close at just a fraction from the intraday low indicates the selling may not be over, but be on the look out for interested buyers. GLW saw this level early in Monday's session and the attractive price level enticed the bulls. To err on the side of caution, we've tightened our stop to $43 from $46. From a broader perspective, other fiber-optic stocks like JDSU, SDLI, LU, and NT are still in a negative trend, which is certainly bodes well going forward. MERQ $66.88 -0.13 (-5.06) A multitude of lucrative opportunities presented themselves during the past two sessions! On Monday morning, the charging bulls took MERQ to $74 only to see the gains quickly disappear. The third test of the supportive $72 level, bolstered by the 5-dma, failed to hold. The bears successfully took MERQ to $66.19 by the time all was said and done. Today was another superb day of trading. After amateur hour, the previous support at $72 acted as upper resistance on attempted rallies. Aggressive entries became viable once again; especially after MERQ slid back under the $70 mark on strong volume. At this point, be patient for further weakness to develop below the $67 level if you're interested in buying into downward momentum; there is support below at $60. Otherwise, consider playing the spread if GLW cycles again. If you choose the latter approach, take note we've lowered our stop to $72 from $74 in an effort to protect existing profits and guard against a strong rebound. For those traders who like to keep track of analysts' comments, SSB recently started MERQ with an Outperform rating. GSPN $25.88 +0.00 (-1.50) With a lack of news to drive the stock price recently, shares of GSPN have been buffeted by the twin forces of technicals and sector sympathy. Volume has been drying up recently, suggesting the lack of buying interest. The 5-dma has provided formidable overhead resistance since late January and so far, this trend has held firmly. Yesterday the stock fell 5.38 percent on 57% of ADV while today, GSPN closed unchanged on less than half the ADV. Failed rallies above the 5-dma (now at $28.06), $28.50 and our stop price of $29 could allow aggressive traders to take a position while a break below support at $25.50 on renewed selling volume would make for a safer play. In both cases, make sure that the technicals and sector sentiment are both moving in your favor before taking a position, gauging the latter using Merrill Lynch's Semiconductor HOLDR (SMH). ISSX $62.19 +1.06 (-0.19) Even yesterday's appearance of a new email virus could not get shares of ISSX or the rest of the Internet Security sector to rally and as such, the stock headed lower, surrendering 6.11 percent of its value in Monday trading. While volume was light, less than 85% of ADV, the majority of it was to the downside, reflecting a state of sellers outnumbering the buyers. Today ISSX took a breather, ending the day down fractionally on 62 percent of ADV, allowing time for its moving averages to catch up to catch up with the stock price. Already a profitable play, we are adjusting our stop price down from $69 to $66. A failed rally at this level as well as the 5-dma at $66.76 could allow higher risk players to make a play while a break below $61 on volume would give the more risk averse the green light to enter, but only if rivals CHKP and VRSN are also showing weakness. BOBJ $72.13 -1.94 (-1.38) Traders that were hoping for some help from Greenspan's testimony today were sorely disappointed, as he gave them no new information. While BOBJ didn't rally leading up to the testimony, it seemed to be held up by the moderate strength across the markets. Once the disappointment hit, the NASDAQ gave up its early gains and headed back down to close right at the low of the day. BOBJ got dragged lower when the buoyant effect of the broader market was gone, and itself closed at the low of the day for a nearly $2 loss. While there may be some mild support near $70-71, the more likely level where the stock could find some help is near $65, also the site of the converged 30-dma ($65.40) and 50-dma ($65.64). After dropping through the 10-dma (now at $76.33), the daily Stochastics has steepened its dive, and BOBJ hasn't been able to mount any kind of recovery, prompting us to move our stop down to $76. Use any bounce near this level as an opportunity to open new positions, or if you prefer, enter on continued weakness that pushes our play below $72. FCEL $58.69 +2.38 (-0.81) Even the early market strength couldn't give FCEL a lift, as the stock failed to even penetrate the $61 level on its first day on our