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Daily Newsletter, Tuesday, 06/26/2001

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The Option Investor Newsletter                  Tuesday 06-26-2001
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        06-26-2001        High      Low     Volume Advance/Decline
DJIA    10473.28 - 31.74 10534.21 10394.72 1.19 bln   1780/1294 
NASDAQ   2064.43 + 13.75  2068.15  2017.34 1.65 bln   2043/1697
S&P 100   629.44 -  2.49   632.03   623.85   totals   3823/2991
S&P 500  1216.68 -  1.84  1220.70  1204.64
RUS 2000  490.56 +  6.63   490.82   482.19
DJ TRANS 2645.05 -  2.82  2663.74  2606.26
VIX        23.35 +   .10    24.50    23.33
Put/Call Ratio      0.66
******************************************************************

Oracle Giveth, Merrill Taketh Away!

Tech warnings are bleeding into other sectors as evidenced by the
huge Merrill Lynch warning this morning. The tech wreck has caused
a market wreck which knocked as much as -37% off Merrill's profits.
Merrill said they had already cut -3300 jobs as a result of lower
retail trades and losses in the stock market. We are all aware of
the tech damage on Wall Street but International Paper also said
they were laying off -3000 of its non-manufacturing employees to
cut costs in an effort to cope with falling demand.  These were
just two of the market movers at the open and the Dow dropped over
-100 points on the news.







It looked very ugly about noon with the Dow down over -100 points
and threatening to fall below 10400. The financials were in the
tank after the Merrill warning. Techs were still under pressure
even though some were trying to buck the trend. The positive
economic reports had Fed guessers worried that we would only see
a -25 point cut and the talking heads on TV were doing everything
they could to put a positive spin on the news. No, it is not October
but the market has many people thinking they went to sleep and woke
up several months later. The markets were looking for any excuse
for an oversold bounce. From 10759 on June 21st to the 10394 low
around noon, there was about -360 points of pain that investors
were looking to forget.

The bounce came on several fronts at once. There was a rumor that
the GE/HON deal might get new life and GE spiked to the high of
the day before the rumor was killed. Microsoft gained almost +2.50
between noon and 2:PM on rumors that the appeals court was going
to rule in favor of Microsoft. Oracle CEO, Larry Ellison, went
public with news that some big customer orders were starting to
come through and the current quarter would be much stronger than
last quarter. ORCL went vertical on the news recovering all its
loss for the day and closing fractionally positive. Traders were
grasping at any straw that appeared to justify jumping into the
market before the Fed announcement on Wednesday.

The coming Fed decision is about as hotly argued as the
presidential election last November. The positive economic
reports all but killed any hopes of a -50 point cut in many minds.
The Durable Goods report showed that orders for Durable Goods
rose +2.9% which was much greater than the 0.5% analysts expected.
With the good DG news we also saw another upturn in Consumer
Confidence which came in at 117.9 for June after a 116.1 in May.
The Fed has said they watch that indicator closely. Also causing
trouble for Fed watchers was the increase in New Home Sales of
+0.8% which shows the lower interest rates are impacting consumer
buying. The triple whammy of three economically positive reports
has veteran Fed watchers thinking the Fed will cut but only by
-25 points. According to most market watchers this will not be
met with enthusiasm by investors. It would signal the end of
an aggressive Fed and investors would have to depend on earnings
for stock direction and we all know how the earnings are going.
The decision will be Wednesday afternoon and which ever direction
they go the markets are likely to be highly volatile.

The Merrill warning this morning was not the only high profile
disaster. Goldman Sachs cut ratings on 39 tech stocks saying
there were only weak signs of a possible recovery and when one
actually appears it will only be moderate in their opinion.
They said yearly estimates had to come down because of sales
in the first two quarters as well as growing weakness in Asia
and Europe.

Lehman Brothers chip analyst Dan Niles said he was not changing
his estimates on Intel at this time "BUT IF HE WAS GOING TO"
he would cut earnings estimates due to inventory oversupply,
lack of pricing power, lack of demand, etc, etc, etc. So, was
this a "soft" warning to keep Lehman from losing any Intel
business or is he just hedging his bets?

After the barrage of chip warnings today Niles is probably
wishing he had made a high profile downgrade announcement to
capture headlines before the flood washed his soft comments
away. XLNX, a maker of programmable logic chips, said revenue
for the quarter would be -32% less than the prior quarter, a
much larger decline than originally forecast. The company
said "turns", where orders are booked and delivered in the
same quarter, had fallen substantially. They said the drops
in revenues and orders were worse than expected. Also margins
were shrinking in the current environment. Photronics cut its
earnings estimates stating the current environment is one of
the most severe the company has experienced during its 32-year
history. They now expect to earn as little as a penny a share
and analysts had expected about twenty-three cents. PRI Automation
warned that revenue would be -20% lower than expected. They
said "the unprecedented industry slowdown is affecting all of
our business segments." VTSS warned that it was cutting estimates
for the quarter after seeing "no improvement in visibility at
a majority of our customers" and remaining high levels of
inventories. All of this came on the back of the AMCC warning
from yesterday. There were probably more chip related warnings
today but you get the point, I hope!

