Option Investor

Daily Newsletter, Monday, 03/26/2001

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The Option Investor Newsletter                   Monday 03-26-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
    03-26-2001               High      Low    Volume Advance/Decline
DJIA     9687.50 + 182.70  9724.90  9509.30 1.12 bln   1998/1072	
NASDAQ   1918.49 -  10.19  1960.68  1909.42 1.71 bln   2000/1631
S&P 100   588.45 +   7.74   592.26   580.98   totals   3998/2703
S&P 500  1152.69 +  12.90  1160.02  1140.15           59.7%/40.3%
RUS 2000  447.38 +   4.11   450.59   443.27
DJ TRANS 2727.87 +  82.53  2728.67  2646.65
VIX        33.19 -   1.72    34.85    33.03
Put/Call Ratio       0.58

Divergent Markets

An impressive gain in the Dow Jones Industrial Average was subdued
by light trading volume and a quiet loss in the Nasdaq Composite.
The Dow added 182.8 points, or 1.9%, to close at 9,687.5, while
the Nasdaq Composite lost just 10.2 points, or 0.5%, to finish at
1,918.5. Volume decreased again on both exchanges, with 1.1
billion shares trading on the New York Stock Exchange and 1.7
million in the Nasdaq Stock Market. Positive market breadth was
displayed as advancers led decliners by 2 to 1 on the NYSE and by
5 to 4 on the Nasdaq.  New 52-week price highs totaled 72 versus
27 new lows on the NYSE.  Advancing volume comprised 73% of total
NYSE trades. The Nasdaq logged 46 new highs and 89 new lows.

You might think that today's rally had legs when you look at the
broader market, including Dow Transports (up 3.1%), Dow Utilities
(up 4.5%) and S&P Financials (up 1.6%).  Smaller cap indices
(RUT, up 0.9%, and MID, up 1.1%) also posted healthy gains.  But
then you remember that the total volume traded was really on the
light side. Part of it may have been due to the trading curbs
installed on the New York Stock Exchange midday.  Curbs prevent
program buying into an uptick or selling into a downtick.  This
limits the ability of big money to maneuver, thereby inhibiting
volume.  No wonder the volume decreased today. The CBOE Market
Volatility Index (VIX) and the Nasdaq Market Volatility Index
(VXN) both pulled back today, ending at 33.2 and 69.2,

Cautions comments from Cisco Systems (NASDAQ:CSCO -0.81) dragged
on the Nasdaq. This weekend, Cisco stated that end-market demand
is likely to be slack for "at least the next three quarters."
Cisco shares hit a new 52-week low at $17.88.  Nearly all of the
tech sectors lost ground today.  Bucking the trend was the
Internet Index (DOT), rising 1.9%.  Amazon (NASDAQ:AMZN +0.75)
added 7.4% to $10.94.  Verisign (NASDAQ:VRSN +1.88) added 5.6% to
$35.25. Ebay (NASDAQ:BAY +1.25) added 3.4% to $38.44.  I notice
that Ebay still has a P/E of more than 200, but seems to have
found support around $30.

Citing a drop-off in demand and order cancellations, PMC-Sierra
Inc. (NASDAQ:PMCS -1.68) slashed expectations for 1Q earnings
and revenues.  The company will also cut its workforce by more
than 13% and close some facilities.

Utilities and airlines showed some of the largest percentage
sector gains, with the Utility Index (UTY) up 4.7% and the
Airlines Index (XAL) adding 4.1%.  The big news in the airline
arena was the strike by Comair pilots. President Bush said that
he did not have the authority to block this strike, having
intervened in a pending strike at Northwest Airlines earlier
this month only at the request of Federal mediators.  Comair
is owned by Delta Airlines (NYSE:DAL +1.73).

Home Depot (NYSE:HD +1.68) was upgraded to Buy before the bell,
which pushed shares up 4.2% to $41.35. Salomon Smith Barney also
raised its price target on the stock to $52 from $45.  Robertson
Stephens upped their rating for Wal-Mart Stores (NYSE:WMT +2.03)
to Buy, sending shares up 4.3% to $49.60.

The Federal Reserve reported that about half of all banks have
tightened their credit standards to their corporate customers
in the past two months by increasing the risk premium. This
special survey of senior loan officers found that the credit
tightening is hitting big companies harder than small
companies. About half of the banks report weaker demand for
loans, in part because spending on equipment is slowing. Only
7% said that loan demand is rising. By the way, the Fed had
has not issued a special loan survey since the financial
market crises of late 1998.

