The Option Investor Newsletter Thursday 05-03-2001 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/050301_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 05-03-2001 High Low Volume Advance/Decline DJIA 10796.70 - 80.00 10872.30 10723.60 1.11 bln 1227/1822 NASDAQ 2146.20 - 74.40 2183.07 2129.07 2.01 bln 1449/2346 S&P 100 647.75 - 9.58 656.19 643.16 totals 2676/4168 S&P 500 1248.58 - 18.85 1264.43 1239.88 39.1%/60.9% RUS 2000 485.65 - 5.99 490.45 484.45 DJ TRANS 2835.51 - 32.80 2869.63 2818.52 VIX 29.50 + 1.73 30.25 29.32 Put/Call Ratio 0.72 ****************************************************************** Running Scared! Stocks have been trending up +100% a month, the Dow just broke 12000 and the Nasdaq is nearing 5000 again. DING-DING-DING! Investors were rudely awakened from their dreams by the opening bell today as stocks plummeted on an increasingly grim outlook and a bigger than expected Jobless Claims report. The constant slow rise of the indexes over the last several weeks was interrupted by a dose of reality. The Initial jobless claims increased to 421,000 and continuing claims (people still out of work) rose to 2,682,000. The continued upward trend was due a surge in layoffs in March and April. The only good news here is an almost certainty that the Fed will continue to cut rates until the labor conditions ease. Ironically, the Fed has been worrying about the low unemployment rate for two years as fuel for inflation. Lack of skilled workers had bid up the salaries for those willing to change jobs and this increased cost was being passed on to consumers in inflated prices. The surge in unemployment is actually helping to slow inflation as out of work job seekers will take less money as a new hire than a gainfully employed person seeking only to up their salary. While the numbers may point to a continued weakening economy you can bet the Fed is breathing easier. The four week moving average is at the highest level since 1992. The NAPM services index fell by -3.2% in April to 47.1%. This is a clear indication that the economic slowdown is spreading to more than the manufacturing sector. The consensus estimate was 50.2% and this was significantly below that and the lowest level in years and is seen as a leading indicator to the economy. The combination of the Jobless Claims and the NAPM reports indicate that the Fed still has several cuts in their future to stop the economic fall. So the economy may still be sliding but tech stocks are always favored by the markets six months before the actual rebound. Not today! Novellus CEO said today that he does not expect a recovery in orders for semiconductors until the fourth quarter of this year, at best. The slowdown could continue into 2002. He added that his own checks have found semiconductor plants working at between 30% and 80% capacity - around the world and across all product lines. Speaking at a Merrill Lynch conference he said he did not expect to see any uptick in orders until the fourth quarter and it would probably take one to two quarters after that before earnings would start to improve. If you multiply his sentiments across all the chip makers and PC makers then it is possible the market bounce was two quarters premature. To emphasize that point Compaq said today that the second half of the year was going to be very tough. Prudential said today that PC demand was still dropping and these comments were echoed by Compaq. He did say the global markets were stable but said he was starting to get worried about currency volatility. UBS Warburg downgraded Dell today based on the accelerating price war. With PC demand still slipping, Dell has pledged to be "ruthless" in cost cutting which would be passed on to consumers as well. This price war was expected by UBS Warburg to possibly cut Dell's margins in half. Compaq CEO Capellas said his company was up to the challenge and said they will be much more aggressive in pricing. What is shaping up to be a massive price war is sure to be great for consumers but the manufacturers will eventually be selling computers at breakeven or less just to maintain operating assembly lines and avoid laying off key employees. Not good for profits and if the demand is still dropping we could be a year away from better profits. A funny thing about price wars, once consumers become used to paying much lower prices it is very hard to get them to pay increased prices for those same goods in the future. Based on their reassessment of the sector JPM and H&Q said today that chip stocks were pricey and had risen too far too fast with the rebound still not in sight. Kiss that sector goodbye! With the chip sector a leading indicator for the Nasdaq all these negative chip stories may have investors rethinking their jump back into tech stocks. The Nasdaq bumped up against resistance just above 2225 on Wednesday and pulled back -74 on the concern about the aborted chip rebound. The Dow broke the uptrend line in place since April 4th and pulled back to light support at 10750 from Mar-26th. The Dow attempted to rally at the close and recovered almost half of the day's loss. The bargain hunting rally was half hearted at best and the bears were probably slobbering with excitement that maybe there was still a shorting opportunity available. The S&P gave up -20 points of hard fought ground to close at 1248 and significantly under the 1267 resistance from earlier in the week. The grim news about the lagging tech revival was not unexpected but the severity of the intraday drop caught many traders off guard. I suggested last night that many traders with profits were deciding whether to go flat or hold over the Non-farm Payroll report on Friday. It appears the jobless claims this morning struck fear into those traders and they ran for cover. If not only tech stocks but also fast food companies, service companies, oil companies, health care companies among others are still warning daily then maybe the bounce was premature. With that thought traders ran for the exits and I was surprised to see any bargain hunting bounce at the close. What happens tomorrow? Regardless of the market drop today the investing sentiment is still bullish. It is very possible that the nonfarm payrolls may be worse than expected but the market may shake off the news assured that the Fed will cut again anyway and we will be back in rally mode. Remember, most mutual funds and retail investors do not make money unless the markets are moving up. The underlying sentiment is always up even when the bears are shorting everything in sight. The last two weeks of rally were a breath of fresh air for investors and they will want to buy anything that does not look like a complete disaster. Buyers that were frustrated by missing the boat on the last bounce have been given another chance to buy a ticket. Now that very human emotion of doubt comes into play. Early this week those investors were begging for a pullback to give them another buying opportunity. Today they got the pullback but now they are thinking, "is it just a pullback or are we going to retest 9100 again?" Their trigger fingers are