Option Investor

Daily Newsletter, Monday, 04/02/2001

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The Option Investor Newsletter                   Monday 04-02-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
        04-02-2001        High      Low     Volume Advance/Decline
DJIA     9777.90 -100.90  9992.50  9705.10 1.21 bln   1182/1861 
NASDAQ   1782.97 - 57.29  1852.49  1769.66 1.85 bln   1022/2724
S&P 100   584.40 -  7.23   597.18   579.47   totals   2204/4585
S&P 500  1145.87 - 14.46  1169.51  1137.51           32.5%/67.5%
RUS 2000  439.76 - 10.77   450.53   439.51
DJ TRANS 2745.02 - 26.34  2791.87  2739.23
VIX        34.75 +  0.93    35.85    32.41
Put/Call Ratio      0.75

New Quarter, Old Story

Spring is here. Birds are chirping and the boys of summer took
the field today. However, the spring promise of beautiful days to
come was put on hold as the winter doldrums extended into the
second quarter today.  Clearly, there remains a decided lack of
confidence in the stock market as we head into the next earnings

The positive momentum that carried us through the end of last week
was severely damaged today by bad news from the pharmaceutical
sector.  Schering-Plough (NYSE:SGP) and generic drug companies
American Home Products (NYSE:AHP) and Upsher-Smith Laboratories
were sued by the Federal Trade Commission today, which charged
that the drug companies violated Anti-trust laws by conspiring to
keep generic drugs off the market.

The drug sector had been a relative safe harbor for investors but
if these accusations have merit, more drug companies could be
scrutinized for similar violations.  The Pharmaceutical Index
(DRG.X) dropped 10.24 points to 374.87.  SGP lost $1.07 to $35.46
and AHP lost $2.25 to $56.50.

Meanwhile, American Express (NYSE:AXP) lost $1.59 to $39.71
following a warning that first quarter profits should be about 39
cents.  Previous estimates were calling for profits of 51 cents.
The company cited diminishing revenues from its Financial Advisors
Group as well as a deteriorating economy for the shortfall.

Honestly, though, the Dow Jones Industrials (INDU) actually held
up pretty well considering all of the bad news. For the day, the
INDU lost 100.75 and closed at 9778.03.  The INDU had traded as
low as 9,705.

The broader NYSE saw decent volume of 1.2 billion shares.
Decliners trumped advancers by 19 to 12.

The NASDAQ (COMPX) dove to a new 29-month low following another
ugly day for technology stocks.  Weakness was pronounced in the
semiconductor sector, as the (SOX.X) fell 41.90 points to 503.15.
For the record, the NASDAQ lost 57.29 points and closed at
1782.97.  Volume was pretty solid for a Monday, coming in at 1.83
billion shares. Losers crushed winners by a 27 to 10 ratio.

The NASDAQ's most active list saw declines from Dell Computer
(NASDAQ:DELL), Applied Materials (NASDAQ:AMAT), JDS Uniphase,

Software company Acxiom (NASDAQ:ACXM) was the disaster du jour, as
it fell $9.38 to $11.50 following an earnings warning.  The
company said that fourth-quarter earnings are likely to fall into
the 10 to 12 cent range while previous estimates were calling for
profits of 36 cents a share.

As for the broader and smaller markets, the S&P 500 (SPX) dropped
14.50 to 1145.85 while the Russell 2000 (RUT), which had been
somewhat stronger than the big stock indices, collapsed 10.77 to

As for the bond arena, Treasury prices did not respond favorably
to today's economic news.  The National Association of Purchasing
Management Index rose to 43.1% in March.  Estimates were calling
for a level of 42.5%. The numbers indicate the beginnings of an
economic recovery, which may hamper the Fed's inclination to
continue easing.  The 10-year Treasury note dropped 14/32 to a
yield of 4.97% and the 30-year government bond fell 17/32 to a
yield of 5.48%.

