Option Investor

Daily Newsletter, Thursday, 02/15/2001

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The Option Investor Newsletter                 Thursday 02-15-2001
Copyright 2001, All rights reserved.                        1 of 2
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MARKET WRAP  (view in courier font for table alignment)
        02-15-2001        High      Low     Volume Advance/Decline
DJIA    10891.00 + 95.60 10922.60 10800.60 1.13 bln   1671/1393
NASDAQ   2552.91 + 61.51  2593.09  2536.63 2.10 bln   2249/1502
S&P 100   688.50 +  5.82   690.89   682.68   totals   3920/2895
S&P 500  1326.61 + 10.69  1331.29  1315.92           57.5%/42.5%
RUS 2000  508.85 +  5.36   510.02   503.49
DJ TRANS 3042.47 + 42.98  3047.18  2996.60
VIX        23.46 -  0.76    24.70    23.33
Put/Call Ratio      0.64

Ciena to the rescue!

Thank Nasdaq:CIEN for the ride. Ciena announced earnings
before the open and there was no mention of weakness or whining
about slowing sales. They beat estimates by three cents with a
500% increase in revenue over the same period last year. This
was only the beginning. CIEN then raised guidance by over +10%
for the next quarter and by a dime, $.66 to $.76 for the full
year. They said business was good and expected to get better as
CLEC buyers moved into the higher end switches, a category in
which CIEN feels they will continue to gain market share. The
market applauded and the Nasdaq gapped up +50 points and then
soared to a high of +102 before the buyers evaporated.

The morning news was much better than this evenings. There was
a flood of negative news after the close and Friday may not be
a follow through on the rally.

Dell Computer announced earnings after the bell and missed
already lowered estimates of $.19 by a penny. While that was
not a real surprise the comments by Michael Dell on CNBC were.
Dell refused to give guidance going forward for the year and
stumbled when guiding lower for the next quarter. Saying the
market was "far softer than anyone expected" he cautioned
about the business environment. He tried to spin the conversation
to the dropping cost of components which would help Dell, he
also had to admit that gross margins had dropped to only 18%.
If falling costs were helping Dell then why did the margins
fall? A little doublespeak there. They are in the middle of
a price war and that war had 1700 casualties this week. Dell
announced they were cutting their work force by -4% or 1700
employees and Michael Dell would not say for certain that
there would be no more. For a company that always bragged
about business going forward Nasdaq:DELL is now faced with
life in the real world as competitors are starting to catch
up. Dell's estimates for the next quarter are $.17 or two cents
below current estimates.

Nyse:HWP also announced earnings after the close and met prior
estimates of $.37 cents. This was after HWP lowered estimates
of $.40 last month. In a prepared statement Carly Fiorina said
they could see revenue growth IF "the U.S. economy improves
and global exchange rates hold." (and pigs fly) They said they
were not comfortable with current estimates going forward and
gave all the current reasons including "no visibility" (read
no sales) for future quarters.

Schering Plough, Nyse:SGP also warned after the close and said
first quarter earnings would be down by -15%. Fortunately it
was not economy related. U.S. regulators had inspected some
of the SGP plants and will force the company to correct some
problems before they can receive FDA approval for a key
experimental allergy drug called desloratadine. SGP dropped
-$10 in after hours to $39.

The ugliest news after the bell actually started before the
close. Huge institutional sell orders, one more than 800,000
shares, caused a sharp drop in Nortel, Nyse:NT, stock of about
-$3 to $29. That seller is a happy camper now with the stock
trading as low as $21 in after hours. After the close Nortel
issued an earnings warning and guided analysts to a -$.04 loss
for this quarter instead of estimates of a +$.16 profit. They
said the economy was falling faster than expected and they
were expecting a faster, more severe downturn by the 4Q. They
are going to cut 10,000 workers, 6,000 of which have already
been given notice. Nortel is expecting only half the revenue
growth analysts had previously targeted. This was a more
serious warning than NT had already given in January. NT was
still being sold in huge multiple blocks of over 200,000
shares in after hours. Over 10 million shares have traded
in after hours. The warning hammered the networking
stocks like Nasdaq:JNPR -7, Nasdaq:CSCO -3, Nasdaq:SCMR -3,
Nasdaq:BRCD -5 as well as chip stocks like Nasdaq:BRCM -5,
Nasdaq:PMCS -3, Nasdaq:AMCC -5.

CIBC World Markets downgraded all the cell phone stocks after
the close with NOK, ERICY, SAWS and PWAV leading the list.
VSTR was downgraded by W.R.Hambrecht, Salomon Smith Barney and
SoundView. Amazon, Nasdaq:AMZN, was downgraded by Prudential
to a rare "sell" today. The analyst, Mark Rowen, said he was
cutting his price target to $9 from $20 citing anemic growth
in the company's core books, music and videos division. He
questioned comments by Jeff Bezos about Amazon posting a
"pro forma operating profit" by year end. This is not a
net profit and would exclude things like interest on Amazon's
$2 billion of debt. AMZN fell sharply at the open but closed
slightly positive after several other analysts came to their

Tomorrow is not shaping up as a banner day. The Nasdaq futures
are down -40 and S&P Futures are down -6. With DELL, SUNW, MSFT,
CSCO, ORCL, INTC, JDSU and every other Nasdaq big cap I could
find down sharply in after hours trading the odds of a negative
open are good. It is far from a sure thing with recent earnings
warnings from JDSU and AMAT as evidence that bad news does not
always last over night. However the severity of the NT warning
and the evasive comments from Michael Dell could cast a cloud
over the Nasdaq again. Just yesterday morning we were only +133
points above our low for the year. Despite the rally today,
which was mostly short covering, we are still on shaky ground.

The volume was good today with the Nasdaq trading over 2.1
billion shares for the first time since the new single counted
volume system began. There was a lot of short covering but there
was some retail buying as well. Investors are tired of waiting
and ready to buy any positive news. Friday has a flood of
economic reports which could inflate or deflate Fed rate cut
hopes again. Building Permits, Housing Starts, PPI, Capacity
Utilization, Industrial Production and Michigan Sentiment are
all on the Friday morning calendar. With the markets closed
for Presidents day on Monday there is a good chance traders
will want to go into the weekend flat. Actually the Friday
before Presidents day has been down NINE years in a row. Any
bets for this Friday? The dead stop at 2400 on Wednesday was
encouraging. Another bounce off that level could be viewed as
a real bottom and all the bad news is priced in. That is
significantly below our current level and it remains to be
seen if the Nortel/Dell/HWP news can push the markets back
down into that range. Remember earnings are now officially
over with Dell, HWP and CIEN being the last three big caps
of interest to the tech community. There is no catalyst to
buy stocks as long as companies are warning on a daily basis.
The exception would be a set of market friendly economic
reports on Friday morning. Currently there is only a 35%
chance of a -50 basis point cut at the next Fed meeting as
evidenced by the Fed funds futures. Anything that will improve
those percentages could help lift the market. Friday is also
option expiration and we could see some volatility as a result.
Friday is a wild card but aggressive traders could nibble on
any rebound from deep under 2500 and on any bargain hunting
bounce at the close. Let your conscience be your guide!

Enter passively, exit aggressively!

Jim Brown

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Old Faithful: Our Weekly Relief Rally
By Austin Passamonte

Our once-weekly relief rally arrived right on schedule today.
Every sign was in place to make it a lead-pipe lock and those who
bought February calls on any major index or some of the right
stocks did very well indeed.

Very well if they sold sometime Thursday's session because Friday
is shaping up to be a different story. Fundamental news recited
by Jim in tonight's Market Wrap tells us all we need to know
about the tomorrow. A look at the technicals paints a promising
picture for bears and bulls alike, depending on which future
session we speak of.

