Option Investor

Daily Newsletter, Monday, 06/18/2001

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The Option Investor Newsletter                   Monday 06-18-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
        06-18-2001        High      Low     Volume Advance/Decline
DJIA    10645.38 + 21.74 10709.05 10614.72 1.10 bln   1311/1779 
NASDAQ   1988.63 - 39.80  2046.63  1987.17 1.53 bln   1172/2615
S&P 100   624.47 -  2.16   630.93   624.46   totals   2483/4394
S&P 500  1208.43 -  5.93  1221.23  1208.33           36.1%/63.9%
RUS 2000  490.53 -  4.60   496.34   490.48
DJ TRANS 2697.42 +  3.80  2708.18  2690.90
VIX        25.83 -  0.50    26.48    25.27
Put/Call Ratio      0.46

Nurse, Please Pass the Tourniquet

Monday's disconcerting settlement of the Nasdaq Composite (COMPX)
marked the seventh consecutive session it finished lower.  But,
news from one of the Nasdaq's big caps after the bell may stop
the bleeding.

Software giant Oracle (NASDAQ:ORCL) reported its fiscal fourth-
quarter numbers after the bell.  The company earned 15 cents per
share, while consensus estimates had Oracle pegged to earn 14
cents per share.  Although the company did report revenue figures
that were a little light, its better-than-expected earnings per
share number appeased buyers in the after hours trading session,
who carried shares over $1.25 higher from their 4:00 p.m. EST

Along with the besting of earnings estimates, Oracle officials
provided guidance that, in their own words, was "cautiously
optimistic."  On several occasions during their conference call,
Oracle officials opined that the worst may be over and that
the business environment, at least in the U.S., is improving.
The remarks made by Oracle's officials - aka guidance - were
the types of comments we need to hear from technology companies.

However, the guidance offered by Oracle officials after the bell
Monday was in stark contrast to what Level 3 Communications'
(NASDAQ:LVLT) officials said before the bell.  The telecom
company revised its projections lower for the remainder of 2001
and also for 2002.  From Level 3's news, the selling momentum in
the tech/telecom space, which was sparked by Juniper Networks
(NASDAQ:JNPR) two weeks ago and fueled by JDS Uniphase
(NASDAQ:JDSU) and Nortel (NYSE:NT) last week, drove shares
within the space lower Monday.

The continued weakness in the tech/telecom complex finally
dragged the COMPX down below the psychologically significant
2000 level Monday on a settlement basis.  The COMPX's close below
2000 is its first since April 17th.

Concerning the COMPX, there are several strategies to consider
over the short-term.  After its close below the 2000 level
Monday, my initial stance would've been to short weak technology
stocks during Tuesday's session.  But, judging by the market's
reaction to Oracle's earnings report after the bell, we may
witness a short covering rally during Tuesday's session, which
is long overdue.

Sentiment has grown pretty negative in the tech sector and
the COMPX has finished lower for seven consecutive sessions.  No
market nor stock goes down in a straight line, so a relief rally
is to be expected.  Obviously, the magnitude and duration of any
relief rally are the variables to consider.  And whether or not
readers choose to game any advance is a matter of time frame and
risk tolerance.  But, keep in mind that the COMPX has some
resistance around the 2060 level, which is a significant
retracement level.  After 2060, the COMPX faces even more
significant resistance at 2100.  So if readers choose to trade
any advance over the next several sessions, keep those two levels
in mind.

On the downside, the COMPX has support right around the 1975
level, which is another significant retracement level and was
roughly 10 points away from the COMPX's intraday low Monday.  If
the COMPX loses the 1975 support level, we may start looking for
the COMPX to hit its bearish price objective generated by its
head-and-shoulders, which lies around the 1875 level.

But, similar to the Oracle development after the bell Monday,
I noticed an equally positive development on the point & figure
charts.  The Bullish Percent for the Nasdaq-100 remained
unchanged Monday from its close Friday at 26 percent.  What that
tells us is that even though the Nasdaq finished lower Monday,
the internals of the Nasdaq-100 didn't get any worse.  We can
deduce from this development that perhaps the heavy selling that
has pressured the Nasdaq over the last seven sessions may have
subsided Monday, which adds credence to the possibility of a
relief rally over the coming sessions.

