The Option Investor Newsletter Thursday 04-26-2001 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/042601_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 04-26-2001 High Low Volume Advance/Decline DJIA 10692.30 + 67.10 10767.00 10623.70 1.27 bln 1955/1114 NASDAQ 2034.88 - 24.92 2095.83 2032.38 2.03 bln 2125/1729 S&P 100 640.29 + 4.71 647.28 637.47 totals 4080/2843 S&P 500 1234.52 + 5.77 1248.30 1231.64 58.9%/41.1% RUS 2000 477.56 + 4.82 479.81 472.99 DJ TRANS 2820.27 + 58.27 2840.28 2749.94 VIX 29.57 - 1.70 30.64 29.38 Put/Call Ratio 0.58 ****************************************************************** Retracing The Rally It was an interesting day of trading action as the markets finished with a split decision: the Dow ($INDU) added another 67 points while investors fled the NASDAQ, closing down 24 points. A slew of earnings today moved individual stocks but trading was a bit choppy out of the gates after Initial Jobless Claims and the Employment Cost Index were released. But it wasn't the daily news that raised my eyebrows today. This morning's economic reports told two different tales. Initial Jobless Claims rose 18,000 to 408,000, breaking the 400K mark for the first time in five years. While evident of a loosening job market, it also indicates that slowing growth is the point of battle for the Fed, not inflation. Yet, in the same breath, the ECI hit its highest level in a year, coming in a 1.1% versus estimates of 1%. This rise in the ECI shows upward cost pressure, however, it is negligible. With the Jobless Claims trending higher, rising unemployment is expected to drive the rate toward 5% in the latter half of the year. To put this into perspective, during the last recession of 1990-91, Jobless Claims peaked at 512,000 per week in March of 1991. Futures traded higher in the pre-market on this morning's news, seeing that it further solidifies the role of an aggressive Fed, widely expected to cut rates again at the May 15th FOMC meeting. On the NASDAQ, the big winner was PeopleSoft (NASDAQ:PSFT) which reported stellar earnings, beating Street estimates of 9 cents by two pennies. It wasn't the headline number that drove the stock higher by 22%, rather the 500% revenue growth year-over-year in an extremely difficult market and economic environment. In addition, PSFT reiterated earnings projections for the year and noted that they have widened the competitive gap from smaller B2B players such as Ariba (NASDAQ:ARBA) and I2 (NASDAQ:ITWO). PSFT finished at $36.62, up $6.69. It is also worth noting that WorldCom (NASDAQ:WCOM) released in-line earnings this morning and reaffirmed earlier financial guidance for the year. The stock initially traded higher on the news, holding above $20, but fell with the broader tech index into the close. WCOM closed at $19.75, up $0.35. Okay...now that we got the boring news out of the way, let me tell you about the interesting developments I saw in the market today. The NASDAQ traded a bit higher in the morning, however, it wasn't very exciting. Typical consolidation. It remained relatively flat between 2070 and 2090, acting well for the most part. But its inability to move through 2095 set off a signal that the NASDAQ really didn't have the legs to go higher. There had to be a break, especially given the recent run-up. I was watching the index via the QQQs, which were equally rangebound between $45 and $46. The break of $45 offered a nice put entry. Looking at the retracement bracket on the QQQs below, we can see that since the recent April rally, the QQQs have backfilled about 38.2% of the advance. (That's the percentage number which is hard to see on the chart.) This level is exactly where buyers stepped in on Wednesday, and it appears that this level may be tested again. A break below this retracement level could very well lead to a test of the 50% retracement, essentially filling the gap from last Thursday. Keep a close eye on the action in the QQQs when determining action points for your trades. If techs pulled back further on a downside catalyst, support at the 68.2% line would be a great opportunity to establish long positions. Further strengthening the significance of these retracement levels is the Semiconductor Index (SOX.X). It too is reaching a key support area around 600. Again, like the QQQs, the SOX.X has retraced approximately 38.2% of the recent rally and happens to be in-line with 600. As we all know, the fate of the NASDAQ is strongly tied to the Semi sector and this 600 level roughly coincides with 2000 on the NASDAQ, also believed to be key support. Buyers may choose to step up at these levels, however, if this major support is broken, it would be safe to go short along with a tight stop. Like the QQQs, we would expect the next test to be at the 50% line. This does not change my general upside bias in the market, but part of consolidation is retracing the rallies. After the bell today, we had a few big earnings reports. In the biotech arena, Amgen (NASDAQ:AMGN) beat the Street by a penny, but lowered their guidance for 2001 and are paying for it in after-hours. AMGN traded $3 lower from its NY close. Look for the Biotech Index (BTK.X) to test 500 tomorrow. Fiber-optic player Corning (NYSE:GLW) also managed to beat estimates by a penny. They also managed to cut 2001 estimates and 4,300 jobs as well. Not so good. Their overexposure to Nortel (NYSE:NT) and the general slowdown in the long-haul fiber market is going to take its toll on GLW going forward. Even in the face of bad news, GLW's stock traded higher by $0.25 from its NY close of $21. The overachiever of the bunch tonight was Verisign (NASDAQ:VRSN). They crushed Street estimates, which were downwardly revised earlier, by ten cents! Needless to say, the stock moved $5 higher in after hours, but I'm wondering who revised those numbers back in February. Looking ahead to Friday, GDP and the GDP deflator will be announced at 8:30am ET. Expectations are 0.9% and 3%, respectively. At 10am ET, Michigan Sentiment-Revised for April will be released. The market expects 89. Don't forget that Friday trading typically brings out the profit takers. As I stated above, key levels on the NASDAQ, QQQs, and SOX.X will be action points for trades. While the market feels like it is recovering and making strides, the short-term(about a week) will likely be sideways to down. The NASDAQ is digesting its recent gains and will give entry points into long positions on a further pullback. Watch those retracements. Volatility has imploded the past two days, closing under 30 at 29.57, which may be indicative of some selling pressure