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Daily Newsletter, Thursday, 07/26/2001

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The Option Investor Newsletter                 Thursday 07-26-2001
Copyright 2001, All rights reserved.                        1 of 2
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        7-26-2001          High      Low    Volume Advance/Decline
DJIA    10455.63 + 49.96 10459.02 10284.09 1.22 bln   1916/1153	
NASDAQ   2022.96 + 38.64  2025.88  1963.21 1.75 bln   2128/1531
S&P 100   619.14 +  5.19   619.85   608.67   totals   4044/2684
S&P 500  1203.20 + 12.44  1204.18  1182.65
RUS 2000  484.75 +  8.08   485.07   475.74
DJ TRANS 2929.06 + 64.15  2931.78  2851.23
VIX        25.15 -  1.55    27.40    25.15
Put/Call Ratio      0.54
******************************************************************

Now That Was Bullish!

Traders shook off bad news from HWP and CPQ and rallied the major
indexes back from severely negative territory into decent gains
for the day. The Nasdaq closed over 2000, the S&P over 1200 and
the Dow over 10400. All serious resistance points which needed
to be broken on decent volume. That all happened today in spite
if negative news from the two biggest PC makers.







HWP warned that earnings would be well below expectations and
they saw no improvement for the rest of the year. They said they
would cut 6000 jobs as the global economic slump hit its consumer
business. Their comments that the global demand was getting weaker
tanked the market in the morning as investors worried about who
would be next. HWP hit a new 126 week low of $24.

Compaq had warned yesterday that earnings would be down for this
quarter and said that revenues would continue to slide in the
coming months due to an increasing worldwide slump. CPQ fell to
a low of $13.50 at the open but rallied to $14.50 by the close.
Amazing strength in light of their news and the HWP news this
morning.

The warnings from the two computer giants should not have
surprised anyone but the severity was greater than expected.
So why did the markets rally?

At a Robertson Stephens conference today there were repeated
comments that the climate for semiconductors was changing. NSM
and Cypress Semiconductor said good things and both led the
sector higher. CY gained +3.79 to $26.35 and NSM gained +3.18
to $30.00. Several analyst also said positive things about the
communications sector. Nokia is seeing a resurgence of orders
and the chips companies that feed that sector have seen the
bottom according to analysts. First Union initiated coverage
on AMCC, VTSS, PMCS with a Buy and BRCM with a Market Perform.
The SOX rallied back up to resistance at 588 with a 35 point
gain.

HGSI missed estimates slightly but traders were not especially
excited. AMGN announced earnings after the close and said growth
next year would still be in the low double digits. AMGN gained
almost +5 in after hours trading.

WCOM earnings fell slightly but Bernie Ebbers made some positive
comments that juiced the stock and caused a short covering rally
all the way back to $14.50 after hitting a 52-week low of $13.20
yesterday. Considering the magnitude of decline in the telecom
sector any positive comments were appreciated.

The economic news today was mixed with Durable Goods Orders
falling much more than expected at -2.0% vs estimates of -0.9%.
Communications orders fell by more than -20% but semiconductor
orders advanced strongly for the second month in a row. The
book to bill ratio is still well below one but improving. The
pricing pressure still exists in semiconductors but any
improvement will be seen as evidence of a bottom. The Employment
Cost Index was neutral with costs dropping slightly as more
workers apply for each job.

While the rally on negative news was deeply appreciated and
welcomed we are not out of the woods yet. After the bell JDSU
announced earnings that were not earnings and they could be a
killer for Friday's market. They were expected to earn three
cents but instead posted a -.36 cent loss. They also said
they were laying off 16,000 workers world wide due to the
global slowdown in their business. This was a very bad report
and the magnitude of the loss is nothing short of incredible
yet the stock was not punished severely in after hours. After
an initial drop to below $8 from a close near $9.50 the stock
found buyers and slowly moved off the bottom.

What happens on Friday will be interesting to say the least.
Multiple major tech companies making drastic statements about
current and future economic conditions but the market appears
ready to ignore them. About time! Still traders will want to
see what the broader market will do on Friday. After the Corning
earnings guidance on Wednesday it was expected that JDSU would
struggle to do anything positive. The bad news was definitely
priced into the stock since they had already warned twice for
this quarter.