Away from the tech sector, the price action in the Dow Jones
Industrial Average (INDU) was more encouraging.  The Dow did
attract buyers from the opening bell, who carried the blue chip
index as high as 10,709 before it pulled back.  Remember last
week we addressed the seemingly significant 10,700 level,
specifically its potential to act as a price magnet.  Also
recall that the Dow traded as high as 10,716 last Friday, before
pulling back.  So it would seem in the short-term that 10,700
may act as resistance.

In terms of support, the Dow has help at the 10,500 level, which
is significant for both psychological and technical reasons.  If
the Dow does fall to 10,500 for whatever reason this week, it may
attract dip buyers and offer traders a relatively low-risk entry
point into some strong blue chip names.  However, a break below
10,500 would be most disconcerting and, conversely, would offer
some shorting opportunities for traders.

The S&P 500 (SPX.X) slipped ever-closer to our significant
support level at 1200 Monday.  We need to see this level hold if
the broader market is going to mount any sustained advance over
the coming sessions.  Otherwise, a breakdown below this level in
the SPX could adversely impact the broader market, including the
Dow and Nasdaq.

Last week's trading, which somewhat spilled over into Monday's
session, is certainly difficult to stomach, especially for
those who were expecting an economic recovery during the
early part of the second-half of the year.  And judging by the
recent slew of earnings warnings, especially in the tech/
telecom space, the recovery might be pushed out to late 2001
or early 2002.

However, we need to keep in mind that the Fed's first interest
rate cut, way back on January 3rd, is just beginning to filter
through the U.S. economy.  And there are many more rate
cuts in the pipeline that have yet to work through the
economy.  Further, if history is any guide, we may be
currently witnessing the darkest period of this particular
contraction in the economy before the eventual rebound.  As
Jim has written in the past, "It's always darkest before

The past week of price action in the stock market may have
been simply a re-adjustment to the view that the economy
would not rebound until later 2001, thus a pushback in the
rebound of corporate profits.  Instead of the Nasdaq
breaking out above the 2250 resistance level two weeks ago,
the further deterioration in fundamentals begged a pullback.
But, we must also keep in mind that we have heard of
anecdotal improvements in certain segments of the market,
such as Applied Materials' (NASDAQ:AMAT) guidance and
Xilinx's (NASDAQ:XLNX) hint of a bottom not too long ago,
in addition to Oracle's comments Monday evening.  A likely
scenario is that the broader market averages pullback a bit
further before basing and eventually turning higher in
anticipation of a sustained rebound in the economy and
corporate profits.

While there may be a bit more blood loss this summer, my
sense is that there's a period of healthy recovery in the
not too distant future.

Eric Utley

June Online Seminar Calendar

You can take the following seminars without leaving the comfort
of your home or office. They are interactive and allow you to
question the presenter during the presentation.

You do not need any special software to take the seminar but you
must have a 56K Internet connection or faster for best results
and a separate phone for the audio portion.

If you are interested in these seminars please click here for
more information:


Wed Jun-20 Entry Point, Exit Point - Jim Brown
Thr Jun-21 Day-Trading for People With Day Jobs - Jon Farnlof
Sun Jun-24 Ask The Analyst - Eric Utley
Tue Jun-26 Assessing Risk with Point & Figure - Jeff Bailey
Tue Jun-26 Charting, Stage Analysis - Mark Wnetrzak, Ray Cummins
Wed Jun-27 Big Cap Strategies - Jim Brown
Wed Jun-27 Conservative CC/NP - Mark Wnetrzak, Ray Cummins

Click here for a detailed explanation of each:



FRX - Forest Laboratories $70.97 +0.74 (+0.74 this week)

One of many specialty pharmaceutical companies, Forest
Laboratories develops, manufactures and sells both branded
and generic forms of ethical prescription and non-prescription
drug products.  . Some of the company's more notable products
are Celexa (for depression), Tiazac (for hypertension and
angina), and respiratory products Aerobid, Aerochamber and
Tessalon.  Additionally, the company produces Infasurf, a
lung surfacant for the treatment and prevention of respiratory
distress syndrome in premature infants.  FRX markets its
products directly to physicians using the company's own
specialized sales force.