New-homes sales fell 2.4% in February.  The Commerce Department
reported that the decline in sales of new single-family homes
followed the larger 10.8% plunge in January, which had been the
biggest monthly setback in seven years. Still, new homes were
sold at a strong annual rate of 911,000 in February, when
adjusted for seasonal variations, which was above the sales
total of 903,000 for all of last year. The forecast for new
home sales was 912,000. The National Association of Realtors
said sales of previously owned homes edged down 0.4% last month
to a seasonally adjusted annual rate of 5.18 million homes,
slightly more than the forecast 5.04 million. Although the
falling stock market and economic slowdown have hurt consumer
confidence, analysts believe that declining mortgage rates have
helped to shore up home sales.

Reports of the solid housing market had little impact on
Treasuries. Two-year notes fell 1/32 to 100-21/32, as their
yield, which moves inversely to price, rose to 4.26%. Five-year
notes dropped 4/32 to 105-2/32, yielding 4.52%.
Benchmark 10-year notes fell 9/32 to 101-5/32, yielding 4.85%,
while 30-year bonds fell 21/32 to 100-9/32 to yield 5.36%.
Investors are waiting for tomorrow's consumer confidence data
and Mr. Greenspan's Speech on "Monetary Policy for a Growing
Economy" scheduled for a business economics conference in

Looking Ahead

Durable Orders forecasts for Tuesday fall in the range of a slight
decline to a 0.50% increase.  The Consumer Confidence Report,
also slated for Tuesday, will likely show a decrease from the
prior month's report, reflecting stock market weakness and the
rash of job cut announcements.  Note that the cut-off date for the
March Conference Board survey was March 21, and therefore probably
did not reflect last week's rally.  ABC/Money Magazine's weekly
consumer comfort index posted its largest decline and the lowest
level of consumer comfort since October of 1997.

Wednesday brings us the Oil & Gas Inventories report.  Thursday's
Initial Jobless Claims Report for the week ending March 24 will
likely prove to be the eighth consecutive weekly increase in this
average.  Bear, Stearns and Company forecasts a small increase to
380,000 versus the previous 379,000.

Bear, Stearns and Company reported that of the 350 interviews
conducted for preliminary March Michigan Sentiment, only 100
took place in the week ended March 16, when the Nasdaq fell
9.7%. The results of the additional 150 interviews carried out
for the final survey due Friday will probably result in slightly
lower final sentiment at 90.5.  Also reported on Friday, the
Chicago Purchasing Managers' Index (PMI) is expected to rise
slightly, to 44%, in March.

It is not clear whether the trading today in the broad market was
a technical bounce or an indication of long-term optimism.
Concerns about the economy and earnings still abound.  But one of
my red flags is officially up.  Too many talking heads are saying
that we are seeing a bottom now and that the return to growth is
going to happen in the fourth quarter.  First Call/Thomson
Financial told clients that S&P 500 earnings will be down for at
least the first three quarters of 2001.  Current estimates call
for a 7.2% drop in earnings growth in the first quarter and for
a 5.2% decline for the second quarter. However, earnings growth
estimates for the first and second quarters have come down about
a full percentage point each week since the beginning of March.
While I do not want to miss the upward turn any more that you do,
I still have that nagging feeling that we just have not seen
enough fear yet.  Have we exhausted the sellers?  Probably not.

The closing tick on the NYSE was positive, at 534.  The Nasdaq
closing tick of -230 is not a significantly negative value.
Generally, a tick that moves above 300 or less than -300 can
indicate a developing trend.  The Nasdaq could go either way
tomorrow, but its downtrend remains intact.  Do you need some
reasons for volatility in the near term?  Another earnings
warning period just began for those companies who have not yet
confessed.  It is also time for end-of-quarter window dressing
by mutual funds. I can't wait to see what they will be buying.
Trade carefully.

PJ Mitchell
Research Analyst

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Calculating the Bullish Percent.  Applying your new knowledge
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Austin Passamonte, Editor, IndexSkybox.com
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How to Profit from Option Pricing, Market Making and Volatility

Rance Masheck, President, SpreadTrader.com
Straddles. An excellent strategy for today's markets.  Traders
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Understanding Option Basics and the roll of an options floor trader.