The most bullish event in after hours was the QCOM earnings.
They beat estimates by a penny and raised guidance slightly.
While things are still tough in the telecom sector they see
things improving slightly. This is like asking for volunteers
for an all expense paid trip to judge the Hawaiian Tropic Bikini
Contest. There was no shortage of buyers in after hours with
QCOM gaining +2 before the conference call. While a long way
from any $1,000 price targets it has held its value remarkably
during the recent market sell off. Now with them being the first
in their sector to make positive statements their fortunes are
likely to get much better quickly.

I like what I saw today. The Dow was negative -115 and rallied
to post back to back gains and close over 10400. This was
very bullish in light of the CPQ/HWP warnings. The Nasdaq rallied
back from 2.5 hours in negative territory to close well above
2000 again. This would appear on the surface to be a successful
retest of the 1935 low from July 11th. It is still under the
longer term down trend resistance at 2075-2100 but if market
sentiment has turned then we could make short work of that
level. The S&P-500 closed over 1200 again after several days
of decent gains. Wow! Could this be a rally breaking out all
over?

Before I turn you completely bullish there are still several
key points in our future. 1217-1225 is significant resistance
on the S&P and 10600 represents the same level on the Dow. It
will take more than a couple days of oversold bounce to penetrate
those levels. According to TrimTabs.com $12.5 billion left
stock funds in the week ended on Wednesday. Investors are tired
of the 100 point swings and having their hopes alternately
raised and dashed as each day drags by. There is reportedly
well over two trillion in cash on the sidelines in the hands
of money managers. They may be a little less emotional in
putting money back into the market than retail investors but
everyone will be entering slowly. Bottoms can only be picked
successfully in retrospect and we do not have the benefit of
that yet. It looks like a bottom, sounds like a bottom and
we want it to be a bottom but it takes real money going back
to work to actually make it a bottom.

Until those levels I mentioned above are broken the majority
of money on the sidelines will remain on the sidelines. What
we saw on Thursday was yet another short covering rally brought
on by the positive semiconductor comments. On Friday the odds
are the QCOM news will be the highlight and JDSU is likely to
be ignored. This could cause another wave of short covering
as well as some retail buying. It is however a summer Friday
and we could see some profit taking from the rebound from
Tuesday's bottom. Volume on Thursday was decent with the NYSE
trading 1.2 billion and the Nasdaq 1.74 billion. After being
negative early in the day the advances beat declines
substantially on both exchanges. New highs also beat new lows.
Sentiment is changing despite being in the dog days of summer.
While I am hesitant in actually predicting a real rally before
mid-August it does appear the groundwork is being laid. 2100
is still my entry point on the Nasdaq and we are getting close!

Enter passively, exit aggressively!

Jim Brown
Editor


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

Phylum Porifera
By Jeffrey Canavan

Sponges feed off of microorganisms in the water that flow through
small openings known as ostia.  Flagella then move the water
through the sponge, absorbing food particles as the water passes.
The water then exits through a cavity at the top of the sponge
known as an osculum.

Why the biology lesson?  Investors have basically been acting
like a sponge - they soak up bad news, but don't sell their
stocks.  Today investors absorbed bad news from Hewlett Packard,
Compaq, and a worse than expected 2% drop in orders for durable
goods.

It took the better part of the trading day for investors to sop
it all up, but eventually all three major averages finished in
positive territory.  They didn't finish deep into positive
territory, but enough to put the Nasdaq back above 2,000 and the
S&P 500 above 1,200.

But a sponge can only absorb so much water before it must be
wrung out.  Tomorrow the sponge will have to absorb an atrocious
earnings report from JDS Uniphase.  The fiber-optic component
maker was expected to report earnings of $0.03, but instead
posted a loss of $0.36.  16,000 more jobs will be cut, and the
company sees no signs that the situation is improving.

Luckily Amgen and Qualcomm might be able to mitigate any losses
in the broader indices.  Amgen posted earnings 2 cents a share
greater than expectations, and reaffirmed guidance for the rest
of the year.  Qualcomm earnings came in one penny above
expectations, and revenues came in better than anticipated, $640
million instead of the planned $608.