The chip sector is commonly referred to as "the" leading
indicator for tech stocks and the Nasdaq in general. If this
is the case then what should we expect for earnings and stock
prices this quarter? Our hope is that investors are feeling
that all this bad news is already priced in and now is the
time to buy. The failure of the Nasdaq to break down the last
three days while the Dow was tanking is evidence of this hope.

Good news after the close that could help fuel this concept
was the PALM earnings. They beat lowered estimates for a loss
of nineteen cents with only a sixteen cent loss and said they
expect to return to profitability by 2Q 2002. That was about
as optimistic as we can hope for today. 3Com, COMS, also
announced a loss of -.67 with a drop in revenues of -38%.
They said they saw no industry upturn anytime soon. A duel
of competing announcements. Which one will investors hang
their hat on tomorrow?

With the unofficial recession in full bloom it is no longer
just tech companies with problems. One of the most stable
companies hidden in the background is Danaher, the maker of
Craftsman tools. They warned that earnings for the second
half of 2001 may fall short. "The accelerated rate of decline
in the U.S. coupled with added slowness in Europe and Asia,
has made the revenue picture more challenging in recent weeks."
The "possible" earnings shortfall was only a couple cents but
the keywords in the warning were "accelerating in recent weeks"
(read that "no recovery in sight") and "slowness in Europe and
Asia", (read that as "recession spreading globally"). I have
no axe to grind on DHR. I only mention this to make a point.
Their products are one of the lowest levels of consumer
spending, tools. If mechanics, handymen and home owners are
not buying tools, a staple item, then what chance do computers,
Digital TVs and high dollar products have in a "challenging
environment?"

Why am I writing all this bearish news? Because this is why
I think the Fed will cut -50 points on Wednesday. I could be
wrong, it is just my opinion and I have a 50/50 chance but
don't you think the Fed has a little more info from which
to make their decision than we do? Don't you think the Fed
is probably looking at underlying details that are painting
more of a dismal picture? We, investors, tend to look at only
one indicator. The markets. We tend to color our perception
of reality by whether the markets are up or down. Alice Rivlin
said on CNBC tonight that the Fed does not care about the
markets. Bull! Why do you think the Consumer Confidence
was up again? It is because the Dow was bumping 11000 until
a couple weeks ago. The Nasdaq was bumping 2250 three weeks
ago and the term "summer rally" was in every stock broadcast.
Today's market feelings are much different. The Fed needs
the consumer to feel bullish and they can't do it with daily
-100 point drops.

Who knows? They may be looking at a briefcase of positive
numbers and they know the recovery is already underway.
Unfortunately they have not told the chip sector yet and
that is the sector that builds the basic parts that all
retail products are built around. No chips, no computers,
cell phones, TV, toasters, hair dryers, etc. A recovery
cannot be underway if chips are not selling. If we are
not going to get another -50 point cut on Wednesday then
we could be in deep water. The good economic numbers on
Tuesday could disappear just as quickly if the Fed quit
too soon. They need another big cut for insurance. They
can take it back later if it was too much but it will be
easier to swallow at Nasdaq 3000 than 2000. Many analysts
feel that this is the last cut and only 25 points could
send the wrong message to the markets just in front of
the summer doldrums.

I will quit on a positive note. Although the volume was
pretty light today advances beat decliners on BOTH the
NYSE and Nasdaq by about 400 issues each. Considering
the Dow was down over -100 at noon and -32 at days end,
the broader market was not as depressed. The Russell-2000
actually gained +6.63 when the S&P-100, 500, Dow and
transports were down. Could there still be a positive
undercurrent here? Contrary to public opinion all tech
stocks are not declining. QLGC added +2.79 and appears
ready to breakout over $60. Yes, a tech stock at $60!
In the Ripley's Believe It Or Not category, there is
still an Internet stock at $70, EBAY, which gave risk
tolerant investors an entry point today. It is all a
matter of perception. If you own LU, WCOM, CMGI or EXDS
you are in the worst bear market you can remember. Or
you could be playing leaders like QLGC and EBAY for a
profit. Tech stocks are not dead, but DO NOT TELL
GREENSPAN BEFORE 2:15 ON WEDNESDAY!

Enter passively, exit aggressively!

Jim Brown
Editor


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****************
MARKET SENTIMENT
****************

Proceed With Caution
By Jeffrey Canavan

cautious \Cau"tious\, Attentive to examine probable effects and
consequences of acts with a view to avoid danger or misfortune;
prudent; circumspect; wary; watchful; as, a cautious general.

That's the word Goldman Sachs used to describe their stance on
technology stocks.  They see continued weakness, noted some
evidence that suggests we could be near a bottom, and then
added that when the recovery does happen, it will be more
moderate.  Quite the revelation.

discriminating \d-skrm-ntng\, Able to recognize or draw fine
distinctions; perceptive; showing careful judgment or fine
taste; separating into distinct parts or components; analytical.

Cautious is a good way to approach the markets these days, but
a discriminating palate is needed for selecting stocks. There
are a few good long candidates, a few good short candidates,
and a lot stuck in the middle.  With the market lacking
direction, it's too close to call what Greenspan's...I mean the
market's sentiment is.