tomorrow. Trade smart. Matt Russ Editor **************** MARKET SENTIMENT **************** Basing Or Breaking? By Austin Passamonte Market action switched abruptly from several-hundred index point swings each session to range-bound action. Is it a coincidence that summer-like weather arrives with this sudden slowdown, or are we merely without lack of further catalyst to push prices in either direction? That will change as we approach the May 15th FOMC meeting when that predictable herd will rally into the news sure as sunrise. Better than that, it happens during expiration week this time! Long straddles about 2:00pm EST could really turn into something valuable three sessions later or less, but first things first. Technology earnings continue to come out below estimates and with no future outlook or murky in most cases. No matter, analysts are goading us to buy now or forever miss the boat. Interesting how free they are with our money, yet that institutional cash flow continues to grow moss on the "sidelines". On the technical front we see the Dow as our strong horse with NASDAQ indexes the anemic sisters. The Dow rests atop its 50 and 200 DMA While the OEX, SPX and NASDAQs are above their 50 DMAs but well below 200 DMAs respectively. On Tuesday all of the above broke below ascending trendlines of support dating back from April 3rd to Monday's close. Henceforth, price action has stalled out the next two sessions right below this subsequent point of resistance. It will take a break & close above to convert these measures back to support. Meanwhile, oscillators and especially stochastic values are turning down from overbought extremes and pointing towards further internal price weakness in the big indexes. Of special note are the daily chart stochastic values: all are now in the process of reversing down from overbought extremes toward oversold. What does this mean? Price action shall most likely move sideways to lower from current values until these stochastic values cycle down from overbought to oversold. It could take weeks or finish within the next few sessions but rest assured the process will occur. High- odds bullish plays can be expected upon completion of this cycle from overbought to oversold but we would not overweight the upside until then. Each attempt to rally by the old index is not supported by the newer sexy stocks. This tells us the same tired dollars are playing ring around the sector without fresh blood joining the fray. The next upside catalyst to do so could be the pre-FOMC run, while further downside might arise from continually weaker earnings than exuberant bulls who recently bought the whole farm are willing to ride out. We might expect sideways action going forward from here with less volatility and more directional trend. Or are we only dreaming? Trade the hourly trend with care! ********* VIX Thursday 04/26 close; 29.57 VXN Thursday 04/26 close; 78.42 30-yr Bonds Thursday 04/26 close; 5.77% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. A reading above 10.00 is considered viable resistance or support respectively within that general strike price range. Thursday (04/26/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 680 - 665 13,390 90 148.78 660 - 645 5,150 1,136 4.53 OEX close: 640.30 Support: 635 - 620 15,916 7,487 .47 615 - 600 5,582 5,331 .96 Maximum calls: 625/10,287 Maximum puts : 580/ 6,478 Moving Averages 10 DMA 629 20 DMA 606 50 DMA 617 200 DMA 715 NASDAQ 100 Index (NDX/QQQ) Resistance: 53 - 51 23,914 1,976 12.10 50 - 48 86,182 18,777 4.59 47 - 45 148,057 54,621 2.71 QQQ(NDX)close: 43.95 Support: 42 - 40 67,882 140,836 2.07 39 - 37 31,375 55,486 1.77 36 - 34 13,826 41,841 3.03 Maximum calls: 46/64,415 Maximum puts : 40/107,191 Moving Averages 10 DMA 44 20 DMA 41 50 DMA 44 200 DMA 70 S&P 500 (SPX) Resistance: 1300 11,819 3,919 3.02 1275 18,779 4,038 4.65 1250 17,049 4,740 3.60 SPX close: 1234.52 Support: 1225 13,238 7,149 .54 1200 11,223 14,284 1.27 1175 11,469 9,066 .79 Maximum calls: 1275/18,779 Maximum puts : 1200/14,284 Moving Averages 10 DMA 1218 20 DMA 1180 50 DMA 1202 200 DMA 1352 ***** CBOT Commitment Of Traders Report: Friday 04/20 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader's direction. Small Specs Commercials S&P 500 (Current) (Previous) (Current) (Previous) Open Interest Net Value +56586 +61808 -57843 -61473 Total Open Interest % (+26.57%) (+28.76%) (-8.08%) (-8.46%) net-long net-long net-short net-short DJIA futures Open Interest Net Value -3031 -2326 +6200 +3973 Total Open interest % (-20.21%) (-13.24%) (+20.88%) (+14.07%) net-short net-short net-long net-long NASDAQ 100 Open Interest Net Value +3168 +3794 -7462 -7890 Total Open Interest % (+12.12%) (+15.00%) (-10.48%) (-10.57%) net-long net-long net-short net-short What COT Data Tells Us ---------------------- Indices: Commercials are holding steady around the eight percent net-short level on the S&P 500. We are seeing growing divergence between the Commercials and Small Specs on the DJIA with the Commercials adding to their net-longs and the Small Specs increasing their net-shorts. Data compiled as of Tuesday 04/17 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/042601_1.asp ************** TRADERS CORNER ************** Option Investing Revisited By Austin Passamonte As oft stated in my little corner here, being editor of a website allows me to receive plenty of email inflow. All are read, most enjoyed and some contain nuggets of gold. Rest assured we'll never run short on topic ideas in here! Let me share two of many that set up our next series for a few Thursdays going forward: "Austin, I've been a broker for seven years and recently moved to a major wire house. Quite frankly I'm less than impressed with what they offer retail clients in terms of execution and sell side research, but I took an up-front check so I'm there for five years. Up-front checks are good! (Editor's note: yes they are!) I find it ridiculous that my clients have to pay high commissions (average of 1% -2% per trade) yet we can't go the extra route for them like Preferred does with OCO orders, stop loss on options, etc. I've learned more from IS in the past few months I've been a member than anything I've learned over seven years as a retail broker. We are technically skewed whereas most equity players are not. I want to do a great job for my clients and build a book of business base on referrals I'll get for doing a great job for them. An old-time broker next to me has $100 million in assets and gets 3% on most of this just for delegating the management of these assets to "outside" managers. (The majors have finally