When we add it all up, the triple Qs are up 50 cents in after
hours.

Sponges live at the bottom of the ocean, and perhaps investors
are feeling a little more confident about doing some bottom
fishing as the treacherous waters earning's season begin to calm.

===

Market Volatility
VIX   25.15
VXN   52.72

===

          Put/Call Ratio  Call Volume   Put Volume
Total           .54        649,535       347,709
Equity Only     .47        581,714       273,540
OEX             .64         11,249         7,158
QQQ             .73         39,433        28,863

===

Bullish Percent Data

           Current   Change   Status
NYSE          34      -2      Bear Confirmed
NASDAQ-100    26       -      Bear Confirmed
DOW           36       -      Bull Alert
S&P 500       48      -2      Bear Alert

Readings above 70 are considered overbought, and readings below
30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

===

10-Day Arms Index  1.15

Extreme readings above 1.5 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      1793           1220
NASDAQ    2025           1560

        New Highs      New Lows
NYSE       64             38
NASDAQ     87             91

===

Advisory Sentiment

Bullish  Bearish  Correction   Net   Change
  52.5%     23.2%    24.3%    29.3%   +3.3%

A bearish reading of 25% to 30%, combined with a bullish reading
greater than 55% is typically considered bearish by contrairians.
A net percentage greater than 30% is also viewed as bearish.

===

Commitments Of Traders Report: 07/17/01
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.

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
Institutions have lightened up on their net bearish for the second
straight week, and the S&P 500 remains above 1,200.  Coincidence?
The commercial sentiment is still bearish, but improving.

Commercials   Long      Short      Net     % Of OI
7/03/01      316,543   395,410   (78,867)   (11.08%)
7/10/01      309,374   385,178   (75,804)   (10.91%)
7/17/01      336,836   403,561   (66,725)   ( 9.01%)

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     % of OI
7/03/01      133,098     54,865   78,233     41.62%
7/10/01      135,587     59,889   75,698     38.72%
7/17/01      122,525     50,211   72,314     41.86%

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

NASDAQ-100
About face!  After slowly reducing their net bearish position for
seven straight weeks, institutions abruptly switched gears.  Keep
in mind this data is from 6/17/01, before the start of earnings
week.  Perhaps some institutions sold some futures contracts to
limit their risk.  This change could be a one or two week
anomaly.

Commercials   Long      Short      Net     % of OI
7/03/01       26,544     34,880   ( 8,336)  (13.57%)
7/10/01       26,688     34,640   ( 7,952)  (12.97%)
7/17/01       26,721     37,225   (10,504)  (16.43%)

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     % of OI
7/03/01       10,443     7,063    3,380      19.31%
7/10/01        9,073     7,486    1,587       9.58%
7/17/01       11,680     8,183    3,497      17.61% 	

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
Institutions got slightly more bullish on the Dow for the second
week in a row.  This is the only index with a commercial net
bullish position, and the Dow was the only index to finish the
week higher than it started.

Commercials   Long      Short      Net     % of OI
7/03/01       12,761    14,623   (1,862)    (6.8%)
7/10/01       13,743    12,999      744      2.8%
7/17/01       14,145    12,963    1,182      4.4%

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     % of OI
7/03/01        4,708     5,715    (1,007)   ( 9.66%)
7/10/01        5,048     7,835    (2,787)   (21.63%)
7/17/01        5,255     9,144    (3,889)   (27.01%)

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


**************
TRADERS CORNER
**************

Retracement Brackets 3.0
By Eric Utley

This is part 3 of a series on the theory and application of
retracement brackets.  Please read Part1 and Part2 if you haven't
already.

The easiest step in using retracement brackets is determining
where support and resistance levels lie.  The hardest part is
knowing how to trade around the predetermined levels.  This is
where the left brain meets the right brain.  It's where the
math behind the Fibonacci sequence transcends the art of
interpretation, and ultimately action.

How an individual trader approaches trading around retracement
brackets will depend upon risk preference and trading style.
In that vein, I think there are two distinct ways to approach
support and resistance levels determined by retracement
brackets:

Momentum Trading: Breakouts and Breakdowns

The Fade: Buying Support and Selling Resistance

Because the future is uncertain, both strategies require a
cross-reference of some sorts.  And both are dependent upon the
broader market.  So let's examine a concrete example of each
and get specific.

