The Option Investor Newsletter Wednesday 05-16-2001 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/051601_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 05-16-2001 High Low Volume Advance/Decline DJIA 11215.90 +342.90 11231.10 10814.30 1.35 bln 2082/1009 NASDAQ 2166.44 + 80.86 2171.22 2057.99 2.08 bln 2329/1551 S&P 100 664.60 + 18.34 665.13 642.46 totals 4411/2560 S&P 500 1284.99 + 35.55 1286.39 1243.02 63.3%/36.7 RUS 2000 497.21 + 7.58 497.90 487.41 DJ TRANS 2925.50 + 45.26 2925.94 2864.22 VIX 25.13 - 2.21 27.54 24.52 Put/Call Ratio 0.64 ****************************************************************** Curbs In & Buyers Back Benign inflation data and faith in the Fed. Today was a big reversal day and the breakout in the Dow & SPX.X has established a new trend. Who would have thought after yesterday's closing failure? If you didn't catch the bottom for fear of getting burned, you gotta be thinking here that this rally is safe to jump onto. We got side-blinded but who's to complain? It always feels better making money on the long side. Given yesterday's 50 bp cut and Fed rhetoric toward fighting further economic weakness were exactly what the market wanted. However, as the euphoria wore off, concerns about what the Fed knew that we didn't filtered through and demand disappeared. The sell-off into Tuesday's close was exactly what we shouldn't have done. This morning's CPI report came in better-than-expected, 0.3% vs. 0.4%, indicating that inflation was in check. We should have known! The Fed wouldn't have given us what we wanted if inflation was a concern (considering that they get a sneak peak at most key economic data). Jim Kramer said it last night, you gotta be a buyer, gimme some MO (NYSE:MO), sell me some Schlumberger (NYSE:SLB). Today was evidence that we can trust the Fed. And big time money went to work, blowing the roof off the Dow ($INDU) and the S&P 500 (SPX.X), conquering key resistance points of 11,000 and 1272, respectively. The Dow, indeed, looked like it wanted to go higher even after yesterday's late session selling. Its recent move off of 10774, which was last Friday's low, maintained a series of higher highs and higher lows. Sure enough, the 10800 area held strong as support today. We saw a classic intraday pattern of early accumulation, followed by consolidation along 11,000 before further accumulation and short-covering. Previous shorts got squeezed hard, having to pare losses. But the big deal is that we now have a lot of new money committed to long positions above 11,000, surely to be defended. After today's massive 342 point day, the fifth biggest point gain ever, it wouldn't be a surprise to see some short-term profit taking. You can be sure that a pullback won't last long with the conviction and underlying support from this new money. A pullback will offer good entries into quality names like MO, Caterpillar (NYSE:CAT), Dupont (NYSE:DD), and United Tech (NYSE:UTX). Hey, we're in a stealth bull market! Key to the $INDU breakout today was the Cyclical Index (CYC.X), which I mentioned in the Market Sentiment last week. The downtrend line from May 1999 was broken today with a 4.28% parabolic gain. The last time we had a similar technical development on the CYC.X along with a breakout, the Dow ran from 10173 to 11130 between April 4th and May 9th, 1999. This move in the CYC.X and the $INDU, in conjunction with an extremely aggressive Fed, gives a strong bullish signal. Deep cyclicals and Financials will lead this market throughout the next six months. Yesterday represents the fifth 50 bp rate cut, totaling 250 bp since January, and EVERY time the Fed cut five times like that, the market was higher a year later. There have been five occurrences like this and three of them resulted in double digits gains after a year. An interesting development today was the implosion of volatility, again. Today's move took the VIX.X below 25 briefly and settled at 25.13. It could indicate that the VIX.X is returning to its normal trading range roughly between 20 and 30, and if the Dow continues to push higher, this very well may be the case. We saw a similar implosion back in January during the initial post-Fed rate cut rally, only to sell off again. This time feels different. The Fed has since cut an additional 150 bps and the Dow is much more technically sound. It's the Nasdaq that, while not unstable, doesn't have the relative strength. The Nasdaq has concerns of its own. It is still in a recovery mode after hitting 1619 on April 4th. Bottomline is that the Nasdaq incurred tremendous technical damage over the past year and capital expenditure forecasts for tech companies remains in question. Money is certainly cheap and going to get cheaper but these companies are still gauging how overbuilt they may be. Tomorrow's earnings reports from Ciena (NASDAQ:CIEN) before the bell and Dell (NASDAQ:DELL) after the bell will give guidance to the tech sector. Ciena will likely set the tone tomorrow. Technically, the Nasdaq is still bouncing around its recent trading range between 2000 and 2250. Support at the 2060 area was tested early after the open today and the Nasdaq quickly moved toward 2100. Following a brief consolidation along this level, the Nasdaq took off into the close, finishing up 80 points to 2166. We saw a reversal today and momentum tomorrow should carry the Nasdaq to a challenge of immediate resistance at 2200. It will be all about Ciena's guidance going forward, especially considering that they have guided higher consistently. Today gave us a technical breakout and a shift in sentiment. Let's run with the bulls. We gotta buy the Dow via strong Cyclicals and Financials. Tonight we added Merrill Lynch (NYSE:MER) and General Electric (NYSE:GE), looking to participate in the new trend in the Dow. Ideally, we are looking for a profit taking pullback near support to enter. The Nasdaq will probably follow suit, but keep in mind resistance overhead at 2200 and its ultimate challenge at 2250. The SPX.X also broke above its long time bullish wedge at 1272 handily, posting a 35 point gain. I will talk more about key levels on all the indices tomorrow in Market Sentiment. Until then, we're looking to Ciena's comments in the morning as well as Initial Jobless