Tomorrow will likely be a down open and that was far greater than
even odds from 2:00pm EST Thursday forward. Many traders bought
February puts at that time when QQQ 60 puts (QQQ-NH) were trading
at 0.90 "ask". They closed at 1.85 and chances are will open
better tomorrow as well. How did these traders know? It's all in
the charts.

Technical analysis is merely a barometer of collective trader's
sentiment. Every single dollar invested in the market was done so
from an endless universe of facts, guesses, logic and emotion
combined. Every piece of news known to man is priced in
accordingly. Should all proceed according to what's expected by
the collective whole, technicians win.

Sudden, unexpected news thwarts this effect. After any surprise
all logic, reasoning and emotion must be rebalanced by the
collective body of traders to "price in" the unexpected that
occurred. Make sense?

Well, near-term chart signals were bearish for the immediate
future since early Thursday afternoon and those who heeded the
clear & simple readings and acted upon it will likely cash in
handsome multiples tomorrow. No bullish surprises after the bell
will see our technical analysis continue its intended direction
from there.

That being said, mid to long-term chart signals in the major tech
indexes and all related sectors are turning decidedly bullish.
This at a time when the Dow looks weaker by the day. How should
we interpret this development? Market Sentiment fully expects and
believes a nearby tech rally will emerge, possibly at the Dow's

Does this differ from what you hear in the media? Every place we
turn, tech stocks are being touted like there's no reason to buy
until next September and the Dow is sure to reach 12,000 right
after breaking 11,000. We don't think so.

Is a picture worth 1,000 words? Let's save ourselves 2,000 words
while we're at it:

(Daily Chart: NDX)

As you can plainly see, stochastic action is about to reverse up
from oversold extreme and Relative Strength (RSI) confirms. Not
only that, stochastic values reached slightly lower-lows since
mid-December while price action held considerably higher-highs.
This is clear bullish divergence between the two, as each should
move in unison with one another. Any divergence that occurs in
oversold zones is bullish and that's exactly what we have.

Today's gap-up pushed shorter-term charts to overbought and a
decline was almost assured. Hence the puts this afternoon. The
"Gravestone Doji" candle is also bearish by nature, especially
above the gap. A pullback tomorrow to support and a bounce from
there should be closely monitored by the bulls.

Does this mean the ultimate market bottom lies behind us? We
doubt that very highly, but expect a tradable rally nonetheless.
One session at a time is all we can handle these days!

(Daily Chart: Dow)

Contrary to this, the Dow continues to force its neutral wedge
while stochastic value demonstrates underlying weakness and
pressure to the downside. RSI is wandering flat; no strength

In addition, stochastic action posted higher relative highs since
early January while price action was flat to lower at best. Any
divergence we have in overbought zones is bearish, and that's
what we have?

What would happen over in here if momentum trader's favorite
darlings start popping up a few dollars each next week? More Wal-
Mart (Dow: WMT) for them? Alcoa (Dow: AA)? Market Sentiment
hardly thinks so.

Therefore, we see weakness at least in the early session tomorrow
but tech indexes and sectors seem poised to rally while the Dow
does not. Watch for a pullback to support next session and a
bounce within a couple that could carry techs considerably higher
from where any bounce might occur.

Trade safely and wait for all chart signals to align!


Thursday 02/15 close: 23.46

Thursday 02/15 close: 63.55

30-yr Bonds
Thursday 02/15 close: 5.50%

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.

  (Open Interest)       Calls        Puts          Ratio
S&P 100 Index (OEX)
725 - 710               14,370        1,565         9.18
705 - 690               16,549        6,298         2.63

OEX close: 688.50

685 - 670                6,010       15,918         2.65
665 - 650                  343       15,163        44.21

Maximum calls: 700/5,142
Maximum puts : 675/5,559

Moving Averages
 10 DMA 694
 20 DMA 703
 50 DMA 699
200 DMA 753

NASDAQ 100 Index (NDX/QQQ)
 68 - 66                58,718         9,342         6.29
 65 - 63                65,958        42,844         1.54
 62 - 60                90,725        50,734         1.79

QQQ(NDX)close: 58.40

 57 - 55                43,132        52,770         1.22
 54 - 52                 7,527        38,118         5.06
 51 - 49                 2,957        20,526         6.94

Maximum calls: 70/60,466
Maximum puts : 60/31,640

Moving Averages
 10 DMA 58
 20 DMA 62
 50 DMA 62
200 DMA 81

S&P 500 (SPX)
1400                   16,124         1,607         10.03
1375                    7,700         3,806          2.02
1350                   14,538        14,244          1.02

SPX close: 1326.61

1300                    3,984        10,892          2.73
1275                      588         9,754         11.59
1250                      923         7,822          8.47

Maximum calls: 1400/16,124
Maximum puts : 1350/14,244

Moving Averages
 10 DMA 1333
 20 DMA 1346
 50 DMA 1334
200 DMA 1411


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

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.


Please visit this link for Market Posture:



New Subscriber Focus: Reading The Newsletter
By Janar Wasito

As a former Marine platoon commander, I tend to take a pretty
focused approach to most things that I do. Trading is no
different. Though some of my past articles were highly emotional,
conveying the excitement of making money during a bull market, I
have since learned that it is by removing emotion that traders
really become successful. With this in mind, let me outline how
I now read the newsletter.

I am sitting here in a library, studying for a professional exam.
To put things in context, let me set the stage. I have a stack of
study materials - that is one career, or at least an avenue. I
have another stack of job related materials - resume, contact
information, etc. But in front of me I have a laptop and wireless
modem, and I am looking down at a binder with the weekend contents
of the newsletter inside of it. I printed it out, punched holes in
it, read through part of it, put comments in the side, and
generally marked up what I thought was useful. In a very real
sense, reading the newsletter was a kind of extra elective class
in graduate school - a class in real world trading, where grades
are given every day.

Now, trading is a source of money in my pocket, and so, I take it
even more seriously. If you are going to step into a boxing ring,
you owe it to yourself to work out every day, or twice a day. The
same is true if you are going to float around the world on an
amphibious ship, prepared to relieve an embassy or whatever other
tasks are possible. I have found a direct correlation between how
well I am prepared for a week and whether or not I am profitable
in that week. That is where the newsletter - as well as other
sources of information comes in.

I print out the whole newsletter, and other articles which I find
helpful, and read extensively; then I put the material into quote
programs, look at charts, and reflect on the various possibilities.
If I do this job right, I have made my money before the market
even opens, just as a battle is won before the first shot is ever
fired. If I tried to do it when the market is open (and I have),
I will lose money. On my bookshelf at home, I have several of
these binders and I list the return of the NASDAQ, S&P, DOW, and my
own account for the week on the back of the binder. It is a direct
way of showing whether or not I did my job well that week. The
numbers don’t lie.

I read through the Market Wrap section mainly for a big picture
view of where the indexes are headed, but I take special note of
key indicators, such as a VIX/Index divergence, or a comment on
a particular formation to be wary of. For example, in last week’s
market wrap, Matt Russ made a note about "no catalyst, no buying"
and a Greenspan bump up being "only temporary." In the margin, I
scribble, "short failed rallies" and "short QQQ & QQQ Puts."

The Market Sentiment backs up this thinking but with more detail.
Austin writes of the "next multi-year bottom in place when
commercial S&P 500 traders unwind their historical short position
at the Chicago Mercantile Exchange and begin to accumulate instead
of distribute." Next to this, I again write, "short QQQ on hourly
chart overbought...be prepared to enter QQQ LEAPS when/if market
bottoms in several weeks." I take special note of the divergence
between commercial traders and small specs - I wish I had taken
special note of this situation several months ago. But it is not
too late to see the situation and profit from it.