(Whether a market, sector or stock breaks out (down) depends
on whether there is enough demand (supply) to carry it above
resistance (below support).  Traders will be well served by
keeping this simple premise in mind.)

Let's say, for example, I was bullish on software stocks
following Peoplesoft's (NASDAQ:PSFT) excellent earnings report
Tuesday.  So I pull up a daily chart of the Software Index (GSO.X)
and lay an advancing retracement bracket over its climb from
April lows to May highs.  What I discover - through Wednesday - is
that risk is rather difficult to measure, at least from a bullish
standpoint.  That's because the GSO.X ran right up to its 61.8
percent retracement level Wednesday.  Roughly, the 61.8 level
sits around 189 - the GSO.X settled Wednesday at 189.04.  So,
are market participants going to sell at the 189 level?  Or, will
demand overtake supply, resulting in the GSO advancing above 189?






I come to one of two conclusions: The GSO.X is going to
breakout above 189 or The GSO.X is going to rollover at 189.
Since I have a bullish thesis on software stocks, I'm betting on
a breakout.  But since the future is uncertain, I need some
intelligent way of confirming any breakout attempt in the GSO.X.

Since the GSO.X is obviously a tech-related sector, I can
cross-reference any breakout attempt above 189 with a larger
tech-related gauge: Nasdaq Composite (COMPX).  Because I already
have several resistance levels in place for the COMPX, I can
monitor the index closely throughout trading Thursday as it
relates to the GSO.X.  What I'm watching for is whether demand
is stronger than supply, or vice versa.  And I accomplish that
by monitoring how the COMPX trades around its various resistance
levels.

The chart below clearly displays that the COMPX easily rebounded
back above the 1975 level during midday trading.  (I deem the 1975
level as pivotal.)  The COMPX advanced on, ultimately clearing
the psychological 2000 hurdle as well as its previous ascending
support line around 2005.  There were several actionable points
in the COMPX as it relates to the GSO.X.









Meanwhile, the GSO.X, not by surprise, followed a very similar
trading pattern to that of the COMPX's Thursday.  The point,
however, is that when a sector breaks out above a retracement
level, it's prudent to confirm any rally attempt with a higher
power; the higher power, in this example, is the COMPX.

In the next example, let's say that I thought the telecom
business and anything associated with it really stunk.  So I
randomly perused a few charts and made some observations.  One
chart that stuck out to was that of Comverse Technology
(NASDAQ:CVMT).

In late June/early July, for some peculiar reason, the stock
could not close above its 61.8 percent retracement level, derived
from the bracket that measured its advance from early April to
mid-May.  Some market participant(s) - hedge fund, market
maker, insiders - would not allow the stock to settle above
the $57.50 level, or thereabouts.  So, despite the prevailing
trend up through July 2, I chose to FADE the stock and short it
against its 61.8 percent retracement level, betting on a rollover.





At the time, the Nasdaq Composite began rolling over around the
2200 level.  Therefore, one might conclude - independent of
CMVT's inability to close above $57.50 - that supply would most
likely overwhelm demand in CMVT around its 61.8 percent
Retracement level because of the broader market weakness.  (Did
it ever! Somebody knew, ahead of time, that this company would
warn and acted on that information!)

In addition, I noticed a lower higher in stochastics.  I put the
stochastics on the chart above to make the point that it's most
beneficial to use other indicators in conjunction with retracement
brackets.  Other indicators such as MACD, Momentum, RSI and
Point & Figure charts.

In essence, the retracement levels give a trader potential support
and resistance levels that help to quantify and manage risk.  It's
up to other indicators to determine supply versus demand, and to
dictate whether or not to buy breakouts, short breakdowns or fade
prevailing trends.  To reiterate, the supply/demand indicators can
include directional analysis of the broader market or sector,
stochastics or even gut feel.

Next week, we'll address another aspect of retracement brackets
that help traders to determine exit points.

Questions and Comments are welcome:

eutley@sungrp.com

P.S. Sorry for the delay in publishing this piece, but life has a
funny way of interrupting.


