The Option Investor Newsletter Wednesday 02-21-2001 Copyright 2001, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/022101_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 02-21-2001 High Low Volume Advance/Decline DJIA 10526.60 -204.30 10746.20 10520.30 1.20 bln 1079/2018 NASDAQ 2268.94 - 49.41 2353.51 2257.15 2.01 bln 1146/2608 S&P 100 647.60 - 13.76 663.61 646.27 totals 2225/4626 S&P 500 1255.27 - 23.67 1282.97 1253.16 32.5%/67.5% RUS 2000 483.51 - 7.63 491.16 482.89 DJ TRANS 2944.47 - 32.99 2977.01 2938.84 VIX 29.41 + 1.91 29.65 27.11 Put/Call Ratio 0.72 ************************************************************* Missed it by six! Can you spell o-v-e-r-s-o-l-d? The Nasdaq has dropped -300 points in the last three trading sessions hitting a two year closing low. The Dow has broken out of the recent bullish wedge and is now in danger of breaking January lows. Support for both indexes has now disappeared and traders are fearful that new lows are in our future. This has caused bargain hunters to wait patiently on the sidelines. The normal end of day bounce, which you would expect after such big drops, failed to appear. It was a grim day after the CPI report came in at twice the expected number. The headline number was +0.6%, double the +0.3% expected. The core rate was only +0.3% but exceeded the +0.2% estimate. Energy prices were a significant factor but the Fed has not reacted to that component significantly in the past. The big jump was the largest gain since March-2000. The possibility of stagflation appears to be growing and most analysts feel the lack of growth is more dangerous than the risk of inflation. Still traders were not happy and ran for cover yet again. A major impact to the Nasdaq drop was Nasdaq:SUNW which was hit with a downgrade from Merrill Lynch. Merrill lowered its rating to neutral and dropped its earnings estimates by about a nickel going forward. "Economic softness is accelerating non-economic trends that threaten Sun and raise the likelihood that numbers may need to again be reduced," Merrill said in a research note. "Channel inventories are at a three year high, more used equipment from dead dot.coms is coming, and enterprises have enough CPU capacity from past aggressive purchases," it said. "Storage spending remains strong," Merrill said. "Sun not only misses this revenue but also runs the risk of losing account control as storage vendors gain influence. Poor storage execution appears to be coming home to roost." Just another friendly love note? Nyse:IBM also announced a new line of storage products which will compete with SUNW and Nasdaq:EMC. EMC fell -$6 in regular trading but was still falling in after hours to a low of $39.25 or almost a -$10 drop. SUNW has a quarterly analyst conference call at 4:30PM ET on Thursday where it is expected to warn going forward. SUNW dropped another -$3 today to another 52-week low of $18.75 in after hours. Intel, Nasdaq:INTC, fell to within 75 cents of its 52-week low of $30 after more negative comments about PC sales in general, the economic outlook and a semiconductor index that rolled over on a +50 point morning gain. Nasdaq:CSCO lost another dollar to another 52-week low of $25 as the comments from their CEO continued to weigh on the networking sector. Nasdaq:JNPR was one of the few networkers to show a gain. Up +$6 intraday but it only managed to eke out a fractional showing at the close. Brocade, Nasdaq:BRCD, announced earnings after the close and beat the street by a penny but warned that "We are seeing the effect of a softening economy" and guided analysts lower for the future. They implicated Nasdaq:EMLX as part of the problem saying that some of their large customers were delaying orders. Brocade had been quiet on the EMLX warning until today. EMLX fell another -$4 to $28 in after hours trading after BRCD used their name in disgust. EMC was also hit by the BRCD warning as well as NTAP which compete in the storage business. Retailers Wal-Mart, Nyse:WMT, and Home Depot, Nyse:HD, lost their 15 minutes of fame and both dropped over $3 as the retail sector came under fire today. With sector rotation that used to take weeks, now taking only hours, the retailers were tossed aside as old news. Coke, Nyse:KO, and Procter & Gamble, Nyse:PG, said today that they were going to create a $4 billion company that would use Coke's global distribution system to spur sales of the companies' juices and snacks. Coke would gain access to new consumer food ideas and PG would gain Coke's 16 million global distribution points. Analysts thought KO gave away too much and investors knocked -3.55 of its stock while PG gained +1.00. The big news was the massive support failure of both major indexes. The Dow fell to the lowest close since January-12th at 10526. Support at 10700 and 10600 failed to even slow down the index as 22 of the 30 stocks lost ground. The major losers were AXP -2.01, C -2.90, KO -3.55, HD -3.14, IBM -3.90, JPM -2.60, WMT -3.19. The Nasdaq did not fare any better with many of the leaders taking serious hits. ADBE lost -4.19, BEAS -3.94, CHKP -5.44, CIEN -5.69, JDSU -2.63, QCOM -4.25, SUNW -2.63, VTSS -4.63, VSTR -3.38. The Dow had been building a large bullish wedge since the middle of September but the breakout came to the downside instead of the upside. Next support for the Dow is at 10500, only -20 points below today's low. Below 10500 we could free fall to our 12 month support of 10300 with only a brief pause possible at 10400. The Nasdaq closed within three points of a new two year closing low at 2268. The previous closing low was 2265 on March 3rd 1999. It also came within 6 points of the 12 month intraday low of 2251 from Jan-3rd. The two year intraday low is 2235 on that same March 3rd of 1999. Support at 2300 held until after 12:00 but downgrades on JDSU and SUNW along with the plummeting Dow finally pushed the index to the days low of 2257. There was no end of day bounce and after the Brocade earnings warning and the continued sell off of the generals in after hours, there is likely to