suddenly paralyzed by doubt and worry. Isn't is amazing how we investing humans are suddenly struck dumb by the very thing we were asking for? I painted this word picture to make one point. Traders everywhere will be poised over their mouse tomorrow just hoping for some sign that the market is going to rebound again. Just some sign that they can hang their hope on before pressing the buy button. If they get that in the morning then we may be headed back up that yellow brick road once again. If they see weakness they may become frustrated once again and pull back into their shell and wait for the lows to be retested. Let's hope for a vote of confidence by portfolio managers at the open and not a case of bears seeing their shadows again for six more weeks of sell off. Enter passively, exit aggressively! Jim Brown Editor **************** MARKET SENTIMENT **************** Ripe For A Pullback By Bill Kaeiser Okay, round 2! I'm feeling well-rested and ready to battle the charts again. Format is changing, but never fear, only a little. Below, you will find the major indices in bold with a brief technical commentary and then, of course, key charts. Within, support and resistance levels are listed and discussed. Enter at your own risk! NASDAQ & QQQ Wednesday's rollover from 2232 and today's subsequent sell off broke our trendline from early April. The chart below is basically the same as Tuesday with the addition of the retracement bracket. Support lies at 2000 still, the 38.2% retracement. A pullback to this level wouldn't surprise me in the least bit. It's part of the consolidation process after a 37% gain in the tech index since April 4th. Traders have big gains and wouldn't be unhappy with a little take back from the first quarter. While a pullback is expected, the Nasdaq's relative strength lately has been surprising. Some of that fund cash was put to work, but if those managers have learned anything in the past year, it's that they must think more like traders than previously. Can't sit and watch a 75% winner take you to even, can you Janus? The Nasdaq has resistance in the 2250 area, with Wednesday's high being 2232. I had to throw in a chart of the QQQs as well because it is a perfect example of how market makers trade the levels. QQQ resistance is $49.50 and support is $43.43. That's not a coincidence. I'd be a big buyer if we hit those 50% levels. SPX & OEX Resistance on the S&P 500 at 1273 was a pivotal point. The levels don't lie. Previous resistance remained strong and traders used that to take down recent profits. Tuesday's chart showed the double bottom near 1100 and upon further review, the SPX.X is looking like a reverse head-and-shoulders(H&S). The neckline lies at 1270. The price objective of such a breakout from this formation is 1440, see the chart for the calculation. Last time the SPX.X traded there was early November 2000 and just happens to be a resistance level. Uncanny! However, let's not start being too long-term focused, I live to be myopic! So in the near-term, we are ripe for a pullback. I mentioned on Tuesday that the 38.2% retracement of April's rally sits right at 1200. We are looking for support there. The OEX.X, the S&P 100, has resistance overhead at 660, with underlying support at 625 and then 605. DOW 30 It was the "10 9 Declination," as my colleagues around the office have been preaching. Scribbled across every whiteboard and email, how could we be mistaken? 10900 on the INDU, indeed, proved to be the pivot for the pullback. It is a tough level. With that resistance overhead, 11000 isn't even a concern yet. Today's low on the INDU was 10723, as buyers stepped up once again wanting to get their piece of the action. From there, the Dow 30 rallied back and clawed its way to finish at 10796. With that said, we continue to see short-term support at the 10725 area. Whether the INDU takes another run at 10900 level depends on tomorrow morning's Employment Report. Remember though, it's not the news that's important, it's how the market reacts that's important. Traders will be taking this data and applying it to expectations of the Fed's next move on May 15th. The market expects Non-Farm Payrolls to add 25,000 jobs. That's a wrap. Another one down. The new beast known as Market Sentiment is taking shape. Once we get a hold of that new COT report due out Friday, I will offer some interpretation of the data in a commentary format on Sundays. I welcome comments and compliments, however, I've never been big on complaints. I just read the charts. Until Sunday, watch those levels. Until we meet again, Bill K. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/050301_1.asp ************** TRADERS CORNER ************** The Roth IRA Silver Lining By Rob Presley In the fourth quarter of 1999, I left my job with a prominent mutual fund reporting agency, bound for the endless wealth and autonomy of my fellow computer brethren. Armed with my "extensive" knowledge of the financial markets and recently acquired programming abilities, I was certain that I possessed a unique set of qualities that would soon entitle me to the elusive pot of gold so artfully insinuated by the woman who sold me the programming classes. Ah, isn't na´vetÚ a beautiful thing? Perhaps in one's children but, certainly not when in accordance with career decisions! Unfortunately, I was about to learn an even harder lesson. And in the end, this one would cost quite a bit more than those programming classes long rolled over into the second mortgage. I've often heard that those of us directly involved in the markets on a daily basis have horrible credit, make hasty investment decisions, and all too frequently ignore the resources we have so close at hand. Needless to say, these are caveats that only apply to the other guys! As one of the many market gurus to show up to the Technology party several years ago, I knew where to invest my assets - Technology. Alright, so I was 60% invested in tech. This obviously flew in the face of all that I had learned regarding diversification but I was primarily in mutual funds - inherent diversification, right? Hardly! I watched my glowing brilliance become beyond impressive over the course of the next several months as my nest egg ballooned from $40,000 to well over $80,000. And I never sold a damn share of any of those funds! Virtually anyone who has been alive over the course of the last two years knows what happened then. Assets were sliced in half. My word, what a painful experience! I mitigate my incredulous stupidity with reassuring anecdotes like, "I'm there for the long- term," or "It'll come back." Well, here is my latest attempt at cathartic mitigation of my past ignorance. It's time to convert that Traditional IRA to a Roth IRA - I'm all about silver linings! You be the judge, but I think this one is pretty good. Back in 1999 I looked into the whole Roth thing and it did sound pretty good. That was the last year that you could convert your entire IRA account to a Roth IRA and spread the applicable taxes over the course of the next four years. Fortunately, I opted for the regular IRA because I didn't feel comfortable