The Option Investor Newsletter Monday 06-18-2001 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/5854_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** 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 close. 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 dawn." 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 Editor ================================================================== 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: http://www.premierinvestorseminars.com/seminarcalendar.asp 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: http://www.premierinvestorseminars.com/seminarcalendar.asp ************* NEW CALL PLAY ************* 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 http://www.premierinvestor.com/oi/profile.asp?ticker=FRX ************ NEW PUT PLAY ************ 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 distributors. 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 http://www.premierinvestor.com/oi/profile.asp?ticker=EMLX ***************** STOP-LOSS UPDATES ***************** 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 ************ DROPPED CALL ************ 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. ************ DROPPED PUTS ************ No dropped puts tonight ************** TRADERS CORNER ************** 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 channel. 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. ********************** PLAY OF THE DAY - CALL ********************** 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. Comments 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 http://www.premierinvestor.com/oi/profile.asp?ticker=QCOM ******************* 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. 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