be another dip at the open as well. A dip to under 2200 would take us all the way back to 1998 for comparisons. Dec-31 of 1998 had an intraday low of 2165 and the first day of 1999 dipped to 2192. The Nasdaq is now down -55% from the March highs of last year and all the gains from the Internet bubble have evaporated. Almost $4 trillion in market cap has been trimmed from the Nasdaq. Now, where will it stop? Nobody knows but the general consensus of opinion is very soon. Most professional traders claim they have shorted everything they can short and most institutional traders claim they have sold everything they have to sell. Granted the sources for this information are biased and prone to exaggeration but the sentiments are the same as we hear on the retail side. Today was closer to a capitulation event than yesterday but still not a classic example. Closing on the low of the day would indicate there could be more tomorrow. Also the volume was still lighter than a normal "bottom" day. I believe a strong dip on Thursday could produce the sell reflex that is needed to trigger the expected trading rally. If we can just get the shorts to cover it would be a huge bounce as we have seen before. I see two scenarios, maybe three. The BRCD warning knocked the Nasdaq futures to -40 in after hours. Every Nasdaq general I looked at had fallen further after the close. This would indicate a drop at the open. Any drop from here would put us under the 2251 prior intraday low and could trigger the "double bottom" buyers. If there is enough of a bounce to trigger short covering then we could easily gain +100 points or more as others see the volume and jump in. Is this wishful thinking? Could be but it is my wish! The other option is enough fear of a recession that traders simply ignore any sub 2251 bounce and stay on the sidelines waiting for the next Fed rate cut or a clear bottom. If the bottom on the opening dip does not hold through Friday then the shorts will load up again and something in the 2000 range would not surprise me. Now there is a wild card in both of those scenarios. There is an increasing call and even a demand for an intra-meeting rate cut. It would not surprise me to see the Fed come riding in to the rescue like they did on Jan-3rd when the Dow was at 10581 and the Nasdaq 2251. Those numbers take on a entirely different perspective as we revisit them two months later. Every -100 points the market drops just adds to the drop in consumer confidence. Greenspan has said the confidence number must be controlled or it will become a death spiral for the economy. If consumers pull in their horns and start stashing money under their mattress for a rainy day instead of spending it on consumables then a real recession is just around the corner. It is Greenspan's job to bolster that confidence and put a floor under the stock market which is the most visible indicator of economic stability for the common citizen. Every investor who received a 401K statement which looked more like a 201K is seriously considering a different investment strategy for 2001. If these investors move their remaining capital into another vehicle like bonds, money markets, tax free funds or even REITs then the stock market will suffer the loss. Alan has to stem that tide of defections and his time is running out. March 20th is too late. He needs to act now. When he does, that will be the wild card that could turn the market around again. How about it AL? About 10:00 Thursday morning would work just great for me! 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." Harry Brown, author of seven investment books. Jim Crimmins, President of TradersAccounting.com Austin Passamonte, editor of IndexSkybox.com Jeff Bailey, editor of PremierMarkets.com Jim Brown, President of the Premier Investor Network. The detailed schedule will be posted in about two weeks. There will not be individual breakout sessions during the day. Each topic will be covered in 1-2 hr general sessions taught by one or more OptionInvestor staff and presented on three giant screens. In the evening we will offer five of our popular chalk talk sessions for that personal question and answer interaction. Unlike other seminars with only two or three instructors, you will get in-depth knowledge from many different instructors who are experts in their field. The cost for the four-day workshop, April 6th to 9th is only $2995 (spouse only $1495). This includes breakfast, lunch and supper each day. All course materials, a CD of all the presentations and a professional video package of the entire seminar so you can review the material at home in the comfort of your living room. There is also a $500 discount if you have attended a prior OIN seminar. This is not a prepackaged presentation that gets repeated over and over with stale information. This is a one-time production and everything is fresh, live and as current as we can make it. The videos will have your real time questions and answers and not some from a prior class. Where else can you get intensive yet personalized options education like this? Do not delay as seating is very limited. We guarantee you will not be disappointed! You can pay for your education one bad trade at a time or you can invest less money one time to learn how to do it right. Click here for more info: https://secure.sungrp.com/workshop/april01/index.asp *************************ADVERTISEMENT********************* Mark Leibovit, the #1 market timer in the nation, will be on the Nightly Business Report discussing his Annual Forecast Model on Friday evening February 23 (between 5:30 and 7:00 p.m. ET). Mark is Chief Market Strategist for VRTrader.com, a Premier Investor Network website, a technical consultant and former 'Elf' on Louis Rukeyser's Wall Street Week for 7 years. His Annual Forecast Model has been subscribed to by Wall Street's most elite. Mark is presently ranked #1 timer in the nation by TIMER DIGEST and #2 on AmericasBestTimers.com. For information on his extremely accurate Annual Forecast Model for your own