There appears to be no rest for the weary in the after hours,
especially among NASDAQ traders.  Software firm Ariba
(NASDAQ:ARBA) released disturbing news that its second quarter
earnings will be well below expectations and as a result the
Company will slash a third of its workforce, or 700 jobs.  ARBA is
pre-releasing losses of about 20 cents while previous estimates
were looking for a loss of about 5 cents.  ARBA finished the
regular trading session down $1.41 to $6.50 and is down more in
after hours trading.  This former high-flyer has a 52-week high of

Another former high-flyer of the software world, Inktomi
(NASDAQ:INKT), also announced that it will slash 25% of its
workforce as its business continues to crumble.  The company
expects a loss of 23 to 25 cents and analysts had been expecting a
loss of 4 cents.  INKT closed at $6.22 during regular trading
hours but is trading as low as $4.60 in after hours.  Inktomi has
a 52-week high of $195.12.

There are obviously continuing problems in the networking and
fiber-optic equipment world, as Redback Networks (NASDAQ:RBAK)
also decided to cut its workforce.  Redback will eliminate 150
jobs, or 12 percent of its workforce.  The company will have to
take a restructuring charge of $27 million over the next couple of
quarters.  Redback closed the day at $11.70 and is trading down to
$10.15 in after hours trading.

With so many former high-flyers now approaching zero, one has to
ask the question, when will it all end?  It is important to point
out that when the Internet high-flyers starting falling into
single digits many people started trying to pick a bottom.  Most
of them are very sorry, as many of these Internet stocks are
either in bankruptcy or close to it.

If you have to bottom fish in the technology sector it would
behoove you to stick with the big boys that are extremely unlikely
to go belly up.  Dell Computer (NASDAQ:DELL), IBM (NYSE:IBM), Sun
Microsystems (NASDAQ;SUNW), Microsoft (NASDAQ:MSFT), Cisco Systems
(NASDAQ:CSCO), Oracle (NASDAQ:ORCL), Corning (NYSE:GLW), Intel
(NASDAQ:INTC) and EMC Corp (NYSE:EMC) all come to mind.

It would also probably be a good idea to avoid buying the shares
of any company that is still not profitable.  It is becoming
increasingly unlikely that these companies will ever show a
profit.  If they cannot make money when the economy is flying, how
are they going to make money in a slowdown?  At some point these
companies will likely go broke, especially since there is clearly
no money available in the secondary market to keep them afloat.

Until the longer term trend improves for the Nasdaq, traders will
simply have to take quick profits.  The short term technical
picture for the NASDAQ is suggesting that we are near a
bottom.  The RSI is indicating a very oversold condition and the
MACD is trying to put in a bottom.  However, momentum is a
powerful force, and we could see a quick drop to 1,500 if we get
some more bad news.  If this occurs, it would likely present an
excellent buying opportunity.  Otherwise, be cautious about
getting caught up in bear market rallies.

The technical picture for the Dow Jones Industrials looks to be
improving a bit.  Some money seems to sloshing back and forth
between drugs, cyclicals and some financials.  There generally has
not been much progress, but we could see a decent rally if the Dow
can climb back over the 10,000 resistance.  Be careful with long
Dow positions if the average drops back below 9550 because it
could spark a quick retest of 9000.

Good luck and may all of trades be winning ones!

Jim Booth
Research Analyst

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Jeff Bailey, Editor, PremierBriefing.com
Learn the basics of Point and Figure Charting while analyzing
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markets and the stocks you want to trade.