Market Volatility
VIX   23.25
VXN   54.01

Put/Call Ratio
Total            .66
Equity Only      .58
OEX              .85
QQQ              .37

Bullish Percent Data: Readings above 70 are considered
overbought, and readings below 30 are considered oversold

NYSE          48
NASDAQ-100    34
DOW           58
S&P 500       54

10-Day Arms Index  1.33
Readings above 1.25 are bullish, and readings below .85 are
bearish.  These signals don't occur often and tend be early,
but when the do, they can signal significant market turning
points.

        Advancers     Decliners
NYSE      1780           1290
NASDAQ    2038           1700

        New Highs      New Lows
NYSE       113            47
NASDAQ     111            88

Advisory Sentiment   Bullish   Bearish
                       51%      30.6%


Commitments Of Traders Report: 06/19/01
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange.

Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.

S&P 500
Commercials   Long      Short      Net     %Change  Open Interest
6/05/01      323,109   400,509   (77,490)    13.1%     510,122
6/12/01      353,074   423,257   (70,183)    (9.4%)    562,025
6/19/01      301,376   371,121   (69,745)    (0.6%)    457,618

Most bearish reading of the year: (111,956) - 3/6/01
Most bullish reading of the year: (41,144)  - 5/1/01

Small Traders   Long      Short      Net      %Change
6/05/01        154,233    76,632    77,601      10.5%
6/12/01        167,720   100,610    67,110     (13.5%)
6/19/01        128,296    56,038    77,258      (7.7%)

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year:  91,122 - 3/06/01

NASDAQ-100
Commercials   Long      Short      Net     %Change  Open Interest
6/05/01       25,098    36,433    (11,335)   (1.5%)    51,660
6/12/01       33,586    44,234    (10,648)   (6.1%)    68,245
6/19/01       23,480    34,097    (10,617)   (0.3%)    47,202

Most bearish reading of the year: (15,521) - 3/13/01
Most bullish reading of the year:  (1,825) - 1/02/01

Small Traders  Long      Short      Net      %Change
6/05/01        11,217    10,062    1,155     (60.3%)
6/12/01        18,374    16,264    2,110      82.7%
6/19/01        14,284     8,403    5,881     178.7%

Most bearish reading of the year:  (1,028) - 1/02/01
Most bullish reading of the year:   8,460  - 3/13/01


DOW JONES INDUSTRIAL
Commercials   Long      Short      Net     %Change  Open Interest
6/05/01       22,717    16,888    5,829      0.3%      35,257
6/12/01       24,724    18,485    6,239      7.0%      37,886
6/19/01       12,346    10,470    1,876    (69.9%)     22,611

Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year:  8,925  - 5/22/01

Small Traders  Long      Short      Net      %Change
6/05/01        3,881     8,132    (4,251)      0.6%
6/12/01        5,332     9,637    (4,305)      1.3%
6/19/01        3,844     7,555    (3,711)    (13.8%)

Most bearish reading of the year:  (7,572) - 5/08/01
Most bullish reading of the year:   1,909  - 1/16/01


***********
OPTIONS 101
***********

Covered Calls on the Cheap - A Success Story
By Mark Phillips

Last week we dove into the topic of writing Covered Calls
against LEAPS as a way to mitigate risk during a sideways
market.  This approach has a distinct advantage over the
standard Covered Calls approach, where the long leg consists
of actually owning the shares of the underlying stock.  Due to
the greatly reduced cost basis with LEAPS, the return on
investment (ROI) is much larger on a percentage basis.

After covering the basics of the strategy last week, I left you
with a hypothetical example to demonstrate the validity of the
strategy in broad-brush strokes.  My article this evening will
dissect a real-world trade, hopefully demonstrating the details
of how such a strategy is implemented.

Our first task is to find a stock with a modest uptrend, or at
least a nice sideways trading pattern.  We want the LEAP to hold
its value or appreciate slowly, while the calls we sell every
month should put decaying time premium in our account.  A
steeply trending stock is not what the doctor ordered for this
strategy.

My example is laced with a bit of vengeance, due to the fact
that I hate to lose to the market, especially when I know I'm
right.  Long-term fans of the LEAPS column will remember when
we took a position in 2002/2003 AOL-Time Warner (NYSE:AOL) LEAPS
in early March, setting a stop at $35.  Well, I should have
given it a bit more room before cutting it loose, maybe to the
$32 area.  On Aril 3rd, AOL closed at $33.90, triggering our
stop and booting us out of the play.  The very next day the
stock reversed on heavy volume and closed back over the $35
level.  The LEAPS column couldn't react that fast, but I sure
could.  Although it was a high-risk move, due to the recent
market action, I liked the bounce at a higher low and the story
behind AOL, so I jumped into the $40 2003 LEAPS (VAN-AH) for
$8.70 at the close, purchasing a round lot of 10 for $8700.

Now recall that I like to leg into my Covered Calls.  There is
more risk involved, to be sure, as the stock could head south
before you've had a chance to mitigate it by selling the first
month's call.  But since I typically initiate my LEAPS positions
when the stock is in an oversold condition, odds favor an upward
move in the stock in the near future.  Also, if the stock does
head south in a hurry, the Covered Call really doesn't do much
more than take the edge off the pain.  Nothing ever takes the
place of stop losses, and we have to use them judiciously, even
in this strategy.  I couldn't have timed it much better on AOL
(I wish I could have done as well with the rest of my portfolio
this spring), and literally picked the bottom.  We can't count
on being that lucky very often, but sometimes you have to go
with your gut, especially when the technicals are in your favor.