Claims expected to be 395K. Today was a pivotal point for market psychology, but remember that nothing goes up forever. Trade what the market gives you. Trade Smart, Matt Russ Editor ************** NEW CALL PLAYS ************** EBAY - eBay Inc $57.86 +1.81 (-6.75 this week) eBay is the world's largest online trading community. Founded in September 1995, eBay is a powerful marketplace for the sale of goods and services by a passionate community of individuals and small businesses. The sellers pay a fee to have their items placed on the company's Web site and the buyers get to browse and make bids on the merchandise. If an item sells, eBay charges the seller a percentage of the closing price. The company's rivals in the auctioning arena are Yahoo! and Amazon.com. The dotbomb may have detonated, but it left a few strong survivors. While the money-losing business models of many Internet firms did not survive the harsh scrutiny of analysts and shareholders alike in a tough economic environment, those that did make it did so on their abilities to generate positive cash flow, gain critical user mass, or create a unique and powerful brand. Leading electronic auctioneer EBAY has done all three, under the guidance of strong management and the more than competent leadership of CEO Meg Whitman. Still well off its all-time high of $127.50, EBAY's stock price has outperformed its sector in both good times and bad. While many industry peers are still struggling under the weight of their major moving averages, EBAY has surpassed those levels of overhead resistance. Recently the company made some major customer wins, signing up CMP Media and famed watchmaker Rolex. The company's frictionless business model has proven itself to not only be unique, but also viable. At this point, the stock appears poised to challenge the $60 level. A bullish surge above $58 may allow conservative traders to make a play, but only if Merrill Lynch's Internet HOLDR (HHH) confirms upward momentum. Aggressive players looking for entries on pullbacks may find moving average support from the 5 and 10-dma at $55.33 and $53.65 respectively. Just keep in mind that we are placing our closing stop at $55. Horizontal support may also be found at $57, $55.75 and $55. BUY CALL JUN-55 QXB-FK OI=4505 at $6.80 SL=5.00 BUY CALL JUN-60*QXB-FL OI= 953 at $4.20 SL=4.50 BUY CALL JUN-65 QXB-FM OI= 484 at $2.45 SL=1.25 BUY CALL JUL-60 QXB-GL OI=5931 at $6.80 SL=5.00 BUY CALL JUL-65 QXB-GM OI=4531 at $4.80 SL=3.00 SELL PUT JUN-50 QXB-RJ OI=4698 at $2.05 SL=3.75 (See risks of selling puts in play legend) Average Daily Volume = 5.57 mln http://www.premierinvestor.com/oi/profile.asp?ticker=EBAY GE - General Electric $52.21 +2.06 (+3.20 this week) General Electric is one of the largest and most diversified industrial corporations in the world. GE's products include major appliances, lighting products, industrial automation products, medical diagnostic imaging products, motors, electrical distribution and control equipment, locomotives, power generation and equipment products, nuclear power support services and fuel assemblies, commercial and military aircraft jet engines, and engineered materials. Through General Electric Capital, GE offers a broad array of financial services. Through NBC Inc. GE provides television, cable and multimedia programming services. As one of the largest and most diversified companies in the U.S., GE is often considered a proxy for the overall strength of the broad market indexes, particularly the Dow and S & P. GE has been languishing in a tight trading range between $48 and $50 for several weeks, consolidating its gains since rallying from a 52-week low of $36.44 on March 22. At this point it seems that hints of future interest rate cuts by the Fed are whetting investors appetites for this dependable stalwart, which has acted like a beacon in an uncertain market. In addition, it seems likely that GE will rally on the anticipation of the completion of the Honeywell merger, which was announced last fall. This deal was under investigation by the Justice Dept., and on May 3rd, the department gave their approval, with a few conditions which are not expected to present a problem. In an announcement which further bolstered the bullish momentum, GE announced last Thursday that they expect earnings to come in at the high end of expectations. GE's President and Chairman elect Jeffrey Immelt stated that the company's diversity and digital transformation have reduced their sensitivity to business cycles. With all this good news, and strength in the major indexes, GE plowed through its 200-dma of $50.42, with good volume of over 24 million shares. After the remarkable rally we experienced on Wednesday, a pullback of some degree seems highly probable. A pullback to light support at $51.50 could present an aggressive entry point. Alternatively, traders could take positions at the current level, if the Dow and S & P are strong. The next major resistance level is $55, and if institutions start buying more aggressively, we may see GE clear this level in the near term future. We are setting a liberal closing stop at $49, to give GE plenty of room to move. BUY CALL JUN-50*GE-FJ OI=45339 at $3.20 SL=1.75 BUY CALL JUN-55 GE-FK OI=64117 at $0.90 SL-0.00 BUY CALL SEP-50 GE-IJ OI=23236 at $5.40 SL=3.50 BUY CALL SEP-55 GE-IK OI=18416 at $2.95 SL=1.50 Average Daily Volume = 21.9 mln http://www.premierinvestor.com/oi/profile.asp?ticker=GE MER - Merrill Lynch & Co. $69.98 +2.83 (+4.99 this week) With its bull icon prominently displayed, many investors view Merrill Lynch as the leader of herd. The diversified Financial powerhouse provides investment, financing, advisory, insurance and related products and services on a global basis to both individuals and institutions. Its Corporate and Institutional Client Group offers investment banking, brokerage and clearing services to corporate and government clients. MER has been slow to move into the online world, entering the online trading ring in 1999. As the DJIA launched through the formidable 11,000 barrier today in the wake of the 5th consecutive 50 basis point interest rate cut, Financial stocks led the charge. MER led the Brokerage sector higher with 4% gain, further distancing itself from