saddling myself with a $3,000 tax bill for the next 4 years. Hindsight, especially if I apply the blinders, has proven me quite the smart guy. When the Dot Bomb burst, I was one of the first on the chopping block and was laid off shortly thereafter. Here is the scenario. Now that my IRA is around the $20,000 mark, my tax bill for converting the account has been cut in half. All back patting aside, I'm well aware that my paper loss of 50% is a far cry from what I'm taking from the tax man. And the fact that the full tax amount is due at the end of the tax year in which the conversion of the account took place has not escaped me either. There is an alternative to moving the entire account, though. Take those assets that have declined most precipitously and move them into your new Roth account. In other words, take all of your under water technology holdings, whether they be stocks or funds, and capitalize on the much lower cost basis at the point of conversion. The tax bill isn't due until you file next year and there is a good chance that a retroactive Bush tax cut could pad the bill some too. I remain convinced that the current valuations of many core technology companies are still well beneath fair levels and therefore, the sector will rebound. Because any gains or losses on these particular investments won't be realized, I'm not actually losing any money and I am getting the tax benefit. The original value of the IRA was $40,000. Taxes would have been approximately 30%, or $12,000. Had I utilized the payment option over 4 years, I would be paying about $3,000 per year. Let's convert the full $20,000 value of the current portfolio. Tax is half the original amount- $6,000. I'm not willing to fork that over just yet so, I'll just wade through a few of the hardest hit and move those. In retrospect, I paid too much for my tech funds and I'm quite thankful that my time horizon is significantly longer than it is for my taxable account. And while it's never my goal to lose money, current valuations present an opportunity that has not been available for quite some time. I've also learned over the last couple of years that although Retirement accounts are meant to be long-term investments, profit realization is an integral part and your assets must be actively managed regardless of the account type. The lesson has the potential to be expensive, but I'm going to do whatever I can to continue to defer my tuition. 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: ***** BRCM $43.79 -4.57 (+5.53) It's been a fun ride up on Broadcom as this former high flyer regained some of its old momentum. However, profit taking on the Nasdaq and the semiconductor sector occurred today, and BRCM fell hard and fast. The SOX.X has been unable to penetrate stiff resistance at the 680 level, and without further strength in the SOX.X, BRCM may very well suffer. As the stock closed below our stop level of $44, we are dropping it tonight. EMC $40.09 -3.91 (+0.91) EMC's run through $45 was promising in yesterday's session, but unfortunately, the trading didn't offer us a productive entry. It was the strong profit taking that tipped the scales and took us out of the EMC play today. Fellow stock, SNDK, also saw the same type of performance as the NASDAQ continued to play havoc with investors' technology portfolios. PUTS: ***** No dropped puts 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. You may also fax the information to: 303-797-1333 ********** 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
The Option Investor Newsletter Thursday 05-03-2001 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/050301_2.asp ******************** PLAY UPDATES - CALLS ******************** RE $63.30 +1.30 (-0.94) It appeared as if RE had lost momentum and might even close below our stop level of $62 today, however, right at the close RE surged up $1.30 past its 5 dma of $63.24 with strong volume. This coincided with a surge in the insurance sector over its 200 dma of 746.72 near the close. This is particularly impressive considering that the insurance sector has suffered over the last two days after Cigna reported that their costs had been rising and enrollment had been falling. However, speculation regarding a possible takeover of Independent Insurance hit the news today, and helped the sector regain momentum. As a defensive stock, RE may climb upon additional weakness in the technology sector, and a break above the 50 dma of $64 with heavy volume would be a good entry point. If RE can clear this level, it would be well positioned to resume its upward channel toward the next resistance level at $65. Monitor other stocks in the property and casualty insurance sectors like PGR and CB, and keep closing stops set at $62. AOL $50.65 -0.96 (+0.66) The climb's been steady and sure; although a bit painstaking. Today, AOL stumbled along with the likes of VIA.B and GMST as the uncertainty over negotiations between Hollywood writers and producers continues to worry investors. Overall, it's been a topsy-turvy week despite a ratings boost to BUY from Raymond James & Associates. The share price rolled along a narrow pipeline with support holding firm at the previous $50 resistance. Playing the spread however, provided traders with profitable opportunities as the share price tottered back and forth with the major indexes. Momentum traders might find entries on a visible break through $52 amid heavy volume, locking in gains as AOL approaches the $55 to $58 area. Keep CLOSING stops in place at the $50 mark. AEOS $37.99 -1.21 (+0.38) After spiking as high as $39.96 on Tuesday, which corresponded to a move in RLX.X above the 910 level, AEOS has once again fallen back from the nearly impenetrable resistance level of $40. Considering the overall weakness in the major indexes, AEOS held up well on Thursday, and closed above the 10 dma of $36.88. In addition, RLX.X was able to close at the 900 level, which bodes well for this play moving forward. AEOS is going to need additional momentum and strong volume to penetrate the $40 level, which has eluded the stock for years. However, a strong bullish wedge has been forming with resistance at $40, and a favorable employment report on Friday might just provide enough momentum to break the $40 level. The stronger the resistance eludes the stock, the stronger the momentum will be once it breaks out, and a true breakout could bring AEOS to a new all time high. Conservative traders might want to wait for strong volume to propel the stock above $40 before taking positions. Alternatively, traders could take positions upon a move above $38.50, if RLX.X is exhibiting strength. We are setting closing stops at $37, so be prepared to exit positions if AEOS closes below this level. C $51.00 +0.40 (+0.09) The past couple of days have been slow but steady gainers for our call play in C. This can be seen as good news however, as shares of the leading financial services provider and major DOW component have moved higher in the face of weakness in the NYSE. News that the company would be selling $2.5 billion in notes was well received, as the stock moved