realized that most retail brokers are not very good at picking stocks so they encourage their brokers to place it with full-time money managers and spend their time gathering more assets.) There are a few holdouts like myself who want to maintain accountability for our clients assets and feel we can do a better job. Here is my question: Given the high transaction costs at my firm, lack of "trading environment" executions, etc., what strategy would you recommend I use in order to best service my clients and make them money? If I'm making them consistent returns, they won't mind paying me for it. I'd sincerely appreciate any advice you could provide." (Name withheld for obvious reasons) And then my favorite... "Austin, I see you like 'cowboy action' option trading during expiration week and I can assure you that is a losing-sum game. You cannot beat the markets over the long haul, young man. Enough of us old timers long ago know what you (are) going to find out soon enough... markets always win. I'm wondering what you know about investing. Can you tell us what you do for your retirement account, if you even have one? Regards, CM." CM certainly pulls no punches and I love to hear from market veterans who've seen more years' worth of action than I've been alive. You have my utmost respect, CM and just like Mohammed Ali in his prime, I will duck no one and accept all comers. So let's talk about investing now, which seems timely now that the worst of market declines certainly should lie behind us. If the worst is indeed still ahead, successful investing is doubly important for survival mode. We're going to share some very simple, basic tactics for trade entry & exit using stocks, sector shares, options and LEAPs that I guarantee will look far too easy. Truth is it can be just this easy if we remove the weakest link from our equation, that being our own inner emotion but we'll park such conversation until later. The premise here is to get bullish near oversold extremes and bearish near overbought extremes. We need a setup that allows us high-odds entry & exit to capture chunks of profit from the midst of sizeable moves. This can include simple buying and selling of shares or options in addition to covered calls and various spread strategies. Individual need for time-length and tax consideration varies widely, so let's explore different strategies each may use to meet such parameters. Entry & Exit Setups I honestly believe individual investors with a few basic tools can outperform most fund managers on a yearly basis. Why? Because we can use option strategies to speculate and/or hedge, which gives us a decided advantage. The approach may indeed be simple & basic but do not confuse this with "easy". It will take time, effort and most of all personal growth but the results can be more than worthwhile. My dearest Uncle Tom made a fortune in the markets buying near support and selling near resistance decades before any former cab drivers ever discovered how to "roll" stocks. The approach we'll look at has certainly stood the test of time and likewise promises to do so long after we've retired from the markets as well. Let's see what we might be able to accomplish using nothing more than daily charts and stochastic values. Ideally we would only take signals in harmony with the overall trend as investors with a longer time horizon, while traders can take both sides of overbought and oversold extremes. For those who may not be 100% familiar with stochastic study, we will refer to that specifically later in this series when we reach the "how-to" stage. (Daily Chart: JDSU) Since early December 2000 until right now we have seen JDSU go from "overbought" three times to oversold three times as measured by stochastic action and nothing more. Now let me ask you this: if we heeded that sell signal back in mid-December anywhere near the $70 range, would that have been a good thing to do? Maybe bought a few Jan 2002 50-strike put LEAPs dirt cheap with the proceeds, for example? Think they gained any intrinsic value since then? We had a second chance to do the same near $60 in late January and a third chance to do so a few days ago near the $30 mark. Which of those short-sell or put plays would have lost money? By the same token there were four clear buy signals of which one was a false signal potentially resulting in loss. A good reason why we always have an exit strategy in place! (Daily Chart: CSCO) Same for mighty CSCO: sell above $50, sell above $40 or sell a few days ago as well. Think there are any "investors" out there among us who'd care to wind back this chart a few months and heed either of those first two sell signals? Everyone had the chance but precious few were willing to act as we'll later discuss. (Daily Chart: SMH) The Semi-Conductor HOLDR offered a real nice trading range over the past few months itself. Go ahead and count up the buys & sells one may have taken along the way. I see one clear loser out of eleven extreme signals here. More importantly, what do you see? (Daily Chart: MKH) The Market 2000+ HOLDR includes the world's 50 largest companies to comprise what I feel is the best blue-chip, big-cap investment vehicle available today. Investors not familiar with HOLDRs in general or this one in particular can learn all details at the public website: www.amex.com Four sells, four buys and only one clear dud. Could we have made any money just waiting for such extreme alignments to occur? You tell me. I sure hope you never, ever take anything I say in here at face value. I strongly encourage you to spend an hour or three scanning some daily charts using nothing but stochastics to derive your own conclusions. Just ask yourself what would happen if you merely bought somewhere in the general vicinity of each extreme from one reversal and held until the opposite side was reached. Do this with every symbol you can think of for all the charts you can tolerate looking at. May I respectfully suggest what you might find? That this simple, simple, simple approach is worth more in potential profits or capital saved than combined subscription cost of OI & IS added together for ten lifetime's or more! Next Thursday, Part II: "Here's The Catch" Best Trading Wishes, austinp@OptionInvestor.com PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** No dropped calls tonight PUTS: ***** TBH $50.25 +2.95 (+5.32) Technical weakness along with rumors of economic and political uncertainty in Latin American were two reasons for initiating this highly aggressive put play. While the issues surrounding Argentina and Brazil continue to be an on-going