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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:
*****

No dropped calls for Thursday


PUTS:
*****

MYGN $45.81 +3.91 (+2.11) There are advantages and disadvantages
to trading highly volatile stocks such as MYGN.  Through
Tuesday, we had captured about $10 on the downside in this play
since initiating coverage.  But the last two days have seen
those gains quickly reduced.  The stock closed above our stop
at $43, and those still with open positions could use any
weakness down to $45 to exit plays.

NVDA $78.80 +7.11 (+3.91) A few bullish comments from a chip
company caused shares of NVDA to snapback in a big way, which
was a reminder why traders use stop losses.  The stock
bolted above its previous nemesis around the $72.40 level
and finished strongly.  Traders with open positions should
take advantage of any weakness Friday to exit plays.

CIMA $61.00 +7.00 (-0.20) It looks like we tightened up our stop
just in time, as buyers ruled Wall Street on Thursday.  Opening
just a few cents below our $56 stop, CIMA started up and
continued that trend right into the closing bell, gaining more
than 14% on well over double the average daily volume.  It looks
like the $53 support level is going to hold for now, and we will
have to content ourselves with the gains accrued since we began
coverage a little over a week ago.

PDLI $59.60 +3.85 (+2.72) On the heels of better than expected
earnings from AFFX, the Biotech sector got a boost on Thursday,
adding to the gains posted on Wednesday.  PDLI wasn't about to
be left behind, starting out at $56 this morning, making short
work of our stop and clearly bringing our play to a close as the
stock actually challenged $61 prior to a bit of end-of-day
profit taking.  With the sector on the rebound and our stop
shattered, it is time to look elsewhere for profitable plays.

SRNA $22.30 +0.81 (+1.45) It was only a matter of time before
the Software bulls got tired of being beaten up, and SRNA joined
the party after confirming support at the $20 level.  Even
though volume was nothing to write home about, we've got to
honor our stop and bid farewell to SRNA, especially with
strength apparently returning to the Software sector.


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The Option Investor Newsletter                 Thursday 07-26-2001
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

To view this email newsletter in HTML format with embedded
charts and graphs, click here:
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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
those who know.

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************************************************************


********************
PLAY UPDATES - CALLS
********************

IBM $106.00 +1.11 (+0.15) The 10-dma is acting like a lid on
shares of Big blue; the stock just can't seem to get above that
level, which currently resides right around $106 - IBM's
closing price Thursday.  With any follow-through, the stock
should get above its 10-dma Friday.  While the 10-dma has acted
as resistance, Beam's short-term support line has provided
plenty of just that: support.  By anchoring at its relative low
at $101.50, up to the next relative low around $103, an
aggressive support line can be drawn.  Notably, IBM has yet to
close below that line so far this week, which is encouraging for
those bullish traders in the play.  As for strategy, new bullish
traders might look for a dip back down to the support line for
new entries, or an advance above current levels (10-dma),
depending upon market conditions.  Make sure to watch the broader
market averages before entering bullish plays in IBM, and
monitor the Hardware Index (GHA.X) for further confirmation.
We're ratcheting stops up to $104, which is the current site of
IBM's short-term support line.

MOT $18.55 +1.27 (+0.05) Interestingly, the sellers could NOT
push MOT down to the $17 level Wednesday, which happens to be
the site of our stop.  And that's not by coincidence.  The $17
level marks an area of demand on MOT's point & figure chart,
thus our stop.  Fast forward to Thursday, and the lack of
strength on the part of sellers resulted in MOT snapping back
on the heels of favorable comments from another semiconductor
company: National Semi.  MOT steadily advanced throughout the
session Thursday, and accelerated into the close.  With such a
large move in a short amount of time, MOT may pullback Friday.
But with the stock well above the $18 level, we'll be looking
for a print at the $19.50 level in the coming trading days to
confirm our bearish leanings in the play.  For new entries,
a pullback down around $18 may offer entry opportunities, or
an advance above $19.  For the time being, we'll keep stops at
$17, but may raise them Friday if MOT follows through.