Buzz Lynn, Contributing Editor, IndexSkybox.com
Slump Busting.  Are you on a losing streak?  Learn what you need
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Rance Masheck, President, SpreadTrader.com
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Austin Passamonte, Editor, IndexSkybox.com
Swing Trading & Day Trading Index Options.  Many consider Index
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Eric Utley, OptionInvestor.com & IntradayTrader.com
Psychology of trading and the Importance of the top down
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Buzz Lynn, Contributing Editor, IndexSkybox.com
Trading with Qcharts.  Learn how to properly set up, use, and
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Derek Baltimore, Co-Editor, IntradayTrader.com
Exit Strategies, knowing when to quit

Tim Taylor - Preferred Trade
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VRSN - VeriSign Inc. $35.25 +1.88 (+1.88 this week)

VeriSign Inc. is the leading provider of trusted infrastructure
services to web sites, enterprises, electronic commerce service
providers and individuals.  The company's domain name, digital
certificate and payment services provide the critical web
identity, authentication and transaction infrastructure that
online businesses require to conduct secure e-commerce and
communications.  VeriSign's services are available through its
web sites or through its direct sales force and reseller
partners throughout the world.

Since autumn of last year, shares of leading digital certificate
and web domain registration provider VRSN have been slowly
crumbling.  With the Software sector leading the NASDAQ lower,
fears of a slowing economy significantly impacting sales have
conspired to lead the stock lower.  Connecting the highs and lows
since October of last year reveals a downward trending regression
channel.  At this point, while VRSN is still in this downtrend,
we are initiating an aggressive call play for a number of
technical reasons.  The stock has spent the past few weeks
building a base, trading sideways between strong support at the
$30 level and resistance at $37.  Today's advance of 5.62 percent
on 1.27 times the ADV in the face of a weak to flat NASDAQ was a
sign of potential relative strength.  What's more, today's close
put the stock above its 5 and 10-dma (at $33.72 and $34.61),
suggesting the possibility of a move from sideways action to
higher prices.  But we cannot stress enough that this is an
aggressive bottom-picking play, so we recommend using only a
small portion of high-risk capital.  An ideal entry point would
be to wait for a bounce off its short term moving averages for an
entry, in conjunction with a closing stop set at $32.  By
limiting the downside in this manner, even a small bounce leading
to an upside test of resistance at $37 could yield a nicely
profitable play.  For a safer entry, wait for VRSN to take out
$37 on volume before jumping in.  Ideally, wait for peers RSAS
and CHKP to confirm upward direction before making a play.

BUY CALL APR-30 QVR-DF OI= 255 at $7.50 SL=5.25
BUY CALL APR-35*QVR-DG OI= 773 at $4.38 SL=2.75
BUY CALL APR-40 QVR-DH OI=1177 at $2.63 SL=1.25
BUY CALL MAY-35 QVR-EG OI=  60 at $6.38 SL=4.50
BUY CALL MAY-40 QVR-EH OI= 299 at $4.38 SL=2.75



ENE - Enron $61.48 +2.08 (+2.08 this week)

Originally only an energy company, in recent years ENE has moved
into the communications market as well.  Through its
subsidiaries, the company is primarily engaged in the
transportation of natural gas through pipelines throughout the
United States, and the generation, transmission and distribution
of electricity to markets I the northwestern United States.  ENE
also markets natural gas, electricity and other commodities and
finance services worldwide.  Most recently, the company has
moved into the Communication business, developing an intelligent
network platform to provide bandwidth management services and
deliver high bandwidth applications.

Energy-related stocks had quite a runup during the NASDAQ's woes
last year, but after reaching a plateau late last year, many of
these stocks have had a rough start in 2001.  ENE, along with
many of its contemporaries, came under pressure from tax-selling
right after the first of the year, as investors sought to
postpone their taxable gains by another 12 months.  The selling
pressure abated near the $67-68 level, and after the
late-January rally, ENE became a favored target of the bears
once again.  This time, support gave way, and the stock fell all
the way to $51.50 last week, helped along by the decline in the
broader markets.  Over the past 2 days, the bulls have been
cautiously nibbling at the stock, but based on the chart
pattern, it looks like they may be running a bit short on
conviction.  After the snapback rally that occurred on Friday,
volume has fallen back to the ADV of just over 4 million shares,
and more importantly, the stock seems unable to crest critical
resistance levels.  There are two primary obstacles for ENE
bulls to deal with at this time.  First there is historical
resistance (old support) near $64, but more importantly is the
6-week descending trendline, currently resting near $62.
Looking at the hourly chart, we can see that volume seemed to
dry up at the end of the day, prices couldn't advance above
resistance, and the Stochastics oscillator looks like it is
starting to roll over, which will lead the way for a
confirmation of bearish divergence.  Look to initiate new
positions near the $60 level as Stochastics rolls over,
confirming the bearish divergence pattern.  More aggressive
traders can target new positions on a failed rally near the
$64 resistance level, also the site of our stop.