fractionally higher yesterday. Citibank is one of the first companies to take advantage of the lower interest rates, which make up a great part of the cost of doing business in the Financial sector. Today, C held firmly, posting a positive day on what was a down day for the broader markets. Aggressive traders may buy bounces off the 5, 10 and 50-dma at $50.41, $49.74 and $50.17 respectively along with support at $50 and our closing stop price of $49. Conservative traders will be waiting for C to take out its 200-dma at $51.57 on volume before jumping in, confirming upward momentum using AMEX's Banking Index (BIX). FDC $66.13 -0.97 (-0.27) Since making a new all-time closing high on Monday, shares of electronic transaction giant FDC have been in consolidation mode. Moving sideways in weak to average trading volume, the range has been narrow, with support below at $66 and resistance overhead at $68. Yesterday, on positive retail news from its check acceptance division Telecheck, the stock managed to buck the NYSE downtrend, ending the day up fractionally on average volume. Today however, FDC pulled back, retreating 1.45 percent. The good news is, the stock bounced strongly off its 10-dma at $65.64. Another successful test of this level, along with our closing stop price of $65 may allow higher risk players to take a position. Just make sure that rivals FISV and PAYX are also heading higher. For the more cautious, wait for FDC to move back above the $67 on volume before making a play. From there, the stock should be poised to once again challenge $68. LAB $38.40 -0.20 (+2.91) After the heavy volume break through its 50 and 100-dma on Tuesday, a healthy pause may not only provide the strength necessary to move higher, but also give traders a potential opportunity to make a play. Trading in the past couple of session has been narrow and on dramatically decreased volume. Fans of candlestick charting will note the two doji star formations, signifying indecision. The proverbial spring is coiling in this play, suggesting that the next move could be a strong one. Moving average support below is strong, with the 5, 10, 50 and 100-dma at $37.43, $36.06, 36.88 and $36.63, allowing aggressive players to take a position. Just be aware that we are tightening our closing stop, from $36 to $37. For an entry on strength, conservative traders will be watching for a break above formidable resistance at $39 on volume for an entry point. In both cases, correlate entries with movement in competitors NITE and SCH. BRCD $46.14 -3.80 (+10.52) Triggered by negative economic reports this morning, the profit takers showed up early and stuck around for most of the day. Storage stocks took it on the chin, but BRCD managed to hold its ground above the $45 support level. A mild bounce at the close indicates that the buyers have not given up on either the stock or the sector. So was the mild closing bounce an entry point? Only time will tell, but the prudent approach was to wait for the Employment numbers tomorrow morning and see how they move the market. Our stop is still at $45, so we need to see BRCD hold above this level to keep our play alive and kicking. A bounce near this level tomorrow morning looks good for new entries, although more conservative traders may want to wait for buying volume to push the stock back above $48 before taking a position. One encouraging point was the fact that selling volume was less than the ADV, while the volume on yesterday's buying frenzy was well over double the ADV. Clearly the bulls are still in charge, but their dominant position could be in danger if the NASDAQ can't hold its ground tomorrow. Remember that earnings are set for May 15th, the same day as we will get the interest rate verdict from the FOMC. LLY $85.32 -1.08 (+2.52) Profit taking hit the Drug sector today, but it was fairly mild and orderly. A significant contributor to the weakness could have been the selling that took place in the HMO sector after CI reported dismal earnings last night. After falling back to the $84.50 level early in the day, LLY saw buyers gradually return. As the major indices vacillated near their lows of the day, buying volume in LLY gradually increased, propelling the stock back up to recover half its intraday losses. Volume seems to confirm that today's action was simple profit taking as it came in at only two-thirds the ADV, significantly less than yesterday's 3 million shares. The stock is continuing to hold above the upper channel line that it broke above on Monday, and support seems to be strengthening near $84, the location of our stop. Aggressive entries can still be considered on a bounce between $84-85, so long as the Pharmaceutical index (DRG.X) continues to maintain its emerging uptrend. A good sign at this juncture would be if we saw the DRG.X move up through resistance near $397. SEBL $45.99 -1.91 (+0.29) The recent uptrend was due for a pause and negative economic reports this morning were the catalyst. It was quite encouraging to see SEBL keep its losses small as selling seemed to hit every sub-sector of the Technology market. Not only was the magnitude of the loss small, but it came on fairly weak volume as well; only two-thirds of the ADV. One factor helping the stock to remain afloat today was Goldman Sachs analyst Rick Sherlund stating that the Software sector would likely be the first to recover in the downtrodden Technology world. Sure enough, our short-term trendline (currently at $45) held up as support as the sellers failed to break through our stop at the same level. Aggressive traders might have taken a position near the close today, as buying volume began to pick up, the more prudent strategy would have been to wait for confirmation of returning strength after the opening bell tomorrow. Conservative entries still look best on a break through the $48 resistance level, preferably on continued strong buying volume. Remember to keep an eye on the GSTI Software index (GSO.X) to gauge sentiment in the sector. If it can move through the $238 resistance level, SEBL will likely continue to set new recent highs. ******************* PLAY UPDATES - PUTS ******************* IDPH $45.10 -1.44 (-4.35) While it appeared last week that the biotech sector was beginning to exhibit strength, today's trading told a different story, as BTK.X rolled over from 564 to lose almost 5% in a broad market sell-off. After plunging from $50 to the $46 level earlier in the week, IDPH opened with a gap down, and spent the entire day consolidating within a half a point above and below strong support at $45. If $45 fails, the next support level is $42.50. Below that, we could be looking at a free fall, as support is light underneath $40 until the $35 level is reached. With additional weakness in the broad market indexes and BTK.X, this is a real possibility. Traders should wait to assess the market's reaction to the employment report on Friday before taking positions. An aggressive entry point could be another roll over from $46.50. Alternatively, wait for a break below $45 with heavy volume before taking positions if you are a more conservative