playlist. Sure, the stock gapped up, but very quickly ran out of steam, allowing aggressive traders an opportunity to jump onboard. As the stock rolled over in the middle of the day, the bears had to exercise patience, with support appearing near $57 again. This support is looking tenuous, and like the broader Technology sector, FCEL is looking vulnerable to further downside, now that Greenspan has refused to give an early Valentine's Day present to the markets. Traders were hoping for an indication that the Fed would be more aggressive cutting rates in the near future, and when that wasn't forthcoming, the bears had their way through most of the rest of the day. The buying towards the close solidified the $57 support level, and we would wait for a break below this level before initiating new positions, unless we get another spike near the $61-62 level with a lack of follow through. Other fuel cell stocks (BLDP and PLUG) are looking weak as well; monitor these stocks for an indication of investor sentiment before initiating new positions. IDTI $37.81 -1.69 (-0.25) Persistent weakness in the Semiconductor (SOX.X) and Networking (NWX.X) sectors IDTI has been unable to break out of its dominant downtrend. The stock moved up yesterday and then gapped up above our $40 stop this morning, likely on anticipation that Greenspan would give some indication that he would take a more aggressive approach towards cutting interest rates. Alas, it wasn't to be, and once investors figured out that their hopes were not to be realized, they sold the stock right into the close. Aggressive traders that jumped into the play as it rolled over this afternoon are smiling this evening, as the stock fell more than $3 from its intraday high to close very near the low of the day. Now sitting right on support at $37-38, IDTI looks poised to give conservative traders an attractive entry as it falls below $37. Support may materialize near $35, but once this level is breached, it is looking like the stock will have a quick trip to the $30 level. Even though the daily Stochastics are flattening out in oversold territory, there doesn't seem to be any sign of a catalyst that can lift the stock through the $40 level on a closing basis, and aggressive traders can continue to use failed rallies to this level as an opportunity to jump into the play. STT $106.80 -1.62 (-1.20) While continuing to take its sweet time about it, STT is gradually heading lower, finally falling below $107 after it became clear that Greenspan wasn't going to give any indication of a more aggressive interest rate cutting strategy. The weak rally yesterday gave aggressive traders a chance to get into the play before the expected selloff after Greenspan's testimony today. Once the expected became known, STT dropped sharply and tested $106 for the first time in over 3 weeks. The declining 10-dma (now at 109.68) is continuing to pressure the stock and further weakness in Financial stocks in the next few days could be just the ticket to get this play headed downhill at a higher rate of speed. Daily stochastics are just entering oversold, but if significant weakness emerges in the Brokerage (XBD.X) sector, it is likely to accelerate STT's decline. Watch this index for an indication of investor sentiment before opening new positions. We have moved our stop down to $109, and aggressive traders can continue to add to positions on failed rallies to this level. More conservative players will want to wait for a drop through $105 before playing. As STT adds to its losses, watch for support to materialize near $98-100, the level where the stock found support in mid-January. ************************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=1586 ************************************************************** ************** NEW CALL PLAYS ************** AGGRESSIVE: MLTX - Multex.com, Inc. $20.00 +0.75 (+1.13 this week) Operating in the Financial Information Services industry, Multex.com provides investment information and technology solutions to over 500 information and distribution partners, including Yahoo!, Quicken.com, AOL, and CBS MarketWatch. The company's products include MultexNET (an online source of real-time investment research and financial information), MultexEXPRESS (the Web-development, site hosting, and ASP business), BuzzPower (a collaborative commerce, messaging and e-community solution). Rounding out MLTX's offerings is Multex Investor properties (Multex Investor, Market Guide and Sage Online - providers of qualified retail and high net worth individual leads for the brokerage, banking