BUY PUT APR-65 ENE-PM OI=11814 at $5.60 SL=3.50
BUY PUT APR-60*ENE-PL OI= 3025 at $2.80 SL=1.50
BUY PUT APR-55 ENE-PK OI= 3698 at $1.30 SL=0.50



ELNT - call play
Adjust from $27 up to $29

PMI  - call play
Adjust from $58 up to $60

MDT  - put play
Adjust from $47 down to $46

VRTS - put play
Adjust from $57 down to $55


ADBE $33.59 -2.10 (-2.10) The company announced today that it
would be shipping a new product for creation and use of
three-dimensional web sites.  Named Adobe Atmosphere, this
software package is expected to ship this summer.  Despite the
good news, shares of the desktop publishing software giant pulled
back almost 6 percent, and while volume was below average, the
close below the 5-dma at $34.13 as well as our stop price of $34,
along with the weakening stochastics, suggests that the stock may
move lower in the near-term.  As such, we are taking profit on
this play and dropping coverage.

SEBL $27.94 -2.12 (-2.12) Weakness in the Software sector, as
measured by Goldman Sachs' Software Index (GSO), translated into
a down day for SEBL.  Giving up over 7 percent today on light
volume, less than 70% of ADV, the stock has put itself back below
its 5 and 10-dma (currently sitting at $28.36 and $28.10
respectively).  As well, the close put SEBL below out protective
stop price of $29.  This move suggests that the stock may once
again test support at $25 before attempting to move higher.  Not
wanting to go along for the ride, we are taking our money off the
table and no longer recommend taking positions in this play.

DELL $25.69 -1.75 (-1.75) Poor old DELL, the stock just can't
seem to catch a break.  Leading the NASDAQ lower all day, the
leading PC maker rolled over right at its upper Bollinger band,
and ended the day below our $26 stop.  Even the late-day
recovery in DELL wasn't enough to lift shares back over our
stop, and needless to say we have no choice but to drop DELL
in light of its inability to continue the recovery begun last
week.  Unfortunately the fledgling recovery in Technology stocks
came to a quick halt on the heels of concerns about continued
weak demand in the PC sector and bearish comments about
Technology stocks in general from CSCO CEO, John Chambers.


No dropped puts tonight.


Little Secrets
By Molly Evans

It is always better to have a trading system based on some
"rules" that you have established for yourself.  When you're
trading by a set criterion, instead of by the change in the
wind, you're apt to be a more successful trader.  While most
of the writers here are consummate chart watchers, there
are other indicators that would be beneficial to guide your
trading direction as well.

Trading by the charts is fine and can be quite lucrative.  Many
of us like to simply wait for the 60 minute and 30 minute charts
to align into overbought or oversold territory to fade the
prevailing trend.  It works most of the time but recently
during the big momentous decline of recent weeks, trying to
go long on the extremely oversold conditions has proved quite
costly.  Today the charts aligned in overbought and presented
an opportunity for put entries.

It takes some fortitude to go against the immediate trend as
you're immediately in the red with the spread and the move still
going against your position.  There's no guarantee that the
overbought condition can't get more overbought either.  The charts
look favorable but goodness, we have to decide an "uncle point"
don't we?  Losses can't get out of hand.  Nothing says that the
market is going to cooperate in coming down enough to be profitable
on a put play here either.  Beating the spread can be tough.

So, what are some other helpful indicators that you could add to
your rule book in regards to entries and exits?  How about looking
at the relationship of the S&P futures to fair value?  The symbol
for the S&P 500 futures contract is ESO1M.  Plug that and PREM.X
into your Q charts quote sheet to track the fair value of the
contract.  Jeff Bailey updates you on the fair value, buy and
sell program trigger numbers each morning in his updates.

On any day, a trader can calculate the fair value of the S&P 500
futures contract.  This fair value is a function of four variables:
1) the price of the S&P 500 cash index (SPX.X) 2) interest rates
3) the time until the contract expires, and 4) dividends on the S&P
500 stocks themselves.  I'm not plugging in all of that here
because you can just go to www.programtrading.com everyday and find
it already done for you there.