Mark Skousen, Ph.D., Editor, FORECASTS & STRATEGIES
The Global Economy and its Impact on Us.
Learn from a professional economist who turns his understanding
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Harry Browne, Author of Fail-Safe Investing
Sixteen Golden Rules of Failsafe Investing.
A powerful session that translates the essence of the book
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Jim Brown, Founder, OptionInvestor.com
Austin Passamonte, Editor, IndexSkybox.com
Jeff Bailey, Editor, PremierBriefing.com
Preparing for Battle.  This is a very popular session where
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Tom DeMark, Author of three books on DayTrading Options
Day Trading Options.  An extremely popular subject taught by one
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Buzz Lynn, Contributing Editor, IndexSkybox.com
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Calendar Spreads & Bull Call Spreads.  Some of the first strategies
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Mark Skousen, Ph.D., Editor, FORECASTS & STRATEGIES
Scrooge Investing - The Best Bargains in Beaten Down Stocks for
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Jeff Bailey, Editor, PremierBriefing.com
Calculating the Bullish Percent.  Applying your new knowledge
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Jim Brown, Founder, OptionInvestor.com
Austin Passamonte, Editor, IndexSkybox.com
Pre-Market Analysis.  A very popular session where multiple
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Dick Arms, Inventor of the Arms Index, Founder, ArmsInsider.com
Increase your profit potential with Equivolume Charting, volume
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Derek Baltimore, Co-Editor, IntradayTrader.com
Risk Management in a declining Market

Buzz Lynn, Contributing Editor, IndexSkybox.com
Sector Trading with IShares.  You may know of DIAMONDS for the
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Successful Option Trading. "Doctor J" is the name and options is
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Matt Russ, Editor, OptionInvestor.com
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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Jeff Wright, Preferred Trade
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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Jim Brown, Founder, OptionInvestor.com
Big Cap Strategies, Naked Puts, Zero Risk Trading, Making Dollars
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Tax Strategies for the Active Trader.  It's that time of year
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Molly Evans, Writer/Trader, IndexSkybox & OptionInvestor.com
The Organized Trader.

Rance Masheck, President, SpreadTrader.com
Five Point Star Trader System.  Learn what you need to know
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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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WFC - Wells Fargo Corp. $49.69 +0.22 (+0.22 this week)

Wells Fargo is a $272 billion diversified financial services
company providing banking, insurance, investments, mortgage,
and consumer finance services through 5400 stores, the nation's
#1 internet bank, and other distribution channels across North
American and elsewhere internationally.

The banking index has been in an upward channel since its low
point of 486 a year ago, and today, while the rest of the market
was selling off, BIX.X poked its head through its 50 dma of 639
and closed just a quarter point below it.  As a money center bank,
WFC is one of the premier financial institutions which has
demonstrated its ability to maneuver through difficult times.
WFC's daily chart shows a neutral wedge which developed since
October, and as WFC just cleared its 50 dma of $49.36, it appears
that the stock is well poised to break out to the upside with
momentum.  The wave of consolidation which has been sweeping the
financial service industry is drawing additional attention to
the banking and insurance sector.  WFC made a dramatic rebound
from a low of $42.55 on March 22 when the Dow rebounded, as
the market responded well to news released regarding WFC's
purchase of HD Vest.  WFC is purchasing HD Vest, the nation's
largest provider of financial services for tax professionals,
for $127.5 million.  Prior to this announcement, WFC reported
that they had signed an agreement to purchase ACO, the parent
company of Acordia, one of the nation's largest independent
property and casualty insurance agencies.  On Monday, WFC
dipped to $49.12 during the height of the sell off, which
confirms the pattern of higher lows formed since March 22 at
$42.55, $46, $48, and $49.12.  With a little help from BIX.X,
WFC should be able to clear $50 on strong volume, which could
be an entry point for conservative traders.  More aggressive
traders could take positions on a pullback to $49, if BIX.X
is rallying.  WFC is scheduled to report earnings on April 17,
which gives traders time to scale in to an earnings run.
Monitor others in the sector like BAC, and FTU, and set stops
at $48.  We will close positions if WFC closes below $48.