its 200-dma (currently at $65.29). While volume was still rather light, the move was solid, and buying volume increased throughout the afternoon as the stock moved through the long-standing $68 resistance level. With all of the major indices marching in the same direction and being led by both Cyclical and Financial stocks, it looks like this rally could actually be for real. The bulls are licking their chops, focusing on the economic recovery that is expected in the second half of the year, and are likely setting their sights on new highs for MER. Given the strength of the move today, MER could continue higher from current levels, but we need to beware of profit taking. Continued strength that pushes the stock through the $70 level could be the cue for initiating new positions, but keep a tight reign in case the bears show up. More attractive entry points could materialize tomorrow on a pullback and bounce at the $68 and $67 intraday support levels or at our $66 stop. This is clearly a momentum play, and we want to ride it as long as the bulls remain in charge. Keep an eye on the Securities Broker/Dealer index (XBD.X). Continued strength in this index will support a continued move higher for our play. BUY CALL JUN-65 MER-FM OI= 4796 at $7.00 SL=5.00 BUY CALL JUN-70*MER-FN OI=16649 at $3.70 SL=2.25 BUY CALL JUN-75 JMR-FO OI= 2051 at $1.65 SL=0.75 BUY CALL JUL-70 MER-GN OI=22505 at $5.50 SL=3.50 BUY CALL JUL-75 JMR-GO OI= 7002 at $3.40 SL=1.75 SELL PUT JUN-65 MER-RG OI= 2280 at $1.75 SL=3.50 (See risks of selling puts in play legend) Average Daily Volume = 5.93 mln http://www.premierinvestor.com/oi/profile.asp?ticker=MER ADBE - Adobe Systems $41.09 +2.30 (+1.23 this week) A long-time leader in desktop publishing software, ADBE provides graphic design, publishing, and imaging software for Web and print production. Offering a line of application software products for creating, distributing, and managing information of all types, the company generates nearly 75% of sales through publishing software products such as Photoshop, Illustrator, and PageMaker. Its Acrobat Reader, which uses portable document format (PDF) is popping up all over the Internet, as businesses shift from print to digital communications. While old economy stocks led the charge in today's broad market rally, there were some impressive gains in the Technology sector as well. The GSTI Software index (GSO.X) put in a solid bounce from recent support and posted better than a 5% gain on the day. Not to be outdone, ADBE gained 6% on solid buying volume (just slightly below the ADV). Investors seemed to take yesterdays interest rate cut in conjunction with today's economic reports as evidence that the economy will be well on the road to recovery by the end of the year, and they are starting to vote with their wallets. Whether this is the recovery we have been waiting for so patiently remains to be seen, but at the very least, it looks like a tradable rally. Today's rally solidified support at the $38 level (the top of the gap from April 18th), and with daily Stochastics just about to poke out of oversold, ADBE could be ready to run. It won't be an easy road, though. By the closing bell, the stock had risen to the $41 resistance level, just below the 30-dma (currently $41.25). Conservative investors will want to see the stock clear $41.25 on continued strong volume before taking a position. Once this event occurs, ADBE will have broken the month-long descending trendline, and the chart will be looking even more bullish. More aggressive players can target shoot intraday dips in the next couple days, so long as the dip is followed by a bounce. We don't want to get overzealous and try to catch a falling knife if the bears show up to spoil our party. Support looks firm near $38, so that will be the initial placement of our stop. A close below that level would confirm the bears have not gone into hibernation just yet, and bring our play to a premature end. Look for continued strength in the GSO.X to confirm the health of ADBE's rally before playing. BUY CALL JUN-40*AEQ-FH OI= 464 at $4.30 SL=2.75 BUY CALL JUN-45 AEQ-FI OI= 856 at $2.30 SL=1.25 BUY CALL JUN-50 AEQ-FJ OI= 892 at $1.10 SL=0.50 BUY CALL JUL-45 AEQ-GI OI=1634 at $3.90 SL=2.50 BUY CALL JUL-50 AEQ-GJ OI=1508 at $2.50 SL=1.25 SELL PUT JUN-35 AEQ-RG OI= 487 at $1.60 SL=3.25 (See risks of selling puts in play legend) Average Daily Volume = 5.35 mln http://www.premierinvestor.com/oi/profile.asp?ticker=ADBE ************ NEW PUT PLAY ************ ENE - Enron $55.01 -1.98 (-3.19 this week) Originally only an energy company, in recent years ENE has moved into the communications market as well. Through its subsidiaries, the company is primarily engaged in the transportation of natural gas through pipelines throughout the United States, and the generation, transmission and distribution of electricity to markets I the northwestern United States. ENE also markets natural gas, electricity and other commodities and finance services worldwide. Most recently, the company has moved into the Communication business, developing an intelligent network platform to provide bandwidth management services and deliver high bandwidth applications. Single-handedly dragging the Dow Jones Utilities (DJU.X) underwater in what was otherwise a stellar day in the markets, ENE gave up 3.5% on volume that nearly doubled the ADV. What's going on here? A moderate volume high-point-gain day for the broad markets, but ENE was heavily sold? You got it, and bad news was the catalyst. Lenders to the company's Dabhol Power Company (DBC) have postponed until Thursday a crucial vote on canceling the contract to sell power to India's Maharashtra state. The company has been sparring for six months now over payment defaults by the Maharashtra State Electricity board and the matter is expected to be resolved by a cancellation of the contract. Of course, it doesn't help that ENE has been largely unsuccessful in influencing the Bush White House with respect to the President's forthcoming energy plan. ENE investors fled the stock in droves today, pushing it right down to the critical $55 support level. Over the past 2 weeks, the stock has been finding resistance near the 30-dma (currently $59.09), yet buyers couldn't