and institutional clients). Taken apart with the rest of the dot.com stocks last year, MLTX fell from $39 at its peak to a low in early December near $8. Since then the stock has more than doubled, climbing briskly above the 20-dma (now at $17.71), and bouncing there to confirm that level as support last week. While it is likely to find overhead resistance near current levels, we are looking for the bulls to continue charging ahead. Today the stock rallied nearly 4% on more than double the ADV of 207k shares. This is particularly encouraging in light of the weakness seen across the broader markets and raises the possibility that the bulls will attempt to push through the $20.50 resistance level in the next few sessions. So what is driving this stock higher, you ask? The move got started on December 5th, when the company signed a multi-million dollar deal with Merrill Lynch HSBC. That announcement was the first of a string of new products and service agreements over the past few months, with a sprinkling of analyst upgrades thrown in for good measure. JP Morgan upgraded the stock to Buy on January 26th, and LaSalle Street Securities began coverage today with a Long-Term Buy rating. Not only that, but the company impressed the street with its earnings report on January 25th, beating estimates by a penny and maintaining its triple-digit revenue growth rate. We are placing our stop at $18, just above the 200-dma, and aggressive investors can target shoot intraday dips above this level for new entries. More conservative investors may get their entry first though, as MLTX pushes through near-term resistance at $20.50. BUY CALL MAR-17.5 UXM-CW OI= 51 at $3.75 SL=2.25 BUY CALL MAR-20 *UXM-CD OI= 27 at $2.19 SL=1.00 BUY CALL MAR-22.5 UXM-CX OI= 0 at $1.25 SL=0.50 Wait for OI! BUY CALL MAY-17.5 UXM-EW OI= 13 at $4.88 SL=3.00 BUY CALL MAY-20 UXM-ED OI=625 at $3.63 SL=2.00 BUY CALL MAY-22.5 UXM-EX OI=124 at $2.63 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=MLTX ESRX - Express Scripts, Inc. $99.66 +1.66 (+1.41 this week) Express Scripts provides progressive health care management by leveraging their expertise in pharmacy benefit management (PBM) to positively impact their clients' total health care benefit. They combine pharmacy and medical claims data to develop new strategies for decreasing total health care spending and improving health outcomes. In addition, they apply managed care principles through diverse health care businesses. Using a managed-care focus, their businesses deliver cost-effective, quality programs. They combine proven fundamentals with advanced capabilities, resulting in value-added products and services for their clients. Since bottoming out last Spring, shares of ESRX have been rallying strongly. Investors last year looking for a defensive play found the stock an attractive place to put their money. Sector sentiment was also on the company's side, as the Healthcare sector had a banner year 2000. On a more company-specific note, strong earnings growth and the trend towards customer demand for prescriptions sent through the mail has helped the company to grow at a higher than expected level. Last week ESRX reported record earnings, beating Street estimates by a penny, with 47 percent revenue growth year-over-year. What's more, the company greatly improved its financial position through early debt retirement. This led to a number of positive analyst comments following the report. Banc of America Securities re-iterated their Buy rating and $120 price target on the stock while UBS Warburg re-iterated their Buy rating and their price target of $114. CIBC also re-iterated their Buy rating and Goldman Sachs maintained their position on the stock, which is on their Recommended list, a step above a Market Outperform rating. Today, ESRX gained 1.69 percent on over 1.5 times the ADV following a well-received conference call. Continued buying pressure launching the stock above resistance at $101 would allow for a conservative entry, if peers AET and UNH are also moving higher. Higher risk players looking to enter on a dip may find support from the 5 and 10-dma at $98.09 and $96.25. The $95 level could also be a target to shoot for but make sure ESRX closes above our stop price of $96. BUY CALL MAR- 95 XTQ-CS OI= 563 at $ 8.63 SL=6.00 BUY CALL MAR-100*XTQ-CT OI=1135 at $ 5.75 SL=4.00 BUY CALL MAR-105 XTQ-CA OI= 63 at $ 3.50 SL=1.75 BUY CALL MAY-100 XTQ-ET OI= 8 at $10.88 SL=8.25 BUY CALL MAY-105 XTQ-EA OI= 10 at $ 8.50 SL=6.00 http://www.premierinvestor.com/oi/profile.asp?ticker=ESRX LOTTERY: LOW - Lowe's Cos Inc $56.25 +2.25 (+2.74 this week) Lowe's Companies are retail distributors of building materials and supplies through its stores in the US. They trail behind the king of the industry, Home Depot (HD) in stores and sales. Their products include lumber, home decoration and lights, kitchen, bath, and laundry items, yard tools, patio accessories, garden tools, and heating, cooling, and water systems. They recently announced plans to sell $500 mln in zero-coupon convertible notes to help fund expansion plans, which include building 75 home-improvement stores in the northeastern US within the next five years. The Lowe's Companies announced last Friday that it'd meet the lowered forecasts of $0.37 notwithstanding its unexpected profit shortfall of about $0.04 cents due to its four-day 10% holiday sale it held to match a similar program offered by its fierce competitor, Home Depot (HD). The announcement provided much needed relief to nervous investors. The judicious outlook also endorses little downside risk for the stock price over the near- term. And that's precisely why we added LOW to our call list! Friday's $3.51, or 7% jump combined with the extended gains into this week provide the upward confirmation going forward. The company will report its final earnings' results on February 26th, BEFORE the opening bell, so be aware of the time frame. We'll exit the play prior to the announcement or if LOW violates our $54 protective stop, whichever comes first. We're optimistic, however, that LOW will continue making steady gains in a cooperating market environment. To enter more on the side of caution, consider buying into subsequent momentum above the $56 level versus buying the dip on a pullback. BUY CALL MAR-50 LOW-CJ OI= 283 at $7.20 SL=5.00 BUY CALL MAR-55*LOW-CK OI= 815 at $3.50 SL=1.75 BUY CALL APR-50 LOW-DJ OI=1857 at $8.20 SL=5.75 BUY CALL APR-55 LOW-DK OI=1449 at $4.90 SL=3.00 http://www.premierinvestor.com/oi/profile.asp?ticker=LOW ************* NEW PUT PLAYS ************* AGGRESSIVE: ABGX - Abgenix - $33.94 -3.25 (-1.62 this week) Abgenix is a biopharmaceutical company focused on the development and commercialization of fully human monoclonal antibody therapies for a variety of diseases. The company's antibody technology platform, which includes XenoMouse (TM) technology enables the rapid generation and selection of high affinity, fully human antibody product candidates to essentially any disease target appropriate for antibody therapy. Abgenix leverages its leadership position in human antibody technology by building a large and diversified product portfolio through the establishment of licensing arrangements with multiple pharmaceutical, biotechnology and genomics companies and through the development of its own internal proprietary products. The biotechnology sector is in the midst of a correction, and many companies in this sector are experiencing heavy selling, as bloated valuations come back to reality. The biotech sector (BTK.X) fell below its 200 dma of 643.43 and its 50 dma of 611.43 early in February, and since then, many stocks such as HGSI have offered the opportunity for profitable put plays. ABGX made a head start on the sector's correction by falling below its 200 dma of $60.16 in late December, and since that time, has lost nearly half its value. After a weak failed attempt to reach the 50 dma of $53.70 late in January, ABGX suffered a serious blow when Robertson Stephens issued a recommendation which stated that they had dramatically increased their estimated expenses and losses for 2001 and beyond due to ABGX's increased expenditures to fund further clinical development. A weekly chart of ABGX shows a long term bearish wedge pattern with strong support at the $35 level, which has just been broken. The next major support levels are $30, and the 52-week low at $25.88. On Tuesday, ABGX struggled to clear $38, but rolled over in the afternoon just as the BTK.X fell below its 50 dma of $611.43. Aggressive traders might take positions on a roll over from $35 if the BTK.X stays below its 50 dma. Conservative traders might want to wait for a break below $33 on high volume, accompanied by weakness in the overall market and BTK.X. Watch others like HGSI, and MEDX and set stops at $37. BUY PUT MAR-35*AZG-OG OI=38 at $5.13 SL=3.00 BUY PUT MAR-30 AZG-OF OI=20 at $2.56 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=ABGX A - Agilent Technologies Inc $47.37 -3.75 (-5.13 this week) Agilent is a diversified technology company that provides solutions to high growth markets within the communications, electronics, healthcare