trader. We are moving closing stops to $49 in light of market action. TBL $48.51 +0.51 (+1.46) Day traders could have picked up a point on Wednesday from TBL's rollover from $48 to $47. While the stock seemed to exhibit strength today amid a weak market, the long term trend line established in January is still intact, and it would take a strong break and close above $50 to reverse this pattern. At this point, TBL is positioned to rollover upon a failed rally from $48.50, which would be an excellent entry point. For more conservative traders, a fall below $48 with heavy volume would most likely lead to the next support level of $47. A break and close below $45.50 would be a very bearish indicator, and another conservative entry point. Put players should try to time their entry points to coincide with overall market and sector weakness. Continue to monitor the specialty apparel footwear sector, like NKE and RBK, and keep closing stops at $50. SGR $57.30 -0.50 (-0.20) Shares of energy infrastructure provider Shaw have been in slow-descent mode since peaking in mid-to-late April. While the stock usually moves closely with the Energy sector, the recent divergence has revealed SGR to be more of a leading indicator. With energy-related stocks now heading lower, SGR continues to drift southward. There has been a distinct lack of news from the company so far this week, so technical factors could take center stage in trading the stock. The 5 and 10-dma, now at $57.72 and $58.82 respectively, which provided the support for SGR's April rally, have now acted as formidable resistance in the stock's decline as of late. Aggressive traders may look for failed rallies above these levels as potential entry points, but make sure that SGR stays below our closing stop price of $59. Strong selling pressure leading to a bearish plunge below $56 could allow conservative traders to enter, provided that sector sisters MLI and KMT are also showing weakness. AMAT $52.60 -2.09 (-1.29) Semiconductor stocks were on the chopping block again today, especially after Tucker Anthony Sutro issued a series of downgrades for the Semiconductor Equipment Manufacturers this morning. Leading the downgrade list was our play, AMAT, which dropped from Market Perform to an Underperform rating. Prompting the downgrade was the perception that the industry slump will be longer and deeper than originally expected. That was enough to push the stock below $53, but the $52 level is still providing support due to stubborn bulls. The fact that the stock couldn't really recover into the close prompts us to lower our stop to $54, just above the gap down open this morning. Aggressive traders will want to target shoot new entries on any intraday strength, so long as this resistance level remains intact. The more conservative approach will still be to wait for a drop through the $52 support level, confirmed by continuing weakness on the Semiconductor index (SOX.X). Don't forget, earnings are set to be released on May 15th, the same day as the FOMC announces its next move on interest rates. ************** NEW CALL PLAYS ************** AGGRESSIVE: MO - Philip Morris Companies Inc. $51.60 +0.59 (+0.63 this week) With 2000 underlying operating revenues of $80.3 billion, ($88.3 billion assuming Philip Morris owned Nabisco for all of 2000) the Philip Morris family of companies is the world's largest producer and marketer of consumer packaged goods. Philip Morris Companies Inc. has five principal operating companies : Kraft Foods Inc., Miller Brewing Company, Philip Morris International Inc., Philip Morris Incorporated, and Philip Morris Capital Corporation. Just over a year ago last May, MO hit a 52-week low of $22.81, but since last October, the stock has been on a tear and has formed one of the strongest charts on the exchanges from a purely technical viewpoint. After recovering from a brief dip below the 50 day moving average in March, MO has resumed its strong upward trend, reaching a 52-week high of $52.35 on Tuesday. After years of suffering with seemingly endless litigation, as well as the stigma of being an old economy stock in a new economy world, MO is back with a vengeance. This week, the company announced news which is likely to propel the shares even further in the coming weeks. On Wednesday, Philip Morris announced that they had filed a registration statement for an IPO of their Kraft subsidiary. Kraft Foods plans to issue 280 million shares in a huge IPO offering expected to raise $7.3 to $9.5 billion, which would make it the second largest IPO in U.S history. This should result in a windfall cash profit to MO, which will be used to pay off the Kraft Foods debt. In addition, MO will retain 97.7% voting rights by owning all of the class B shares to be issued. Over 13 major investment banks are expected to participate in the offering, which is expected to be completed by the end of the second quarter, which is the end of June. MO's firm, steady chart and exciting IPO news should attract retail and institutional investors to the stock in the weeks ahead. Traders can take positions at the current levels, or at a break above $52 on heavy volume of over the daily average of 7.6 million. A pullback to support at the 5 dma of $51.2 would be a more aggressive entry point. Monitor others like RJR, and set a liberal closing stop at $49 as we want to give MO some space to work higher into the IPO of Kraft. BUY CALL MAY-47.5 MO-EW OI= 4213 at $4.60 SL=2.75 BUY CALL MAY-50 *MO-EJ OI=17264 at $2.55 SL=1.25 BUY CALL JUN-47.5 MO-FW OI= 8713 at $5.50 SL=3.50 BUY CALL JUN-50 MO-FJ OI=26065 at $3.70 SL=1.75 http://www.premierinvestor.com/oi/profile.asp?ticker=MO STOR - StorageNetworks Inc $13.87 +0.89 (+3.93 this week) StorageNetworks is a provider of storage management services and developer of storage management technology. It operates in two distinct business segments: managed storage services and professional services, which assist customers in assessing their data storage needs and designing appropriate data storage systems. Most of StorageNetworks' sales come from monthly fees, as well as consulting and related data storage services. The company is currently expanding its network, which currently includes more than 20 data centers in 11 US metropolitan areas and one in the UK. In recent months, the share price has been regaining ground as the company met earnings expectations and the outlook grows stronger. But yesterday's storage deal with Ford Motors was the catalyst that launched STOR upward almost 50% on five times the ADV in the past two sessions! The Buy recommendation by Thomas Weisal partners was a nice touch, too. But let's not mince words when it comes to our play on STOR. It's AGRRESSIVE. We took notice of the inverse head-and-shoulders formation and importantly, the convincing break above the $13.50 neckline amid today's bullish action. These technical developments set this low-priced stock up for a big rally, if all comes to fruition over the short-term. In consideration of the risky nature of the play, we're keeping a tight leash on STOR. We've set our CLOSING stop at $12.50, which