BUY CALL APR-45 WFC-DI OI= 7826 at $5.20 SL=3.00
BUY CALL APR-50*WFC-DJ OI=21720 at $1.55 SL=0.75
BUY CALL MAY-45 WFC-EI OI=  775 at $6.00 SL=4.00
BUY CALL MAY-50 WFC-EJ OI= 1079 at $2.70 SL=1.25



MRX - Medicis Pharmaceutical $43.99 -0.83 (-0.83 this week)

Focused primarily on the treatment of dermatological conditions,
MRX is an independent, specialty pharmaceutical company, based
in the United States.  Targeting major segments within
dermatology, MRX provides products for the treatment of acne,
rosacea, aczema, hyperpigmentation, pediculosis, psoriasis, and
dermatitis.  The company offers a long list of targeted products
both by prescription and for the over-the-counter (OTC) market.

The recent selling frenzy of stocks drove home the point that in
a sharply declining market, there really is no safe haven.  Even
Drug stocks, normally a defensive sector, took a beating less
than 2 weeks ago as all the major indices set new lows for the
year.  The bounce back was just as swift as the decline, due in
large part to short covering.  Although not a member of the
index, our new play, MRX, has been tracking right along with the
Pharmaceutical index (DRG.X).  Crashing down 2 weeks ago and
then recovering last week, MRX is ready to slide down the
slippery slope again.  Resistance in the $45-46 area has been
too much for the bulls to handle, as the stock has fallen back
from that level on each of the past 4 days.  The bears have been
helped by the 2-month descending trendline, which is now sitting
at $45.50.  Throw in a daily Stochastics oscillator which is
rolling over from overbought to complete a pattern of bearish
divergence, and this looks like a compelling trade based on the
combined bearish technicals.  The first level of intraday
support that we need to contend with is $43, and a break below
there would be the trigger point for conservative traders to
initiate new positions.  The more aggressive approach will be to
target another failed rally to the $45-46 level.  Once it is
clear that the stock is rolling over again, feel free to jump
into the play, as long as the rollover is confirmed by weakness
in the DRG.X.  In either case, protect your position by setting
your stop at $46; if the price can push through that level, it
will be a strong signal that the bulls are getting bold again.

BUY PUT APR-50 MRX-PJ OI=34 at $6.80 SL=4.00
BUY PUT APR-45*MRX-PI OI=20 at $3.10 SL=1.50
BUY PUT APR-40 MRX-PH OI=31 at $0.90 SL=0.00  High Risk!!



PMI - call play
Adjust from $63 up to $64

AETH - put play
Adjust from $14 down to $13

AMGN - put play
Adjust from $62 down to $60

DPMI - put play
Adjust from $45 down to $44

ISSX - put play
Adjust from $30 down to $29

NSM  - put play
Adjust from $28 down to $27

SONS - put play
Adjust from $23 down to $21

XLNX - put play
Adjust from $38 down to $36


ERTS $53.44 -0.81 (-0.81) After the stellar run that ERTS has had
over the past couple of weeks, it's no surprise that there are
those eager and willing to take some profits.  With that in mind
along with a down day for the NASDAQ, shares of the video game
software maker pulled back today, retreating 1.5 percent.  While
the volume was average, the stock encountered resistance from its
5-dma line (now at $54.88).  Although the 10-dma at $52.77
provided support today, the close below our stop price of $54
takes this play off our recommended list.

UVN $37.33 -0.83 (-0.83) It appears that resistance from the
50-dma is proving to be formidable.  Shares of the Latin
broadcasting giant have flirted with this moving average for the
past five trading sessions.  With weakness in the broader
markets, the stock slipped 2.18 percent today.  Volume was just
over half the ADV, suggesting that it was not so much strong
selling conviction that caused the pullback but rather,
tentativeness on the part of the buyers.  However, with the 5, 10
and 50-dma clustered together between $38 and $39, resistance
overhead is heavy.  Add to that the close below our stop set at
$38 and we have little choice but to drop coverage of this play.


No dropped puts tonight


The Value of History
By Molly Evans

Growing up in a small Missouri town in the early seventies, no
one had much money and really, no one cared.  My parents, younger
sister and I lived in a small house but had enough to eat and
thought vacations to St. Louis were quite special.  My dad drove
a '58 Chevy and Nancy and I had to hold our feet up on the back
seat because the road could be seen through the floorboards.
But that was fine.  We had a tree house, a big back yard and a
two foot pool.  What more could a girl want?