After waiting for more than 2 weeks and clapping my hands with
glee as AOL rose back towards the $50 mark, I finally saw my
opportunity to take in some premium as the ascent began to slow.
The $50 mark looked pretty firm, but I wanted to give myself a
little bit of insurance in case the stock broke through this
level, so I sold the $55 May Calls (AOO-EK) on April 27th for a
whopping $0.70.  Not exactly a windfall, but it did allow me to
pocket $700, reducing my cost basis for the LEAPS to a round
$8000.  Once again, time to wait and let the market deliver the
verdict as to whether I had acted wisely.

Notice that the Stochastics are pegged in overbought territory
where I sold the covered calls.  While this oscillator can
remain there for some time to come, odds favor flat to down
motion for the near future.  Also, remember that we are hoping
for a rangebound market, and that is the type of condition in
which oscillators excel, giving buy and sell signals at relative
lows and highs, respectively.

So let's fast-forward to May expiration (May 18th) and see how
we did.  Sure enough, the stock failed to penetrate the $55
level, but this is a clear case of saved by the bell, as the
stock closed above $57 a mere two days later.

I must say I was getting a bit nervous near the end of the May
expiration cycle, but my faith was rewarded as the stock closed
at $54.43, allowing me to keep all the premium I took in a few
weeks before.  On Monday morning, the stock was still in ascent
mode, prompting me to hold off on selling the June calls until
some weakness emerged.  All the way to the closing bell, it
kept pointing up and I spent the day on the sidelines.  The next
day was a different story though, as AOL gapped up and quickly
began falling back to earth.  With all my oscillators pegged in
overbought, it seemed like the time to strike.  Given the break
above our $55 resistance level, I decided the $60 strike made
more sense, given our desire to not have our LEAP called away
from us.




So in a flash, during amateur hour (when volatility is the
highest), I sold 10 of the June $60 Calls (AOO-FL) for $1.00, or
a total credit of $1000.  This dropped the total cost basis of
our LEAPS down to $7000, and a quick look at the daily Chart of
AOL shows that our LEAPS were never in danger of being called
away throughout the June expiration cycle.

On June 15th, the sold calls expired worthless, leaving us free
to repeat the process in July when conditions dictate a
favorable entry point.  As of this writing, AOL has not yet
provided what I think is an attractive entry point for the July
cycle options.  But with daily Stochastics entering overbought
territory, we are getting close.  All we have to do is wait for
the inevitable rollover, which will begin to materialize on the
hourly chart first (the reason I tend to monitor it even for my
long-term trade entries), giving us another high-odds, low-risk
play for the month.

Coming back to the May expiration cycle, I mentioned that we
were saved by the bell.  If the price spike came before May
expiration, we would have had two choices; buy the short-term
call back (possibly for a loss), or roll out to the June
contracts prior to May's expiration.  Rolling out consists of
buying back the calls that are in danger of closing in the
money, and moving out to the next expiration month (and
possibly a higher strike price) so that time decay continues
to work for us.  Unfortunately, I didn't have a good example
of a Covered Call play going against me recently, so perhaps
we'll just have to periodically review our progress on this
play.

This is not high-octane options trading, but it is a method for
using what we know about technical analysis to juice up the
returns of our long-term portfolio.  During the two months we
covered here, we took in $1700 in premium on a net investment of
$8700.  That alone represents an ROI of 19.5%.  Annualize that,
and we have 117%.  If we were playing the same strategy with the
underlying stock (which would have cost us $35,000), our covered
call strategy would have netted us a whopping 4.9%, which comes
out to 29% on an annualized basis.  Nothing to sneeze at for
sure, but a far cry from what is possible when using the
leverage of LEAPS.

We have ignored the appreciation of the long-term leg in this
example, but as of June expiration, the VAN-AH LEAP was trading
for $17.80, which yields better than 100% by itself.  Taking
into account the continuously dropping cost basis, the ROI after
the June cycle rests at 154% ($17,800/$7000).  And it's only
going to get better as we continue to write low risk front-month
calls against those LEAPS.  At the current rate, those LEAPS
will have a negative cost basis long before expiration, making
it tough to calculate the effective rate of return of the whole
position.  But I can tell you this.  It sure is an easier way
to sleep at night than trying to buy and hold cheap,
far-out-of-the-money LEAPS on some fallen technology superstar
of yester-year (like RMBS or JDSU) hoping against hope that the
stock will come back, making your portfolio whole again.

I apologize for not adequately covering the downside of this
strategy, but as you can see, I have already rambled on far too
long.  But we have yet to enter the July contracts, so there is
plenty of opportunity.  If you're lucky (and I'm not), there
could be more education on this topic in a few weeks when the
July expiration cycle draws to a close.  If you're interested
in continuing updates, drop me an email.  If I get enough
interest, I'll continue to update the trade over the coming
months.  In the process, you should get a good view of the
good as well as the bad.