In the Market Posture section, I often note that when the
indicators are pegged either left or right, it is just about time
for them to swing in the opposite direction. I make a quick scan
of this page, often drawing an arrow from an extreme oversold
condition back toward the center, just to reinforce my thinking
on the matter.

The other columns I skim for nuggets on money flows into funds, or
an innovative strategy for a type of market (such as the
butterflies which Lynda Schuepp discussed in last Sunday’s
newsletter). I mark the butterfly strategy to paper trade as she
suggests. The various columns - Ask The Analyst, Traders Corner,
Options 101 - often contain bits and pieces of information that I
might not find immediately useful, but which will come in handy
somewhere down the road. It’s like cross training on foreign
weapons in the military. 99% of the time, we will use American
weapons which we train on all of the time. But, in the rare
circumstance where a unit has to use captured equipment, it makes
sense to be able to operate another piece of gear. The same is
true of the thought process used to formulate a strategy like a
butterfly which makes money just because time passes - and those
Mondays are great because of the extra drippage over the weekends.

In the LEAPS section, I read Mark Phillips piece with a little
more than casual interest, because I have given back a large part
of my 1999 profits due to use of LEAPS in 2000. Great strategy
during the late 1990s, horrible strategy in 2000 (unless you were
using LEAPS Puts - which might be something for Mark to think
about?). I also reflect that the drops in LEAPS in the list
reflect the patterns in the overall market, and I think about
novel strategies, such as selling LEAPS against core stock holdings
and buying shorter term puts. Such a strategy could have worked
well in early 2000 with large cap tech stocks that many investors
held as core long-term holdings. I am happy that the LEAPS section
is starting to focus on non-tech plays like CLX and WM, and I make
a note to investigate these types of plays further.

The core of my weekly planning is in the Call and Put play
section. Even though I am focusing on the QQQ, I enter each of the
call plays into my quote software. I am particularly happy to see
low volatility plays, since in this environment, it will probably
be easier to make money on the slow movers rather than the high
fliers of the past. I am thinking about the strategies to use on
these plays and I make a note to consider bullish strategies like
bull put spreads to minimize the effect of time decay on the plays,
which might take longer to develop than the fast hitting tech
plays of years past. In any case, close focus on these plays
helps me to get a feel for what is working in this market and for
what is failing.

I am interested in the covered calls section because this is the
strategy I want to use to manage the majority of my money. This is
the house (eventually), the base, and the income stream that
handles the monthly and quarterly bills. This is where I want to
make 5% a month and compound it. Although I have not been
following this section as "religiously" as I did the straight
calls in the past, I am going to make a special effort to do so
now because I want to understand the selection criteria and
trading methodology to set up covered calls. I might make my own
variations on this strategy, but I want to learn how to employ
the different facets of the strategy. The key here is compounding,
but that is a whole separate column. If my short term account is
the equivalent of a Marine Expeditionary Unit floating out there
and looking for the most aggressive trading opportunities, my
covered call writing is the equivalent of my home base, that makes
sure I stay in business for many years to come. Therefore, I
allocate 50 - 85% of my resources to this strategy.

I skim through the naked puts section quickly. There is a range
of risk in options strategies, some more conservative, like
covered calls, some much more aggressive, such as naked puts. I
know from attempting this strategy in early 2000 that the strategy
is not for me, so I scan the plays for possible plays with other
bullish strategies, and I move on.

I scan the weekly events list, which is very useful. I pen in the
fact that Greenspan will be a catalyst on Tuesday, and circle the
inventory numbers on Wednesday, and wonder whether those numbers
will be a problem, given the recent emphasis on inventories by
companies like CSCO, PMCS, and others.

Importantly, I boil all this thinking down into an actionable plan
on the back of the first page that I have printed out. I use a
Marine Corps planning acronym - SMEAC (Situation, Mission,
Execution, Admin, Command & Control) - to sketch out my plan for
the week. This works for me, since I was trained to think this
way. However, for the musicians, artists, doctors, etc, in our
readership, I would suggest that you use whatever planning
template brings together the whole orchestra for you. My plan for
the week ends up looking something like this:

Situation: Oversold but still downward momentum
Mission: Make $ by paper trading & taking best trades with ___ max.
1. Find optimal QQQ Entry
2. Track OIN Call Plays
Admin: Get Qcharts up
Command & Control: Establish contact with other traders on key

It is important to note that the newsletter is not my only source
of information. I read widely in other business periodicals and
sources on the Internet. It would be hard to summarize the sources
because they are so wide. The newsletter probably provides the
closest thing to that last minute intelligence report that a unit
commander needs to look at before going into battle (or whatever
metaphor most suits you, be it musical, artistic, or athletic). It
is a one-source summary that includes everything in one way shape
or form, although other sources go into more detail about important
subjects like the impact on the high yield bond market on the
build out of the telecom infrastructure. Those types of broader
articles will impact the market weeks and months down the road, and
are relevant for longer-term plays. But the newsletter hits almost
everything that will impact the market tomorrow and next week.

Marty Schwartz’ rule 7 for trading is, "work, work, work," and
there simply is no substitute for sitting down for 2 or 3 hours
with a pen, hard copy of the newsletter, and your quote software.
When I do that I find I am ready for what the market throws at me.
When I don’t, and I try to trade anyway,  I usually find that I get
hit with something that I should have seen, but didn’t.


Identifying Divergence With Stochastics
By Molly Evans

In charts we display in articles, we often remark on the
divergence of price action to the tracings of the stochastics
or MACD.  Both Stochastics and MACD, known as moving average
convergence-divergence, are oscillators.  They are tools used
to identify countertrend points - or should we say, reversals,
from the prevailing trend.  Naturally these appeal to many
trader's contrarian inclinations.

What these two indicators actually do is reflect the momentum
of a move.  A healthy price trend will show strong momentum,
while a weakening trend will alert the trained eye to stagnant
or declining momentum , which is often the prelude to a reversal
or a correction.

Additionally, these momentum indicators will expose shorter-term
market extremes or exhaustion points which we term "overbought"
and "oversold."  The logic is that extremely strong and rapid
price moves are not indefinitely sustainable.  When a stock or
a market rises or falls a great distance over a short period of
time, momentum begins to slow and there is often a countertrend
move of the prevailing trend at least for a short time.

Stochastics measures momentum by comparing a recent close, whether
it be during a five minute, sixty minute, daily, weekly or whatever
time period, to the absolute price range (high minus low of the
range) over a specified period.  That resultant line is %K.  Then,
the second line of the stochastic is %D which is just a specified
period of %K's moving average.  In our daily trading, most of
us use the ten, three, and five settings.  If you use Q-charts, you
can right click on the stochastics indicator.  For %K fill in the
"length" as ten, the "smoothing" as three and for the %D make the
smoothing five.

The MACD is just another short term indicator which takes the
difference between two exponential moving averages of specific
length and then calculates a specified moving average of this
difference.  A buy signal is generated when the lines cross over
the neutral line to the upside and conversely a sell signal is
generated for crossing to the downside.  We use a length of eight
periods, crossed by 18 periods and a moving average of eight again.
These generate shorter-term signals pertinent to shorter term
traders.  Textbooks will default these lengths to a 12 period ma,
26 period ma and then a nine period moving average of these.

As I said in the opening paragraph, one of the best uses for
oscillators beyond giving us a heads up on overbought and oversold
conditions, is that of divergence.  Divergence is a very valuable
bit of information.  It refers to the phenomenon of momentum moving
in the opposite direction of price.  A classic divergence is when
there is a higher priced high that is unconfirmed with a lower
oscillator high OR when a lower price low is accompanied by a
higher oscillator low.