concern, traders that were once in a panic appear now to be taking things in stride. Technically, the stock has bounced on strengthening volume and in the process, has closed above both its 5 and 10-dma (at $46.81 and $48.90 respectively). Now above our stop price of $49, we are dropping coverage tonight. FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Thursday 04-26-2001 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/042601_2.asp ******************** PLAY UPDATES - CALLS ******************** WMT $51.24 +0.57 (+0.81) This retail stalwart actually moved to a high of $51.60 Thursday when the Dow was at its strongest point. While WMT fell back later in the day, support is strong at $50.50, and could be a possible entry point going forward. WMT has now established a series of higher lows starting with $45 on March 26th, $47.50 on April 12th, and the 50 dma of $50 this week. Today's close above the 200 dma of $51 is a bullish sign, and a more conservative entry point could be taken at this level. The next point of resistance is $52.75, and, with its earnings approaching on May 15th, WMT may very well have a shot at clearing this level. Watch others in the retail sector like HD, S and TGT, as well as the retail sector, RLX.X and keep stops at $50. We will close positions if WMT closes below the $50 level. AEOS $36.46 +1.16 (+1.48) The retail sector came roaring back Thursday and the specialty apparel sector was among the best performing of the retail stocks. AEOS has now formed an upward stair step pattern, and may pull back to the $36 level tomorrow, which could be an aggressive entry point. AEOS is having difficulty penetrating the $37.50 level, and RLX.X is having difficult penetrating the 880 level in the same fashion. A close above $37.50 with strong volume could clear the way for a more conservative call player to take positions, as AEOS would most likely move easily to the $38.50 level from here. Above this level, there is very heavy resistance at $40, which would take a considerable amount of strength to penetrate. Continue to monitor specialty retailers like GPS and TJX and move stops to $35. We will end the play if AEOS closes below this level. AA $42.08 +1.59 (+1.73) With Old Economy stocks enjoying a surge recently, AA has benefited from this bullish action of the past couple of days. Yesterday, in the midst of strength in the broader markets, shares of the aluminum giant gained 1.33 percent. While volume was still light, the positive close and bounce off its 10-dma (now at $39.85) was a good sign. Today, AA advanced strongly, moving up 3.93 percent on almost 1.3 times the average daily volume. In doing so, the stock closed at a new 52-week high. Now within striking distance of its all-time high of $43.62, we are moving our protective closing stop up from $39.50 to $40. Bounces off support at $42, $41.50 and $40 may allow aggressive traders to take a position. For the more risk averse, wait for AA to break above $42.50 with conviction before making a play. In both cases, correlate entries with strength in rivals AL and PY. C $49.51 +0.21 (+0.09) On Tuesday we mentioned that shares of financial services provider Citibank had been in consolidation mode, trading in a narrow range on decreasing volume. Price/volume action in the past couple of days has yielded more of the same, with support below at $48 and resistance overhead at just above $50. On Wednesday, with the NYSE in full rally mode, C managed to rise 1.19 percent on 73% of the average daily volume. Today the stock added fractionally to its gains on lower volume. At this point, patient and disciplined traders could stand to benefit from this period of calm. A break above $50 on strong buying volume could give conservative traders the signal to jump in, provided that the AMEX Banking Index (BIX) confirms upward momentum. For aggressive traders willing to buy the dip, C has moving average support from the 5 and 10-dma at $49.08 and $48.79 respectively, reinforced by horizontal support at the $49 level. A bounce off our stop price of $48 may also be bought, but make sure that the stock ends the day above this point. BRCM $37.00 -1.10 (-1.69) When the Nasdaq and Dow both rallied on Thursday, Broadcom went along for the ride, and reached a high of $38.80 before the technology rally faded. The SOX.X led the Nasdaq down on Thursday afternoon, and is starting to get perilously close to its 50 dma of 590.86. At an analyst meeting today, Intel's company management stated that they did expect to see a seasonal pick up in demand in the fall, and that they felt the outlook is brighter going forward for the chip sector. However, they stated that uncertainties in the macroeconomic environment continue, and could present problems going forward if they do not improve. The fact that Broadcom was able to rebound from its low point of $35.94 is impressive, and BRCM is among the best positioned semiconductor stocks to benefit if the sector recuperates going forward. Since the SOX.X fluctuates wildly with the analyst comments de jour, we must play Broadcom very carefully. Traders could consider taking positions at current levels, but only if the SOX.X and others like INTC are showing strength. A break above BRCM's 50 dma of $40.72 would be a very bullish sign, and a possible entry point for conservative traders. We are keeping stops at $35, so close positions if BRCM closes below this level. AOL $49.51 +0.10 (+0.82) AOL led the media stocks as the market lingered in purgatory today and made a fractional crack in the $50 resistance during early morning trading. The trading volume continued to remain robust as a pattern of higher intraday-highs developed. The bullish prescription lends to a good probability for an upside breakout; although the tightening trading channel is rather frustrating. The price range, which is currently dictated by the convergence of the 5 & 10 DMAs at $48.51 and $47.09, respectively, continues to limit entry opportunities on the downside. An enterprising trader might consider vying for a position at the above-mentioned proximity in anticipation of a dynamic and visible move through the $50 level. If this strategy fits your trading style and is pursued, be prepared to exit if AOL closes below our $47 protective stop. On a breakout, watch for some opposition as AOL approaches the $55 and $57 marks. While AOL is a leader of the media-related stocks, some others to watch include GMST, COX, UVN and even DIS; all of which can impact the sector's sentiment. ******************* PLAY UPDATES - PUTS ******************* VRTS $55.39 -3.34 (-8.91) A failed rally past