The Option Investor Newsletter Monday 05-07-2001 Copyright 2001, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/050701_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 05-07-2001 High Low Volume Advance/Decline DJIA 10935.20 - 16.00 10995.30 10893.60 0.93 bln 1458/1592 NASDAQ 2173.55 - 17.98 2215.37 2166.51 1.75 bln 1823/2041 S&P 100 657.46 - 1.28 661.13 654.64 totals 3281/3633 S&P 500 1263.51 - 3.10 1270.00 1259.19 47.4%/52.6% RUS 2000 489.64 - 3.25 494.59 489.46 DJ TRANS 2850.64 - 18.55 2869.72 2848.36 VIX 28.11 + 0.39 28.87 27.67 Put/Call Ratio 0.56 ****************************************************************** Stuck In A Moment "And [we] can't get out of it," said my favorite rock-and-roll band, U2. I think the Irish lads' lyrics pretty well sum up the action in the broader markets Monday. The major market averages were stuck in a trading range for the better part of the session as the battle between the underlying fundamentals and technical levels paused. Volume on both the NYSE and the Nasdaq was light, very light. Roughly 930 million shares traded on the NYSE and a mere 1.7 billion shares exchanged on the Nasdaq. Moreover, the intraday ranges of the Dow Jones Industrial Average (INDU) and the Nasdaq Composite (COMPX) were tight, very tight. The COMPX reached an intraday peak of 2215, but fell only as low as 2170 - a 45 point range! The INDU traded in a 100 point range, which was a far cry from the 300 point swings we've been witnessing recently. Obviously, the light volume and tight trading ranges are very indicative of indecision on the part of market participants and a reluctance to commit. Now, there are two takeaways from the recent consolidation. The first is that the major market averages, as measured by the INDU, COMPX and S&P 500 (SPX), are merely biding time at current levels before the next leg higher. And the longer the averages base, the stronger the ensuing rally once the catalyst is presented. The second, and less friendly takeaway, is that the averages are growing top-heavy and ready to rollover, as key resistance levels lie just above each of the three indices. Along with the BIG resistance levels I'll address below, the market is waiting for additional confirmation on the economic and corporate profit fronts. The fast-approaching May 15th FOMC meeting is obviously of concern to the market, and participants are still debating whether or not the Fed will cut by another 50 basis points or only 25. Two key economic releases later this week are likely to impact the Fed's decision, and may strengthen the case for another 50 basis point cut following the terrible jobs report last Friday. The Labor Department is scheduled to release weekly jobless claims Thursday morning, with estimates calling for a number north of 400,000. In addition, retail sales for April are slated for release Friday morning. Consensus estimates call for a mere 0.2 percent rise, dampened by a slump in auto sales. The April producer price index (PPI) will be released Friday morning in conjunction with retail sales, but should prove to be more of a non-event. What we'll want to focus on are the jobless claims and sales numbers and, should they come in worse-than- expected, the Fed would be more inclined to cut by 50 basis points. On the corporate profit front, all tech eyes will turn to the Cisco Systems (NASDAQ:CSCO) earnings report Tuesday evening. Following the networking giant's earnings warning in early April, consensus estimates were drastically slashed and currently call for the firm to earn 2 cents per share. For the first time I can recall, Wall Street is somewhat confused over Cisco's quarter. The high-end of estimates are calling for the firm to earn 4 cents per share, while the low- end has Cisco pegged to breakeven. In short, there is room for Cisco to surprise in either direction. Along with the actual number reported, we'll want to listen closely to the guidance. Shares of Cisco have rallied from the $13 level up to $20 in the space of a month. And I know that there was a bullish note put out last week from a Morgan Stanley analyst, but I think a lot of Cisco's recent advance was predicated upon an improvement in the networking business. So, we'll want to hear from Chambers & Co. that the telecom business has, indeed, improved or else the stock is at risk for a pullback, which will carry the COMPX lower. However, the bullish analyst note last week and its bullish reception by the market tells me that participants are just waiting to jump all over Cisco and take it along with the COPMX higher. But if the COMPX is going to move substantially