If you watch for it - you can pick them out all day long.  They're
not significant on a very short-term chart but when you can see
this happening on a longer-term chart, you're probably on to
something.  Let me show you what is probably the best trade I ever

I found JNIC on a weekly chart back in mid to late October.  If
you'll recall, everything tech was coming down.  Everything but
JNIC.  I had to wonder why it was hitting the all time high list.
I pull up the chart, see this stock making a blow off top on
declining volume which is unconfirmed by the stochastic as it
has already crossed over to a sell signal (%K fast moving average
crossed over %D slower moving average = losing momentum).

I guess there were some poor people excited that something was
remaining strong in the face of everything else declining that
they were willing to pay the next price up.  I'd watch that stock go
by in 100 share lots - all small traders.  A little searching turned
up some fundamental problems and I just couldn't help myself from
averaging in to a put position.  I know I can't pick a top in a
mania but if I wait until the indicators are oversold at least on
the daily, I know my chances of getting hurt are less and my chances
of success are escalated.  And that's what I did.

Let's look at another example of topping action.  I think you will
all recognize this one.  Had you sold on the sell signal - as
generated by the weekly stochastic, you'd have missed a good run.
However, it does show you that price can be carried higher on hype
not necessarily momentum of volume and healthy advances.

I think that the bottoming oscillators are more difficult to
interpret.  My question is - if the price is lower, and the
oscillator is higher, doesn't that mean that the price has further
to go before it reaches oversold?  I showed an example of the
healthcare index in an article a few weeks ago.  I went to the
main man of divergence (within our site) and Austin said that he
has found that any time there is a price divergence with the
oscillators and they are in the oversold or overbought condition -
it is either bullish or bearish.  And yes, from what I've watched,
it is true.  However, just as in the case of this chart, it might
just be a dead cat bounce that you get.  There's still no
substitute for vigilance of watching your positions.  The trade
could have been profitable, not wildly so, but profitable.


So, back to searching.  Check out the SOX.X chart though.  Here we
have two examples in one.  In the first example the price is the
same yet the stochastics is higher as in the healthcare chart and
then in the second example we've got a much higher low that the
stochastics thinks is even more oversold than before.  That is the
one that's the classic that makes the best trades.

Out of time again - they're waiting on me to send it to the
programmers.  Keep your eyes peeled.  These divergences are worth
a lot of money if you can pick them out and pull the trigger.
Good luck!  MKE

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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.


SEBL $65.13 +1.75 (+8.00) While SEBL rallied with the Nasdaq
and the software index, spurred by excellent earnings and a
bullish forecast from Ciena, SEBL's afternoon roll over does
not bode well for the stock going forward.  In addition, the
software index (GSO.X) is still below its 50 dma of 303.65.  In
today's enthusiastic market, SEBL should have been able to
perform better, so we will take small profits and drop the
play tonight.

BRCM $85.00 +3.81 (+7.81) Broadcom is a stock that makes frequent
appearances on our play list, and for good reason.  It's a
fundamentally sound company in an important emerging industry
with volatile stock price movement, allowing us to make
substantial gains playing it both ways.  Yesterday BRCM dipped in
the early morning, giving aggressive traders an ideal entry,
whereupon it rocketed past our recommended conservative entry
point at the 5-dma.  From there the stock continued higher to end
the day up over 8 percent on stronger than average ADV.  While
BRCM also made a positive close today, we have decided to sell
too soon and close out this highly successful play, taking our
large gain in a few short days safely off the table.  But rest
assured that we'll be back for more.

ESRX $92.63 -5.50 (-5.63) It seems that resistance at $101 was
just too formidable for ESRX.  Yesterday the stock made one last
attempt in early morning trading but with a lack of conviction on
the part of the bulls, the bears took the driver's seat,
resulting in a down Wednesday for the stock, despite an up day
for the markets.  Today the sellers stepped in on volume,
trimming 5.61 percent of ESRX's stock price on 1.58 times the
ADV. While the 50-dma at $91.83 provided support today, the close
well below our stop price of $96 leaves us with little choice but
to drop coverage of this play.


A $53.85 +5.85 (+1.35) Agilent's ship came in at the wrong time
- for us anyway!  The bullish technology trading that ensued
after we added this put play at least keep us at bay yesterday.
Even though buyers weren't very interested in the stock during
Wednesday's oversold rally, there weren't any sellers either.
Agilent traded in a very narrow channel between $47.70 and $49;
and therefore didn't tempt put players to take new positions.
And as it turned out, that was a good thing - Agilent was swept
up in today's extended rally.  The momentum resulted in a $5.85,
or 12.2% spike.  It's true that one day doesn’t make a trend,
but the big jump took Agilent through our $50 protective stop
and the near-term DMAs at the $51 level.  The sketchy optimism
of the broad markets combined with the company's earnings'
report next Tuesday further dictates that we must drop the play

GSPN $32.00 +4.13 (+4.63) We are dropping coverage on our put
play in GSPN, as the price/volume action of this past week
suggests that the stock may have found a bottom.  Support at $25
had been holding all week long until yesterday when it dipped
below that level on low volume, only to find willing buyers at
$24.  With a NASDAQ that was firming up, the stock drifted higher
on to end the day up 7.73 percent on 56% of ADV.  In doing so,
GSPN closed above its 5-dma ($27.80) for the first time this
month.  Today GSPN gapped up and closed above our stop price of
$29.  While the bears did start to take back some control by the
end of the day, as noted by strong selling volume near the close,
we are sticking to our sell rules.

BOBJ $76.06 +5.06 (+2.56) Bringing our BOBJ put play to a quick
and dramatic end, the bulls went on a rampage today.  Continuing
the rally that began shortly after the open yesterday, buyers
showed up early and often, producing a gap open that was just
fractionally above today's low.  Shooting right through our $74
stop on heavy volume (more than double the ADV), BOBJ leaves us
no choice but to eject it from the play list tonight, as
sentiment in the Technology sector seems to be taking a turn
for the better.

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The Option Investor Newsletter                 Thursday 02-15-2001
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

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AES $57.08 +0.20 (-2.50) AES is consolidating at the nearly
converged 5 dma of $57.42 and 10 dma of $57.  AES still remains
in an upward channel, and is solidly above the 200 dma of $52.52
and the 50 dma of $55.45.  The increasing awareness among the
public and investor community for the ever increasing demand for
power should help AES to clear heavy resistance at $60, if it
stays in the upward trading channel.  Conservative traders might
want to wait for such a breakout with heavy volume.  Aggressive
traders could take positions at current level, with strength in
other power producers like CPN.  Keep stops set at $56.

IFIN $83.07 -0.92 (-3.93) After a sharp intra day drop to $81
in the market sell off on Wednesday, IFIN has regained momentum
above its 50 dma of $79.18.  We really want to see IFIN clear
heavy resistance at $87, which eluded the stock three times
this week.  At that point, it could be clear sailing to the
52-week high of $96.  Conservative traders might want to wait
for a move above $87.50 on heavy volume.  Aggressive traders can
take positions on a break above $85, with strength in the
financial sector, particularly investment management.  Continue
to set stops at $80.

FDC $62.90 +1.32 (+2.60) Yesterday FDC continued to struggle with
resistance at $62.50, as AG Edwards initiated coverage on the
stock with an Accumulate rating and a $74 price target.  While
their comments were generally bullish, they cautioned against
macroeconomic concerns.  The stock pulled back fractionally
yesterday on 1.3 times the ADV despite an up market.  It appears
however, that the move was just a pause to refresh before moving
higher.  Today FDC broke out above resistance of $62.50 to close
at a new all-time high.  This level should now act as support,
with additional reinforcement from the 5 and 10-dma at $61.50 and
$60.64.  Horizontal support may also be found at $62 and our
adjusted stop price of $61.  These prices may serve as targets
for aggressive traders, but wait for buying volume to return
before entering.  For an entry on strength, wait for FDC to take
out resistance at $64 with conviction before making a play.  In
both cases, make sure sector sympathy is on your side by watching
competitors FISV and PAYX.