CSCO $19.38 +0.68 (+1.39) The entry strategies we mentioned in
the initial write-up of Cisco should've allowed for bullish
traders to get into this play either Wednesday or Thursday.  For
those who entered the play on weakness Wednesday may be starting
to think of quick exit points to lock in some gains after the
stock's pop higher Thursday.  Keep in mind that the $20 level
is formidable resistance and may be the best bet for an exit
point in the short-term.  However, if CSCO breaks above that
level we will most likely hold the play, after further
investigation.  The JDS Uniphase earnings debacle after the
bell Thursday may adversely impact trading in CSCO Friday, but
CSCO did remain relatively stable in the after hours session,
so it remains to be seen whether JDSU has any impact at all.
We're sliding our stop up on CSCO to $18, but bullish traders
with open positions should consider a tighter stop depending
upon risk tolerances and time frames.  Ideally, we'd like to
hold this play into earnings (August 7), and that's the
reason for the relatively loose stop.  But individual traders
should use their own discretion.

AHAA $38.90 +3.15 (+4.10) Buyers were definitely not in short
supply on Thursday as the recovery broadened to virtually every
sector of the market.  AHAA launched higher, picking up steam
(and volume) throughout the day, closing right at the high.
Once the stock crested the $37 resistance level, things really
got moving, jumping another $2 in the final 2 hours.  With a
solid stairstep pattern higher, AHAA is still looking good.
Consider new positions on intraday pullbacks to support (prior
resistance), first at $36 and then $35, also the new location
of our stop.  Look for resistance to now appear at $40, followed
by $42.  A continuation of this afternoon's buying spree could
send AHAA through the $40 level, making for another attractive
entry point in the days ahead.

DO $30.84 +0.59 (+0.34) A production cut by OPEC did nothing to
dampen investor enthusiasm for the Oil Services stocks, as the
OSX index continued fractionally higher on Thursday in the wake
of the news.  DO reclaimed the majority of its losses from
yesterday, recapturing the $30 level and climbing within a penny
of the $31 level.  This isn't a high-octane stock, but should be
a steady mover in the days ahead, as investors are reminded that
somebody will have to provide the equipment and manpower needed
to get the black gold out of the ground.  With today's recovery,
we are ratcheting our stop up to $30, and intraday dips (and
bounces, of course) above this level should provide for
attractive entries.  Resistance is looming overhead at $32 and a
breakout over that level should embolden the bulls further,
making for another attractive entry point, so long as volume
remains robust.


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

DIGL $20.11 +0.86 (-2.19) DIGL traded about in-line with the
Networking Index (NWX.X) Thursday, which came as a bit of a
surprise.  That's because DIGL is a more volatile stock and
on strong advancing days such as Thursday, we would've
expected the stock to go up a bit more than its index.  This
is of course an encouraging development for bearish traders
because any further market and/or sector weakness should
produce further gains.  But before putting too much emphasis
on reward, there's risk to address.  On its daily chart,
stochastics are deeply oversold and about to turn higher.  As
such, a relief rally could be in the offing, so bearish
traders should monitor stochastics as a guide.  In terms of
entry points, at this stage, it may be most prudent to wait
for DIGL to take out its relative low around $18.36 before
initiating new put plays.  Bearish traders who've been in
this play since we initiated could have some decent gains
built up, so don't be shy about booking them.  We're lowering
stops to $21 in order to preserve those gains.

PDII $65.00 -0.13 (-3.39) PDII isn't showing the least
inclination to follow along with the broad market rally,
posting another fractional loss, while virtually every sector
of the market advanced on Thursday.  The decline is continuing
with the highs getting lower.  However the lows have been
getting higher in recent days, building a short-term neutral
wedge.  This coiling action is likely to break in the next
couple days and its direction will either produce a fresh entry
point or bring the play to a premature end.  Any failed rally
below our $67 stop can be used for fresh entries, but the
high-odds strategy will be to wait for the stock to drop through
the $63 level before adding new positions.  The action has
calmed down quite a bit since the excitement last Friday, and
the best approach will be to let volume be your guide.


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**************
NEW CALL PLAYS
**************

RFMD - RF Micro Devices $27.67 +2.08 (+3.52 this week)

RF Micro Devices designs, develops, manufactures and markets
proprietary radio frequency integrated circuits (RFICs)
primarily for wireless communications products and applications.
The Company's products are included primarily in cellular and
personal communications service phones, base stations, wireless
local area networks, and cable television modems.