the $61.99 level occurred on Thursday morning, and VRTS quickly fell to light support at the $60 level. It is important to note that VRTS fell to $57.50 shortly thereafter, and rolled over again from a lower high at the 50 dma of $58.50 while the Nasdaq was rallying during the mid afternoon. A head and shoulders has now formed during April with the left shoulder at $62.77, the head at $68, and the right shoulder at $62. VRTS closed on a bearish note, and if the Nasdaq remains weak, it could possibly drop below $55. This could be a good entry point for conservative put players. The software index, GSO.X has managed to stay above its 50 dma of 208.31, but a drop below this level could be a very bearish sign for software stocks. Continue to monitor others in the sector like MSFT and SEBL, and move stops to $60. We will close positions if VRTS closes above this level. HDI $44.79 +0.44 (+0.04) After finding support near $43 on Tuesday, HDI investors hit the throttle yesterday, tagging along on the broad market recovery that continued through most of today's session. As the stock approached our stop at $45, HDI ran out of gas and languished just south of that level for the rest of the afternoon. We are at a pivotal point here on our play. Resistance at $45 should keep the bulls in check, and should the broader market weaken, we'd look for the stock to begin its next downward leg. However, the broader market is trying very hard to move higher. This could provide enough lift to HDI to help it break its 7-month trend of posting lower highs. Now that daily stochastics have dropped out of overbought territory, it looks like the deck is stacked in favor of the bears. Volume has been rather anemic the past several days, and we need to see it pick up closer to the daily average, before we can really place much stock in the price action. Aggressive investors can consider nibbling on new positions near current levels, but keep your stops in place. More conservative traders will wait for the bears to flex their muscle and push HDI below the $43 intraday support level before taking a position. PMCS $35.22 -3.8 (-9.59) In case you haven't noticed, the flu bug that brought down the highflying Networking and Semiconductor stocks is just as virulent as ever. Better known as declining revenues and questionable visibility, the effects can clearly be seen in the recent trading pattern of PMCS. Despite tagging along on the recent NASDAQ recovery, we can see the tech index declining back towards the critical 2000 support level again, and PMCS and its Telecom Equipment brethren are leading the decline. After boldly shooting higher last Friday after posting inline estimates, the bears are clearly back in charge. After the bulls had a slight up day yesterday, the sellers piled on this morning, and pressured the stock right up to the close today, serving up a 10% loss. Ending the day just above the $35 support level, we are looking for conservative traders to get their entry point as this support level fails, preferably on increasing volume. Due to the recent weakness, we are lowering our stop to $39. Aggressive traders can still consider entering the play on failed intraday rallies that rollover below our stop. As long as the Semiconductor index (SOX.X) and Networking index (NWX.X) continue to lead the NASDAQ lower, PMCS is unlikely to be capable of a sustained recovery. ************** NEW CALL PLAYS ************** AGGRESSIVE: LLY - Eli Lilly $81.39 +0.50 (+1.29 this week) LLY discovers, develops, manufactures and sells Pharmaceutical products targeted at the diagnosis, prevention and treatment of human diseases. The company's best known commercial product is the anti-depressant Prozac, although there are numerous other lesser-known drugs that treat conditions such as Parkinson's disease, diabetes, osteoporosis along with a broad range of antibiotics. The company also conducts research to find products to treat diseases in animals and to increase the efficiency of animal food production. Although LLY has come under significant selling pressure in recent months due to speculation over the impact of patent expiration on its blockbuster Prozac drug. Once the patent expires, generic versions will begin to arrive in the marketplace, potentially cutting into the company's revenue stream. Despite these long-term concerns, the primary catalyst to the stock's movement recently has been the investor's interest in Drug stocks in general. Since topping out in early January, the Pharmaceutical index (DRG.X) has seen heavy selling, but appears to have found its sea-legs recently, breaking above the 4-month descending trendline. LLY has actually been performing better than the broader sector recently, and has been in a sustained uptrend for the past month, helped along by their own solid earnings report on April 16th. While not a fast-moving stock, LLY is providing a rarity in this market -- namely a tradable trend. Every time the stock pulls back to the 5-week ascending trendline, buyers appear and push the stock higher, providing attractive and easily manageable entry and exit points. In fact, a better tool for gauging entry points is the 4-week ascending channel. Consider new entries on a bounce from the lower channel line, currently $79.50 (the site of our stop) or $80, the location of the ascending trendline. Entries can also be considered on a break above the $82 resistance level, but keep in mind that LLY is likely to pullback again once it touches its upper channel line near $83. Patient investors are likely to do better here, waiting for the pullback before entering the play. BUY CALL MAY-80*LLY-EP OI=3493 at $3.60 SL=1.75 BUY CALL MAY-85 LLY-EQ OI=3549 at $1.35 SL=0.75 BUY CALL JUN-85 LLY-FQ OI= 560 at $2.80 SL=1.75 BUY CALL JUN-90 LLY-FR OI= 281 at $1.40 SL=0.75 BUY CALL JUL-85 LLY-GQ OI=2731 at $4.40 SL=2.75 http://www.premierinvestor.com/oi/profile.asp?ticker=LLY ************* NEW PUT PLAYS ************* AGGRESSIVE: Vitesse Semiconductor is a supplier of high-performance integrated circuits targeted at systems manufacturers in the communication and automatic test equipment (ATE) markets. A leading manufacturer of gallium arsenide (GaAs) integrated circuits, a type of IC that performs at higher speeds than silicon chips. The company offers several products that address the needs of high-performance communications systems at data rates for the SONET, ATM, IP, Fibre Channel and Gigabit Ethernet markets. VTSS also provides gate arrays and custom products that offer a combination of high complexity, low power dissipation and high speed for the ATE market. Since