SDS $57.79 +1.85 (+2.80) After the massive run-up recently for
shares of SDS, the stock has taken a breather these past few
days.  Tuesday's fractional decline was followed by the same on
Wednesday’s trading but considering the low volume, it looked to
be normal profit taking.  Today the stock resumed its upward
climb, ending the day up 3.31 percent.  We would have liked to
see more buying pressure, as today's gain was on average volume,
but considering that support at the 5-dma (now at $56.63)
continues to hold, we'll take it.  A bounce off this moving
average as well as horizontal support at $56.50, $56 and our new
stop price of $55, could allow aggressive players to take a
position, but confirm with volume.  A break above resistance
overhead at $58.50 to blue-sky territory, backed by the return of
strong buying volume, would be the signal for conservative
traders to enter this play.  Just make sure that peers EDS and
REA are also moving higher.

MLTX $21.81 +1.06 (+2.94) Taking advantage of improving
sentiment on the NASDAQ, and its solid upward trend, MLTX has
posted a nice gain since we added it on Tuesday.  Yesterday's
move through the $20.50 resistance level was accompanied by more
than five times the average daily volume, and it didn't stop
there.  Apparently there were a few late-comers to the party,
and they pushed the stock higher still today on more than triple
the ADV.  Fueling the move over the past couple days was the
company's positive comments at the Robbie Stephens Technology
Conference, where they stated they felt comfortable with
revenue estimates for the 2001 fiscal year.  Lest you start
thinking of buying calls first thing tomorrow, hold your horses.
The recent rise brought MLTX up to challenge resistance at $22,
right at the upper Bollinger band, and this coincides with the
fast Stochastics line entering the overbought zone.  While our
play could very well continue higher from here, we need to
prepare for a bit of profit taking in the near future.  With
that in mind, we would only recommend new positions at this
point on a pullback and bounce, preferably near the $20 support
(old resistance) level.  Note that we have moved our stop up
to $19.


ABGX $35.69 +2.44 (+0.13) Abgenix sold off sharply on Wednesday,
and hit an intra day low of $30.06 on more than double its average
daily volume.  Considering today's strong rally on the Nasdaq,
the biotech sector was only lukewarm, with a gain of $4.90, and
the sector remains below its 50 dma of 611.19.  Abgenix rolled
over from $35 to $32.81 during the mid morning rally, and is now
poised to roll over after failing twice to clear resistance at
$36.  Traders can take positions on a roll over from the 5 dma
of $34.50, if accompanied by weakness in the biotech sector.
More conservative traders may want to wait for a drop below $30
on strong volume, which would most likely lead Abgenix to a new
52-week low.  Monitor others like MEDX for sector strength, and
set stops at $37.

GLW $42.01 +3.11 (+1.05) Take a look at a daily chart of GLW and
you can visually confirm that it follows the design of recent
market and sector direction.  The stock basically patterned the
technology laden NASDAQ and rolled with the other fiber-optic
stocks.  Thus, we saw GLW swing low to $36 on Monday before it
rallied back above the $38 level in late day trading; although
if you didn't already have positions, the trading session didn't
offer viable entries for most players.  Today's extended gains
through the $44 level and subsequent bounce off the resistive
10-dma ($44.52) provided the more aggressive types a risky
entry opportunity.  GLW's relative intraday support near the $42
level, however, does warn a bottom may be forming.  Therefore,
it'd be wise to wait for weakness below this level and the 5-dma
($40.62) before taking additional positions; especially in light
of the growing confidence amongst some technology investors.

FCEL $61.81 +1.69 (+2.31) Fuel Cell stocks have spent the past
couple days recovering some of the ground they lost recently,
and FCEL went along with the gang - at least until it ran into
impenetrable resistance near $64.  Granted, this is above our
$62 stop, but the fact that it fell back so sharply by the
closing bell prompts us to keep the play alive, at least for
one more day.  Today's rollover commenced right at the converged
10-dma and 30-dma (both at $64.13).  Aggressive investors that
jumped at the opportunity got a great entry point, but they need
to keep a watchful eye on our play, as it is still on thin ice.
FCEL ended the day just fractionally below our stop at $62, and
if the stock posts a close above there, it will be gone.  In the
meantime, aggressive traders can still buy puts near current
levels, provided the stock is headed down, accompanied by
selling in other Fuel Cell stocks like BLDP and PLUG.  More
conservative traders will want to wait for selling pressure to
fracture the $60 support level before jumping into the fray.

STT $105.39 -0.14 (-2.61) Still going, our STT play has been
giving up a little ground each and every day, as Stochastics
have made their slow journey into the oversold region.  Today
was the strongest performance for the stock in a couple weeks,
as it found support at $104, followed by a surge of buying
volume, that helped STT to finish almost flat on the day, with
only a $0.14 loss.  Recall we have been walking our stop down
behind the stock, and it now sits at $108.  Given the fact
that the stock couldn't even get up to the $107 level where
the stock meandered on Tuesday and Wednesday, even with strong
gains in the broader market, STT looks like it still has more
downside in store for patient bears.  Just beware of the daily
Stochastics - now that it is flattening out in oversold
territory, STT could be setting up for a bounce.  While
conservative traders will want to wait for a break below
today's $104 support level before playing, that doesn't preclude
adding to new positions on a failed rally near the $107 level,
so long as our stop remains intact.

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AEOS - American Eagle Outfitters $59.94 +2.44 (+4.69 this week)

American Eagle Outfitters is a specialty retailer of collegiate-
style casual apparel, accessories and footwear aimed at men and
women ages 16 to 34.  The company's fashion line of relaxed
clothing bears the American Eagle Outfitters and AE brand name
and are sold exclusively in their mall-based stores.  They
currently operate over 550 stores in 47 states and Washington,

AEOS's robust volatility during the market's sluggish period
coupled with its bullish spike through the $60 resistance today,
prompted our coverage of this retail stock.  AEOS sound
demonstration of its resilience and strength as it traded
confidently in the proximity of the supportive 5 and 10 DMAs,
now at $57.24 and $56.57 separately, provides a solid foundation
going forward.  The company is scheduled to announce its 4Q
earnings on March 15th, BEFORE the opening bell.  This event is
likely to generate some upward momentum.  In addition, the
stock's 10+ percent move to the upside in the midst of the
NASDAQ rally this week further indicates AEOS is poised to make
a big breakout.  If skepticism plays into your stratagem, simply
stay in the wings until AEOS makes a high-volume charge through
$60 and the new 52-week high ($60.06) it set today.  It's also
fairly reasonable to consider beginning new plays on pullbacks
to the stock's support levels, which is bolstered by the above-
mentioned DMAs; especially if there appears to be an overall
positive bias across the retail sector and broad markets.  Take
a look at American Eagle's competitors such as The Gap (GPS) and
Abercrombie & Fitch (ABF) as well as the #1 retailer, Walmart
(WMT), who is reporting its earnings next Tuesday morning, to
give you a feel of what direction AEOS may take over the short-
term.  This should help in planning your entries and exits.
There are a couple of weeks before AEOS reports its 4Q numbers,
so there's time to be patient and pick your entries with
diligence.  Until we see the anticipated breakout come into
play, so to speak, we're keeping a tight stop at the $56 mark to
protect our capital.  For the benefit of our new readers, this
essentially means that OI will exit the play if AEOS closes
below that $56 level on any given trading day.