I remember a traveling salesman came calling one day.  He had a
beautiful set of encyclopedias for sale.  My dad let him in and
perused the sample volumes with wanton desire.  He managed to
convince my mother that though quite expensive, they were well
worth the price.

My dad has always had a love for studying history.  He'd study
those encyclopedias for hours and would encourage me to think of
any subject, pick one up and read about my chosen topic.  Nah.
Forget that.  I had playmates outside and a purple bike to
ride to the stop sign and back.  Little did I know he had a
wicked scheme in the works.

My mom was part of a card-playing club.  Every Tuesday evening,
she'd leave my sister and me with Dad for her evening out.  I
came to dread Tuesday evenings because it was the time for my
dad to play out his harassing scheme.  My sister and I would
from then on lose our Tuesday evening playtime to "lessons."  Yes,
I knew about Anastasia before it was fashionable to know about
Anastasia.  I knew who Winston Churchill was at age six.  He
even had the audacity to test us.

Of course, always the rebel, I fought it with all my might.
Nancy, who was only 4 or 5 at the time would tell me, "Molly,
just listen to him and then we can be done."  But no, I couldn't
sit quietly and found that my own stubbornness was surpassed only
by his.

In fact, it's still that way today but admittedly, I do now share
his voracity for studying history.  Care to guess what I find so
engrossing?  The market, of course.  It's a fascinating read.
Right now I'm into John Steele Gordon's, "The Great Game."  From
Wall Street's beginnings as a Dutch influenced trading post to
the super power it is today, Gordon has recounted many
interesting tales and brought numerous characters back to life.

My dad taught me that if one would learn about historical events,
he could foretell future events.  History repeats itself. Edwin
LeFevre's 1923 classic "Reminiscences of a Stock Operator," is
still a very high seller in bookstores today because it is
timeless.  It captures the very real and persistent frailties and
lessons of a trader.

Isn't it prescient that Lefevre comments, "Nowhere does history
indulge in repetitions so often or so uniformly as in Wall Street.
When you read contemporary accounts of booms or panics, the one
thing that strikes you most forcibly is how little either stock
speculation or stock speculators today differ from yesterday.
The game does not change and neither does human nature."

And that is why markets are susceptible to bubbles and panics,
booms and busts.  People make up the markets and peoples'
emotions, greed and fear surface again and again in the market.

The First Recorded Financial Bubble - the Real Story of Tulipomania

New York or Nieuw Amsterdam, as it was called, was colonized by
Dutch settlers in the early 1620's.  The Dutch were quite a
progressive breed.  They invented modern capitalism in their
own city of Amsterdam in the early seventeenth century through the
commercialization of banks, stock exchanges, credit, insurance and
limited-liability corporations.  As a result, the Netherlands
exploded with wealth and became a formidable powerhouse in Europe
for that time.

Within their own stock exchanges, the early techniques of market
manipulation were born such as short selling, bear raids, price
fixing and cornering.  With this level of sophistication already
in progress, it should be of no surprise that an equal level of
speculation was possible.

With the introduction of tulips into Western Europe in the middle
of the sixteenth century from Turkey, a craze developed for the
flower.  The rich paid handsomely to compete with the Jones' for
the rarest and richest varieties in their own gardens.  By the
early 1630's, the competition had developed into a speculative
frenzy.  Tulip bulbs were purchased not for growing but for the
expectation of continued inflation.  One could always sell his
bulbs at a higher price.

By 1635, a rare bulb known as the Childer had an asking price of
1,615 florins.  According to Gordon's research, consider that
a team of four oxen, the equivalent of one tractor, could be
purchased for 480 florins.  One thousand pounds of cheese, 120
florins.  Yet still, the prices paid escalated.  In the next year,
a single bulb of a particularly rare variety sold for 4,600
florins PLUS a new carriage, two gray horses, and a complete
set of harness.