Operating in the market niche between the big Drug companies
and the speculative Biotech firms, specialty pharmaceutical firm
FRX benefited handsomely from the April-May rallies in both
sectors.  The recent Biotech weakness knocked the stock back a
little, but it has been encouraging seeing support hold near
$70.  Similarly today, the Pharmaceutical index (DRG.X) held
support at $400 and the Biotechnology index (BTK.X) held above
the $575 level.  When buyers return to these sectors in
sufficient numbers to get prices moving north, FRX should
benefit by moving back towards its recent highs near $78.
Daily Stochastics are flattening out in oversold, and with both
the 30-dma ($69.35) and the lower Bollinger band ($68.27)
rising to provide support, FRX is due for an upward move.
There is significant support just below current levels, so we
are starting the play with our stop at $67.  The bullish price
target generated from the Point and Figure chart is $88, meaning
that there is plenty of potential upside in the play.
Conservative players will want to wait for FRX to clear the $72
level before opening new positions, while aggressive traders
will want to target intraday dips near $70 or even $68.

BUY CALL JUL-70*FRX-GN OI= 162 at $4.10 SL=2.50
BUY CALL JUL-75 FRX-GO OI= 943 at $1.80 SL=1.00
BUY CALL AUG-70 FRX-HN OI= 313 at $5.40 SL=3.50
BUY CALL AUG-75 FRX-HO OI= 663 at $3.00 SL=1.50
BUY CALL AUG-80 FRX-HP OI=  89 at $1.45 SL=0.75

SELL PUT JUL-70 FRX-SN OI=1625 at $2.70 SL=4.50
(See risks of selling puts in play legend)

Average Daily Volume = 1.38 mln


EMLX - Emulex Corporation $30.05 -2.83 (-2.83 this week)

A leading networking company, EMLX designs, builds and
distributes three types of connectivity products: network
access servers, printer servers, and high-speed fibre channel
products.  It's fibre channel products, which are based on
internally developed ASIC technology, are deployable across
a variety of network configurations and operating systems to
support increasing volumes of stored data.  EMLX sells its
products directly throughout the world to OEMs and end users,
as well as through system integrators and industrial

As the bullish sentiment of April and May continues to
dissipate, everything related to the Networking sector is
being hit hard, and EMLX is no exception.  Now down 40% from
its May highs, the stock is building a new downtrend, with
the descending trendline resting at $35, reinforced by the
50-dma at $35.21.  Placing a retracement bracket over the
April-May rally shows that EMLX fell through its 50%
retracement ($30.91) at the close this afternoon, opening the
door for a drop to the 61% retracement level ($26.56).  There
is a fair amount of congestion between $23-26, and we would
expect to see some buying support near that level.  If you're
looking for a aggressive bearish price target, the Point and
Figure chart delivers once again.  The target generated at
the beginning of the current decline equates to $12, which
corresponds to the April lows.  Although the daily Stochastic
oscillator is now entering oversold territory, recent
experience confirms that it can remain there for some time
while price continues to deteriorate.  Intraday rallies should
provide for attractive entry points on a rollover below the $35
level.  More conservative players will want to enter on
continuing weakness, as EMLX falls through the $30 level on
strong volume.  Place stops at $36, just above the resistance
level cited above.

BUY PUT JUL-35 UMQ-SG OI=2393 at $7.40 SL=5.25
BUY PUT JUL-30*UMQ-SF OI=1639 at $4.30 SL=2.75
BUY PUT JUL-25 UMQ-SE OI=1365 at $1.95 SL=1.00