higher, it will need to clear some pretty heavy congestion just above current levels. On the chart below, you'll note the retracement bracket I've placed over the COMPX's move from its relative high in January at 2892 down to its relative low in early April near 1619. The 50% retracement of that move lies at the 2250 level, and shortly thereafter lies 2300. If the COMPX can clear this 50 point range of resistance, I honestly believe it will work its way up to 2600 or 2700. The only question is whether or not the COMPX clears that range on its current push higher (It could do it with help from Cisco). If it doesn't, a rollover at current levels and subsequent break below 2100 will set up some good shorts. In the meantime, I think the most prudent strategy is to wait for a break in either direction and trade accordingly. For the SPX, I've also laid a retracement bracket over its recent downside forecast, and readers will note a very interesting development similar to that on the COMPX chart. Like the COMPX, the SPX is also running into resistance at the key 61.8% retracement. However, readers will also notice that the SPX has formed an inverse head-and-shoulders (HNS), which is suggesting it wants to work higher, much higher! Interestingly, the shoulders of the SPX H&S are reinforced by the 50% retracement...very interesting. Here again, like the COMPX, I think the most prudent approach is to wait for a break either above or below key levels and trade accordingly in the SPX names. I'd put resistance at roughly 1265 - 1280 range and support around 1230. As far as the INDU is concerned, we're ALL obviously watching the 11,000 level and waiting, and waiting for the breakout. The thought of another 50 basis point cut by Greenspan, reinforced by this week's economic data, might be the catalyst that finally pushes the INDU over 11,000. But like the COMPX and SPX, if the INDU fails to advance above 11,000, it's likely to rollover, where a breakdown below support might offer traders profits from the short side. Of course, I'm sure that many market participants are shorting the INDU names at current levels, betting that the blue chip index doesn't make it above the elusive 11,000 on this push. The thought I'd like to reinforce, and the reason for my U2 inspired title, is that the markets are stuck in a trading range and it's awful difficult to find conviction, or an edge for that matter, in the current tape. I think the best bet is to wait for a catalyst to emerge, either bearish or bullish, monitor the technical levels and trade accordingly. As much as I want to be overly bullish, I don't think the major indices will push through the above discussed resistance levels on this leg higher. We recently witnessed a parabolic move higher, especially in the COMPX, and those types of moves are not necessarily conducive to the extension of a rally. Instead, what we need is an extended basing period, where the shorts are slowly suckered in and the weak longs are weeded out. Having said that, the longer the major market averages hold at current levels, and don't break down, the more bullish I will grow. On a final note, Dell Computer (NASDAQ:DELL) said late Monday evening that it would meet its first-quarter estimates, which are set for release on May 17th. While the box maker said it would cut 3,000 to 4,000 jobs, it also reported that its operating margin will be higher-than-expected. But, company officials also said, "[Dell] remains cautious about the outlook for the balance of the year." The Dell comments, while still cautious, suggest that business conditions are beginning to stabilize. What we need to hear now is that demand is picking up, and maybe Cisco will bring that news Tuesday evening. Eric Utley Assistant Editor ************* NEW CALL PLAY ************* CAT - Caterpillar Inc $51.51 +0.96 (+0.96 this week) Caterpillar is a Fortune 50 industrial company and the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. Caterpillar also offers innovative financing options through its Financial Products Division. Caterpillar is dedicated to both sustaining and improving the quality of life. The company is guided by its Code of Worldwide Business Conduct in meeting or exceeding local environmental regulations, developing solutions to customers' environmental challenges, in advocating free trade and in taking the lead in the business community on important issues. Fundamentally favorable conditions have led to technical strength in CAT, and with that, the stock has been on a steady advance. While still off from its all-time high, sitting just above the mid-60's level, the prospect