But the day of reckoning was inevitable.  At some point, someone
refused to pay the higher price and soon the craze to buy was
surpassed by the craze to sell.  Price collapsed and people were
financially ruined.

And so it was that the people who participated in a mania that
settled into a small colony now known as New York.  It's amusing
to read Gordon's accounting of their establishment.  "From the
very first it differed from most of the other colonies that were
planted on North America's eastern seaboard in that century.  The
Puritans of New England, the Quakers of Pennsylvania, the
Catholics of Maryland, all came to the New World to worship God
as they chose.  In each case, the colonists' first task as they
saw it, was to build a shining city on a hill, a community to
be emulated for its piety and morality.

But when the Dutch set up shop - quite literally - in their
new colony, their purpose was only to make a buck.  So busy were
they pursuing wealth that they didn't even get around to building
a proper church for seventeen years."

As New York's origins and character were distinctly different
from that of the other colonies, tensions grew from the very
beginning.  Thomas Jefferson called the city "a cloacina of
all the depravities of human nature."

Today, things may not be all that different.  To the rest of
the country, New York resides in a class all its own and is
perhaps viewed with disdain for its brisk nature.  New Yorkers,
it seems, sees the rest of the country as morally smug and
obviously, boring.

There are many more great stories between the covers of the
book.  If you like history, check it out.

See some of you at the seminar this coming weekend?  Please say
hello!  Looking forward to meeting you.


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XLNX - Xilinx Inc $33.13 -2.00 (-2.00 this week)

Xilinx develops and markets complex programmable logic
solutions.  Their design software allows clients to customize
chips to meet specific needs.  The company's solutions include
advanced integrated circuits, software design tools, predefined
system functions delivered as cores of logic, and field
engineering support.  They primarily market to electronic makers
who use the chips in telecommunications and data processing
equipment, industrial controls, military and aerospace
applications, and networking equipment.  Blue chip clients
include Alcatel, Cisco, Fujitsu, IBM, Lockheed-Martin and Nokia.

Most Recent Write-Up

Unnerved investors may have thought the worst was over, but
chipmaker XLNX led the semiconductors lower as the NASDAQ
continued its slide on concerns of eroding corporate profits.
After Palm and Nortel Networks lowered their sales forecasts,
XLNX fell off the cliff.  The historical support at $40 crumbled
under the broad selling pressure.  At the moment, XLNX is
teetering precariously at the $35 level.  Xilinx's counterparts
like MXIM, CRUS and MU have also taken severe lashings of late.
With the general sentiment of more earnings disappoints to come,
we're anticipating more weakness across the sector.  The
Philadelphia Semiconductor Index (SOX.X) provides traders with a
panoramic account of the semiconductors, so look for continued
action under the 550 level for bearish confirmation.  More
specifically, if traders take XLNX through $35 on respectable
volume, then get ready to jump on this put play.  The more
aggressive types might also find an entry if XLNX rolls over
near the trailing 5-dma, at $39.  Lows of this magnitude haven't
been seen since October 1999, which of course leads us to the
topic of using stops for protection.  We have a closing stop set
at $38; although if you're erring on the side of caution or
playing a sharp decline, set your intraday stops accordingly.


Chip stocks fell under pressure Monday on concerns over future
earnings.  Those concerns were evident in XLNX as the stock fell
to a new 52-week low.  In addition, the Semiconductor Index
(SOX.X) fell closer to critical support at the 500 level.  With
concerns mounting, XLNX is susceptible to further weakness.
Traders might look for new put entries early Tuesday morning if
XLNX falls below $32.50.  A more aggressive entry might be
offered if XLNX rebounds up to the $35 level and subsequently
rolls over.

BUY PUT APR-35*XLQ-PG OI=4484 at $4.38 SL=2.75
BUY PUT APR-30 XLQ-PF OI=3253 at $2.00 SL=1.00


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