bouncing strongly off the lows of early April, the Chip sector, as measured by the Philadelphia Semiconductor Index (SOX), has once again been showing signs of weakness. Stochastics of many Chip stocks have already crossed over bearishly with the first signs of a potential rollover already apparent. With that in mind, shares of communications chipmaker Vitesse have under-performed its sector both fundamentally and technically. The company reported its earnings early last week. VTSS just met Street estimates of 10 cents, with dramatically weak revenue numbers. A bearish conference call, in which the CEO called the quarter "disappointing", and a continued lack of visibility going forward, was not a good sign. With that, CS First Boston and Goldman Sachs cut their numbers for the upcoming quarter. Interestingly enough, the two brokerages later upgraded the stock. Joining the analyst tug-of-war, Merrill Lynch downgraded VTSS this week from a NT Accumulate to a NT Neutral rating. Technically, VTSS unlike other Chip stocks, was unable to break above its 50-dma, now at $36.38. Since failing its test of that moving average, the stock has pulled back on decreasing volume. What appeared to be consolidation however has turned into something a little more ominous. Today, VTSS fell over 12 percent and in doing so, now finds much moving average resistance. Failed rallies at the 5 and 10-dma at ($32.33 and $30.35 respectively) along with horizontal resistance at $30, $33 and our closing stop price of $34 may allow aggressive traders to take a position. For an entry on weakness, conservative traders may wait for a break below $28 on volume before jumping in. Just make sure that peers AMCC and CNXT are also heading lower. BUY PUT MAY-30*VQT-QF OI=1555 at $4.20 SL=2.50 BUY PUT MAY-25 VQT-QE OI= 628 at $1.75 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=VTSS CIEN - Ciena Corp $52.15 -5.39 (-14.94 this week) CIENA Corporation's market-leading optical networking systems form the core for the new era of networks and services worldwide. CIENA's LightWork architecture enables next- generation optical services to transmit signals simultaneously over the same circuit. This multiplexing system changes the fundamental economics of service-provider networks by simplifying the network and reducing the cost to operate it. About 45% of sales comes from outside the US markets. Just when you thought it might be time for the champagne and roses, a storm threatens to release its torrent - an applicable analogy when it comes to CIEN. After rising off its lows as the tech-laden NASDAQ resurrected itself earlier in the month, the outlook is once again looking bleak for this optical networking equipment stock. A slew of analysts, in particular UBS Warburg and Goldman Sachs, cut ratings on most of the major equipment makers this week. The influential firms mainly cited the slowdown in spending amongst telecommunications companies as the rational for the downgrades. But honestly, who hasn't heard about that? No matter, investors took the analysts' comments and recent economic data to market. On the week, CIEN lost $14.94, or 22.3% and closed the door below the previous resistance at the $55 level. Today's strong sell-off, notwithstanding the NASDAQ attempt to shatter 2100, indicates the downside activity may not be over. Other leaders in the industry like Corning (GLW), Nortel (NT), Cisco (CSCO), and even Sycamore Networks (SCMR) are also failing miserably. For instance, after the market today, GLW spun another woeful earnings' tale and lowered expectations going forward. It's also obvious that NT isn't shaking off investor caution too easily as it slides towards single-digit status; and CSCO just recently announced it will discontinue selling its most expensive product due to weak sales. If you're interested in jumping into the negative momentum, look for heavy downside volume to take CIEN through the 30-dma ($50.35); especially if you're more conservative. Else, an aggressive rollover might better suit your style. We currently have a $56 CLOSING stop on CIEN and will drop coverage if the share price violates this mark at the close. However, that's not to say the less-risk adverse might find entries near the $60 level, just above the intersected 5, 10, and 50 DMA lines, amid a sharp reversal. If you take the road less traveled, make sure the bears are in control and there's little doubt of the sector and market sentiment. BUY PUT MAY-55*EUQ-QK OI=5047 at $8.60 SL=6.00 BUY PUT MAY-50 EUQ-QJ OI=3189 at $6.10 SL=4.00 http://www.premierinvestor.com/oi/profile.asp?ticker=CIEN ********************* PLAY OF THE DAY - PUT ********************* VRTS - Veritas Software Corp. $55.39 -3.34 (-8.91 this week) Veritas is an independent supplier of storage management software. The company's products help to improve the level of centralization, control, automation, and manageability in computing environments. More specifically, the company's products offer protection against data loss and file corruption, allow rapid recovery after disk or computer failure, enable IT managers to work efficiently with large numbers of files, and make it possible to manage data distributed on large networks of computer systems without harming productivity or interrupting users. Most Recent Write-Up A failed rally past the $61.99 level occurred on Thursday morning, and VRTS quickly fell to light support at the $60 level. It is important to note that VRTS fell to $57.50 shortly thereafter, and rolled over again from a lower high at the 50 dma of $58.50 while the Nasdaq was rallying during the mid afternoon. A head and shoulders has now formed during April with the left shoulder at $62.77, the head at $68, and the right shoulder at $62. VRTS closed on a bearish note, and if the Nasdaq remains weak, it could possibly drop below $55. This could be a good entry point for conservative put players. The software index, GSO.X has managed to stay above its 50 dma of 208.31, but a drop below this level could be a very bearish sign for software stocks. Continue to monitor others in the sector like MSFT and SEBL, and move stops to $60. We will close positions if VRTS closes above this level. Comments Shares of VRTS have traced a top-heavy head-and-shoulders (H&S) pattern over the past two weeks of trading. This formation may very well portend lower prices in the near-term for VRTS. The neckline for VRTS' H&S can be located near the $54 - 55 range. Ideally, we'd like to see the stock break below that range on heavy volume, as support is scarce until the $47 level. However, those traders with slightly higher