Questions are welcome:
Contact Support


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PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

GE $48.79 -1.46 (-3.07) Once again failing to hold above the $50
mark, GE has been a victim of the weakness on the DJIA this week,
and could have problems again tomorrow in the wake of the Fed's
decision on interest rates.  Particularly disconcerting in
Tuesday's action was the fact that the stock closed right at its
low of the day, while the old-economy index managed to recover
the lion's share of its early losses.  GE is looking weaker than
we'd like to see, so we are taking pre-emptive action by moving
it to the drop list tonight.


PUTS:
*****

NVLS $54.64 +1.04 (+2.67) Optimistic bulls finally found some
traction Tuesday afternoon, pushing NVLS sharply higher ahead
of the much-anticipated Fed meeting.  Since being added, the
stock has been trading in a narrow $2 range, affording very
little in terms of entry points, even for aggressive
day-traders.  With today's close above our $54 stop, coming on
a solid increase in volume, we are just as happy to move it to
the drop list ahead of tomorrow's expected volatility.

SRNA $28.30 +1.36 (+0.58) There just hasn't been much tradable
action on SRNA, and the daily price range seems to be narrowing.
While our $30 stop hasn't been violated, we are growing
concerned that the stock is coiling for a breakout.  Tomorrow's
FOMC meeting results are a big catalyst and we'd prefer not to
get in the way of a possible stampede.  The old adage says not
to short a dull market, and SRNA has definitely been dull, as
its daily range has narrowed to $2.00.  It's time to get out of
the kitchen before we get burned.


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The Option Investor Newsletter                  Tuesday 06-26-2001
Copyright 2001, All rights reserved.                        2 of 2
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********************
PLAY UPDATES - CALLS
********************

RATL $27.54 +0.40 (+1.24) Shares of RATL continue to inch ever-so
closer to their pivotal breakout point at the $29 level.  In the
meantime, however, RATL needs to get above the $28 level.  In
mid-May and early June, RATL rolled over near the $28 level, which
is where the stock is currently finding resistance.  If its
pattern of higher relative lows continues, the stock should break
above the $28 level in the next day or two.  But a lot of RATL's
short-term action will depend upon the market's reception of the
Fed's announcement Wednesday afternoon.  That said, a favorable
reaction should carry RATL above the $29 level, where traders
can look to enter new long positions, or add to existing call
positions.  Just make sure any breakout above $29 comes on strong
volume.  On the other hand, if RATL breaks down below its one
week aggressive, ascending support line, look for pullbacks to
support near $26, or lower around $24, which is the current site
of our stop.

MEDI $45.75 +1.56 (+0.45) Despite recent setbacks in the
broader biotech sector, MEDI continues to exert its relative
strength.  Dip buyers have been quick to prop the stock up,
following any light volume pullback.  Going forward, options
traders can use any additional pullbacks to gain entry.  Look
first for support to materialize around the $43 level, which is
the current site of MEDI's 10-dma.  Below that, strong support
exists at $42, which coincides with the level of our stop.  For
those who prefer trading breakouts rather than pullbacks, be
patient and wait for MEDI to stage a strong advance above the
$48 level.  Though more than $2 away from its current price,
a breakout above $48 could set MEDI to advance in the mid $50's.
Of course, it will have to surpass its 200-dma first, which
currently resides at $48.50.  For MEDI to breakout, the stock
will most likely need assistance from its sector in the form
of the Biotechnology Index (BTK.X).  Make sure to confirm
direction in the BTK when entering any new plays on strength
in MEDI.

CEPH $68.65 -0.03 (+0.05) Depending upon perspective, the price
action in CEPH so far this week has been constructive.  The
broader biotech sector, as measured by the AMEX Biotechnology
Sector Index (BTK.X), has shed roughly 3.5 percent while CEPH
has held steady.  Its relative strength may very well portend
a breakout above the key resistance level at $71 this week,
which would allow traders to enter new call positions, provided
it comes on healthy volume.  Trading activity has been
extremely light so far this week, which again is constructive
and indicative of consolidation.  Those who prefer to enter
bullish plays on weakness can use any light volume dip down to
the $66 level to get long this stock.  But, perhaps the best
approach to CEPH is to wait for the breakout above $71 on
strong volume and enter accordingly.

MWD $63.82 -0.70 (-1.23) Shares of MWD were pressured early
Tuesday morning in the wake of Merrill Lynch's profit warning.
Indeed, the Securities Broker/Dealer Index (XBD.X) fell under
heavy pressure, but was able to stage a rebound from its early
intraday lows.  The relative strength of MWD was encouraging
to witness Tuesday, but we must concede that going into
Wednesday's session may be rather tricky because of the Fed's
official announcement on interest rates in the afternoon.  Those
with aversion to risk may consider holding off on entering any
new positions prior the announcement.  Post announcement, if the
market likes what Greenspan delivers, look for MWD to advance
above the $65 level, at which time traders can look to get long
with $70 as a short-term target.

AHC $83.73 +0.15 (+0.13) We initiated coverage on AHC over the
weekend in an attempt to gauge a short-term, oversold bounce in
the sector in conjunction with rising tensions in the Middle
East.  Neither of our speculations have come to fruition yet this
week, so AHC is on a rather short leash.  The stock hasn't yet
performed, but it hasn't really pulled back either.  It continues
attract buyers near the $82.25 level and refuses to go lower.
While encouraging, we need to see some upside movement in short
order for AHC to remain on the call list.  Nimble, intraday
traders might look to enter new positions on a pullback down to
$82.25.  While those who tend towards momentum strategies might
look to get long calls if AHC advances above $84.