is above the 5, 10, 30 and 50 DMAs. Volatile intraday trading could however, provide aggressive entry points in the lower $10 and $11 range; especially for the target shooters. A high-volume move through $14 and $15 unmistakably gives the green light to jump into the play, with stops in place of course! The upside momentum might find some resistance around the $17 level, although the real challenge is at $20. Take a look at a chart covering the last three to four months for visual confirmation. It's also important to note that STOR's recent charge is in direct divergence with the broad technology sector; therefore, pay particular attention to the stock's minute subtleties as you trade. BUY CALL MAY-10 OSU-EB OI=1142 at $4.40 SL=2.75 BUY CALL MAY-12.5*OSU-EV OI= 956 at $2.60 SL=1.25 BUY CALL MAY-15 OSU-EC OI= 796 at $1.30 SL=0.75 BUY CALL JUN-12.5 OSU-FV OI= 178 at $3.50 SL=1.75 BUY CALL JUN-15 OSU-FC OI= 74 at $2.45 SL=1.25 BUY CALL JUN-17.5 OSU-FW OI= 86 at $1.65 SL=0.75 http://www.premierinvestor.com/oi/profile.asp?ticker=STOR ************* NEW PUT PLAYS ************* AGGRESSIVE: GMST - Gemstar-TV Guide $40.51 -2.60 (-0.60 this week) Gemstar-TV Guide International develops, markets and licenses proprietary technologies and systems that simplify and enhance consumers' interaction with electronics products and other platforms that deliver video, programming information and other data. The company's first proprietary system, VCR Plus+, is currently incorporated into virtually every major brand of VCR sold worldwide. The company has also developed and acquired a large portfolio of technologies and intellectual property to implement interactive program guides (Gemstar Guide Technology), which enable consumers to navigate through, sort, select and record television programming. After more than doubling in value in the month of April, it appears that shares of digital media provider GMST may now be due for a breather. A strong market for tech stocks recently, along with bullish news from the company, helped to drive the stock strongly higher last month. The company launched an online version of its TV Guide as part of its Internet strategy. As well, GMST won a major customer in signing a 10-year agreement with Congeco Cable. A deal with NewCorp, which became the company's largest shareholder with a 17 percent stake, was also well-received. Despite this however, the technicals suggest that a pull-back is not only necessary, but likely. This past week has found GMST struggling to break and stay above its 100-dma, now at $42.66. This major moving average has acted as formidable resistance, keeping a lid on the stock price since late last year. Today's fall of over 6 percent also put GMST below its 5 and 10-dma, at $41.87 and $40.55 respectively. Rollovers as the stock approaches moving average resistance may allow aggressive traders to take a position, but confirm with selling volume. Horizontal resistance may also be found at $41, $42.50 and our closing stop price of $43. Conservative traders may target a break below psychological support at $40 for an entry on weakness. Track sector sentiment by keeping an eye on other digital media issues such as SFA and WINK. BUY PUT MAY-40*QLF-QH OI=1875 at $3.20 SL=1.75 BUY PUT MAY-35 QLF-QG OI=3565 at $1.30 SL=0.75 http://www.premierinvestor.com/oi/profile.asp?ticker=GMST JNPR - Juniper Networks $60.82 -4.29 (+5.80 this week) As a provider of Internet infrastructure solutions, JNPR serves Internet service providers and other telecommunications service providers, helping them to meet the demands resulting from the rapid growth of the Internet. The company delivers next generation Internet backbone routers that are specifically designed for service provider networks. The routers provided by the company combine the features of the JUNOS Internet Software, high performance ASIC-based packet forwarding technology and Internet-optimized architecture into a purpose-built solution for service providers. The Networking sector has been one of the leaders throughout the recent NASDAQ rally, but it is looking a little long in the tooth as evidenced by the strong pullback in today's session. After coming right up to resistance at 495 (also the site of the 8-month descending trendline), the Networking index (NWX.X) pulled back for more than a 5% loss today. Mirroring the broad sector, JNPR fell back too, losing more than 6.5% on slightly less than average volume. Resistance seems to be solidifying in the $68 area, with bearish divergence beginning to appear on the daily Stochastics oscillator. Ending the day right on the one-month ascending trendline, JNPR hasn't yet completely broken down, but it is very close. Falling below $60 will complete the technical violation and open the door for conservative traders to take a position. Those that can take on a little more risk will want to target failed intraday rallies as their opportunity to enter the play. While solid resistance sits near $68, we want to limit our risk by focusing on the intraday resistance between $63-64 created by today's gap down open. Place stops at $64 and confirm weakness in JNPR by watching for more weakness on the NWX.X. BUY PUT APR-65 JUX-QM OI= 7211 at $8.00 SL=5.75 BUY PUT APR-60*JUX-QL OI=14761 at $5.10 SL=3.00 BUY PUT APR-55 JUX-QK OI= 5998 at $3.70 SL=2.25 BUY PUT APR-50 JUX-QJ OI= 8678 at $2.20 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=JNPR ********************* PLAY OF THE DAY - PUT ********************* IDPH - Idec Pharmaceuticals Corp. $45.10 -1.44 (-4.35 this week) Idec Pharmaceuticals focuses on the commercialization and development of targeted therapies for the treatment of cancer and autoimmune diseases. Idec's antibody products act chiefly through immune system mechanisms, exerting their effect by binding to specific, readily targeted immune cells in the patient's blood or lymphatic systems. Most Recent Write-Up While it appeared last week that the biotech sector was beginning to exhibit strength, today's trading told a different story, as BTK.X rolled over from 564 to lose almost 5% in a broad market sell-off. After plunging from $50 to the $46 level earlier in the week, IDPH opened with a gap down, and spent the entire day consolidating within a half a point above and below strong support at $45. If $45 fails, the next support level is $42.50. Below that, we could be looking at a free fall, as support is light underneath $40 until the $35 level is reached. With additional weakness in the broad market indexes and BTK.X, this is a real possibility. Traders should wait to assess the market's reaction to the employment report on Friday before taking positions. An aggressive entry point could be another rollover from $46.50. Alternatively, wait for a break below $45 with heavy volume before taking positions if you are a more conservative trader. We are moving closing stops to $49 in light of market action. Comments The broader biotech sector, as measured by the Biotechnology Index (BTK.X), recently rolled over near the high of its descending channel around the 575 area. That rollover is gaining momentum to the downside