viewing, click here: http://www.vrtrader.com/vr_forecaster/index.asp ************************************************************ ************* NEW CALL PLAY ************* MSFT - Microsoft Corp $56.25 +0.38 (-1.06 this week) Microsoft is the #1 software company in the world. They develop, manufacture, license, and support a broad range of software products including Windows operating systems, server applications, the popular MS Office suite, and a Web Browser. As most of you know, the company is presently involved in anti-trust issues with the government. CEO and co-founder, Bill Gates still owns 15% of Microsoft. We're in the midst of a bloodbath as the NASDAQ hit lows not seen in almost two years. And to boot, Sun Microsystems' downgrade by Merrill Lynch today only made things worse. But yet, we remain optimists at OI. While there's no arguing that the market sentiment is very anti-tech at the moment, we believe there is a light at the end of the tunnel; particularly in the case of MSFT. Take a look at the stock's chart and you can visually confirm its strength and buoyancy during these turbulent and uncertain times; especially considering the CPI numbers. We're expecting the $55 level to continue to provide bottom support and thus, be a launching pad on the rebound. If you chose to enter prior to a convincing breakout however, keep stops tight! As a whole, the software sector is rather weak with other software stocks such as ACRU, ADBE, and BEAS sagging, but then there's also other bright spots like Intuit (INTU), which posted better-than-expected 2Q earnings and gained 16% on the day. As for MSFT, look for a solid bounce off the 5- dma ($57.30) followed by a move through the 10-dma ($58.95) and the $60 resistance to confirm an uptrend. You might consider selling into strength as MSFT approaches the 200-dma ($64.68). This formidable line of opposition recently halted other rallies. In the news today, Microsoft announced it settled a 1998 antitrust suit with Bristol Technology Inc. Although terms were not officially disclosed, there are whispers of a $4.8 mln figure. BUY CALL MAR-50 MSQ-CJ OI= 1270 at $7.50 SL=5.25 BUY CALL MAR-55*MSQ-CK OI= 7996 at $3.88 SL=2.50 BUY CALL MAR-60 MSQ-CL OI=27032 at $1.44 SL=0.75 BUY CALL APR-55 MSQ-DK OI=25672 at $5.50 SL=3.50 BUY CALL APR-60 MSQ-DL OI=21772 at $2.88 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=MSFT ************ NEW PUT PLAY ************ ADBE - Adobe Systems $30.06 -4.19 (-6.25 this week) A long-time leader in desktop publishing software, ADBE provides graphic design, publishing, and imaging software for Web and print production. Offering a line of application software products for creating, distributing, and managing information of all types, the company generates nearly 75% of sales through publishing software products such as Photoshop, Illustrator, and PageMaker. Its Acrobat Reader, which uses portable document format (PDF) is popping up all over the Internet, as businesses shift from print to digital Communications. The bears are rejoicing as selling pressure in all things Technology has driven ADBE to a new 52-week low, fractionally above $30. In less than a month, the desktop publishing leader has given up more than half its market cap, and is showing no signs of reversing the trend anytime soon. If anything, the downtrend that has been in place since November is getting steeper as the NASDAQ threatens to drop to its lowest level in more than 2 years. The negative news continues to flow and even the strongest Technology stocks are being beaten up on a daily basis. As cheap as these stocks appear on a historical basis, there simply is no reason to buy with a lack of forward visibility amid an environment where the Fed is seen to be too slow to soften its position on interest rates. After stumbling to a new 52-week low today, ADBE is at risk of breaking the $26-27 support level. Although daily Stochastics are deep in oversold territory, that doesn't mean the stock needs to recover anytime soon, and with the lower Bollinger band at $16.16, there is still room to fall. Adding to the bearish outlook is the volume trend which has been increasing for the past week and a half, hitting 11.2 million shares today, more than double the ADV. In the absence of any good news or a positive move in the NASDAQ, the new stock should continue to deteriorate. Given the sharp increase in selling volume this afternoon, conservative investors can initiate new positions on a drop through the $30 level, while keeping an eye out for a possible bounce near the $26-27 support level. More aggressive traders can look to enter on a failed rally, so long as the rollover occurs below our $34 stop level. BUY PUT MAR-35 AEQ-OG OI=1946 at $6.58 SL=4.50 BUY PUT MAR-30*AEQ-OF OI=1034 at $3.50 SL=1.75 BUY PUT MAR-25 AEQ-OE OI= 229 at $1.38 SL=0.75 http://www.premierinvestor.com/oi/profile.asp?ticker=ADBE TIBX - TIBCO Software Inc $15.50 -4.25 (-7.56 this week) TIBCO Software is a leading provider of real-time infrastructure software for the Internet and enterprise that enables business to dynamically link internal operations, business partners and customer channels. The company's flagship solution, ActiveEnterprise, facilitates this business process integration by connecting applications, web sites, databases and other content sources using patented technology called The Information Bus (TIB). Its software has since been adopted in a wide range of industries from high-technology manufacturing and telecommunications to retail and e-business. Tibco Software revolutionized trading on Wall Street in the mid- 1980's, but the stock itself isn't faring too well nowadays. After going public in July 1999 and having a phenomenal run up to $147 in March 2000, TIBX never recovered from this summer's doldrums. The wobbly markets, weakness in the software sector, and its own momentum driving the share price lower, it now appears TIBX is on the way to single digits. Even positive analyst coverage from some of the more influential firms like Salomon Smith Barney and