of an improving economic environment and continued rate cuts from the Fed may spur demand for the company's products, leading to higher than expected earnings growth. If this is the case, then the favorable Fed action could benefit deep cyclical stocks for some time to come, possibly giving this play a longer and more profitable holding period. Positive analyst coverage has also been helping CAT to climb ever higher. Last week, the stock was upgraded by Dresdner Bank, from an Add to a Buy rating, following upgrades from Legg Mason (from a Buy to a Strong Buy) and Morgan Stanley Dean Witter (from Neutral to an Outperform). Over the past six months, the stock traded in a range between support at $40 and resistance at $50. With this technically and psychologically important level now surpassed, a short to intermediate upside target of at least $60 is reasonable indeed, though CAT may encounter some historical resistance at $55. At this point, we would ideally recommend entering on a pullback. Horizontal support is strong at $50 and our closing stop price of $49. Bounces off 5-dma, near $49.50, may also provide traders with a potential target to shoot for. Those looking to enter on strength may wait for the buyers to return, taking CAT above today's intra-day high of $51.51, before jumping in. In making a play, keep an eye on competitors DE and DOV, as well as the movement in the NYSE. ***May contracts expire in less than two weeks*** BUY CALL MAY-45 CAT-EI OI=3892 at $6.70 SL=4.50 BUY CALL MAY-50*CAT-EJ OI=4678 at $2.40 SL=1.25 BUY CALL JUN-50 CAT-FJ OI= 513 at $3.60 SL=1.75 BUY CALL JUN-55 CAT-FK OI=1804 at $1.40 SL=0.75 BUY CALL AUG-50 CAT-HJ OI=2781 at $5.00 SL=3.00 BUY CALL AUG-55 CAT-HK OI=1557 at $2.80 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=CAT YHOO - Yahoo! Inc. $19.98 -0.15 (-0.15 this week) Yahoo! Inc. is a global internet Internet communications, commerce and media company that offers a comprehensive branded network of services. The company's principal offering is an online navigational guide to the web. The company also provides online business and enterprise services designed to enhance the productivity and Web presence of Yahoo!'s clients. Yahoo! has offices in Europe, Asia Pacific, Latin America, Canada, and the United States. Under the Yahoo! brand the company provides broadcast media, communications, business, enterprise and commerce services. Fans of internet stocks may have started to notice that the overall sector has started to show real technical strength lately after nearly a year of being bashed, and blamed for the woes of the Nasdaq. INX.X made a clean break above its 50 dma of 169.57 on April 18, the day of the Fed's surprise rate cut. The index has added to its gains since then, and has remained above the 200 level since the beginning of May. If investors decide to go shopping for internet stocks again, few are as well positioned as YHOO from both a fundamental and technical standpoint. As the leading search engine for the web, YHOO offers brand name recognition as well as strong online ratings. In addition, YHOO's chart indicates that the upside potential may be greater than the downside risk in the near term, provided that the market conditions stay favorable, and the sector remains strong. It was quite a fall from YHOO's 52-week high last June of over $150 to its 52-week low of $11.38 on April 3. However, YHOO's daily chart shows a nice, smooth rounded bottom forming since January, with a move above YHOO's 50 dma of $17.75 on April 26. YHOO failed to move above resistance at $23.70 last week, but the pullback exhibited by the stock since then is consistent with the pattern of higher lows formed since the beginning of April. Optimistic comments made by Chairman Tim Koogle at the company's annual meeting on April 27 have helped restore investor confidence, as Koogle stated that he feels YHOO stands to gain from online advertising in coming years, and that the shake out in the internet stocks has left the company with fewer competitors. This week may be a volatile one for tech stocks, with Cisco's earnings due on Tuesday, as well as an upcoming Fed meeting, so pick entry and exit points carefully. A move over the 10 dma of $20 could be a good entry point, if INX.X and others like AOL and EBAY are strong. Traders with stronger nerves could wait for a pullback to $19. We are setting closing stops at $17.50, so be prepared to exit if YHOO closes below this level. ***May contracts expire in less than two weeks*** BUY CALL MAY-15 YHZ-EC OI= 3943 at $5.30 SL=3.25 BUY CALL MAY-17.5*YHZ-EW OI= 9489 at $3.00 SL=1.50 BUY CALL