In addition to tracking the futures chart all day, I draw lines on
my PREM chart to visualize where the contract is at all times in
regard to fair value.  Today, the fair value was $9.62.  When
the cash value of the S&P 500 is $9.62 below that of the futures
contract, the futures contract is at fair value.  Programmed
trading takes place when the futures contract and the cash index
get out of sync, as arbitrageurs step in to reconcile the
differences.  When the futures acquire too much premium, they
are expensive so arbitrageurs will sell the futures and buy
stocks.  It happens very quickly as the abitrageurs' own actions
force the premium of the futures versus the cash index to shrink.

So.  How and why is this to our advantage to know about?  Because
our index option prices are based on the futures contracts.  When
the S&P futures are overvalued (as they were on the open this
morning) the OEX options will be overly expensive as well.  Yet,
OEX puts will be priced at a discount.  Conversely, when the
futures are undervalued, the OEX calls will be at a discount while
the puts will be at a premium.

This helps to explain why when you're sitting on calls or puts
and the market moves against your position, your options are
deflated within seconds. Options are a tough way to go unless
you're absolutely right about the call.  The leverage works not
only for you but against you as well.  You can trade by the charts
but you should also be cognizant of what the futures contract is
doing at the time you place the order to buy or sell an option.

Did you notice that ramp up at the end of the day today?  Let's
have a look:

Other variables to look at are TICK and TIKI.  When the tick
is at an extreme, over 700 to either the plus or minus side, a
buying or selling climax could very well be at hand.  Extreme days
such as last Thursday lend to extreme ticks.  The TICK is simply
the number of advancing issues minus declining issues at any given
moment.  The 700 is just a number that I've noticed tends to
culminate a buying or selling climax.  On Thursday afternoon, the
TICK reached -1364 and -1397 on the lows.  Be sure to watch the
TICK on strong moves in the market and note where the market
turns in relation to both the tick and TIKI.  The TIKI is the
number of Dow advancers minus decliners.  Since there are only 30
Dow stocks - the most TIKI value you can have is plus or minus 30.
A buy program is generally occurring at a plus 22 TIKI while a
sell is at a minus 22.  You can pretty much assume that the
program is completed when the TIKI falls back to plus or minus
12 and that would be the time to fade the prevailing trend.

So many things to think about.

We'll talk again soon.


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VRTS - Veritas Software $50.06 -3.82 (-3.82 this week)

As an independent supplier of storage management software,
VRTS develops and sells products that protect against data
loss and file corruption, allowing rapid recovery after disk
or computer system failure.  The company's products provide
continuous data availability in clustered computer systems with
shared resources. This enables IT managers to work efficiently
with large file systems, making it possible to manage data
distributed on large computer network systems without harming
productivity or interrupting users.  VRTS provides products for
most popular operating systems, including UNIX and Windows NT,
as well as a full range of services to assist its customers in
planning and implementing their storage management solutions.

Most Recent Write-Up

Slowing its descent after a 50% loss over the past 2 months,
VRTS still looks vulnerable to another mauling by the bears.  As
buyers came into the broader market Thursday afternoon and
continued their shopping spree on Friday, our new play couldn't
attract enough buying interest to advance with broader NASDAQ.
The pitched battle between the bulls and the bears has brought
VRTS to a point of decision as the bearish wedge, which has been
solidifying over the past 3 weeks is coming to a point.  With
the base of the wedge (support) sitting at $51-52, and the
descending trendline now resting near the $58 resistance level,
we have clearly defined entry points to work with.  Those with
a conservative approach will want to wait for renewed selling
next week to drive the stock below $51 with the help of strong
volume.  Aggressive traders will focus on the descending upper
trendline, and will initiate new positions as VRTS rolls over
from this level.  Place stops at $60, as a close above this
level will represent a bullish breakout from the bearish wedge,
indicating that there is more upside in store for VRTS.  Watch
the movement of the broader Computer Software index (GSO.X)
before playing.  While it has been strong the past 2 days,
VRTS' relative weakness will leave it vulnerable to the bears
should the index fail to continue moving higher next week.


VRTS traced yet another new 52-week low in Monday's session,
while the broader tech sector traded relatively well.  The
underperformance of VRTS may lend to lower prices this week if
the sellers return to the tech sector.  Watch early Tuesday
morning for VRTS to break below the $50 level on heavy selling
volume, as little in the way of support exists immediately
below.  If, however, VRTS rebounds Tuesday, aggressive traders
might look for a rollover near the $55 level, which is the site
of our recently lowered upside stop.

BUY PUT APR-50 VIV-PJ OI=5142 at $6.00 SL=4.00
BUY PUT APR-45 VIV-PI OI=2253 at $3.70 SL=2.25


Mark Leibovit, the #1 market timer in the nation.

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:


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