and life sciences industries. They're a leading maker of analysis equipment with 51% of sales deriving from its Test and Measurement Unit. Recently Philips Electronics agreed to buy Agilent's Healthcare Solutions for $1.7 bln. Customers include AT&T, Cisco, and Pharmacia. Agilent Technologies defied the NASDAQ's slump last Thursday and spiked a whopping 8.1%, or $4.07, on news of its success with a powerful visualization software package, AVS/Express, developed by Advanced Visual Systems. The rally was short-lived and the stock succumbed to the negative pressure of the market and more specifically, its sector the next day. Related stocks such as BLDP, SANM, PLXS, and SLR are all trading near their respective lows, too. Although Agilent (A) is confirmed to report earnings next Tuesday, February 20th, we decided to add it to our put list as a quick in-and-out type play. Today the share price suffered a technical breakdown notwithstanding a recent Strong Buy recommendation and $130 price target from Lehman Brothers. Following Greenspan's Congressional Address today, the support at the $50 and $51 levels, which was also bolstered by the converged 5 and 10 DMAs, faltered. A panicky 5.3% sell-off ensued, leaving the stock in a precarious position. We're looking for the losses to extend into the earnings' announcement scheduled for next week. It'll be important to confirm the downtrend before taking positions - we've set a tight stop at the $50 mark. Also, be prepared for quick exits in light of the narrow time frame. Aggressive traders might consider beginning a play if A continues it downtrend line amid a declining market or fails to break through old support ($51) and rolls over on strong volume. BUY PUT MAR-55 A-OK OI= 456 at $9.30 SL=6.50 BUY PUT MAR-50*A-OJ OI=1381 at $5.60 SL=3.50 BUY PUT MAR-45 A-OI OI= 188 at $1.88 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=A ******************************************** Do you like OptionInvestor? Then vote for us as a favorite site: http://www.investorlinks.com/vote.html Thanks for your support! ******************************************** ********************* PLAY OF THE DAY - PUT ********************* STT - State Street Corp. $106.80 -1.62 (-1.20 last week) State Street is a bank holding company and is one of the world's leading specialists in serving institutional investors. The company provides a full range of products and services for portfolios of investment assets. Customers include mutual funds and other collective investment funds, corporate and public pension funds, corporations, unions and non-profit organizations both in and outside of the United States. Most Recent Write-Up While continuing to take its sweet time about it, STT is gradually heading lower, finally falling below $107 after it became clear that Greenspan wasn't going to give any indication of a more aggressive interest rate cutting strategy. The weak rally yesterday gave aggressive traders a chance to get into the play before the expected selloff after Greenspan's testimony today. Once the expected became known, STT dropped sharply and tested $106 for the first time in over 3 weeks. The declining 10-dma (now at 109.68) is continuing to pressure the stock and further weakness in Financial stocks in the next few days could be just the ticket to get this play headed downhill at a higher rate of speed. Daily stochastics are just entering oversold, but if significant weakness emerges in the Brokerage (XBD.X) sector, it is likely to accelerate STT's decline. Watch this index for an indication of investor sentiment before opening new positions. We have moved our stop down to $109, and aggressive traders can continue to add to positions on failed rallies to this level. More conservative players will want to wait for a drop through $105 before playing. As STT adds to its losses, watch for support to materialize near $98-100, the level where the stock found support in mid-January. Comments Beautiful entry off of $109 this morning, from where STT sunk steadily throughout the session. We are looking for continued selling pressure tomorrow. Look to entry to this put play on further weakness below today's low of $106.25. Below $105, the downward momentum may accelerate. If the shorts let the stock rally early tomorrow, look for rollovers at resistance at $108 to gain entry. ***February contracts expire on Friday*** BUY PUT FEB-110 STT-NB OI=700 at $4.20 SL=2.75 High Risk! BUY PUT FEB-105 STT-NA OI=115 at $1.55 SL=0.75 High Risk! BUY PUT MAR-110*STT-OB OI= 88 at $7.80 SL=6.00 BUY PUT MAR-105 STT-OA OI= 24 at $5.20 