BUY CALL MAR-55 AQU-BK OI=181 at $8.63 SL=6.00
BUY CALL MAR-60*AQU-BL OI=402 at $5.75 SL=3.75
BUY CALL MAR-65 AQU-BM OI=455 at $3.25 SL=1.50
BUY CALL MAY-60 AQU-EL OI=565 at $9.13 SL=6.25
BUY CALL MAY-65 AQU-EM OI=225 at $6.88 SL=5.00



LAB - LaBranche & Co. $50.55 +3.99 (+4.70 this week)

Founded in 1924, LaBranche is one of the leading specialist
firms on the New York Stock Exchange in terms of capital,
number of stocks traded, dollar volume, and share volume.  With
74 seats on the NYSE, the company is the specialist for 386
issues, six of which are in the Dow Jones Industrial Average,
and 68 of which are in the S & P 500.

LAB has been on a strong upward trend since clearing both the
50 and 200 dma in late December.  Today, LAB burst above its
converged 5 and 10 dma at $46.50 on strong volume after having
consolidated for over two weeks.  Excellent earnings, as well
as a possible debt upgrade and an inclusion to the S & P 400
mid cap index have spurned the rally this week, and LAB is now
at a 52-week high, as well as a new all time high since going
public in August of 1999.   On January 22, LAB reported a
revenue increase of 72% for the year, and an earnings increase
of 57% for the year.  On January 31, the S & P announced that
LAB would be included in the mid cap index as of February 6.
In addition, Moody's announced this week that LAB's senior
debt has been placed on review for upgrade.  This excellent
news, as well as the consolidation which is occurring in the
financial services industry could easily spur LAB to new all
time highs in the days to come.  Traders could take positions
at current levels, or at a possible pullback to support at $49.
Watch the financial sector for strength, and set stops at $46.

BUY CALL MAR-45 LAB-CI OI= 66 at $ 7.80 SL=5.75
BUY CALL MAR-50*LAB-CJ OI=347 at $ 5.00 SL=3.00
BUY CALL MAY-45 LAB-EI OI=263 at $10.40 SL=7.00
BUY CALL MAY-50 LAB-EJ OI=  6 at $ 7.90 SL=5.75


SGR - Shaw Group Inc. $52.35 +2.30 (+4.56 this week)

The Shaw Group Inc. is the largest supplier of fabricated piping
systems and services in the world, with unparalleled experience
and expertise in the global power generation market.  Shaw
distinguishes itself by offering comprehensive solutions
consisting of integrated engineering and design, pipe
fabrication, construction and maintenance services and the
manufacture of specialty pipe fittings and supports to the power
generation, crude oil refining, chemical and petrochemical
processing and oil & gas exploration and production industries.

It just goes to show that even a value stock can be made sexy by
a strong fundmental picture.  Shares of SGR have been on a steady
uptrend since January of 1999, with rare visits to the 50 and
100-dma (now near $41 and $44 respectively) providing investors
with ideal entry points.  Rising oil prices and the buildout of
refining facilities have fueled SGR's ascent.  Lower interest
rates will only help the company, as many of its customers use
debt to finance their expenditures.  A strong of stellar earnings
reports with significant upside surprises are also helping.  In
early January, the company came in with record numbers, beating
Street estimates by three cents, with a backlog of $2.1 billion.
Last week, the company won a $400 million contract to construct
an ethylene plant in China, further adding to its bottom line
going forward.  The Basic Materials sector as a whole also got a
major thumbs up from the Oracle of Omaha, as Warren Buffett
recently took a stake in peer MLI.  Having taken out formidable
resistance today at $50, a bounce off this newfound support level
could allow for an aggressive entry, with additional support at
$51.50, the 5-dma at $49.68, and $48.75.  Just make sure SGR
closes above our stop price of $49.  If buying pressure resumes
tomorrow, taking the stock above $52.50, this would allow the
more risk averse to make a play.

BUY CALL MAR-50 SGR-CJ OI=1088 at $5.60 SL=3.50
BUY CALL MAR-55*SGR-CK OI=   5 at $3.20 SL=1.50
BUY CALL APR-60 SGR-DL OI=   5 at $3.50 SL=1.75




BRCD - Brocade Communications $56.06 +1.81 (-18.06 this week)

Brocade Communications is a provider of Fibre Channel switching
solutions for Storage Area Networks (SANs), which apply the
benefits of a networked approach to the connection of computer
storage systems and servers.  The company's family of SilkWorm
switches enables companies to cost-effectively manage growth in
their storage capacity requirements and improve the performance
between their servers and storage systems.  This provides the
ability of increasing the size and scope of a company's SAN,
while allowing them to operate data-intensive applications,
such as data backup and restore, and disaster recovery on the

Oh how the mighty have fallen.  One of the last high-flyers in
the Technology sector to see a sharp reduction in its market
value, BRCD began to lose its lustre in mid-November with the
completion of its Head and Shoulders formation.  After falling
below the neckline near $105, it didn't take long before the
stock had fallen all the way to $70.  That level was looking
like pretty good support 6 weeks ago, but just yesterday we
witnessed the stock tracing a new yearly low of $49.63.  After
the devastating earnings warning from EMLX last Friday,
virtually every stock related to SANs took a bath, and BRCD
certainly wasn't immune to the effect.  From Friday's close,
BRCD plunged through the supposed support between $66-68, and
gave up a whopping 27% by yesterday's close.  Although BRCD is
set to release its quarterly earnings on February 21st after the
close, investors will be eyeing the guidance going forward,
rather than this quarter's results.  And given the bad news from
EMLX last week, it seems unlikely that BRCD will be able to
muster anything approaching a solid rally as the magic date
appears.  Throw in the abysmal earnings warning from NT after
the close today, and it appears the lights will wink out pretty
quickly once the opening bell rings tomorrow morning.  After the
sharp move up this morning, it became clear that there was
limited interest in the stock as it ran out of buyers near $61,
and then fell sharply in the last 90 minutes of trading.
Aggressive traders will find attractive entries on repeated
rollovers near the $61 level (also the location of our stop).
With earnings approaching in less than a week, this is a
short-term trade, not for those with a buy-and-hold approach.
Those with a more conservative approach will want to wait for
the gap from today's open to finish closing before opening new
positions - once $55 support falls victim to the bears again,
feel free to step into the play.

BUY PUT MAR-60 UBZ-OL OI=3132 at $10.00 SL=7.00
BUY PUT MAR-55*UBZ-OK OI=1117 at $ 7.13 SL=5.00
BUY PUT MAR-50 UBF-OJ OI= 739 at $ 5.00 SL=3.00


NETE - Netegrity, Inc. $59.94 +4.75 (+4.63 this week)

Netegrity is a provider of software and services that manage
and control user access to Web-based e-commerce applications.
The company's SiteMinder product is part of the software
infrastructure that is used to build and manage an e-commerce
Web site, commonly known as a portal.  SiteMinder manages the
complex process of identifying users and assigning entitlements
to each, which determines what information that user can see
and what transactions the user can perform on that Web site.

Unless you've been asleep like Rip Van Winkle, you know that
Net stocks have yet to see a revival in investor enthusiasm,
and judging by the downgrade of AMZN to Sell today, it is likely
to get worse before it gets better.  Our new play, NETE has been
getting weaker since the stock posted a pretty clear Head and
Shoulders formation between late September and late December.
Prompted by the cut in interest rates at the start of the year,
our play managed a pretty decent rally, moving from $31 at the
lower Bollinger band to $65 at the upper Bollinger band, before
investors finally took some profits off the table.  Shares of
NETE saw a fair amount of turbulence earlier this week, but so
far the bulls have managed to keep the upper hand.  Alas, it
doesn't look like they will do so for long.  Despite the fact
that daily stochastics are headed up again, and the price moved
up through the 200-dma ($53.44) on heavy volume again, we can't
ignore the broader trend.  NETE is locked in a persistent
downtrend, posting lower highs since late October, and there is
no catalyst that would indicate the trend is about to change
anytime soon.  Throw in the negative sentiment created by the
prominent earnings warnings from the likes of EMLX and NT, and
we can see that the trend is still down.  The descending
trendline falls at $62, and then the highs from late January sit
at $64-65.  A failed rally at either of these levels looks
attractive for new aggressive entries, as we are placing our
stop at $65.  More conservative players will want to watch for
today's opening strength to fall apart and will look to initiate
new positions on a drop through $57.  Keep an eye on the broader
Technology sector via the NASDAQ - this should give a good
indication of the sentiment that will prevail in shares of NETE.