Average Daily Volume = 6.34 mln


IDPH - call
Adjust from $67 up to $69

QLGC - put
Adjust from $57 down to $55

SRNA - put
Adjust from $31 down to $30

TLAB - put
Adjust from $26 down to $25

TMPW - put
Adjust from $60 down to $58


MSFT $66.88 -1.14 (-1.14) Mr. Softee just couldn't dodge the
widespread Technology weakness that engulfed the market this
morning and continued to deteriorate.  Friday's drop below the
50-dma paved the way for today's loss, and that important
level acted as resistance today.  Concern's about ORCL's
numbers, due out after the close tonight, helped to keep
Software buyers at bay.  The spat with AOL flared up again
today, as it appears the two companies can't agree on a Windows
XP deal.  This certainly didn't endear investors to MSFT in an
uncertain economic environment.  MSFT's inability to hold above
the $70 level and then falling below our $67 stop leaves us no
choice but to eject it from the call list tonight.


No dropped puts tonight


Market Neutral Trading
By Mark Phillips

In the past, we have talked about the way emotions rule the
market and how we can improve our trading results if we can
hold our own emotions at arm's length while allowing our own
intellect to rule our trading decisions.  Understanding how
emotions influence trading decisions is certainly an important
milestone on the path to becoming a long-term successful trader,
but we have another component that can double the profitability
of most traders.

Double?  That's a pretty bold statement, don't you think?  Let's
talk specifics and see if my assertion is valid or not.  When
you look at a given stock, do you see only its upside potential
or do you see opportunities to play the downside?  Referred to
as playing the short side, adding this approach to your arsenal
of trading strategies can dramatically increase your
profitability over the long run.

Whether you buy and sell stocks or trade call and put options,
the basic approach is the same.  The charts will tell us which
way to play, if only we can block out the Buy-and-Hold mantra
that most investors have had drilled into their heads.  While
that approach works just fine for long-term investors preparing
for their retirement in the far-off future, you and I are
traders, profiting from the shorter-term moves that accompany
the ebb and flow of the equity markets.

The stock market has a natural bias to the upside, and this is
helped along by our collective psychology.  As a society, we
tend to root for winners, and this seems to permeate our
analysis of stock charts.  We seem to see bullish patterns
wherever we look, hence the tendency of traders to buy each dip
during the bear market of 2000.  If only they could have removed
their rose-colored glasses and taken the patterns developing in
front of their eyes at face value, it would have provided them
with endless profitable trading opportunities to the downside.

There is another factor that makes trading the short side of
market moves very attractive, and that is the rapidity of the
movement.  As powerful a catalyst as greed is, fear of loss
produces an even more visceral reaction.  When selling takes on
the element of panic, the rate of descent will outpace all but
the most violent bullish moves.  So those that can recognize and
act on a bearish trade setup can actually profit more handsomely
in the right environment than a trader who is equally adept at
ferreting out the bullish trade setups.  Those that can
recognize both with equal aplomb are practically able to print
money, regardless of market conditions.

Now that I have whetted your appetite for recognizing and then
trading to the short side, let's look at a couple of charts to
see if there is evidence to back up my position.  The first
chart should be familiar to everyone, as it is the NASDAQ
Composite on its record-breaking run from south of 3000 to the
high side of 5000 in less than 5 months.  We can all recognize
the solid ascending trend that emerged in late October as the
index rallied through the 2900 level and rocketed higher with
hardly a backwards glance.  It didn't take a rocket scientist
to recognize the strong bullish trend and occasionally jump in
to take juicy chunks of profit along the way up.  Bearish trades
in this market were fraught with peril, and many a bear was
ground into dust under the stampeding bulls' hooves.

Now that was almost too easy, wasn't it?  How about looking at a
mystery chart?  Afterall, if we are going to be able to trade
both bullish and bearish chart setups, then we ought to be able
to do it without knowing what the security or index is.  I have
even removed the price scale, so as to further obscure the
identity of the equity in question.  This one is very similar to
our NASDAQ chart, now isn't it?  After confirming support at the
first line, and then clearing resistance at the second, it was a
simple matter to draw another ascending channel that contained
the upward move.  Even the most basic trading approach would
allow us to profit by buying when the stock bounced at the lower
channel line and taking profits near the upper edge of the

Ah, but here's the trick!  Below is the mystery chart with its
identity revealed.