SL=3.50 http://www.premierinvestor.com/oi/profile.asp?ticker=STT *************************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=1580 ************************************************************ ************************ COMBOS/SPREADS/STRADDLES ************************ Greenspan's Optimism Sends Stocks Lower... The stock market took a bearish turn today after Federal Reserve Chief Alan Greenspan indicated that he would be much more patient and deliberate in making future adjustments to interest rates. Monday, February 12 Blue chip stocks rallied today in anticipation of an optimistic speech from Fed Reserve Chairman Alan Greenspan at the upcoming Humphrey-Hawkins testimony. The Dow closed 165 points higher at 10,946. At the same time, worries continued in the technology sector, limiting the NASDAQ to an 18 point gain to 2,489. The S&P 500 index was up 15 points to 1,330. Trading volume on the Big Board was a light 1.01 billion shares, with winners beating losers 1,956 to 868. Activity on the NASDAQ was meager at 1.75 billion shares exchanged with advances edging declines 2,005 to 1,781. In the bond market, the 30-year Treasury fell 16/32, pushing its yield up to 5.47%. Sunday's new plays (positions/opening prices/strategy): Alza (NYSE:AZA) FEB37P/FEB40P $0.60 credit bull-put Alza (NYSE:AZA) APR45C/FEB45C $2.65 debit calendar Pfizer (NYSE:PFE) MAR50C/MAR47C $0.55 credit bear-call Icos (NASDAQ:ICOS) APR50C/MAR50P $10.38 debit straddle TV Grupo (NYSE:TV) APR50C/MAR50P $8.30 debit straddle MetroOne (NASDAQ:MTON) MAR40C/MAR25P $0.25 credit synthetic There were a number of excellent opportunities to participate in the new combination positions. Alza and Pfizer were active and the target prices were available in both issues. The straddles in Grupo Televisa and Icos were less cooperative, but we expect to achieve lower debits in those plays in the coming sessions. The Reader's Request position in MetroOne was also available as the volatile issue dropped below $30 in afternoon trading. Portfolio Plays: The bullish activity in industrial stocks came as a surprise to many investors, as technology stocks were first in line for a technical recovery. Confidence in a future reduction in interest rates was seen as the driving force behind the rotation into Old Economy issues and Alan Greenspan's Humphrey-Hawkins speech is expected to shed some light on the subject. Analysts say lower borrowing costs are needed to offset the effects of a slowing economy and help corporate earnings recover from recent declines. Among blue-chip stocks, Johnson & Johnson (NYSE:JNJ) topped the gainers Monday, rising over $3 to a recent high near $98 after Banc of America upgraded the issue, saying the company's new coated stents will have a positive affect on the firm's growth. Wal-Mart (NYSE:WMT) and International Business Machines (NYSE:IBM) also led the Dow higher. In technology issues, chip stocks moved upward on strength in Intel (NASDAQ:INTC) and Applied Materials (NASDAQ:AMAT). On the downside, the Data Storage group slumped after Emulex (NASDAQ:EMLX) said it could miss its third-quarter earnings forecast because of a slowdown in fiber-channel product orders. Inside the broader market, biotechnology stocks added support, with Celera Genomics (NYSE:CRA) rallying after the firm published its findings on the assembly and sequencing of the human genome. A long list of retail and consumer-products shares also boosted the S&P 500 while utility and oil service companies consolidated from recent gains. The Spreads Portfolio enjoyed today's upside activity and there were a number of highs achieved during the session. Household International (NYSE:HI) finished above $60 for the first time in it's history and our bullish synthetic position in the issue was one of the best plays during the past month. Landry's Seafood (NYSE:LNY) jumped to a two-year high near $12 and our bullish position in that stock has also exceeded expectations. The debit straddle in Jefferson Pilot (NYSE:JP) experienced some excellent upside activity as the stock spiked above $70 but unfortunately, the options are expiring Friday and the move did not add much to the value of the position. Murphy's Law continued to play a big part in our portfolio as Lennar (NYSE:LEN) rebounded amid the optimism for a future rate cut. The bullish credit spread (that we closed) will likely expire at maximum profit. Another issue in that category, Molex (NSADQ:MOLX) also rallied and it may yet achieve profitability. Qualcomm (NASDAQ:QCOM) was a big winner, up $3.75 to $83 and other bullish issues in the