The wireless-related sector has been working well, to the upside
that is.  It is perhaps the strongest sector in technology
currently.  Several carries have had good things to say about
the wireless business, including Verizon (NYSE:VZ) and
Sprint PCS (NYSE:PCS); even shares of Nextel (NASDAQ:NXTL) have
held up quite well.  This all concerns RF Micro because the
company makes components for wireless applications and its
shares have been bucking any market weakness recently.  In
fact, another recent OI call play of the same variety in AHAA
has confirmed our bullish tendencies with this group.  We
much concede, however, that RFMD has had a substantial run,
so a profit taking pullback may appear at any time.  Nevertheless,
we do want to initiate coverage on this play so that we may be
able to gain a solid entry point before the stock's next leg
higher.  For the momentum crowd, an advance above the $28 level
early Friday may offer a favorable entry point for a very
short-term trade, with the understanding that the risk in
doing so is greater than entering on a pullback.  Insofar as a
pullback is concerned, support lies at the $25 level, and also
near $24, which is the site of our stop.  But before entering
on any market related pullback, make sure to confirm any
weakness in RFMD with light volume, which is usually indicative
of routine profit taking.

BUY CALL AUG-25*RFZ-HE OI=4052 at $4.30 SL=2.75
BUY CALL AUG-30 RFZ-HF OI=5727 at $1.65 SL=0.75
BUY CALL SEP-25 RFZ-IE OI= 180 at $5.80 SL=4.00
BUY CALL SEP-30 RFZ-IF OI= 331 at $3.40 SL=1.75

Average Daily Volume = 7.88 mln



JDAS - JDA Software Group $20.50 +0.64 (+1.80 this week)

JDA Software is a global provider of sophisticated software
solutions for the retail industry.  The JDA portfolio of
products consists of comprehensive, integrated software
solutions that are designed to address the demand and supply
chain management, business process, decision support, e-commerce
and collaborative planning requirements of the retail industry
and their suppliers.

If you're looking for a bullish trade in the Retail sector, look
no further than JDAS.  Alright, well maybe it isn't the Retail
sector, but the Software company is highly leveraged to the
Retail sector -- but in a good way.  As retailers are pinched by
decreased consumer spending and price competition, JDAS is
standing ready to help.  Their software solutions help retail
companies streamline their operations, and judging by their
earnings report last week, business is brisk.  After the rally
in April and May, the share price was caught in a range between
$15-18.  In the wake of earnings a week ago, buying volume
surged, quickly propelling the stock through the top of its
range.  Even better, the buying continued the past 2 days and
JDAS launched through the $20 resistance level for the first
time since March of 2000.  This is a plain old-fashioned
momentum run and that's how we'll play it.  Target new positions
either on a breakout over the $21 resistance level or on a
low-volume pullback to intraday support at either $20 or even
$19, where we have initially placed our stop.

BUY CALL AUG-17.5 QAH-HW OI= 11 at $3.60 SL=1.75
BUY CALL AUG-20.0*QAH-HD OI=  5 at $1.80 SL=1.00
BUY CALL OCT-20.0 QAH-JD OI=374 at $2.75 SL=1.25

Average Daily Volume = 145 K



MERQ - Mercury Interactive $40.19 +4.51 (+3.56 this week)

As a provider of integrated performance management solutions
that enable businesses to test and monitor their Internet
applications, MERQ is looking for growing e-commerce demand to
continue to fuel its business.  The company's products perform
such tasks as analyzing and eliminating Web site performance
bottlenecks and automating quality assurance testing.  MERQ's
client base spans a wide range of industries including
Internet companies such as Amazon.com and America Online,
infrastructure companies Ariba and Oracle, as well as Apple
Computer, Cisco Systems and Ford Motor Company.