even test that level today. It was a long, steady decline from the open to close, which came right at the low of the day, as volume shot through the roof in the final 2 hours. Nearly 3 million shares traded hands in the final hour, and that doesn't bode well for the stock tomorrow. Conservative traders will want to initiate new positions as further weakness pushes the stock below $55. ENE found support near $53 in April, so beware of a bounce near that level. Resistance has been building in recent days at $57-58; more aggressive traders can target shoot new entries on a failed rally near this level, so long as the buyers can't manage a close above our $58 stop. BUY PUT JUN-60 ENE-RL OI=2935 at $5.80 SL=3.75 BUY PUT JUN-55*ENE-RK OI=2234 at $2.50 SL=1.25 BUY PUT JUN-50 ENE-RJ OI=2155 at $0.90 SL=0.00 Average Daily Volume = 3.62 mln http://www.premierinvestor.com/oi/profile.asp?ticker=ENE ***************** STOP-LOSS UPDATES ***************** MO - call play Adjust from $50.50 up to $51 GDW - call play Adjust from $60.50 up to $61.75 CAT - call play Adjust from $51.75 up to $53.75 JNY - call play Adjust from $44 up to $45 ************* DROPPED CALLS ************* GPS $34.15 +0.87 (+0.95) We mentioned yesterday that we were looking for one last burst of strength in GPS before closing out this play ahead of its earnings report, due tomorrow after the closing bell. A strong day for the broader markets worked in our favor, as shares of the popular apparel retailer gained 2.61 percent. At this point, the chart still looks bullish. But with what has turned out to be a substantial profit in this call play, we are following our sell rule to the letter and taking our gains off the table. ************ DROPPED PUTS ************ DIGL $46.25 +3.66 (+3.95) While it appeared yesterday that we might have been faced with a post-Fed rate cut sell off, today's action was extraordinarily positive for the bulls. Most of the major sectors experienced heavy buying, as well as short covering. The Nasdaq still has some major hurdles to cross, and DIGL may sell off further if we have a pullback. Nonetheless, the stock has closed above our stop level, and as such, we are dropping it tonight. EMLX $42.87 +5.28 (+4.07) In a delayed sort of reaction, the bulls really charged forward today. This time, when EMLX crested the $39 resistance level, the bulls never looked back pushing the stock higher throughout the day. The combination of yesterday's interest rate cut and benign economic reports this morning gave fuel to the rally, leaving our $39 stop in the dust. This is exactly the type of move our stops are designed to protect against as we still escaped with a gain. HGSI $61.67 +4.63 (+3.79) In full participation with the broader markets, Biotech stocks surged strongly today after the opening dip, and by the close of trading the Biotech index (BTK.X) was sitting well above $540 level. With a nearly 7% move for the index, it is no surprise that HGSI shot right through its $60 stop early in the day. Volume was still on the light side, but the resilience of the bulls in today's session points to further gains this week, and we are just as happy to step aside and let the buyers have their fun. JNPR $57.89 +4.74 (+3.63) It took Networking stocks a bit longer to get moving than the rest of the market, and JNPR spent most of the day meandering near our $55 stop. Then with a burst of buying volume, the bulls finally left this level behind in the final 2 hours of trading, bringing JNPR up to close just shy of $58, near the high of the day. Once again, stop losses saved our bacon, giving us a respectable exit from a play that could have gone sharply against us. The strong close could be forecasting more gains through the rest of the week, and we will gladly move JNPR to the drop list and go looking for the next play. MERQ $67.17 +7.92 (+5.85) MERQ began recovering from the negative open, almost before the sound of the opening bell had faded away. Gradually moving higher throughout the session, our hopes for another entry into the play were dashed shortly after the lunch hour as the bulls pushed the stock solidly through our $65 stop. They didn't stop there either, as MERQ continued to rally right up to the closing bell. Volume was solid, and the bulls look ready to stampede even higher later this week. While the $68 level may represent resistance for the stock, we don't want to place too much stock in that, given all the solid resistance levels that were smashed in today's session. NVLS $52.85 +4.65 (+3.76) Although AMAT's earnings report last night was far from stellar, their comments about a 'bottom' in the current chip cycle seemed to give new life to the Semiconductor Equipment stocks this morning, as they found support and began moving higher shortly after the opening bell. Even bearish comments from Dan Niles about the 3rd quarter revenues continuing to decline couldn't dampen the bulls enthusiasm. NVLS found support at $47, and rallied consistently throughout the day. Clearing our $50 stop during the lunch hour, this further energized the bulls as they pushed higher right into the close, posting a nearly 10% gain on the day. Sentiment has clearly shifted and the bears are going to have a hard time pushing Semiconductor stocks lower in the near future. BRCM $40.55 +3.41 (+2.06) While uncertainty over the climate surrounding the Semiconductor is still being called into question, if traders were asked today whether the Chip sector has hit bottom, the answer most likely be an affirmative. Despite disappointing earnings from chip equipment maker AMAT, who missed Street estimates by a penny, bullish comments during the conference call in which the company came out to say that there will likely be an upturn in the second half of the year will due to new computer sales were more than well received. In addition to this, chipmakers moving to new technologies and processes may not only realize a boost in efficiency, but also benefit from lower costs going forward. With that, BRCM rallied over 9 percent today and in doing so, closed above our stop price of $40. As a result, we are dropping coverage. DOX $62.50 +1.64 (+1.20) Ending the day right at our recommended closing stop price of $62.50, we are playing it safe and