ADBE $44.65 +0.13 (+1.07) Along with the broader Software
sector, ADBE spent the past few days sliding back from its
recent rally, finding support near $43.50 as volume has
continued to wane ahead of the FOMC meeting.  Traders that
bought the dip were finally rewarded this afternoon as the
stock rallied as high as $45 before pulling back a bit at the
close.  At this point, the pivotal factor will be the Fed
tomorrow.  Traders with open positions may want to consider
locking in profits ahead of the actual announcement and then
consider whether to renew the play after the dust settles.
The $43 level still looks attractive for dip buyers, with the
converged 10-dma ($42.54), 30-dma ($42.37) and 50-dma ($42.61)
adding to this support.  A rally through the $46 level will
open the door for new entries as well, but make sure that it
is accompanied by much stronger volume than we have been
seeing in recent days.  Our stop is still resting at $40.

FRX $71.51 -0.24 (-0.59) The Drug sector has continued to
deteriorate this week on the heels of MRK's bearish product
news late last week.  It is a credit to FRX's relative strength
that the stock has managed to hold its ground without succumbing
to the selling frenzy that has engulfed many large
Pharmaceutical stocks.  Part of FRX's strength is likely due to
the fact that as a specialty drug company, it will likely
benefit from the problems (namely, increased competition from
the small and generic drug manufacturers) that are plaguing the
likes of MRK, LLY, PFE and BMY.  While there hasn't been much
trading action this week, we are seeing the $71 level solidify
as support.  Dip buyers can consider new positions on a bounce
either there or at the $70 support level, keeping in mind that
our stop rests at the $67 level.  If you're waiting for the
breakout, look for volume to increase, driving FRX through the
$74 level on its was to a test of $76 and then the all-time
high of $78.28.

MVSN $59.40 -0.80 (+0.85) While it didn't bolt right out of the
gate this morning, MVSN actually had a pretty decent first day
on the playlist, considering the wild gyrations of the broader
markets ahead of the FOMC meeting.  After the opening dip, the
stock recovered nicely to spend most of the day consolidating
above the $59 level, likely gathering its strength to push
higher after the Fed announcement tomorrow afternoon.  Recall
from last night's writeup that we have some serious resistance
between $61-62, reinforced by the stock's 38% retracement of
the stock's decline since Labor Day last year.  While dips in
the $58 range are definitely buyable, the higher odds play right
now is to jump on board after the bulls power MVSN through the
$62 resistance level on strong volume.  Recall that the initial
breakout on the Point and Figure chart occurred as the stock
cleared $58, the bullish pattern will be strengthened
considerably once price moves decisively through $62,
completing another bullish breakout pattern.  Keep stops at $55.

OPWV $30.50 +0.63 (+1.83) Despite an opening dip to the $28
level this morning, OPWV gathered its strength and recovered
nicely for most of the day, finally closing at $30.50.  With the
broader markets primarily marking time until the conclusion of
the FOMC meeting, it is hard to put much credence on today's
price action (coming on only half the ADV), even though it was
in our favor.  Until the market picks a direction that lasts for
more than a few hours, we need to rely on entry points based on
support and resistance.  A breakout over the $32 resistance
level will open the door for new entry points, so long as volume
comes back to life.  So long as our $24 stop isn't violated in
the near-term, the Point and Figure chart indicates upside to
the $39-40 level.  After clearing $32, the next major obstacle
will appear in the $34 area, as OPWV begins to challenge the gap
left on June 12th.  Dip-buyers can still target intraday support
near $28, and then firmer support at $25 for initiating new
positions.

QCOM $53.45 -0.90 (-0.58) QCOM has been a nearly picture perfect
play so far, bottoming at $48 and stopping its ascent at $55,
just like the Point and Figure chart said it should.  The big
question that must be answered now is whether there is any more
profit left in the play.  It made sense that the stock would
pull back after tagging the $55 level.  As long as the bulls can
remain in control, the Point and Figure chart is now pointing to
an upside target of $67, very near major resistance for the
stock.  If you are looking to play the breakout, keep in mind
the strong resistance at $56-57 and then again at $60.  The more
prudent approach at this point looks like buying the dips in the
vicinity of $52, or even near our $50 stop.  The market reaction
to the FOMC meeting results are a complete unknown at this time,
so unless you like to live dangerously, you might want to wait
until after that event before initiating new positions.


*******************
PLAY UPDATES - PUTS
*******************

NETE $28.20 -0.83 (-1.94) NETE's sharp decline Monday was most
promising for those bears with open positions in the play.  The
stock continues to act very weak and volume remains relatively
strong during the recent decline.  For those two reasons, we're
keeping the play active and would look for entries on any
breakdown below the $27.60 level.  If NETE takes out its
relative low around $26 that was traced Monday, we could very
well see the stock work down to the low $20's.  But to reiterate
our comment over the weekend, for those with substantial accrued
points in this short play, consider booking some gains on any
further weakness this week.