MAY-20 YHZ-ED OI=11182 at $1.40 SL=0.75 BUY CALL JUN 17.5 YHZ-FW OI= 187 at $4.00 SL=2.50 BUY CALL JUN-20 YHZ-FD OI= 548 at $2.60 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=YHOO ************ NEW PUT PLAY ************ HGSI - Human Genome Sciences $59.45 -2.32 (-2.32 this week) Possessing one of the largest human and microbial genetic databases, HGSI licenses its database of knowledge to pharmaceutical heavyweights like GlaxoSmithKline and Merck. Management has chosen to forgo the race to decode the entire human genome, and has instead focused on finding and patenting genes involved in developing gene-based therapeutics. Its four compounds currently in clinical trials are intended to limit the toxic effects of chemotherapy, promote the repair of damaged cells, stimulate antibody production, and spur regrowth of blood vessels. Despite breaking above its 6-month descending trendline last week, the Biotechnology index (BTK.X) is about to be engaged in a major battle. Twice in as many weeks, the BTK has topped out at $580, the site of major resistance. Although the price highs exceeded those of mid-April, the oscillator highs were significantly lower, setting the stage for some sector-wide bearish divergence. That just sets the stage for our new play on HGSI, which brings its own list of problems to the party. First off, the stock topped out just below the 200-dma (currently $66.70) last Wednesday, the final stages of bearish stochastics divergence are being put in place, and all the oscillators are firmly pointed at the basement. After a lethargic rally attempt this morning, HGSI fell back from the $64 resistance level, consistently losing ground throughout the day. While aggressive traders can target shoot new positions on another failed rally near $64 (also the location of our stop), more conservative players will want to wait for intensified selling action to push HGSI below the $58 support level before taking a position. So what have we got? The NASDAQ is having a hard time maintaining ground because it has run too far, too fast. The Biotechs are under-performing the NASDAQ and the BTK has several strikes against it. And finally, we have a stock within the weak sector, which can't seem to keep its head above water. Sounds like the recipe for a successful put play, don't you think? ***May contracts expire in less than two weeks*** BUY PUT MAY-60*HHA-QL OI=750 at $4.70 SL=2.75 BUY PUT MAY-55 HHA-QK OI=720 at $2.50 SL=1.25 BUY PUT JUN-60 HHA-RL OI=184 at $8.00 SL=5.75 BUY PUT JUN-55 HHA-RK OI= 94 at $5.60 SL=3.50 BUY PUT JUN-50 HHA-RJ OI= 29 at $3.70 SL=2.25 http://www.premierinvestor.com/oi/profile.asp?ticker=HGSI ***************** STOP-LOSS UPDATES ***************** STOR - call play Adjust from $13.50 up to $14 AMAT - put play Adjust from $54 down to $53 GMST - put play Adjust from $42 down to $41 JNPR - put play Adjust from $64 down to $62 NVLS - put play Adjust from $53 down to $52 PMCS - put play Adjust from $44 down to $43 ************* DROPPED CALLS ************* BRCD $44.02 -3.63 (-3.63) The bulls were stymied at every attempt to push stocks higher on Monday, and BRCD fell victim to the consistent profit taking, closing below the critical $45 level. We saw some nice gains on the play last week as the stock continued to run higher, but it looks like it is time to let this one go. Nervousness about the economy and what the Fed will do next week pushed BRCD to close below both intraday support and our stop at $45. After taking a chunk of the gains provided from the recent run, we are perfectly happy to remove BRCD from our playlist tonight and go in search of the next winner. SEBL $44.10 -3.80 (-3.80) As frustrating as it is to admit, it appears we arrived too late for the recent run on SEBL. The combination of the magnitude of the recent rise in price, along with concerns about the economy has served to keep the Technology sector from seeing significant gains in recent days. Correspondingly, our play has been stuck in a narrow range for the past few days, confined at the upper end by $49 resistance. SEBL finally broke out of the range today, but unfortunately it broke down through our stop $46 and never recovered. ************ DROPPED PUTS ************ TBL $50.50 +1.83 TBL did offer put players some opportunity for gains last week, with a dip to a low of $47.10 on Wednesday. However, after months of failed rallies from spiky lower highs, it appears that TBL is making a serious attempt at a real rally, as today's close positions the stock just above the long term downward trend line. While this may very well turn out to be another trap for the