risk tolerances may consider getting in ahead of the curve with an entry at current levels or on a rollover near the $60 level. BUY PUT MAY-60*VIV-QL OI=15300 at $8.90 SL=6.50 BUY PUT MAY-55 VIV-QK OI= 3819 at $6.20 SL=4.00 http://www.premierinvestor.com/oi/profile.asp?ticker=VRTS ************************ COMBOS/SPREADS/STRADDLES ************************ Blue-Chips Lead The Way! Industrial stocks rallied again today amid renewed strength in cyclical, retail and oil issues. Wednesday, April 25 Stocks rebounded today as investors looked ahead to a potential economic recovery in the second half of 2001. The Dow closed up 170 points at 10,625 while the NASDAQ ended 43 points higher at 2,059. The S&P 500 index ended up 19 points at 1,228. Trading volume on the NYSE hit 1.17 billion shares with advances beating declines 2-to-1. On the NASDAQ, volume hit 1.96 billion shares with winners beating losers 23 to 15. In the bond market, the 30-year Treasury fell 11/32, pushing its yield up to 5.78%. Tuesday's new plays (positions/opening prices/strategy): Scios (NASDAQ:SCIO) JUN30C/J20P $0.70 debit synthetic Scios (NASDAQ:SCIO) MAY20C/M22C $2.25 debit bull-call Visx (NYSE:EYE) SEP30C/M30C $0.95 debit calendar Progressive (NYSE:PGR) MAY95P/M100P $0.55 credit bull-put Our bullish selections in SCIO were accurate but not timely as the issue opened almost $2 higher and never retreated. There were no opportunities to open those positions. However, VISX and PGR did offer the target entry prices. Portfolio Plays: Industrial issues rallied today following the release of a number of positive earnings reports and strong housing data. News that home sales climbed to record levels, a sign the sluggish economy has pockets of strength, triggered a buying spree in the broader market and a new round of short-covering boosted share values. On the Dow, Walt Disney (NYSE:DIS) surged almost 8% after posting a second-quarter profit of $0.19 a share, which topped consensus estimates by $0.06. Disney also expects to achieve double-digit earnings growth this year. Home improvement retailer Home Depot (NYSE:HD) enjoyed buying pressure amid the strong housing data and Philip Morris (NYSE:MO) rose 6% to $50 on speculation the company may raise cigarette prices in the near future. General Electric (NYSE:GE) and Honeywell (NYSE:HON) also benefited from the rally in blue-chip issues. In technology trading, shares of Amazon.com (NASDAQ:AMZN) rebounded after the company posted a first-quarter loss of $0.21 a share, better than the $0.24 shortfall expected by analysts. The company also said it expects profits to improve in the second quarter. Semiconductor stocks also rose after Applied Micro Circuits (NYSE:AMCC) offered an optimistic outlook for the last half of 2001 but the upbeat attitude was tempered by selling pressure in telecom equipment shares after UBS Warburg downgraded the group. Cisco Systems (NASDAQ:CSCO), Nortel Networks (NYSE:NT) and Juniper Networks (NASDAQ:JNPR) all fell victim to the research note, which cited an expected decline in capital spending. Inside the broader market, biotechnology stocks rallied and drug shares also finished higher after solid earnings reports from a number of bellwether companies. Banking and financial issues also rebounded from Tuesday's slump while oil service shares continued to advance. The Spreads Portfolio enjoyed today's bullish activity and almost every category benefited from the upside momentum. Stocks in the S&P 500 sectors performed well and oil issues were particularly strong. The recent movement in this group has been favorable for the broader market but at the same time, one of our bearish plays is under pressure due to the rising share values. Tota Fina Elf (NYSE:TOT) has rallied to a past resistance area on solid volume and it will likely test our sold strike at $75. The potential for further upside activity is somewhat limited, based on heavy overhead supply near $76-$78, but we don't want to get into a situation like last month's Avery Dennison (NYSE:AVY) spread. The obvious alternative is to roll up and forward to a (short) JUN-$80 Call, which is above any price the issue has achieved in its past. The debit to close the play in today's session pushed the overall basis to a loss of approximately $0.70, but the sale of the new call option (MAY-$80) will provide an additional credit in the play. Our initial goal will be a new cost basis of $80.50 with a maximum gain of $0.50, if the issue finishes below $80 in June. Thursday, April 26 Industrial stocks rallied again today amid renewed strength in cyclical, retail and oil issues. The Dow was up 67 points at 10,692. Profit-taking in technology issues pushed the NASDAQ down 24 points to 2,034. The S&P 500 index ended up 5 points at 1,234. Volume on the Big Board hit 1.27 billion shares with advances beating declines 19 to 11. On the NASDAQ, volume was average at 2.01 billion shares traded with winners outpacing losers 21 to 17. In the bond market, the 30-year Treasury rose 1 point, pushing its yield down to 5.69%. Portfolio Plays: Stocks ended mixed today as the industrial segment moved higher on strength in financial and cyclical components while technology stocks slumped amid a sell-off in semiconductor shares. The Dow advanced on gains in American Express (NYSE:AXP), Alcoa (NYSE:AA), Walt Disney (NYSE:DIS), DuPont (NYSE:DD), Honeywell (NYSE:HON), General Electric (NYSE:GE), International Paper (NYSE:IP) and J.P. Morgan (NYSE:JPM). On the NASDAQ, almost every sector declined but some buying pressure was seen in software stocks and Internet issues. Leading the broader market higher were shares of oil and oil service, natural gas, financial, precious metals and transport issues. One well-known analyst expressed some comments about the recent caution among investors. UBS Warburg's Edward Kerschner said that, "With second quarter earnings expected to be weak, the temptation is to avoid buying stocks until an upturn in economic activity and profits is definitely under way. History suggests this would be a mistake. In the last three recessions, the stock market bottomed four to five months before industrial production turned up and six to 14 months before positive earnings growth resumed." I, for one, hope his optimistic outlook is correct. The Spreads/Combos section enjoyed a number of bullish moves in today's session as investors diversified into various areas of the market. In the telecom sector, WorldCom (NASDAQ:WCOM) was a positive influence, posting a first-quarter profit of $0.25, in line with analysts' consensus estimates. The optimism over the quarterly report spread to other companies in the group and that helped our long-term positions in AT&T (NYSE:T) and Sprint (NYSE:FON). Our new speculation play in Infospace (NASDAQ:INSP), which offers content and services to Internet sites and wireless companies, benefited from the company's quarterly report. INSP announced a quarterly loss that was smaller than expected as strong wireless demand helped the once high-flying company get back on track and their share value rose 4% to $4. Active Power (NASDAQ:ACPW) recovered from post-earnings selling pressure and the issue closed up 5% at $22.50. Our break-even basis in the conservative credit-spread is near $17. In the retail sector, Liz Claiborne (NYSE:LIZ) led the way with an unexpected rally to $48 and our new bullish position in Progressive (NYSE:PGR) is off to a good start as the stock is now $15 above the sold Put option at $100. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** UNH - UnitedHealth $64.87 *** Earnings Speculation! *** UnitedHealth Group (NYSE:UNH) forms and operates markets for the exchange of health and wellbeing services. The company provides a broad spectrum of resources to help people improve their health and well being through all stages of life. The company's Health Care Services segment consists of UnitedHealthcare and Ovations. UnitedHealthcare coordinates network-based health and well-being services on behalf of local employers and consumers in six broad regional U.S. markets. Ovations is a business that advances the health and well-being goals of Americans in the second half of life, age 50 and older. Uniprise is devoted to serving the needs of large organizations. The company's Specialized Care Services is a portfolio of specialized health and well-being companies. The company's Ingenix business operates in the field of health care data and information, analysis and application. The majority of managed care firms are expected to report solid quarterly earnings growth due to increases in premium prices and some analysts say the gains could be as high as 20%. Revenues in the industry are expected to rise 8% on average and with strong fundamentals, expanding margins and tight cost controls, earnings growth may continue to exceed expectations throughout the coming year. Obviously, traders are expecting positive news when UNH offers its results tomorrow morning (before the open) and if there is post-announcement dip, we may be able to achieve a reasonable entry point in this speculative position. PLAY (speculative - bullish/synthetic position): BUY CALL MAY-70 UHB-EN OI=720 A=$1.05 SELL PUT MAY-60 UNH-QL OI=1196 B=$1.05 INITIAL NET CREDIT TARGET=$0.25-$0.50 TARGET PROFIT=$0.75 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $2,200 per contract. http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=UNH ****************************************************************** PVN - Providian Financial $51.56 *** Rally Potential? *** Providian Financial (NYSE:PVN), through its subsidiaries, is a leading provider of lending and deposit products to customers throughout the United States and they also offer credit cards in the United Kingdom and Argentina. The company serves a broad, diversified market with its loan products, which include credit cards and membership services products. The company also offers various deposit products and has more than $31 billion in assets under management and over 14 million customers. Companies in the Credit Services industry have been in the news recently with the improving interest-rate environment and PVN is one of the leaders in the sector. Last week, the company posted 30% earnings per share growth for the first quarter 2001 on total profits of $230 million, well above the $174 million in the first quarter of 2000. During the quarter, customer accounts grew to 17.1 million, a 31% increase over the end of the first quarter of 2000, driven by new accounts and strong customer retention. The total number of managed loans also increased by $1.3 billion to $28.4 billion in what is typically a seasonally slow quarter for that segment. The CEO said the company continues to build a very strong consumer franchise, as evidenced by a continued high level of customer retention during the quarter, and he is very pleased with the positive business momentum in the midst of an uncertain economy. Investors apparently agree with his outlook and this position offers a conservative way to profit from future bullish activity in the company's share value. PLAY (conservative - bullish/credit spread): BUY PUT MAY-40 PVN-QH OI=3257 A=$0.55 SELL PUT MAY-45 PVN-QI OI=243 B=$0.95 INITIAL NET CREDIT TARGET=$0.50-$0.55 PROFIT(max)=11% B/E=$44.50 http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=PVN ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** SHPGY - Shire Pharma $51.60 *** Trading Range? *** Shire is a rapidly growing international specialty pharmaceutical company with a strategic focus on four therapeutic areas: central nervous system disorders, unique metabolic diseases, oncology and gastroenterology. SHPGY has a sales and marketing infrastructure with a broad portfolio of products, with its own direct marketing capability in the US, Canada, UK, Republic of Ireland, France, Germany, Italy and Spain and with plans to add Japan in the next few years. The company also covers other pharmaceutical markets indirectly through distributors and their global sales coverage continues to grow. We like this issue for a premium-selling position because it has a relatively well-defined trading range and no apparent news or events that will substantially change its character prior to the May options expiration. SHPGY's quarterly earnings announcement occurred earlier today and the news was favorable with a positive outlook for the future. The issue traded with an upside bias and the current trend is bullish. However, our profit envelope is outside the most recent trading range at $42-$57 and our plan is to sell OTM options for credit and use the earned income to offset any losses on the downside. If the stock rallies above the recent resistance area near $58 on heavy volume, we will close the short call or buy the stock to cover the position. PLAY (conservative - neutral/credit strangle): SELL CALL MAY-60 UGH-EL OI=490 B=$0.95 SELL PUT MAY-40 UGH-QH OI=375 B=$0.70 INITIAL NET CREDIT TARGET=$1.65-$1.75 PROFIT(max)=11% UPSIDE B/E=$61.65 DOWNSIDE B/E=$38.35 http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=SHPGY ****************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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