CSFB this month couldn't give TIBX a much needed boost. The company's CEO also tried to soothe investors concerns, but to no avail. This week, TIBX lost another whooping 33%, or $7.56 amid robust trading. Today's volume was 1.8 times the ADV as TIBX hit a new 52-week low ($15.06) in the late afternoon. The negative bias across the broader market is an obvious catalyst, so of course pay attention to overall market sentiment in combination with the stock's direction before beginning new plays. Because of the inexpensive share price and the risk of buyers stepping in on a rally, we have a stop in place at $18. Although, it still may be viable to consider entries at the 5-dma ($21.88) proximity amid a high-volume rollover scenario. BUY PUT MAR-25.0 PAV-OE OI= 97 at $10.63 SL=7.50 BUY PUT MAR-22.5 PAV-OX OI=222 at $ 8.25 SL=5.75 BUY PUT MAR-20.0*PAV-OD OI= 45 at $ 6.25 SL=4.25 http://www.premierinvestor.com/oi/profile.asp?ticker=TIBX ***************** STOP-LOSS UPDATES ***************** AES - call play Adjust from $56 up to $57 MO - call play Adjust from $45 up to $47 SDS - call play Adjust from $57 up to $58 LH - call play Adjust from $141 up to $144 NETE - put play Adjust from $56 down to $54 QLGC - put play Adjust from $50 down to $46 GS - put play Adjust from $102 down to $98 ABGX - put play Adjust from $34 down to $33 BBOX - put play Adjust from $55 down to $53 ************* DROPPED CALLS ************* CIEN $71.63 -5.69 (-11.00) The tech carnage continued to wreck havoc across the NASDAQ and CIEN felt the pain. The share price fell another 7.4% on 1.5 times the ADV. In the absence of a much hoped for rebound today combined with the indisputable violation of our $78 stop, we have no choice but to drop CIEN from our call list. CTX $41.78 -1.98 (-2.72) Profit takers showed up this week at the $45 level and booked recent gains. Today's move was rather extreme for CTX, falling 5%. It appears that after last week's news that homebuilders were off to a strong start in January, investors sold on the news. Our stop at $43 was overtaken today by the wave of selling, resulting in a drop tonight. LOW $54.31 -3.99 (-2.19) LOW saw liquidation all day as the stock plunged from $58 until the close. Volume was relatively lighter than the past two weeks, but the 7% slide is no less painful. With concerns over consumer sentiment already abound, this morning's stronger-than-expected CPI re-ignited fears of inflation. Retailers across the board felt the pain, and LOW violated our stop of $57. We are dropping it from the call list tonight. SGR $49.50 -2.20 (-2.54) SGR fell today along with other business cycle sensitive issues after the stronger-than-expected CPI. Given potential inflationary worries and slowing economic growth, investors ponder whether the Fed will cut rates prior to their March 20th meeting. These concerns over the Fed wringing its hands about inflation versus a slowing economy brought negative sentiment to SGR. The stock slipped below our stop of $50 and we must drop it this evening. CPN $44.24 -1.46 (-3.00) CPN fell today on news about the California energy situation. Duke Energy said that it would not sign long-term contracts to provide power unless the state guarantees that it will get paid. On February 7th, CPN signed a 10-year deal valued at $4.6 billion. Duke also stated that they feel California seemed to be losing its sense of urgency in regard to solving the energy crisis. This raised concern in the market that payments will not be guaranteed amid uncertainty in the solution. CPN felt the selling pressure and close under our stop at $45. While the stock very well rebound, we must drop it tonight. *********** DROPPED PUT *********** BRCD $44.69 -0.19 (-8.56) As the NASDAQ attempted to recover this morning, BRCD gave aggressive investors one last entry opportunity as the stock traded up to nearly $51 by lunchtime. As the markets began their long afternoon slide, BRCD went along for the ride, falling to close very near where it ended the day yesterday. We've gotten a nice ride from the play, but as we mentioned last night, it is time to move on. BRCD announced earnings tonight after the close, and with BRCD beating estimates by a penny, the near-term trading direction will likely be determined by the tone of the company's conference call this afternoon. Judging by the -$8 drop in the after-hours session, it was not well received, giving an extra burst of profits to those who decided to take on the added risk of holding over the announcement. ************** TRADERS CORNER ************** Gauging A Recovery By Mary Redmond While the stock market seems to be poised in suspended animation, we may need to look at the bond market for clues as to the progression of the recovery in progress. Specifically, the spread between Treasuries and high yield debt has a significant impact on the stock market, as well as the entire economy. In his December speech, Chairman Greenspan stated that the Federal Reserve must intervene when banks and the capital markets start to become so risk averse that companies cannot obtain financing for expansion. In fact, we have swung the pendulum from a propensity toward excessive risk in the last few years to the excessive caution we have been experiencing in the last several months. During 1999 and early 2000, it was so easy for small companies to issue new shares that over $350 billion in IPOs were issued. Not only did this drain liquidity from the market, but now individual and institutional investors have found that many of these stocks are currently in critical need of additional financing which they are unable to obtain. This can lead to additional risk averse behavior. The equity IPO market has been in a serious bear market since last fall, and shows few signs of recuperating. Only a few IPOs have been successfully issued in 2001. Since the majority of IPO buyers are institutions, this can indicate a high level of caution and selectivity among institutional buyers. However, the credit spreads are gradually starting to narrow. Several companies have