bulls, TBL has closed above our stop level of $50, and, as such, we are dropping it tonight. ************** TRADERS CORNER ************** Dow Theory Applied - Part III of III By Molly Evans For the past two weeks, Dow Theory has been explored and described. Recall that Charles Dow lived from 1851-1902 and was a journalist through most of his adult life. While covering an assignment in 1879 for The Providence Journal on the mining boom in Leadville, Colorado, Dow met prominent men of the financial community. Dow realized that financial journalism could be of significant utility. From that point forward, Dow began to concentrate his efforts on the financial aspects of the mining industry. Dow met the man who would become his business partner, Edward D. Jones, in 1880 in New York when he began writing for the Kiernan News Agency. Just two years later, Dow and Jones left Kiernan and developed their own news service, Dow Jones & Company. In 1883, Dow Jones & Company began to print a daily news sheet, a precursor to what would come to be known as The Wall Street Journal. The Journal itself would not come to be until July 8, 1889 with Dow as the editor and Jones taking care of the business details. It was in Dow's editorials that historians have had a field day in bringing about Dow Theory. Dow himself never considered his commentary to be a philosophy or science. He merely reflected his observations while others decided that it was a valid theorem. As so many have subsequently interpreted Dow's compositions, Dow Theory has been subject to various translations. It's great to read about and ponder all of this but to be of any utility to ourselves, wouldn't it be interesting to hear Dow's commentary on today's market? Sadly, that is not possible. However, we can apply the basic concepts that he observed more than one- hundred years ago to see if there aren't some correlations and interesting observations to be made about the market we find ourselves faced with today. I'll enumerate each concept, offer a basic description and then will add my own interpretation of how today's market manifests these tenets. 1) Everything known about the stock and the averages is reflected in its price. Dow Theory specifies that the closing prices are the only ones that should be considered. The closing price is that which informed investors are willing to carry positions overnight. The large active stocks typically move in step with the averages but individual issues may deviate from the broader market because of individual circumstances. 2) The market has three trends in play at any one time. The primary is the secular trend, the secondary is the intermediate or counter trend and the tertiary is the day-to-day movement. This is the one that may or may not be at a crossroads. The question is: has our long term bull market ended? For the Nasdaq, yes. However, the world looks to the U.S. Dow as the "U.S. Market." The Dow has been in a secular up trend since 1982. In that time span and up until the present day, the Dow has increased nearly 1290%. The Dow continued to make higher highs until January 14, 2000 when it topped at 11,750. Since that time, the Dow has twisted about its 200 dma and has recently begun to make lower lows only to quickly snap back to and around the 200 dma. One could apply other modern day technical analyses of the pattern being traced by Dow price action as a bull flag on a weekly chart. It is perplexing that there are definite differences of opinion concerning whether the Dow is in an uptrend or downtrend. For the past two years, there has seemingly been no trend other than the intermediate trends that cause it to shift about that 200 dma. In terms of the intermediate trend, some would say that the Dow is presently experiencing a contrary upside rally in what has otherwise become a secular bear market. The Dow did enter the area that is a widely accepted and precise definition of a bear market - that of a 20% decline from the high. However, according to my interpretation of Dow Theory, the Dow is indeed in a bear market as it has failed for over a year now to make a higher high. Furthermore, Graham and Dodd's Security Analysis credit Dow for the recognition of accumulation and distribution, stating that Dow believed, "when movements of several weeks or longer are confined . . . to a ranger of 5 per cent, a 'line' is said to have been formed suggesting either accumulation or distribution." If we look at the Dow for the past year, price has remained in a zone of 10,300 on the downside to 11,000 on the upside. This represents just over six percent, which is close enough to Dow's suggestion of five percent for me. The question is: are shares being accumulated or distributed? Dow's answer to that would be to note whether both the transports and the industrials broke out to the upside or to the downside of the "line." If one average crosses the line while the other does not, the move is said to be inconclusive. 