preemptively closing out this put play. Today's rally of 2.69 percent, while light in volume, was more than enough to give the bears good reason to be nervous. Today's close put the stock above its 100-dma at $62.07 for the first time in over two months. Continued bullish action in the broader markets could help DOX overcome its last line of moving average resistance from the 200-dma at $63.03. Look for any weakness tomorrow as an opportunity to sell open positions. ************** TRADERS CORNER ************** Jumpin' Juniper By Mary Redmond Over the past few weeks, there have been opportunities to profit from bearish trades in the networking sector. Since many of the networking stocks are both volatile and liquid, trading can be both profitable and dangerous. It is always important to monitor the action of the broad market indexes, the sector, the volatility indicators, and other indicators like the stochastics and tick. We started too see hints that a pullback in the Nasdaq was likely around the beginning of May, as the index failed at two attempts to clear strong resistance at 2250. In addition, shortly after this, it became apparent that the stochastic oscillator was demonstrating divergence from the Nasdaq in a overbought condition. Around this time, we began to see weakness in several of the sectors which are critical to supporting the Nasdaq. For example, the first week in May, the Networking Index, NWX.X, failed to rally past the 500 level and pulled back. In addition, the Semiconductor Index, SOX.X, started to pullback after failing to rally from lower highs at 697 and 687. These indexes also displayed divergence in the stochastic oscillator. It is very difficult for the Nasdaq to rally without participation from the Semiconductor sector, the Software sector (GSO.X), and the networking sector. In addition, the volatility indicators for the Nasdaq, the VXN.X and the QQV.X had made significant retracements from their previous abnormally high levels. The VXN had moved down from its highest level of 85 in mid-April to a low near 65, and the QQV had moved down from over 70 to the mid-50s range. While the Nasdaq appears to have strong support at 2000, there are many Nasdaq stocks which are still good bearish plays. Many of the former high flyers have so much overhead resistance that it seems they might require a prolonged period of excellent news and bullish earnings forecasts before they can stage a full recovery. Juniper fit into this category in the beginning of May, as the weakness in the Networking sector, as well as cautious comments from bellwethers like Cisco seemed to cast a cloud of uncertainty on suppliers of networking and telecom equipment companies. The forecasts for capital spending in the coming months are still vague, as company managements attempt to grapple with the uncertain macroeconomic forecasts, and no one wants to commit to stating that they know when a real recovery will ensue. You can see from the chart how Juniper made a bearish double top pattern, which coincided with a bearish stochastic divergence. At this point, considering the weakness in the Nasdaq and the Networking sector, it seemed that the odds favored a downside move. Downside trades can be dangerous when we are in the middle of a Fed easing cycle. However, it seems unlikely that we will rally straight up from here without some type of pullback, particularly on the Nasdaq. Investors will demand proof from companies in the form of earnings that the recovery is sustainable. It makes sense at this point to make quick one or two day trades using several different indicators. The tick.nq has proven to be very useful as an indicator for Nasdaq trades. When the tick.nq hits a negative 500, it can signal a buy opportunity. When the tick.nq hits a positive 500 or greater, this often means a selling opportunity. We can see in a chart how the tick was highly useful in selecting an entry point for a bearish trade in Juniper, which coincided with weakness in the Nasdaq. You see how JNPR rolled over at the points at which the tick.nq spiked up? This occurred simultaneously with the volatility indicators, the VXN and QQV spiking to low levels. As a side note, it is interesting to see that the tick.nq has been trading in an increasingly narrow wedge over the last several weeks. It is not clear if this is indicative of any future action, but it seems likely that a breakout of this range may occur. Those who have been paying attention to the cyclical index, CYC.X, may have noticed that it appears to have broken the long-term downward trend it had established in January of 1999. However, the volatility indicators have been breaking out to the downside during today's action. How much lower can they go? No one knows, but as investors' perceptions of future market ranges evolve, we could be looking at new trading ranges for the VIX, VXN, and QQV. It seems that caution would prevail here, as the VIX spiked way out of its Bollinger bands to the downside when the Dow hit 11,000. Monitor this volatility situation closely with such a drastic move today. It can be a trade-saver. ********************** PLAY OF THE DAY - CALL ********************** MO - Philip Morris Companies, Inc. $52.35 +1.43 (+0.60 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. Most Recent Write-Up With the spotlight on the Federal Reserve, MO took a back seat over the last two days, as investors struggled to find a clear trend, and interpret the future policy directives. Some disconcerting news was released concerning a possible increase in the cigarette tax, and FDA regulation of cigarettes, as well as new tobacco rules adopted by the European parliament. Despite this news, and a somewhat disappointed market, MO maintained firm support at the $50.50 level. The closer we get to the Kraft IPO, the more attention MO will attract, and it is likely that we could see a strong rally in the shares in the days ahead. Aggressive traders could take positions at the current level, if the overall indexes are exhibiting strength, as well as others in the sector, like LTR and RJR. As an alternative strategy, wait for MO to move above its converged 5-dma and 10-dma of $51.50 on strong volume before entering. We are keeping stops at $50, so close