BUY PUT MAR-65 UPN-OL OI=102 at $7.50 SL=5.25
BUY PUT MAR-60*UPN-OK OI= 46 at $5.38 SL=3.25
BUY PUT MAR-55 UPN-OJ OI=276 at $3.50 SL=1.75



AES - AES Corporation $57.08 +0.20 (-2.50 last week)

AES is an independent power producer headquartered in Arlington,
Virginia.  The company's generating assets include interests in
one hundred and thirty four facilities totaling over 53 gigawatts
of capacity.  AES's electrical distribution network has over
920,000 km of conductor and associated rights of way and sells
over 126,000 gigawatt hours per year to over 17 million end-use
customers.  In addition, through its various retail electricity
supply businesses, the company sells electricity to over 154,000
end-use customers.

Most Recent Write-Up

AES is consolidating at the nearly converged 5-dma of $57.42 and
10-dma of $57.  AES still remains in an upward channel, and is
solidly above the 200-dma of $52.52 and the 50-dma of $55.45.
The increasing awareness among the public and investor community
for the ever increasing demand for power should help AES to clear
heavy resistance at $60, if it stays in the upward trading
channel.  Conservative traders might want to wait for such a
breakout with heavy volume.  Aggressive traders could take
positions at current level, with strength in other power producers
like  CPN.  Keep stops set at $56.


AES dipped this morning to $55 and big buyers stepped in.  They
aggressively bought the stock throughout the day and rallied AES
for $2.  With techs likely to be weak tomorrow on the NT warning,
AES may continue to attract the buyers.  Look for support to hold
at $57.  A bounce from there or near $56 would present entry
opportunities.  Watch for the surge of buying volume that we saw
today.  Overhead, a move through resistance at $58 could result
in a challenge of $59 and $60.  The latter is strong resistance.

BUY CALL MAR-55 AES-CK OI= 135 at $4.70 SL=3.00
BUY CALL MAR-60*AES-CL OI=1315 at $1.95 SL=1.25


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Ciena Shares Lead The Way!

Technology stocks moved higher today, providing bullish support
for a broad market rally.

Wednesday, February 14

Technology stocks rallied today as investors moved back into the
semiconductor sector after analysts made bullish comments on the
industry.  The NASDAQ closed up 63 points at 2,491.  The broader
market slumped amid a belief that the Federal Reserve will be
less agressive with regard to interest rates in the future.  The
Dow was down 107 points at 10,795 and the S&P 500 index ended 3
points lower at 1,315.  Trading volume on the NYSE reached 1.11
billion shares, with losers outpacing winners 1,699 to 1,398.
Activity on the NASDAQ was light at 1.96 billion shares traded,
with declines beating advances 1,968 to 1,779.  In the U.S. bond
market, the yield on the 30-year Treasury ended at 5.44%.

Tuesday's new plays (positions/opening prices/strategy):

Calpine    (NYSE:CPN)     MAR45C/M45P  $6.30  debit   straddle
Cont. Air  (NYSE:CAL)     MAR60C/M45P  $1.40  credit  strangle
Zoltek     (NASDAQ:ZOLT)  APR7C/APR5P  $0.06  debit   synthetic

Two of our new positions offered reasonably favorable entry
opportunities during the volatile session.  Calpine traded in a
relatively large range, with almost $3 between the high and low
of the day.  Continental Airlines was not as volatile however,
and the overall credit was just below our target.  Zoltek fell
lower in early trading, but not enough to allow an entry at a
credit (on a simultaneous order basis).  We will continue to
monitor that position for a cost basis at the suggested target.

Portfolio Activity:

Semiconductor stocks led a recovery in the NASDAQ today after an
unexpected rally in the sector.  Investors flocked to the group
after Applied Materials (NASDAQ:AMAT) reported favorable earnings
and beat reduced forecasts.  The company also issued discouraging
guidance for the coming quarter but analysts said the industry
weakness was already factored into the shares.  J.P. Morgan Chase
raised its investment rating on the company, along with those of
rival chip-equipment makers, saying the current valuations may be
viewed as a bargain.  The brokerage also noted that today's action
could be an indication that portions of the technology group have
reached levels where the bad news has already been discounted.
In the networking sector, Sycamore Networks (NASDAQ:SCMR) rallied
after beating second-quarter earnings estimates by a penny and
announcing that it expects revenues to climb 210% over last year.
JDS Uniphase (NASDAQ:JDSU), a bellwether in the industry, also
rebounded after a string of losing sessions.  Among the flagging
Dow issues, Minnesota Mining & Manufacturing (NYSE:MMM), Philip
Morris (NYSE:MO) and SBC Communications (NYSE:SBC) led the losers.
Technology components limited the losses in the blue-chip average
however, with Intel (NASDAQ:INTC), International Business Machines
(NYSE:IBM), Hewlett-Packard (NYSE:HWP) and Microsoft (NASDAQ:MSFT)
moving higher.  In the broader market, utility, consumer products,
biotechnology and retail issues generally retreated while select
oil service and finance shares achieved small gains.

The Spreads portfolio enjoyed a number of bullish moves in the
technology group and among those issues, networking shares were
the top performers.  Newport (NASDAQ:NEWP) rebounded after a week
of downward movement and the oversold conditions were apparent in
most stocks in that sector.  Hardware companies also performed
well and semiconductor-equipment stocks were among the leaders in
that segment.  Advanced Energy Ind. (NASDAQ:AEIS), Hewlett-Packard
(NYSE:HWP), Qualcomm (NASDAQ:QCOM), Cabot Micro (NASDAQ:CCMP) and
International Rectifier (NYSE:IRF) topped our list of technology
winners.  Among broad market issues, HSBC Holdings (NYSE:HBC) and
Weatherford (NYSE:WFT) enjoyed excellent gains.  In the small-cap
category, Davox (NASDAQ:DAVX) was again the standout, up another
$0.81 to a 6-month high near $13.  The new bullish selection has
performed just as expected after moving up and out of an ascending
triangle formation.  Luminent (NASDAQ:LMNE) and Atrix Laboratories
(NASDAQ:ATRX) also rallied during the session.  The move in ATRX
provided a $0.50 closing credit to exit the play, but traders who
plan to remain in the position may need to make an adjustment in
the bullish calendar spread.  The issue closed at $24.94, just
below our sold strike and we decided to move to March options in
the sold (short) position to reduce our cost basis in the spread.
The credit for a roll-out to the MAR-$25 option was near $1.75,
thus reducing the overall debit to $0.75 in the MAY-$25C/MAR-$25C
time-selling position.

Thursday, February 15

Technology stocks moved higher today, providing bullish support
for a broad market rally.  An upbeat earnings outlook from Ciena
(NASDAQ:CIEN) spurred buying in networking shares group, and the
NASDAQ closed up 61 points at 2,552.  The Dow ended up 95 points
at 10,891 on strength in blue-chip technology components.  The
S&P 500 index was up 10 points to 1,326.  Trading volume on the
NYSE reached 1.12 billion shares, with losers outpacing winners
1,674 to 1,394.  Activity on the NASDAQ exchange was heavy with
2.1 billion shares changing hands and declines beating advances
2,254 to 1,507.  In the bond market, the 30-year Treasury fell
19/32, pushing its yield up to 5.49%.