3) The primary trends have three phases. For a bull market this would be accumulation, increasing activity and then speculative frenzy. A bear market's phases are manifest by distribution, acceleration to the downside and finally, further weakening, erosion and nothing but bad news. We've seen a speculative frenzy in the Nasdaq through 1999 and early 2000. The result was that of distribution, acceleration then relentless erosion and now questionably, accumulation. The Nasdaq has just illustrated beautifully for us all the phases of a trend. The question in the back of everyone's mind however is: Is there a new secular trend or is this higher pricing action just a counter secondary trend? That answer will come in time with either higher highs or lower lows. For the Dow we must await a breakout to higher highs or lower lows as well. The Dow acted as though it would topple decisively just six weeks ago. Yet, buyers bought the dip with a fever at that time, taking the Dow back toward the highs of its six percent weekly range. 4) The Dow industrials and the Dow transports must confirm each other. The logic of this is that the industrials and the transports are independent of each other yet dependent upon each other as well. For the industrials to get their product to market, they must use the transports. When one of the averages is doing well, the other should be doing well too. This is where Dow Theory starts to get more interesting. If the transports should confirm the industrials, is anyone paying attention to what the transport index has been doing? Like the industrials, the transport average is stuck twisting around its 200 dma since at least April of last year. When the Dow plunged to 9100, a new lower low, the transports did not confirm by making a lower low as well. To the contrary, the transports made a higher low. Furthermore, the transports range is a much more volatile 15% - 17% for the past year. I shall conclude that the transports and industrials have made inconclusive moves respective of each other. It should be noted that the transports and the industrials dependence on one another has lessened. The industrial average now includes many companies whose goods and services need not be transported and several of the transport companies are in fact commercial services themselves and not contributors to production for the industrials. Nevertheless, Dow had a brilliant observation for his time and he was in fact, the one to develop the averages. One could make the argument that in today's market, the Dow utilities average would be the better choice for comparison and confirmation. Were we to inject the utilities in for the transports, we would see that the utilities failed to make any kind of lows with the coincident industrials plunge. In fact, the utilities are near their highs and the 200 dma is up sloping. Yet, the weekly stochastics show bearish divergence and lack of momentum behind the move of the last six weeks. One wonders whether Dow would have thought the utilities to be of importance in confirming an industrials movement as so much of the industrial companies warning have pointed to higher energy costs having been such a dramatic factor on their bottom lines. 5) Volume should confirm a trend. An overbought market becomes dull on rallies and active on declines. An oversold market will become dull on declines and active on rallies. Large volume is present at the end of a bull market and light volume characterizes the end of a bear market. If this is true, then in my opinion, it bodes ill for the Dow. Go back to the first chart of the monthly Dow trend. It's taking all that volume to just sustain it at 11,000 and hasn't been able to push it on through to higher highs. That being said, I have to conclude that it bodes ill for the Nasdaq as well if in fact, volume should decline at the end of a bear market. The volume on the Nasdaq has been as strong as it ever was. 6) A trend remains intact until a definite reversal signal is registered. An uptrend is signified by higher highs and higher lows and a down trend is characterized by lower lows and lower highs. To break this uptrend, prices must have at least one lower high and one lower low. Obviously, the reverse is true to break the downtrend. When a reversal