EMLX $33.56 +1.45 (+0.86) The day changes, but the pattern
remains the same.  Following its habit of the past couple weeks,
EMLX caught a burst of buying this afternoon that lifted the
price briefly above the $34 level, before falling off into the
close.  This is clearly not a buy-and-hold play, but it has been
providing consistent gains for those that can buy the buy puts
near the peaks ($34-35) and sell near the valleys ($31).  It
isn't a big move, but enough to consistently keep your equity
curve on the rise.  Today's rally in advance of the FOMC meeting
lifted most of the storage stocks, but the bears were lying in
wait.  While the market's reaction to the Fed's decision
tomorrow is an unknown, any spike in price on EMLX will likely
provide further entry opportunities in our play, so long as our
$36 stop remains intact.  Continue to play the current range as
long as it lasts.  Should the bears succeed in pushing EMLX
below $30 on strong volume, we could consider new positions down
to the next support level at $26.50, the site of the 61%
retracement of the stock's April-May gains.

HGSI $57.55 -1.54 (-4.95) This is one party we got to just in
time!  Beginning coverage of HGSI over the weekend, we were
looking for the action around the pivotal $61 level to guide us
into new positions, and we weren't disappointed.  After falling
to that level shortly after yesterday's open, HGSI fell right
through and never looked back, reaching an intraday low near
$58.50.  The festivities continued this morning, with the bears
continuing to sell the stock all the way down to $56.25 before
any serious buying relief appeared.  While the buyers managed to
lift the price to the $58 level, there wasn't much conviction in
their actions, and it looks like HGSI could roll over again,
allowing us to repeat the process for the next leg down.  A
clean break below $56 would be the first entry target, as it
would open the door for a test of support first at $54 and then
$51.  We do need to watch the $57.25 level, which is the 50%
retracement level of the stock's recent gains.  HGSI's ability
to close above this level (although just barely) today, could
be warning us of demand at that level.  An alternative strategy
will be to look for a failed rally in the $61 area to provide
entry into the play.  Stops have been moved down to $61.

MERQ $53.71 +1.34 (-0.76) Despite an early dip, the bulls came
out with a victory in Tuesday's session, lifting MERQ for a gain
on decent volume.  Of course, they were unable to penetrate the
$54 level, and this could be the beginning of an attractive
entry point.  A rollover in the $54-55 area looks good in this
case, although prudent traders may want to wait for the outcome
of the FOMC meeting before committing fresh cash to the play.
Additionally, the stock has been bumping into resistance at the
$58 level, making that a good location to place our stop and
providing an entry target for more aggressive dip-buyers (or
spike-sellers, in this case).  This morning's low occurred just
above the $50 support level, and once the bears push below this
level it will provide another attractive way to play, as it
will complete the descending triple-bottom breakdown on the
Point and Figure chart.

NVDA $93.75 +2.63 (+2.45) Ever since we picked it last week,
we've been waiting for a high-odds entry point to materialize on
NVDA.  Either we are getting very close to an entry, or having a
busted play, and the market's reaction to tomorrow's FOMC
decision will be the key.  The 3-week descending trendline and
historical resistance are converged near $95, just below our $96
stop.  Weakness near that level could provide an attractive
entry point tomorrow, ideally after the Fed decision becomes
known.  Stochastics on the hourly chart have entered overbought,
and with this oscillator in danger of rolling over mid-stroke on
the daily chart, odds are in favor of the bears.  But don't jump
the gun.  If the bulls can push NVDA through our $96 stop, it
could very well portend another test of the relative highs near
$100.  More cautious players may want to wait for a drop back
under $92, or even $89 before taking a position.


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*************
NEW CALL PLAY
*************

CHKP Check Point Software $51.37 +2.84 (+2.58)

Check Point provides Internet security.  The company provides
secure enterprise networking solutions that enable customers
to implement centralized policy-based management with enterprise-
wide distributed deployment.  Simply put, CHKP has benefited
from rising demand for its virtual private networks software
which lets remote workers, business allies and customers
securely access corporate computer networks.

Providing a refreshing picture of health, CHKP gained better
than 5% today, ahead of the Fed's interest rate decision.
Perhaps investors have finally figured out the analyst game,
buying whenever the stock is downgraded.  Yesterday, First
Analysis Securities downgraded the stock from Strong Buy to
Accumulate and today the buyers were definitely in control.
Granted, volume was only about two-thirds of the ADV, but that
was to be expected ahead of the FOMC meeting.  Since bottoming
near $42 two weeks ago, CHKP has been putting together a nice
upward move, and looks like it could continue, at least for a
few more days.  Today's advance halted at the 30-dma (currently
$52.13), and we'll want to see a volume-backed move through $52
before taking a momentum-based position.  The Point and Figure
chart is forecasting an eventual target of $67, but we have a
couple other obstacles to deal with first.  The bearish demand
line is resting at $56, which also happens to correspond to the
38% retracement (actually $55.67) of the stock's recent decline.
Additionally. there are 2 dominant descending trendlines to
contend with, one originating in late January, and the other
in mid-April.  Both currently rest near $55, which is also the
site of significant historical resistance.  While that seems a
lot stacked against us in the play, it also provides a clear-cut
action point.  If the bulls can push through $56 on solid
volume, that will give us a high-odds point to enter the play.
Dip-buyers will want to target bounces between $48-50, where the
stock has been consolidating before launching higher this
afternoon.  Place stops at $47, and prudent traders will want
to wait for the dust to settle from tomorrow's interest rate
decision before playing.