been able to issue substantial debt offerings since the Fed's rate cuts, which would have been impossible with the yields we saw last fall. While this is an optimistic sign, we may need to realize that credit spreads may have further to go before a true recovery is complete. The graph below shows the approximate historical credit spreads compared to the S&P 500. The worst spread in recent history occurred during the 1991 recession. Following the Federal Reserve's rate increases, and subsequent rate decreases in the 1994-1995 period, the credit spreads narrowed to a level of approximately between 400 and 500 basis points. Risky high yield bonds paid about 400 to 500 basis points above Treasuries. Last fall, before the Fed's rate cuts, credit spreads had widened to at one point over 800 basis points. High yield debt interest payments rose to over 12 to 13%. Investors in the credit markets became more selective and discriminating, since this yield generally implied a default rate of about 9%, which is historically very high. This credit crunch practically cut off the life line to many rapidly expanding telecom stocks, which rely heavily on the corporate debt markets. Since the Fed cut rates by 100 basis points, high yield debt rates have fallen by nearly 200 basis points. Ideally, we would like to see spreads fall even further, to the levels we experienced from 1995 to 1997. When we see credit spreads narrow further, as long as other macroeconomic factors remain benign, and inflation is under control, this could be the sign that the recovery is well underway. At that point, companies could more freely borrow money to finance their expansions. The customers of companies like Cisco and Nortel could start ordering more equipment, which could lead to company managements revising their expectations upward. However, there are profitable trades which can be made in both calls and puts. While put players may have found it easy to profit in the last weeks, call plays have occurred in certain sectors and circumstances. For example, AES has been bucking the trend of the overall market in the last few weeks, as the energy sector has come into favor. AES and CPN have attracted investor interest as the California energy crisis intensified, and the increasing demand for energy has become apparent. In addition, the stock reported excellent earnings and several analysts have upgraded both AES and others in its sector in the last few weeks. A daily chart pattern of AES shows a stock in a strong upward trend, with a bullish wedge developing with resistance at the $60 level. After watching the stock's pattern closely, it was apparent that AES had fairly low sensitivity to weakness in the Dow and Nasdaq. A possible entry point occurred when the stock spiked out of the Bollinger bands when viewed on a 15 and 30 minute chart. This occurred in combination with the other technical indicators moving up. While it is unclear if the stock will have sufficient strength to break out of the bullish wedge, the position offered a profit opportunity for aggressive traders Since this type of market is riskier than one which is in a clearly defined rally, traders might want to get in and out of positions quickly. One of the most accurate short-term tools for gauging a daily oversold and overbought condition is the new Nasdaq Volitility Index(VXN.X or $VXN). The VXN has a much wider range than the VIX, however, if you watch the VXN compared to the action of the QQQ, you will see that over the last month, a buying level has occurred when the VXN spikes out of its Bollinger bands to the upside, which has usually occurred around the 66 level, and a sell indicator has occurred when the VXN spikes out of the Bands to the downside, which has occurred around 62. The is not completely failure proof, but for a range bound market, it has had a high level of accuracy in the last couple of weeks. For example, on Wednesday morning, following the release of the CPI, an entry point for QQQ calls occurred, when the QQQ dropped to $51. However, at this point, the VXN remains in the high range and we will have to wait and see how much longer the Nasdaq and QQQ can remain in this oversold condition. *************************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=1693 ************************************************************ ********************** PLAY OF THE DAY - CALL ********************** SDS - SunGard Data Systems Inc. $59.16 +0.91 (+1.90 this week) SunGard is a global leader in integrated IT solutions and eProcessing for financial services. SunGard is also the pioneer and a leading provider of high-availability infrastructure for business continuity. SunGard provides a wide range of modular, best-of-breed financial software solutions that are integrated using standard message protocols and SunGard integration technologies to form highly scalable, web-enabled enterprise solutions. Most Recent Write-Up SDS continued to display relative strength in a market that is not necessarily friendly to anything tech-related. However, SDS' strength is not isolated; several of its competitors traded higher during Tuesday's tough session for the tech sector. SDS' relative strength should bode well going forward if the Nasdaq and broader tech sector rebounds. Having said that, the most prudent strategy would be to wait for an advancing Nasdaq in conjunction with strength in competitors such as FISV before entering new SDS positions. If you get confirmation early Wednesday morning, new positions can be added at current levels, thereafter traders might look to take some profits as SDS approaches $60. Low volume pullbacks can be pursued conservatively, but be aware that we've raised our protective stop to $57 and would drop coverage on SDS if the stock closed below that level. Comments SDS has been a strong performer, and although it finished higher on the day, resistance at $60 has been established. The stock bounced from $58 this morning and ran straight to $60. There very well may be a pullback tomorrow that can provide