technology group included; Advanced Energy (NASDAQ:AEIS), AT&T (NYSE:T), Cabot Microelectronics (CCMP), International Rectifier (NYSE:IRF) and Motorola (NYSE:MOT). The surprise of the day was the new play in Davox (NASDAQ:DAVX), which broke-out to a recent high near $12. Traders who managed a favorable entry in the synthetic position will likely be rewarded in the coming sessions. Tuesday, February 13 The stock market took a bearish turn today after Federal Reserve Chief Alan Greenspan indicated that he would be much more patient and deliberate in making future adjustments to interest rates. The NASDAQ ended down 61 points at 2,427 and the Dow finished 43 points lower at 10,903. The S&P 500 index was down 11 points at 1,318. Trading volume on the NYSE hit 1.06 billion shares, with winners outpacing losers 1,633 to 1,440. Activity on the NASDAQ was light at 1.72 billion exchanged, with winning issues leading declining issues 2,131 to 1,634. In the bond market, the 30-year Treasury rose 4/32, pushing its yield down to 5.41%. Portfolio Plays: Stocks retreated today as investors showed their disappointment with the upbeat remarks on the U.S. economy by Federal Reserve chief Alan Greenspan. The nation's leading economist told the Senate Banking Committee that when the glut in capacity recedes, earnings growth will recover. Greenspan's bullish comments on technology spending, which has accounted for a large part of the domestic economic growth in the past, were very optimistic. His attitude implied that he expects the economy to rebound and that suggests a less aggressive stance on interest rates going forward. The market took the news in a bad way, with most sectors falling into the red during the afternoon session. Both technology and industrial issues were affected by the sell-off and only a few select companies in the retail, paper, chemical and natural gas segments saw buying pressure. Among the broader market groups, financial, drug, biotechnology and oil shares slumped. Our new bearish position in Pfizer (NYSE:PFE) received some good news as the company announced it halted a late-stage trial of patients with neuropathic pain being treated with the firm's experimental drug pregabalin, due to concern by U.S. regulators over tumors in mice who had been given the drug. The stock retreated to $45 and our call-credit spread is in good shape. The debit straddle in UnumProvident (NYSE:UNM) also benefited from a downward move with the position offering a $1.60 profit as the issue dropped to $26. The neutral-outlook strategy provided an 80% return in just over one week. Navistar (NYSE:NAV) has backpedaled almost continuously since the take-over speculation began to fade and our calendar spread in the issue has performed as well as could be expected. With the front-month premiums evaporating, we have decided to roll to March in the short option and the new spread; APR-$30C/MAR-$30C will have a cost basis of $0.60. Our new play in that category, Alza (NYSE:AZA) is doing very well and today's small rally in the issue moved the neutral calendar spread into a profitable range. A credit now exists in the overall position and we will exploit that potential as we transition to the March options later in the week. Questions & comments on spreads/combos to Contact Support ****************************************************************** - STRADDLES & STRANGLES - ****************************************************************** CPN - Calpine $45.62 *** Utility Sector Volatility! *** Calpine Corporation (NYSE:CPN) is an independent power company that is engaged in the development, acquisition, ownership and operation of power generation facilities and the marketing of electricity predominantly in the United States. The company owns interests in 44 power plants having an aggregate capacity of 4,273 megawatts. The company also has ten gas-fired projects and two project expansions under construction having an aggregate capacity of 5,935 megawatts, and has announced plans to develop twelve additional gas-fired power plants. Upon completion of its projects it has under construction, Calpine will have major interests in 54 power plants located in 17 states. The Electric Utility sector has been very active recently with the California energy crisis, the increased demand for heating oil and mandates from the Federal Government that gas companies will ensure adequate fuel supplies to cash-strapped electricity producers. Calpine, one of the nation's largest merchant power providers based in California, has also been affected by the recent energy crunch, as