BUY CALL JUL-50 KEQ-GJ OI=7197 at $5.20 SL=3.25
BUY CALL JUL-55*KEQ-GK OI=3644 at $3.00 SL=1.50
BUY CALL AUG-55 KEQ-HK OI= 267 at $5.40 SL=3.50
BUY CALL AUG-60 KEQ-HL OI= 490 at $3.60 SL=1.75

SELL PUT JUL-45 KEQ-SI OI=3265 at $1.30 SL=2.50
(See risks of selling puts in play legend)

Average Daily Volume = 12.9 mln
http://www.OptionInvestor.com/charts/chart.asp?symbol=CHKP


************
NEW PUT PLAY
************

ENZN - Enzon $58.10 -1.69 (-3.84 this week)

Enzon is a biopharmaceutical company developing and
commercializing enhanced therapeutics for life-threatening
diseases through the application of its proprietary technologies,
PEG-Modification or PEG Single-Chain Antibodies.  Enzon's
research activities are focused on applying its technologies to
enhance performance compounds with known therapeutic efficacy.
Enzon also pursues commercialization through strategic partnering,
including arrangements with Aventis, Schering-Plough, Eli Lilly,
Bristol-Myers Squibb, Baxter and Alexion.

So far this week, shares of ENZN have traded poorly relative to
the Biotechnology Index (BTK.X).  We're looking for this pattern
to continue over the short-term.  We appreciate the fact that
some may argue that ENZN is oversold noting the current
Stochastics reading.  However, the stock is clearly trending
downward and we're especially encouraged by the break and
subsequent close below the 200-dma on Monday, which currently
resides at $61.35.  We've placed our stop just above that level
at $63 in the event ENZN does sustain a relief rally, which may
provide a solid entry point for those inclined to fade the trend.
But the 200-dma should now serve as resistance, so traders can
look for rollovers near $61 to gain entry if ENZN does rebound
from current levels.  The $60 level might also provide resistance.
Otherwise, confirm weakness in the Biotechnology Sector Index
(BTK.X), and target entries near current levels.  A break below
$58 might offer an entry point, as well as a decline below $57.
For those who pursue the breakdown strategy, watch for weakness
in the BTK with a decline below the 575 level and confirm with
a break below 570.

BUY PUT JUL-60*QYZ-SL OI=396 at $5.40 SL=3.50
BUY PUT JUL-55 QYZ-SK OI=371 at $3.20 SL=1.50
BUY PUT JUL-50 QYZ-SJ OI= 65 at $1.55 SL=0.75

Average Daily Volume = 1.34 mln
http://www.OptionInvestor.com/charts/chart.asp?symbol=ENZN


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**********************
PLAY OF THE DAY - CALL
**********************

RATL - Rational Software $27.54 +0.40 (+1.24 this week)

Rational Software provides a platform for software development
that speeds time-to-market while improving software quality.
This integrated full life-cycle solution combines software
engineering best practices, market-leading tools, and
professional services.  Ninety of the Fortune 100 build
software with the Rational solution.

Most Recent Write-Up

Shares of RATL continue to inch ever-so closer to their pivotal
breakout point at the $29 level.  In the meantime, however, RATL
needs to get above the $28 level.  In mid-May and early June,
RATL rolled over near the $28 level, which is where the stock
is currently finding resistance.  If its pattern of higher
relative lows continues, the stock should break above the $28
level in the next day or two.  But a lot of RATL's short-term
action will depend upon the market's reception of the Fed's
announcement Wednesday afternoon.  That said, a favorable
reaction should carry RATL above the $29 level, where traders
can look to enter new long positions, or add to existing call
positions.  Just make sure any breakout above $29 comes on strong
volume.  On the other hand, if RATL breaks down below its one
week aggressive, ascending support line, look for pullbacks to
support near $26, or lower around $24, which is the current site
of our stop.

Comments

There's no doubt that Wednesday's trading will center around
the Fed's announcement on interest rates.  And if the market
rallies off of the announcement, RATL has a very good change
of breaking out above its big resistance level at $29.  In
fact, ahead of the meeting we may see RATL advance up to that
level.  Perhaps the most prudent course of action, however,
would be to enter on a breakout above $29 following the Fed's
announcement, assuming the market receives it well.

BUY CALL JUL-22.5 RAQ-GR OI= 225 at $6.00 SL=4.00
BUY CALL JUL-25.0*RAQ-GE OI=1278 at $4.20 SL=2.50
BUY CALL JUL-30.0 RAQ-GF OI=1594 at $1.70 SL=1.00
BUY CALL AUG-25.0 RAQ-HE OI=   3 at $5.20 SL=3.25
BUY CALL AUG-30.0 RAQ-HF OI= 298 at $2.90 SL=1.50

Average Daily Volume = 4.50 mln



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index instead?

Learn how to invest in the OEX, QQQ, and SPX.  Get intraday
market updates, plays, education and daily commentaries by
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