entry. Look for a bounce from intraday support at $58, and possibly another run at $60. A break above resistance at $60 on strong buying volume would also provide a nice entry point. Continued selling in SDS along with a recovering NASDAQ might be rotation and a sign to pass. BUY CALL MAR-55 SDS-CK OI=1419 at $5.00 SL=3.25 BUY CALL MAR-60*SDS-CL OI= 228 at $2.00 SL=1.00 BUY CALL APR-55 SDS-DK OI= 804 at $6.50 SL=4.75 BUY CALL APR-60 SDS-DL OI= 348 at $3.75 SL=2.00 http://www.premierinvestor.com/oi/profile.asp?ticker=SDS ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Retesting the lows...and is the worst yet to come? Stocks moved lower today as additional signs of inflation weighed heavily on investors. The despairing corporate earnings outlook added to recent concerns about the effects of a slowing economy, effectively ending any hopes of a near-term rebound in technology shares. New economic data also showed an unexpected increase in January consumer prices, pressuring traders with indications that inflation may be increasing despite lagging growth. The Labor Department reported a 0.6% climb in the consumer-price index for January, well above the 0.3% rise that analysts were expecting. The latest price data augmented last week's producer-price index, which also showed signs of inflation and troubled investors. On the bright side, much of the increase in the CPI was due to a rise in natural gas prices, which have since deflated and experts noted that the FOMC has said the slowing economy, not inflation, is its primary near-term concern. The real problem is that traders are worried that the central bank might not reduce interest rates by the expected half-percentage point at its upcoming policy meeting. With the NASDAQ now firmly reestablished in a downtrend, the fact that we will soon be hearing another round of mediocre earnings announcements makes this outcome seemingly unbearable. The one ray of hope comes from the contrarian viewpoint, which suggests that when conditions appear to be at their worst, that's a "buy" signal that can't be overlooked. I, for one, would entertain almost any reason for a recovery at this point... Summary of Previous Picks: NOTE: February prices as of Friday's Expiration Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return CTLM FEB 35 34.06 37.31 $0.94 5.2% ERTS MAR 45 42.88 47.25 $2.12 5.0% Positions closed: FTE, ADI, EMLX Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return CTLM FEB 35 33.94 37.31 $1.06 18.7% UHS FEB 80 78.95 85.15 $1.05 12.9% CMVT FEB 90 88.81 103.75 $1.19 9.5% IDTI FEB 35 34.44 41.88 $0.56 5.1% BRKS MAR 30 29.31 36.63 $0.69 8.3% ERTS MAR 40 39.12 47.25 $0.88 8.0% AEOS MAR 45 43.94 56.88 $1.06 6.9% SEIC MAR 75 73.94 83.63 $1.06 5.3% DIGL MAR 35 33.56 27.56 -$6.00 0.0% Closed Positions closed: VSTR, EMLX, FTE, ADI Sell Strangles: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return VECO FEB 30 29.06 49.44 $0.94 7.3% VECO FEB 95 96.13 49.44 $1.13 8.7% AFFX FEB 50 49.19 62.31 $0.81 7.4% AFFX FEB 97.5 98.31 62.31 $0.81 7.4% AFFX FEB 52.5 51.81 62.31 $0.69 9.4% AFFX FEB 85 85.69 62.31 $0.69 9.4% VECO FEB 35 34.50 49.44 $0.50 8.0% VECO FEB 80 80.63 49.44 $0.63 10.0% CHKP FEB 80 79.25 90.19 $0.75 11.5% Adj 3-2 split CHKP FEB 113.3 114.00 90.19 $0.67 9.4% Adj 3-2 split MUSE MAR 40 38.94 50.06 $1.06 7.8% MUSE MAR 95 96.06 50.06 $1.06 7.8% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return OSIP FEB 85 86.13 47.88 $1.13 8.6% BRCD FEB 135 136.25 53.25 $1.25 7.4% CIEN FEB 145 146.00 82.63 $1.00 6.2% MYGN FEB 100 100.69 62.00 $0.69 6.1% BEAS MAR 80 80.94 45.81 $0.94 8.3% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status CMVT $121.63 $103.75 FEB95p/100p $0.75 $99.25 $0.75 Exp ITG $45.81 $51.80 FEB35p/40p $0.69 $39.31 $0.69 Exp CEPH $58.50 $58.50 FEB75c/70c $0.38 $70.38 $0.38 Exp IMPH $55.94 $56.25 FEB45p/50p $0.75 $49.25 $0.75 Exp NBR $62.30 $57.90 MAR50p/55p $0.60 $54.40 $0.60 Alert Positions closed: A-FEB45p/50p - Murphy's Law rebound on Friday to $50, NUFO-FEB40p/45p Debit Straddles: Stock Pick Last Position Debit G/L Status ASFC $55.91 $54.38 MAR55c/55p $4.38 $-1.57 Open FAST $57.69 $56.94 MAR60c/60p $5.50 $-0.62 Open Positions closed: AC-FEB55c/55p, reached profit target, $0.75 (30%) gain. New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations *************** CCMP - Cabot Microelectronics $91.19 *** Technicals Only! *** Cabot Microelectronics (NASDAQ:CCMP) is a supplier of slurries used in chemical mechanical planarization, or CMP, a polishing process used in the manufacturing of integrated circuit devices. The company has also begun selling new slurries for polishing of the magnetic heads and the coating on hard disks in hard disk drives. In addition, it recently began limited production of CMP polishing pads for customer evaluation and qualification. We originally found this position while scanning for charts of bullish issues with favorable option premiums. Unfortunately, there is little reason to explain the strength of the stock, considering the bearish market conditions. A Goldman Sachs analyst recently raised her 2001 EPS estimates for CCMP, based on the company's stellar earnings report. Cabot announced that revenues for the quarter increased 97% to $68 million while net income for the quarter increased 206% over the prior year. The company benefited from revenue growth across all applications and regions, and the outlook for the production of advanced IC devices remains strong overall. CCMP officials anticipate that 2001 revenues will increase in excess of 50%, with earnings between 16% and 18% of revenue, due to slightly higher growth and slightly lower costs for the overall year. Based on the current price of the underlying issue and its recent technical history, these positions offer reasonable speculation for traders who are bullish in the semiconductor equipment industry. CCMP - Cabot Microelectronics $91.19 PLAY (sell covered call or naked put): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call MAR 70 UKR CN 10 24.00 67.19 5.5% *** Sell Call MAR 75 UKR CO 44 20.25 70.94 