the position if MO closes below this level. Comments It looks like MO wants to go. The way of the Dow is the way of MO. With the massive breakout today in the $INDU, we are making MO the call Play of the Day. A pullback in the Dow is to be expected but it will most likely be short-lived as buyers step up earlier and earlier. Entry off of intraday support at $51.50 would be ideal. If it doesn't retrace that much, watch for buyers and an entry at $52. BUY CALL JUN-50*MO-FJ OI=26314 at $3.70 SL=1.75 BUY CALL JUN-55 MO-FK OI=16571 at $1.10 SL=0.50 http://www.premierinvestor.com/oi/profile.asp?ticker=MO ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** A Delayed-Reaction Rally Pushes The Dow Past 11,000! By Ray Cummins Stocks rallied today with the Dow industrial average climbing to a 9-month high as investors cheered favorable inflation data. News that consumer prices rose more moderately than expected in April lifted the mood on Wall Street and gave credence to the Fed's aggressive approach to restoring the sagging U.S. economy. The consumer price index rose 0.3% versus expectations for a 0.4% increase. The core index, which excludes the volatile food and energy components, rose only 0.2% and most experts perceived the data as an indication that inflation will continue to ease into the coming year. In other economic news, April housing starts were higher than expected, furthering the view that a recession is unlikely since an economic collapse generally begins with a failure in the construction sector. Analysts said the bullish inflation report simply fueled optimism that the Fed may not be done cutting rates and that led to a broad-market rally. Buying pressure in blue-chip stocks quickly spread to other sectors and by midday, all the major indices were participating in the upside activity. The Dow Industrials plowed through the 11,000 mark on strength in Alcoa (NYSE:AA), Hewlett-Packard (NYSE:HWP), Procter & Gamble (NYSE:PG), Merck (NYSE:MRK), Minnesota Mining (NYSE:MMM) and Caterpillar (NYSE:CAT). The NASDAQ also enjoyed exceptional gains with semiconductor and software shares leading the way. Positive reports from software maker BEA Systems (NASDAQ:BEAS), chip-equipment maker Applied Materials (NASDAQ:AMAT) and doughnut maker Krispy Kreme Doughnuts (NASDAQ:KREM) helped boost investor sentiment in technology stocks. In the broader S&P 500 groups, drug, biotechnology, gold, consumer and cyclical sectors were the best performers and very few groups retreated during the session. Summary of Previous Candidates: Covered Calls: (Margin not used in calculations) Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield PDII MAY 65 62.30 86.90 $2.70 5.7% NVDA MAY 60 57.76 85.49 $2.24 5.1% Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield CMVT MAY 65 64.15 68.36 $0.85 13.4% ENZN MAY 55 54.55 61.84 $0.45 8.9% AMAT MAY 40 39.50 54.10 $0.50 8.3% CCMP MAY 35 34.00 66.32 $1.00 7.1% FCEL MAY 40 39.20 80.30 $0.80 6.6% NVDA MAY 45 43.95 85.49 $1.05 6.5% MUSE MAY 25 24.35 38.00 $0.65 6.2% PDII MAY 60 59.50 86.90 $0.50 5.9% NVDA MAY 55 54.45 85.49 $0.55 5.7% PDII MAY 55 54.35 86.90 $0.65 5.5% VSTR MAY 85 84.10 97.79 $0.90 5.4% NVDA MAY 45 44.35 85.49 $0.65 5.2% GS MAY 80 79.00 99.95 $1.00 4.8% KREM JUN 40 38.75 56.40 $1.25 9.0% CMVT JUN 55 53.55 68.36 $1.45 7.3% ENZN JUN 50 48.85 61.84 $1.15 6.8% APWR JUN 35 34.30 51.55 $0.70 5.5% Sell Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield AMAT MAY 38p 36.60 54.10 $0.90 7.9% AMAT MAY 70c 70.70 54.10 $0.70 6.3% CHIR MAY 38p 36.55 49.97 $0.95 10.3% CHIR MAY 50c 50.95 49.97 $0.95 10.2% XLNX MAY 30p 29.55 44.18 $0.45 6.1% XLNX MAY 60c 60.55 44.18 $0.55 7.4% CIEN MAY 40p 39.10 58.90 $0.90 13.2% CIEN MAY 80c 80.75 58.90 $0.75 11.2% CIEN MAY 45p 44.50 58.90 $0.50 13.4% CIEN MAY 75c 75.50 58.90 $0.50 13.4% Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield LH MAY 160 161.45 133.50 $1.45 6.6% CIEN MAY 90 90.60 58.90 $0.60 6.6% CHKP MAY 90 90.65 54.19 $0.65 6.4% SII MAY 85 86.40 79.48 $1.40 6.3% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status UTX $72.85 $82.90 MAY85c/80c $1.00 $81.00 $-1.90 Closed HMC $91.29 $87.65 MAY80p/85p $0.65 $84.35 $0.65 Open BGEN $59.23 $60.28 MAY70c/65c $0.75 $65.75 $0.75 Open LEH $76.75 $78.94 JUN60p/65p $0.70 $64.30 $0.70 Open Debit Straddles: Stock Pick Last Position Debit Value Target Status NUE $49.80 $52.50 JUN50c/50p $3.90 $3.85 $4.90 Open The Alliance Capital (NYSE:AC) straddle has traded above the 25% target credit of $5.38 several times over the last several weeks. New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). ******************************************************************* BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations ******************************************************************* FCEL - FuelCell Energy $80.30 *** On The Move! *** FuelCell Energy (NASDAQ:FCEL) is a developer of carbonate fuel cell technology for stationary power generation. The company has developed a proprietary patented carbonate fuel cell, which the company believes has significant advantages in terms of fuel efficiency and cost over competing fuel cells for stationary power generation. The company manufactures carbonate fuel cells, usually on a contract basis. Its revenue is primarily generated from agencies of the United States government and customers located throughout the United States, Europe and Asia. The rally in FCEL started in early April after a published report that a state project would use the company's fuel cells in what analysts described as the "largest fuel cell commercialization effort anywhere in the U.S. to date." The Connecticut Resources Recovery Authority (CRRA) has proposed spending $124 million over five years for FCEL's products through a new contract with their distributor, Enron North America (NYSE:ENE). Enron will serve as project developer and twelve fuel cell units will be installed at multiple sites in Connecticut to relieve transmission congestion in the Southwestern part of the state and add needed capacity. A Lehman Brothers utility analyst said he believes the request for purchase is a significant step towards technology validation and commercialization of the company's products and an order of this magnitude would absorb half of FuelCell's