in the secular trend is signaled by both the industrials and the transports, the odds of the new trend continuing is at its greatest. And herein lies our ultimate frustration. The Dow is teasing with aspirations to go higher but seems to get a few hundred points over the 200 dma only to be knocked down again. The transport's action has been inconclusive in confirming any movements by the Dow even if that average's utility as a confirming factor is in question. Parting Thoughts Charles Dow often wrote about valuations, "It is always safer to assume that values determine prices in the long run. Values have nothing to do with current fluctuations. A worthless stock can go up 5 points just as easily as the best, but as a result of continuous fluctuations the good stock will gradually work up to its investment value." In 1941, according to Richard Russell of The Dow Theory Letters, George Shaefer, another Dow disciple wrote, "The philosophy of Charles Dow always gave first consideration to values, then to economic conditions and third to the action of both the industrial and rail averages. When the low point of a bear market is reached, values will be the first indication of a change in trend." The current PE of the DJIA is 23; for the S&P 500 it is 24. The current dividend yield is 1.25%. These are valuations over that which have marked the top of every prior bull market. Again, as Richard Russell notes, "history has shown that when PE ratios are as high as 22, the expected median return over the coming ten years is five percent. What does median mean? It means that there may be mini-bull and mini-bear markets over the coming ten years, but when these are all averaged out, the median will be below five percent." I hope you have enjoyed and learned from this series. MKE ********************* PLAY OF THE DAY - PUT ********************* JNPR - Juniper Networks $57.08 -4.05 (-4.05 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. Most Recent Write-Up This is clearly an aggressive play, and we may be tilting at windmills here (read: fighting the Fed), but the Networking index (NWX.X) is showing definite signs of weakness. While the NWX managed to move to new recent highs last week, these new highs were not confirmed by a comparable rise in the daily Stochastics oscillator before price action began to weaken. Take a look at the chart, and you can see the bearish divergence setting up. Sure enough, JNPR is running into formidable resistance near $68, and despite its recovery off the lows on Friday, looks vulnerable to more selling next week. The rebound off the lows brought JNPR right up to the $64 resistance level (also the location or our stop), providing a nice entry for aggressive traders before the stock rolled over, ending the day just above the $61 support level. As the stock sold off into the close, selling volume was on the rise, indicating we could see more weakness in the week ahead. Should sellers start to exert their influence on the NASDAQ ahead of the FOMC meeting on May 15th, it is entirely possible that JNPR could test the $50 support level. The pivotal event for next week will likely be the CSCO earnings report, set to be released Tuesday after the closing bell. As a bellwether for the Networking sector, investors will likely be focused on the outlook more than the actual numbers. If visibility is still absent, look for JNPR and other leading Networking stocks to feel the pain of the bears' assault. Aggressive entries can still be considered on an intraday bounce near the $64 level (our stop), while those looking for a more conservative entry will want to wait until JNPR falls below the $60 level before taking a position. Comments Despite the relatively tepid trading in the broader Nasdaq, JNPR shed $4 during Monday's session. Part of the weakness may stem from the upcoming Cisco Systems earnings report. There have been rumors that Cisco is capturing market share from Juniper in a big way, which may come to realization Tuesday evening. We're looking for the nervousness to continue in shares of JNPR early Tuesday. Traders can take new positions at current levels or on a break below $57. Target the $54 level on the downside, and those looking to minimize risk might close positions before Cisco's earnings report after the bell Tuesday evening. ***May contracts expire in less than two weeks*** BUY PUT MAY-60*JUX-QL OI=13882 at $6.60 SL=4.50 BUY PUT MAY-55 JUX-QK OI= 6111 at $4.20 SL=2.75 http://www.premierinvestor.com/oi/profile.asp?ticker=JNPR ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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