The NASDAQ Composite makes another appearance, yet I'll bet if I
showed you this chart first, you wouldn't have been nearly
excited about the bearish trading opportunities.  All I did was
invert the price scale, remove any identifying marks, and draw
in the support/resistance and channel lines.  It's a cheap
trick, but designed to point out how our minds naturally filter
out what we are not accustomed to.  After years of being
immersed in a bullish market, many of us have become used to
seeing only bullish chart patterns.  But as the year 2000 has
demonstrated all too plainly, profits are plentiful for bearish
traders as well.

All we have to be able to do is see them, and act accordingly.
Seeing them actually turns out to be the biggest challenge.
After they have run their course, declining markets are apparent
for all to see, but we need to be able to identify them in time
to profit as they play out.  If you have a hard time seeing the
bearish trends due to the limitation of your bullish glasses,
consider printing out a few down trending charts and look at
them in the mirror.  The trading opportunities will quickly
become apparent, and your trading account will thank you for
the effort.

If only we could turn back the hands of time, think how
profitable the year 2000 could have been.  Since time only moves
in one direction, we can only learn from our experiences and
improve with age.  Hopefully this little exercise will allow you
to expand your horizons, seeing the opportunities contained in
bearish markets, as well as the bullish ones.


QCOM - Qualcomm, Inc. $50.04 +0.69 (+0.69 this week)

Based on its proprietary CDMA technology, QCOM is engaged in
developing and delivering digital wireless communications
services.  The company's business areas include integrated
CDMA chipsets and system software and technology licensing.
QCOM owns patents that are essential to all of the CDMA
wireless telecommunications standards that have been adopted
or proposed for adoption by the worldwide standards-setting
bodies.  Currently, QCOM has licensed its CDMA patent portfolio
to more than 80 telecommunications equipment manufacturers
around the world.

Most Recent Write-Up

After a dismal week in the Wireless sector, thanks to Nokia's
earnings warning, QCOM looks like it is ready for another quick
run to the upside.  Giving up more than 20% during the course
of the week, QCOM hit $48.50 at its low on Friday before finding
some mild buying interest.  A quick look a the Point and Figure
chart shows that $48 was the bearish target generated by the
decline that began a week ago Friday.  With this target
achieved, it looks like the stock could be due for an oversold
bounce.  The fact that the bullish percent on the NASDAQ-100
fell into oversold on Friday with a reading of 26, further
stacks the deck in favor of the bulls near-term.  There isn't
much in terms of overhead resistance until $55, but that is
the location of the 38% retracement of the recent decline, so it
looks like a good bullish target to shoot for.  Aggressive
traders can target entries in the $48-49 range, while more
conservative players will want to wait for a move through
Friday's $50 intraday resistance level before jumping into new
positions.  Should the decline continue below $48 before giving
us our bounce, we'll be out of the play in a flash with our stop
set at $47.  Watch the overall NASDAQ for signs of life, as this
will help to confirm that we are on the right side of the trade.


The bounce we had been gaming in QCOM came to fruition Monday,
as buyers stepped in early to carry shares of the telecom
equipment maker higher despite earlier warnings within the
group.  QCOM's bounce Monday may very well morph into an extended
advance Tuesday on the heels of Oracle's relatively upbeat
earnings report.  In terms of entry points, look for a quick
bounce off the $50 level or consider entering on strength if
the stock advances above Monday's intraday high of $52.24.  Look
for exit points around the $55 level.

BUY CALL JUL-45 AAO-GI OI=  528 at $7.90 SL=5.75
BUY CALL JUL-50*AAO-GJ OI= 3244 at $4.90 SL=3.00
BUY CALL JUL-55 AAF-GK OI= 3424 at $2.50 SL=1.25
BUY CALL OCT-50 AAO-JJ OI= 1653 at $9.30 SL=6.50
BUY CALL OCT-55 AAO-JK OI= 2786 at $7.10 SL=5.00
BUY CALL OCT-60 AAF-JL OI= 3159 at $5.40 SL=3.50

SELL PUT JUL-45 AAO-SI OI=10874 at $2.65 SL=4.50
(See risks of selling puts in play legend)

Average Daily Volume = 14.9 mln


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