7.6% Sell Put MAR 60 UKR OL 130 1.13 58.87 7.7% *** Sell Put MAR 65 UKR OM 154 1.88 63.12 12.4% Sell Put MAR 70 UKR ON 128 2.88 67.12 18.0% Sell Put MAR 75 UKR OO 110 3.88 71.12 21.2% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=CCMP ***** INTU - Intuit $38.00 *** Solid Earnings! *** Intuit (NASDAQ:INTU) offers a variety of small business, tax preparation and personal finance software products and related products and services that enable people and small businesses to revolutionize how they manage their activities. The company's products and services include QuickBooks, Quicken, TurboTax, ProSeries and Lacerte desktop software products, as well as an expanding array of Internet-based products including QuickBooks Deluxe Payroll service, QuickBooks Internet Gateway services, the Site Builder website tool, Quicken TurboTax for the Web, Quicken.com, Quicken Loans and QuickenInsurance. Intuit offers products and services through four principal business divisions: Small Business, Tax, Consumer Finance and International. Intuit shares rallied today after the personal-finance software maker posted quarterly earnings that beat consensus expectations, despite slowing sales of its core accounting software product. The company reported second-quarter earnings of $104 million, or $0.48 a share, which compared favorably with quarterly earnings of $91 million, or $0.44 a share, a year earlier. Analysts had expected earnings of $0.45 a share for the quarter and after the announcement, Salomon Smith Barney raised its investment rating on the company to "outperform." A Prudential Securities analyst also reiterated his "strong buy" rating on the stock, saying that he believes investors who aggressively purchase Intuit shares will be rewarded. Our outlook is not quite as optimistic, but we do think that the opportunity to own this issue near the target cost basis is favorable, considering the fundamental outlook for the company. INTU - Intuit $38.00 PLAY (sell covered call or naked put): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call MAR 35 IQU CG 18700 4.75 33.25 7.0% *** Sell Put MAR 30 IQU OF 1138 0.62 29.38 10.0% *** Sell Put MAR 35 IQU OG 1790 1.81 33.19 17.1% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=INTU ***** NOC - Northrop Grumman $94.82 *** New Trading Range! *** Northrop Grumman (NYSE:NOC) is an advanced technology company operating in the Integrated Systems and Aerostructures (ISA), Electronic Sensors and Systems (ESS), and Information Technology (IT) segments of the aerospace and defense industry. The ISA segment includes the design, development and manufacturing of aircraft and aircraft subassemblies. The ESS segment includes the design, development, manufacturing and integration of electronic systems and components for military and commercial use. Logicon, the Company's IT segment, includes the design, development, operation and support of computer systems for scientific and management information. Northrop Grumman shares continued to move higher today, after the aerospace company announced that its Oceanic and Naval Systems business unit had been awarded a $22 million contract by the U.S. Naval Sea Systems Command, to provide shipboard radar systems. The contract is just one is a slew of recent awards and the news confirms SG Cowen's recent comments that Northrop Grumman is well positioned to absorb policy changes under President George W. Bush's administration. Northrop, which makes the B2 bomber and combat radar systems, is expected to benefit from a shift in the U.S. military's focus to naval forces from infantry and land-based systems. In addition, the proposed merger with shipbuilder Litton Industries (NYSE:LIT) is considered a good strategic fit, strengthening the company's defense electronics and information technologies while boosting earnings. Technically, NOC is resuming its Stage II climb, moving above resistance (September - October highs) to a new two-year high. The buying pressure also continues to increase, suggesting the upside momentum will continue. NOC - Northrop Grumman $94.82 PLAY (aggressive - bullish/credit spread): BUY PUT MAR-85 NOC-OQ OI=63 A=0.35 SELL PUT MAR-90 NOC-OR OI=34 B=1.00 INITIAL NET CREDIT TARGET=$0.75 ROI(max)=17% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=NOC ***** NVDA - Nvidia $56.00 *** Positive Outlook! *** Nvidia (NAADAQ:NVDA) designs, develops and markets 3D graphics processors, graphics processing units and related software that set the standard for performance, quality and features for every type of personal computer user, from professional workstations to low-cost PCs. The company's 3D graphics processors are used in a wide variety of applications including games, the Internet and industrial design. Its graphics processors were the first to incorporate a 128-bit multi-texturing graphics architecture designed to deliver to users of its products a highly immersive, interactive 3D experience with compelling visual quality, with realistic imagery and motion, stunning effects, and complex object and scene interaction at real-time frame rates. The company sells its products to major OEMs such as Compaq, Dell, Gateway, Hewlett Packard, IBM, micronpc.com, NEC, Packard Bell and Sony and add-in board manufacturers such as ASUStek, Creative Labs, Elsa, Guillemot and Leadtek. Nvidia recently reported favorable profits, announcing quarterly earnings of $0.38 a share, a penny higher than analysts expected. For the fourth quarter of fiscal 2001, revenues increased to $218 million, compared to $128 million for the fourth quarter of 2000, an increase of 70%. In the conference call, Nvidia President and CEO Jen-Hsun Huang announced that the company's next push would be into supplying the mobile computing market with 3D graphics chips, currently a nonexistent part of its revenue mix. He also said that the second half of 2001 would be when the first returns from the Microsoft Xbox are recognized, a positive boost to the bottom line. Investors applauded the news and NVDA has now reversed its downtrend, jumping