anticipated year-end production of 50 megawatts and provide a significant step towards reaching the $1200/kilowatt cost target the company has outlined. The news started a recovery in FCEL shares and alternative energy technology stocks continued to rally after California suffered a series of statewide blackouts and officials warned of a potential for future energy shortages. Power plants were providing limited output due to plant maintenance and refueling and that condition combined with high demand overwhelmed the available electricity supplies, creating power outages throughout the state. Today's move propelled the stock to a 6-month high on heavy volume and traders who believe the trend will continue can speculate on that outcome with these conservative positions. FCEL - FuelCell Energy $80.30 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put JUN 60 FQG RL 75 0.95 59.05 5.7% *** Sell Put JUN 65 FQG RM 60 1.75 63.25 9.6% Sell Put JUN 70 FQG RN 184 3.00 67.00 12.3% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=FCEL ******************************************************************* IMCL - Imclone $44.45 *** New Drug Development! *** Imclone Systems (NASDAQ:IMCL) is engaged in the research and development of novel cancer treatments. The company focuses on growth factor inhibitors, therapeutic cancer vaccines and unique angiogenesis inhibitors. The company's lead product candidate, IMC-C225, is a therapeutic monoclonal antibody that inhibits stimulation of a receptor for growth factors upon which certain solid tumors depend in order to grow. IMC-C225 has been shown in several Phase I/II trials to have an acceptable safety profile, to be well tolerated and, when administered with either radiation therapy or chemotherapy, to enhance tumor reduction. The company is also developing inhibitors of angiogenesis, which could be used to treat various kinds of cancer and other diseases. Imclone has identified IMC-1C11 as a lead clinical candidate for angiogenesis inhibition. IMC-1C11 is an antibody that binds selectively and with high affinity to KDR, a principal Vascular Endothelial Growth Factor (VEGF) receptor, inhibiting angiogenesis. Today's rally in ImClone shares capped a recent recovery on new speculation about the company's lead product candidate, IMC-C225, which is being studied for treatment of colorectal and other cancers. Analyst Cory William Kasimov at Gruntal said the data presented by Imclone is encouraging because the product, when combined with another drug, has demonstrated a favorable overall response rate that is well above the 15% believed necessary for approval. The analyst also said the report presented this past weekend substantiates his belief that C225 has "billion-dollar" annual sales potential and Imclone stands to achieve substantial profits from the unique product. Investors have pushed the share value to a 6-month high on the bullish news and these positions offer a reasonable cost basis in the issue. IMCL - Imclone $44.45 PLAY (sell covered call or naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Call JUN 40 QCI FH 6020 6.60 37.85 5.8% *** Sell Put JUN 35 QCI RG 156 0.65 34.35 6.9% *** Sell Put JUN 40 QCI RH 1136 1.95 38.05 12.9% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=IMCL ******************************************************************* MER - Merrill Lynch $69.98 *** Brokerage Sector *** 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. Merrill Lynch is one of our favorite issues in the Investment and Brokerage group and these companies are statistically some of the best-performing issues after a rate cut. In addition, the company has recently been the target of merger speculation and officials from HSBC Holdings (NYSE:HBC) and Merrill have tried to quell rumors that they will combine to form a financial services group that would give it the clout to rival industry leading Citigroup (NYSE:C). HSBC, Britain's largest bank, said the two firms have had no talks on extending their ties beyond a current wealth management joint venture but rumors about a deal continue to surface at regular intervals. Traders who agree that investment banking stocks will continue to perform well, now that interest rates have been reduced further, should consider this conservative position. We will target a higher premium in the spread to allow for any near-term consolidation in the issue. MER - Merrill Lynch $69.98 PLAY (conservative - bullish/credit spread): BUY PUT JUN-55 MER-RK OI=1346 A=$0.40 SELL PUT JUN-60 MER-RL OI=2293 B=$0.85 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=MER ******************************************************************* NVLS - Novellus Systems $52.85 *** Chip Sector *** Novellus Systems (NASDAQ:NVLS) manufactures, markets and services advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as unique equipment for preparing the device surface for these deposition processes. The company supplies high-productivity deposition and also surface preparation systems used in the production of integrated circuits. Novellus focuses on advanced thin film deposition systems and surface preparation equipment including processes such as Chemical Vapor Deposition, Physical Vapor Deposition, photoresist strip, electrofill, and residue removal systems that provide high film quality while attaining the high levels of productivity required to meet the semiconductor industry's need for high-volume, low cost wafer production. NVLS is one of our favorite issues in the semiconductor group and stocks in the segment have moved higher in recent sessions after some key analysts speculated that the worst conditions for chip equipment companies have passed. Industry experts say they are seeing sequential bookings improvement in the June quarter and that a bookings "bottom" has been reached in the near-term. In addition, some analysts believe the recent pullback in the chip equipment group had created a buying opportunity as the industry moves into a positive cycle that will produce increased earnings estimates by early 2002. If that's the case, NVLS should provide an optimistic outlook when the company reports quarterly earnings in late May and investors who agree that the company is a leader in the semiconductor equipment sector