The Option Investor Newsletter Thursday 02-15-2001 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/021501_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ 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 defense. 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 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. 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Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1639 ************************************************************** **************** MARKET SENTIMENT **************** 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 expense. 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 there. 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! ****** VIX Thursday 02/15 close: 23.46 VXN 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. Thursday (02/15/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 725 - 710 14,370 1,565 9.18 705 - 690 16,549 6,298 2.63 OEX close: 688.50 Support: 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) Resistance: 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 Support: 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) Resistance: 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 Support: 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 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/021501_1.asp ************** TRADERS CORNER ************** 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. Execution: 1. Find optimal QQQ Entry 2. Track OIN Call Plays Admin: Get Qcharts up Command & Control: Establish contact with other traders on key issues. 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 made: 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 *************************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=1625 ************************************************************ 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: ***** 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. PUTS: ***** 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 tonight. 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. *************************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=1633 ************************************************************ 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. 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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. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/021501_2.asp ************************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=1640 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** 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. ******************* PLAY UPDATES - PUTS ******************* 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. *************************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=1626 ************************************************************ ************** NEW CALL PLAYS ************** AGGRESSIVE: 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, DC. 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 http://www.premierinvestor.com/oi/profile.asp?ticker=AEOS LOW VOLATILITY: 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 http://www.premierinvestor.com/oi/profile.asp?ticker=LAB 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 http://www.premierinvestor.com/oi/profile.asp?ticker=SGR ************* NEW PUT PLAYS ************* AGGRESSIVE: 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 SAN. 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 http://www.premierinvestor.com/oi/profile.asp?ticker=BRCD 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 http://www.premierinvestor.com/oi/profile.asp?ticker=NETE ********************** PLAY OF THE DAY - CALL ********************** 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. Comments 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 http://www.premierinvestor.com/oi/profile.asp?ticker=AES ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1606 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ 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% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=JNJ ****************************************************************** 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 products. 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% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=AHP ****************************************************************** 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 products. 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 INITIAL NET CREDIT TARGET=$0.00-$0.25 TARGET PROFIT=$1.00 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. http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=LLY ****************************************************************** - 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 INITIAL NET DEBIT TARGET=$1.50 TARGET ROI=50% - 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 INITIAL NET DEBIT TARGET=$0.00 TARGET PROFIT=$0.75-$1.00 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. http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ANSR *************************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. 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