much of their production is fueled by natural gas. Since the volatile activity in the industry will likely continue for the next few months, this position offers a great way to speculate on the character of CPN's movement. The issue also meets our criteria for a favorable debit straddle; cheap option premiums, a history of adequate price movement and future events or activities that may generate volatility in its industry. PLAY (conservative - neutral/debit straddle): BUY CALL MAR-45 CPN-CI OI=3185 A=$3.70 BUY PUT MAR-45 CPN-OI OI=346 A=$2.90 INITIAL NET DEBIT TARGET=$6.50 TARGET ROI=25% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=CPN ****************************************************************** CAL - Continental Airlines $51.85 *** Range-bound? *** Continental Airlines (NYSE:CAL) is a United States air carrier engaged in the business of transporting passengers, cargo and mail. Continental, together with its wholly owned subsidiaries, Continental Express, and Continental Micronesia, serve over 200 airports worldwide. Continental flies to over 130 domestic and approximately 87 international destinations and offers additional connecting service through alliances with domestic and foreign carriers. Continental directly serves 16 European cities, eight South American cities, Tel Aviv and Tokyo, and provides service to Mexico and Central America. Through its Guam hub, CMI offers extensive service in the western Pacific. One of our long-time subscribers asked why I hadn't offered any premium-selling positions in this section during the last few weeks. Unfortunately, there have been very few statistically favorable opportunities with the decline in option premiums and today's search produced only a small number of new candidates. However, this position offers a high probability of a profitable outcome with its robust option premiums and relatively stable trading range. The likelihood of the share value moving beyond our sold (short) strikes is rather low, but there is always the possibility of a technical change in character, so monitor the issue and the industry news on a daily basis. PLAY (conservative - neutral/credit strangle): SELL CALL MAR-60 CAL-CL OI=50 B=$0.65 SELL PUT MAR-45 CAL-OI OI=1210 B=$0.70 INITIAL NET CREDIT TARGET=$1.40-$1.50 ROI(max)=12% UPSIDE B/E=$61.40 DOWNSIDE B/E=$43.60 http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=CA ****************************************************************** - Speculation Plays - These positions are based on recent increased activity in the stock and underlying options. All of these plays offer favorable risk/reward potential but they should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** ZOLT - Zoltek $6.16 *** Cheap Speculation! *** Zoltek (NASDAQ:ZOLT) is a applied technology and advanced materials company focusing on the commercialization of carbon fiber composites. Zoltek is engaged in the developing carbon fibers market, manufacturing products for a diverse range of applications based upon carbon fibers' distinctive combination of physical and chemical properties, principally high strength, low weight and stiffness. Zoltek's operations consist of three business segments: Carbon Fibers, Composite Intermediates and Specialty Products. The Carbon Fibers Segment manufactures and markets carbon fibers and develops applications for carbon fibers. The Composite Intermediates Segment develops, manufactures and markets reinforcements, specialty resins, consumable supplies and manufacturing equipment for the composite manufacturing industry. The Specialty Products Segment manufactures and markets acrylic fibers, nylon products and industrial materials. This unique stock emerged in one of our bullish chart scans and since we have traded the position with success in the past, we decided to offer a speculative option play in the issue. There is little news to explain the recent rally, but the technical indications suggest traders are expecting positive news and the stock has excellent upside potential. Since there will likely be a pullback in the coming sessions, we will try to open the play at a credit, establishing an overall cost basis near $5. PLAY (speculative - bullish/synthetic position): BUY CALL APR-7.50 QOT-DU OI=29 A=$0.62 SELL PUT APR-5.00 QOT-PA OI=14 B=$0.43 INITIAL NET CREDIT TARGET=$0.00-$0.12 TARGET ROI=25% Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $180 per contract. http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ZOLT ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. 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