and it looks as if the BTK could make its way towards the 500 level. For its part, IDPH traded poorly Thursday and traders could look to enter new put positions on a break below $45 early Friday. Those who would prefer entering on weakness might look to take new positions if IDPH takes out its intraday low Thursday of $44.45. BUY PUT MAY-50 IDK-QJ OI=561 at $6.30 SL=4.25 BUY PUT MAY-45*IDK-QI OI=492 at $3.30 SL=1.75 http://www.premierinvestor.com/oi/profile.asp?ticker=IDPH ************************ COMBOS/SPREADS/STRADDLES ************************ Fear And Profit-Taking Stalls The Technology Rally! Stocks tumbled today after an increase in jobless claims and new indications of slowing growth rekindled fears the U.S. economy is headed for a recession. Wednesday, May 2 Technology stocks extended their recent rally today on strength in Internet and networking issues. The NASDAQ finished 52 points higher at 2,220, its highest closing level since early March. The Dow retreated after hitting resistance at 10,900, closing down 22 points at 10,876. The broader market S&P 500 index was unchanged at 1267. Trading volume on the Big Board hit 1.34 billion shares with advances and declines finishing at similar levels. On the NASDAQ, volume was extreme with 2.57 billion shares exchanged and winners beating losers 12-to-7. In the bond market, the 30-year Treasury rose 16/32, pushing its yield down to 5.69%. Tuesday's new plays (positions/opening prices/strategy): Cisco (NASDAQ:CSCO) OCT20C/MAY20C $2.60 debit calendar Net. Appl.(NASDAQ:NTAP) JAN02-30/M30C $6.50 debit calendar Nextel (NASDAQ:NXTL) JAN02-22/M22C $3.95 debit calendar Today's rally made it almost impossible to achieve the target prices in our new positions. The Nextel spread finally offered a good entry opportunity late in the session but Network Appliance and Cisco traded higher at the open and did not retreat throughout the day. With today's market strength, traders began to buy-in without regard to the price of an issue (so they won't miss the rally). That's often a sign of too much bullish market sentiment and usually precedes a correction. Only you can decide when and what price a new position should be initiated in your portfolio. Portfolio Plays: The NASDAQ rallied today with networking stocks extending recent gains on renewed strength in Cisco Systems (NASDAQ:CSCO). The communications networking bellwether jumped to $20 after Morgan Stanley said positive data on networking spending is becoming evident. Internet stocks also advanced and semiconductor issues received a boost after news of an optimistic note from Goldman Sachs, which said stocks have probably seen their lows. Stocks in the wireless telecom sector rallied after Bear Stearns said industry fundamentals are intact and concerns about subscriber growth are overdone. The rotation to technology issues weighed heavily on the Dow and weakness in the oil segment toppled the broader markets. Oil and oil service stocks came under selling pressure after an unexpected increase in crude stockpiles. The American Petroleum Institute reported crude supplies rose 8.28 million barrels last week to 322 million barrels, their highest level since August 1999, when crude prices were at $6 to $7 per barrel. Exxon-Mobil (NYSE:XOM) was one of the biggest losers on the blue-chip average, falling to $86. Shares of Philip Morris also led the industrial index lower while International Business Machines (NYSE:IBM), Microsoft (NASDAQ:MSFT) and AT&T (NYSE:T) were among the weaker technology components. Our portfolio experienced some bullish activity in a number of technology issues and the most significant moves were seen in small-cap stocks. Sprint (NYSE:FON) was an unexpected leader in telecom group, closing at a recent high near $20 and Earthlink (NASDAQ:ELNK) climbed to its highest price in 9 months at $13.06. The bullish calendar spread offered a $1.40 closing credit (a 40% gain in 6 weeks) during today's session. Our new synthetic play in Ariba (NASDAQ:ARBA) benefited from the upside activity and the position achieved an $0.85 credit in just three days. That is a very favorable early-exit profit based on the collateral required for the sold (short) Put at $7.50. Infospace (NASDAQ:INSP) was another low-risk speculation issue and today's impulsive rally provided a closing credit of $0.70 (a 100% gain) in the recent time-selling position. Visx (NYSE:EYE) climbed above $22 during the session as speculation about a potential buyout continued to attract investors and the SEP-$30 call was offered at $1.25; a $0.30 gain for traders were looking for an early exit after last Friday's retreat. On the downside, Unitedhealth Group (NYSE:UNH) dropped over $2 amid weakness in the healthcare sector and those of you participating in the bullish synthetic position should monitor the issue for a close below near-term support at $60. Thursday, May 3 Stocks tumbled today after an increase in jobless claims and new indications of slowing growth rekindled fears the U.S. economy is headed for a recession. The NASDAQ ended down 74 points at 2,146 and the Dow was down 80 points at 10,796. The S&P 500 index was down 18 points at 1,248. Trading volume on the NYSE reached 1.10 billion shares with declines beating advances 9 to 6. Activity on the NASDAQ was average at 1.99 billion shares exchanged with winners beating losers 23 to 14. In the bond market, the 30-year Treasury rose 29/32, pushing its yield down to 5.64%. Portfolio Plays: Technology stocks slumped today as investors moved to lock-in profits after a string of bullish sessions. Industrial issues also retreated as the selling pressure spread to the broader market. The NASDAQ was hammered from the open and technology losses extended as the session progressed with the majority of selling in Internet and networking shares. Computer hardware stocks also declined and semiconductor shares slid lower after Novellus Systems' (NASDAQ:NVLS) CEO Richard Hill said he thinks the earliest that chip-equipment companies will see an up-tick in demand is the fourth quarter of 2001. Communications chip companies were weak with Vitesse Semi (NASDAQ:VTSS) leading the segment lower after announcing it will reduce its work force by 12%. The Dow succumbed to downward movement in its technology components and pushing the blue-chip average lower were shares of Intel (NASDAQ:INTC), SBC Communications (NYSE:SBC), Hewlett Packard (NYSE:HWP) and International Business Machines (NYSE:IBM). International Paper (NYSE:IP) and Caterpillar (NYSE:CAT) were among the weaker industrial issues. The broader market was also a sea of red with biotechnology, financial, gold, major drug and cyclical stocks generally consolidating. The Spreads Portfolio ended the session with mixed results as a number of bullish positions were negatively affected by the new downward trend while bearish spreads and premium-selling plays flourished. There were also a few winners among select sectors, even as the broader market moved lower. Progressive (NYSE:PGR) and Liz Claiborne (NYSE:LIZ) ended the session higher and Cirrus Logic (NASDAQ:CRUS) rallied almost $4 to a recent trading range near $20. Our original bullish calendar spread in the issue is long at $30 (in September) and we will plan to sell the JUN-$30 Call as the stock moves higher, to lower our cost basis in the position. Among the bearish plays, Minnesota Mining (NYSE:MMM) appears comfortable at its current price (well below our short option at $125) and the rebound in Biochem Pharma (NASDAQ:BCHE) has stalled near short-term resistance at $34. Our selection of premium-selling issues, Chiron (NASDAQ:CHIR), Shire Pharma (NASDAQ:SHPGY) and Veeco (NASDAQ:VECO) are currently mired in the middle of their respective ranges. Today's consolidation also provided some excellent entry points in our new calendar spreads and traders who had the patience to avoid chasing the rally were rewarded with excellent opening prices for those positions. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** MER - Merrill Lynch $66.00 *** Reader's Request! *** Merrill Lynch (NYSE:MER) is a holding company that, through its subsidiaries and affiliates, provides investment, financing, advisory, insurance and related products and services on a global basis. Merrill Lynch provides these products and services to a wide array of clients, including individual investors, small businesses, corporations, governments, governmental agencies and financial institutions. Merrill Lynch has three major business segments, the Corporate and Institutional Client Group, the Private Client Group and Merrill Lynch Investment Managers. The company provides financial services worldwide through various subsidiaries and affiliates that frequently participate in the facilitation and consummation of a single transaction. Merrill Lynch has organized its operations outside the United States into five regions, Europe, Middle East and Africa; Japan; Asia Pacific and Australia; Canada, and Latin America. One of our readers requested some suggestions for bullish option plays in this issue, based on the recent recovery in brokerage stocks and the potential for additional upside activity in the banking and financial services industry. Indeed lower interest rates typically mean good news for brokers because when lending and borrowing rates fall, business improves and the spotlight has recently been on the major players in this group, including MER, as the company posted favorable quarterly earnings. Despite the slumping stock market, Merrill beat consensus estimates of $0.90 a share by two pennies and the company held onto its position as the top global underwriter of debt and equity services, with an increased market share of 13%. Traders who believe the sector will continue to rebound in the coming weeks can profit from that outcome with these bullish positions. PLAY (conservative - bullish/credit spread): BUY PUT MAY-55 MER-QK OI= A=$0.30 SELL PUT MAY-60 MER-QL OI= B=$0.80 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% B/E=$59.40 - or - PLAY (speculative - bullish/synthetic position): BUY CALL JUN-80 JMR-FP OI=162 A=$0.75 SELL PUT JUN-50 MER-RJ OI=192 B=$0.55 INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.75-$1.00 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,400 per contract. http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=MER ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** ICOS - ICOS Corporation $56.00 *** A Big Mover! *** ICOS (NASDAQ:ICOS) is a product-driven company that has expertise in both protein-based and small molecule therapeutics. The company combines its capabilities in molecular, cellular and structural biology, high-throughput drug screening, medicinal chemistry and genomics to develop products with commercial potential. The company is evaluating Cialis, a small molecule compound that inhibits the phosphodiesterase type five enzyme for the treatment of male erectile dysfunction and female sexual dysfunction. The company is also evaluating Pafase, a recombinant human serum protein, for the treatment of sepsis and other unique diseases characterized by higher instances of platelet-activating factors. ICOS has been active in recent sessions amid speculation over a new inhibitor (PDE5) in development by Lilly ICOS LLC to treat erectile dysfunction. After taking the product, men reported an improved ability to achieve erections even 24 hours and there were no treatment-related serious adverse events. Hmmm, that's a very unique drug and one that will certainly garner more attention when the results are presented for the first time at the Annual Meeting of the American Urological Association in June. Technically, this position meets our basic criteria for a favorable straddle; cheap option premiums, a history of adequate price movement and future events or activities that may generate volatility in the issue or its industry. This selection process provides the foremost combination of low risk and potentially high reward and traders who want to speculate on continued volatility in ICOS can profit from that outcome with this neutral-outlook position. PLAY (speculative - neutral/debit straddle): BUY CALL MAY-55 IIQ-EK OI=48 A=$3.00 BUY PUT MAY-55 IIQ-QK OI=117 A=$1.85 INITIAL NET DEBIT TARGET=$4.75 TARGET PROFIT=20% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=ICOS ****************************************************************** LNCR - Lincare $55.01 *** Trading Range? *** Lincare Holdings (NASDAQ:LNCR) is one of the nation's largest providers of oxygen and other respiratory therapy services to patients in the home. The company's customers typically suffer from chronic obstructive pulmonary disease, such as emphysema, chronic bronchitis or asthma, and require supplemental oxygen or other respiratory therapy services in order to alleviate the symptoms and discomfort of respiratory dysfunction. Lincare currently serves over 225,000 customers in 42 states through 429 operating centers. Lincare has been active in recent sessions as stocks in the healthcare group declined over concerns of current valuations versus future earnings growth. Shares of Lincare moved lower in sympathy with other companies in the sector but despite the recent slump, a number of analysts see favorable revenues for many specialized health care service providers including LNCR. Investors apparently agree with that outlook as they quickly pushed the share value back to a previous trading range near $50 and those who believe it will remain near that price for the next two weeks can attempt to profit with this speculative premium-selling position. As with any position, current news and market sentiment will have an effect on the issue, so review the play thoroughly and make your own decision about its future outcome. PLAY (speculative - neutral/credit strangle): SELL CALL MAY-60 LQN-EL OI=355 B=$1.00 SELL PUT MAY-50 LQN-QJ OI=4030 B=$0.90 INITIAL NET CREDIT TARGET=$2.00-$2.20 PROFIT(max)=12% UPSIDE B/E=$62.00 DOWNSIDE B/E=$38.00 http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=LNCR ****************************************************************** ********** 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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