back above its 150 dma on heavy volume and taking out the January high in the process. The bullish activity suggests additional upside movement in the future and traders can speculate on that outcome with these conservative positions. NVDA - Nvidia $56.00 PLAY (sell naked put): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put MAR 40 UVA OH 2007 0.75 39.25 8.3% *** Sell Put MAR 45 UVA OI 2288 1.44 43.56 14.8% Sell Put MAR 50 UVA OJ 752 2.75 47.25 19.0% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=NVDA ***** WPI - Watson Pharmaceuticals $55.98 *** Bullish Breakout? *** Watson Pharmaceuticals (NYSE:WPI) is engaged in the development, production, marketing and distribution of branded and off-patent pharmaceutical products. WPI's products include therapeutic and preventive agents sold by prescription or over-the-counter for the treatment of human diseases and disorders. Watson has grown, through internal product development and synergistic acquisitions of products and businesses, into a diversified pharmaceutical company that currently markets over 100 branded and off-patent products. The company is also engaged in the development of advanced drug delivery systems, primarily designed to enhance the therapeutic benefits of pharmaceutical products, both to expand Watson's own product line and under collaborative agreements with other parties. Watson Pharmaceuticals has a number of positive factors working on its behalf, the most favorable of which appears to be the potential for reform of a key generic drug law. Members of both houses of Congress are planning to re-introduce legislation to update the 1984 law that governs generic competition and that activity is seen as a positive move for stocks in this group. In addition, generic drug companies continue to enjoy a favorable industry environment and valuations in the sector are reasonable. Over the next few years, patents on a number of brand-name drugs will expire and the generic drug segment is expected to realize significant upside earnings growth. Traders who agree with a positive outlook for the industry and WPI can speculate on its short-term movement with this conservative position. PLAY (conservative - bullish/credit spread): BUY PUT MAR-45 WPI-OI OI=14 A=0.30 SELL PUT MAR-50 WPI-OJ OI=238 B=0.80 INITIAL NET CREDIT TARGET=$0.55-$0.60 ROI(max)=12% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=WPI *************** Neutral Plays - Straddles & Strangles *************** CERN - Cerner $56.25 *** Premium Selling! *** Cerner (NASDAQ:CERN) designs, develops, markets, installs and supports information technology, and content solutions for healthcare organizations and consumers. These solutions are capable of being implemented on an individual, combined or enterprise-wide basis and are accessible over the Internet by consumers, physicians, and healthcare providers. The company's integrated suite of solutions enable healthcare providers to improve operating effectiveness, reduce costs, and improve the quality of care as measured by clinical outcomes. Cerner's solutions are designed to provide useful health information and knowledge to care givers, clinicians, and consumers with the appropriate management information to healthcare administration on a real-time basis, allowing secure access to data by clinical and administrative users in organized settings of care and by consumers from their home. Cerner is an excellent candidate in the premium-selling category of options trading. The issue has robust option premiums, a relatively well-defined trading range and a high probability of remaining between the sold (short) strike prices. The company has already announced earnings for the quarter and officials are comfortable with consensus estimates for the coming year. In addition, the maximum price target for the issue (among brokers) is $65 and no news announcements or major events are expected before the March options expire. Based on historical analysis of option pricing and the underlying stock's technical history, the issue meets our criteria for a favorable credit strangle. CERN - Cerner $56.25 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put MAR 45 CQN OI 23 0.81 44.19 8.9% Sell Call MAR 65 CQN CM 132 1.19 66.19 10.5% - or - Sell Put MAR 50 CQN OJ 100 1.75 48.25 12.9% Sell Call MAR 60 CQN CL 575 2.75 62.75 16.9% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=CERN ***** SDS - Sunguard Data Systems $59.03 *** Too Far, Too fast? *** SunGard Data Systems (NYSE:SDS) provides integrated technology solutions, principally proprietary software and application services to the financial services industry; and business continuity and Internet services, comprised of high-availability infrastructure, Web-hosting, co-location, outsourcing and remote access computer services. In addition, the company provides a workflow management system that increases business efficiency and flexibility in managing healthcare insurance organizations, and an automated mailing-services business. The recent rally in SDS began early in February when the maker of software systems for financial services companies posted a 37% increase in fourth-quarter income. The profits exceeded most analyst's expectations and the upside surprise came amid growth in the company's investment support systems, business and also Internet services segments. Investors reacted favorably to the news, driving the issue well out of its recent trading range to a new all-time high. Now it appears that the stock is slightly overbought and with the potential for future volatility and the discounted option prices, we can speculate conservatively on the future movement of the issue. PLAY (conservative - neutral/debit straddle): BUY CALL MAR-60 SDS-CL OI=228 A=$2.05 BUY PUT MAR-60 SDS-OL OI=16 A=$2.90 INITIAL NET DEBIT TARGET=$4.75 TARGET ROI=25% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=SDS ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1672 ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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