Portfolio Activity:

Today's broad market rally produced some excellent gains in the
Spreads Portfolio and the bullish activity provided a number of
adjustment opportunities in the time-selling positions.  Hewlett
Packard (NYSE:HWP) was a big mover, up almost $2 to $36 ahead of
it quarterly earnings report and the rally was tailor-made for a
roll-out to March options in our Covered-calls with LEAPS play.
The credit for the transition to MAR-$40 calls was approximately
$1.00.  Alza (AZA:NYSE) and Clorox (NYSE:CLX) traded higher in
the morning session and those issues were also candidates for
early adjustment.  The Alza calendar spread has already provided
a favorable short-term profit and the premium for a roll-out to
March options is favorable as well.  Another long-term position,
AT&T (NYSE:T) edged higher today and the calendar spread at $25
is performing well.  Our credit target for the roll-out to the
MAR-$25 call will be $0.50, bringing our overall cost basis in
the JAN02-35C to $1.38 with almost a year left until expiration.
The standout performer in the technology group was by far Cabot
Microelectronics (NASDAQ:CCMP).  The issue rocketed $16 to $99
on no public news and traders said rampant "short-covering" was
a big contributor to the move.  Regardless of the reason for the
rally, our bullish position at $70 is at maximum profit.  In the
small-cap category, Davox (NASDAQ:DAVX) continued its incredible
rally, trading as high as $14.88 during the session.  That's a $4
move since the issue was selected for a bullish play last week.
Our new position in Zoltek (NASDAQ:ZOLT) was also active, moving
to a low near $4.62 early in the day.  The decline provided the
opening credit we were waiting for in the bullish synthetic play
and now we hope the recent rally continues.

Questions & comments on spreads/combos to Contact Support
                       - READER'S REQUEST -

One of our subscribers requested some bearish positions in the
Drug Manufacturing Sector and based on technical indications in
some of the group's bellwether issues, this may be a profitable
outlook in the near-term.  Here are some conservative plays that
may fit your strategic approach and personal trading style.  All
of the positions are based on the current price or trading range
of the underlying issue and the recent chart history or trend.
Current news and market sentiment will have an effect on these
issues, so review each position individually and make your own
decision about the future outcome of the play.

JNJ - Johnson & Johnson  $93.97  *** Failed Rally? ***

Johnson & Johnson (NYSE:JNJ) manufactures and sells a broad range
of products in the health care field in many countries of the
world.  The business is divided into three segments: Consumer,
Pharmaceutical and Professional.  The Consumer segment's products
are personal care and hygienic products including nonprescription
drugs, skin and hair care products, baby care products, oral care
products, first aid products and sanitary protection products.
The Pharmaceutical segment's worldwide franchises are in the
antifungal, anti-infective, cardiovascular, contraceptive,
dermatology, gastrointestinal, hematology, immunology, neurology,
oncology, pain management and psychotropics.  The Professional
segment includes suture and mechanical wound closure products,
surgical equipment and devices, wound management and infection
prevention products, interventional and diagnostic cardiology
products, diagnostic equipment and supplies, joint replacements
and disposable contact lenses.

PLAY (conservative - bearish/credit spread):

BUY  CALL  MAR-105  JNJ-CA  OI=980   A=$0.25
SELL CALL  MAR-100  JNJ-CT  OI=2271  B=$0.85
INITIAL NET CREDIT TARGET=$0.65-$0.70  ROI(max)=15%

AHP - American Home Products  $59.07  *** Trading Range? ***

American Home Products (NYSE:AHP) is currently engaged in the
discovery, development, manufacture, distribution and sale of a
diversified line of products in three businesses; Pharmaceuticals,
Consumer Health Care and Agricultural Products.  The company's
Pharmaceuticals segment manufactures, distributes and sells
branded and generic human ethical pharmaceuticals, biologicals,
nutritionals and animal biologicals and pharmaceuticals.  The
company's Consumer Health Care segment manufactures, distributes
and sells over-the-counter healthcare products.  In addition, the
company's Agricultural Products Group manufactures, distributes
and sells crop protection and pest control products.  Products
include Triphasil, infant nutritionals, neuroscience therapies,
Advil, Robitussin and Dimetapp, Centrum vitamins, and herbal

PLAY (conservative - bearish/credit spread):

BUY  CALL  MAR-70  AHP-CN  OI=294   A=$0.15
SELL CALL  MAR-65  AHP-CM  OI=2759  B=$0.55
INITIAL NET CREDIT TARGET=$0.50-$0.55  ROI(max)=11%

LLY - Eli Lilly  $75.25  *** Breaking Down! ***

Eli Lilly (NYSE:LLY) discovers, develops, manufactures, and sells
pharmaceutical products.  Eli Lilly manufactures and distributes
its products through owned or leased facilities in the United
States, Puerto Rico, and 28 other countries.  Its products are
sold in approximately 160 countries.  Most of the products that
the company sells today was discovered or developed by its own
scientists.  The company directs its research efforts primarily
toward the search for products to diagnose, prevent and treat
human diseases.  They also conduct research to find products to
treat diseases in animals and to increase efficiency in animal
food production.  The company's products are classified as
neuroscience products, endocrine products, anti-infectives,
cardiovascular agents, oncology products, and animal health

PLAY (speculative - bearish/synthetic position):

BUY  PUT   MAR-65  LLY-OM  OI=1285  A=$0.65
SELL CALL  MAR-85  LLY-CQ  OI=2022  B=$0.45

Note:  Using options, the position is similar to being short the
stock.  The collateral requirement for the sold (short) call is
approximately $1,550 per contract.

                      - Speculation Plays -
ANSR - Answerthink  $8.56  *** On The Move! ***

Answerthink (NASDAQ:ANSR) provides Internet services for clients
ranging from Fortune 1000 to Internet start-up companies.  The
company's practice areas include e-business strategy, interactive
marketing, branding and technology architecture and integration.
The company's professionals in these practice areas help its
clients improve their business through Internet-enabled commerce,
including ePlex, customer relationship management, procurement,
human resources and financial management.  The company offers
products in the following areas: e-business strategy, interactive
marketing and branding, technology, architecture and integration.
The company utilizes its knowledge base and professional talent
from these practice areas to provide its clients with various
solution offerings.

The rally in ANSR shares began yesterday after the company posted
excellent quarterly earnings along with an optimistic outlook for
the future.  Answerthink announced that net revenues for the past
year increased to $311 million, up 19% from $260 million in 1999.
Net income increased in the year 2000 to $7.9 million, or $0.18
per share, from $1.1 million, or $0.03 per share, in 1999.  After
the earnings report, WR Hambrecht and Co. issued bullish comments
on the company, saying ANSR's stock appears extremely attractive
on a risk-reward basis.  In addition, the CEO commented that new
technology-driven enterprise-wide transformation initiatives have
re-emerged as a priority for global companies and this presents
Answerthink with an opportunity to emerge as one of the most
comprehensive and profitable consulting and systems integration
providers in the industry.

Traders who agree with a bullish outlook for this unique issue
can speculate on its future movement with these positions.

PLAY (conservative - bullish/calendar spread):

BUY  CALL  JUL-10  QRA-GB  OI=29  A=$2.56
SELL CALL  MAR-10  QRA-CB  OI=79  B=$0.93

- or -

PLAY (speculative - bullish/synthetic position):

BUY  CALL  MAR-10.00  QRA-CB  OI=79  A=$1.12
SELL PUT   MAR-7.50   QRA-OU  OI=50  B=$0.75

Note:  Using options, the position is similar to being long the
stock.  The collateral requirement for the sold (short) put is
approximately $350 per contract.


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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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