can speculate on the future performance of its stock with these positions. NVLS - Novellus Systems $52.85 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put JUN 40 NLQ RH 1282 0.80 39.20 7.1% *** Sell Put JUN 45 NLQ RI 3615 2.00 43.00 13.3% Sell Put JUN 50 NLQ RJ 4735 3.50 46.50 16.3% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=NVLS ******************************************************************* Neutral Plays - Straddles & Strangles ******************************************************************* HGSI - Human Genome Sciences $61.67 *** Premium Selling! *** Human Genome Sciences (NASDAQ:HGSI) researches and develops novel compounds for treating and diagnosing human diseases based on the discovery and understanding of the medical usefulness of genes. The company has used automated, high speed technology to discover the sequences of chemicals in genes and generate a collection of partial human gene sequences. HGSI believes its large collection includes most of the genes responsible for producing proteins in the human body. The company also possesses one of the largest databases of the genes of humans and microbes, which they refer to as its genomic database and it has created a range of product opportunities based on its genomic database. The company intends to focus primarily on the research and development of proteins for the treatment of human disease. HGSI is an excellent issue in the "premium-selling" category of options trading. The issue has robust premiums, a well defined trading range in the near-term and an acceptable probability of remaining between the sold (short) strike prices. Speculation on new developments in "genome discovery" have pushed the (OTM) premiums higher in recent sessions and this play will allow us to benefit from the renewed buying pressure in HGSI's options. As always, review the current news and sector outlook before making your own decision about the future outcome of the position. HGSI - Human Genome Sciences $61.67 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put JUN 45 HHA RI 67 1.00 44.00 7.6% *** Sell Call JUN 80 HBW FP 139 1.30 81.30 9.7% *** - or - Sell Put JUN 50 HHA RJ 205 2.00 48.00 13.5% Sell Call JUN 75 HHA FO 356 2.00 77.00 14.1% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=HGSI ******************************************************************* NVDA - Nvidia $85.49 *** The Rally Continues! *** Nvidia (NAADAQ:NVDA) designs, develops and markets 3D graphics processors, graphics processing units and related software that set the standard for performance, quality and features for every type of personal computer user, from professional workstations to low-cost PCs. The company's 3D graphics processors are used in a wide variety of applications including games, the Internet and industrial design. Its graphics processors were the first to incorporate a 128-bit multi-texturing graphics architecture designed to deliver to users of its products a highly immersive, interactive 3D experience with compelling visual quality, with realistic imagery and motion, stunning effects, and complex object and scene interaction at real-time frame rates. The company sells its products to major OEMs such as Compaq, Dell, Gateway, Hewlett Packard, IBM, micronpc.com, NEC, Packard Bell and Sony and add-in board manufacturers such as ASUStek, Creative Labs, Guillemot and Leadtek. Readers continue to request "premium-selling" positions and this issue often surfaces on a list of candidates with relatively positive trends and excellent option prices. Indeed, the company is a leader in its industry and we also favor the stock for a bullish position. In this case, will sell "out-of-the-money" options for credit, using the earned income to offset any losses on the downside, in the event of assignment. If the stock price moves through the resistance area near $95 on a heavy-volume rally, we will consider purchase the underlying shares, or an offsetting position, to cover the sold (short) options. NVDA - Nvidia $85.49 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put JUN 55 UVA RK 1270 1.35 53.65 7.4% *** Sell Call JUN 115 RVU FC 105 1.25 116.25 6.9% *** - or - Sell Put JUN 60 RVU RL 1512 1.80 58.20 9.7% Sell Call JUN 110 RVU FB 1050 1.85 111.85 9.9% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=NVDA ******************************************************************* BEARISH PLAYS - Naked Calls ******************************************************************* EXFO - Electro-Optical $33.50 *** Technicals Only! *** Electro-Optical Engineering (NASDAQ:EXFO) designs, manufactures and markets fiber-optic test, measurement and monitoring equipment and instruments for the telecommunications industry. The company makes products primarily for two markets. The Portable and Monitoring Division provides solutions primarily to telecommunications carriers, cable television companies, public utilities, and private network operators, as well as third-party installers and equipment rental companies. The Industrial and Scientific Division designs a line of more sophisticated and higher performance instruments for industry manufacturers of optical components, value-added optical modules and optical networking systems, as well as for research and development markets. This position was discovered with one of our primary scan/sort techniques; identifying potential "failed" rallies on issues with bullish options activity. In this case, the premiums for the (OTM) call options are excellent and the possibility of a successful technical recovery is significantly affected by the resistance at the sold strike price; a perfect condition for a bearish position. Those of you who agree with this outlook can attempt to profit from the recent volatile movement in the issue by selling these inflated options. EXFO - Electro-Optical $33.50 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Call JUN 40 FQO FH 35 2.25 42.25 24.9% Sell Call JUN 45 FQO FI 13 1.35 46.35 17.0% Sell Call JUN 50 FQO FJ 0 0.75 50.75 10.2% *** http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=EXFO ******************************************************************* ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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