MERQ investors have had a rough couple months as they have
watched their stock give back all of its gains from the
April/May Fed-induced rally.  But it looks like things are set
to improve if Thursday's session is any indication.  After
falling as low as $32 least week, the stock consolidating near
$34-35 before the spurt of buying seen today.  Buyers showed up
early and often, propelling the stock to a 12% gain as Software
stocks benefited from the broad market rally.  Even though its
earnings report last week was less than stellar with the company
cutting staff and lowering guidance, investors seem to be
focused on the fact that the company matched estimates and are
willing to hold on for the anticipated recovery.  Daily
Stochastics are emerging from oversold, the Software index
(GSO.X) is starting to recover from major support, and the
NASDAQ reclaimed the 2000 level today.  Sure the bears are still
out there, but we're more than happy to take a piece of this
bullish move as long as it lasts.  We are initially placing our
stop at $35, and will target intraday pullbacks above this
level, preferably in the $37-38 range.  While we can buy
continued strength, given the magnitude of today's gain, we'd
prefer to gain entry on an intraday pullback.

BUY CALL AUG-35 RQB-HG OI= 805 at $6.90 SL=5.00
BUY CALL AUG-40*RQB-HH OI=2084 at $3.70 SL=2.25
BUY CALL AUG-45 RQB-HI OI=6476 at $1.75 SL=1.00
BUY CALL OCT-40 RQB-JH OI=3242 at $7.50 SL=5.25
BUY CALL OCT-45 RQB-JI OI=4269 at $5.60 SL=3.50

SELL PUT AUG-35 RQB-TG OI=2284 at $1.20 SL=2.50
(See risks of selling puts in play legend)

Average Daily Volume = 4.41 mln



*************
NEW PUT PLAYS
*************

FD - Federated Department Stores $36.50 -0.10 (-1.70 this week)

Better late than never, FD is trying to leave the comfort of
its luxurious brick and mortar walls.  The company is the
largest upscale retailer in the U.S., with over 400 stores in
33 states.  In addition to its flagship chains, Macy's and
Bloomingdale's, the company runs six regional chains, Lazuras,
The Bon Marche, Burdines, Stern's, Rich's, and Goldsmith's.
Attempting to capitalize on consumer demand for online shopping,
FD is increasing its focus on catalog (Macy's by Mail and
Bloomingdale's by Mail) and internet (Macys.com) sales.

Retail stocks have been staging a nice recovery over the past
couple weeks, but that hasn't helped shares of FD to find any
buyers.  After breaking below the 200-dma (then at $38.57) in
early July, the retailer has been unable to gain any traction
and it looks like the selling pressure is on the rise once
again.  Despite a broad-based market rally and the Retail index
(RLX.X) posting a small, but respectable gain, FD fell
fractionally and is now resting just above solid support at $36.
Below that is support at $35 and then $34, but any sector
weakness could mean violated support.  Speaking of the sector,
it is looking like it could be in trouble as well.  The RLX
index is approaching the $910 resistance level, and above that
is the $918 level, and any weakness in the broad sector will be
felt by the weakest players (read:FD) first.  Chiming in with
its own bearish voice, the Point and Figure chart has given us
a triple-bottom breakdown and is indicating a bearish price
target of $26.  Look out below!  Target failed intraday rallies
below our $38 stop for new entries.  If you'd rather wait for
renewed weakness before playing, target a drop through the $36
support level, preferably on continued strong volume.

BUY PUT AUG-37.5 FD-TU OI=710 at $2.05 SL=1.00
BUY PUT AUG-35.0*FD-TG OI=684 at $0.95 SL=0.50
BUY PUT AUG-32.5 FD-TZ OI=320 at $0.40 SL=0.00

Average Daily Volume = 1.38 mln



MEDI - MedImmune Inc. $40.02 -1.06 (-3.29 this week)

MedImmune is a biotech company focused on developing and
marketing products that address medical needs in areas such as
infectious disease, autoimmune disorders, cancer, and
transplantation medicine.  The company has six products on the
market and a diverse product development portfolio.  The
products currently on the market include Synagis, CytoGam,
RespiGam, Ethyol, Neutrexin, and Hexalen.

Beating up on the sector weakling seems to be a recurring theme
around here, but there's no sense arguing with a pattern that
works.  MEDI has been in a steady downtrend since the end of
June, helped along by the fact that the broader Biotech index
(BTK.X) has made a concerted effort to break down under the $500
level.  The last couple days have seen the BTK rebound once
again, but there sits MEDI, gradually drifting lower.  All is
not honey for the bears though, as the last 2 days have actually
seen buyers pushing the stock higher after the morning drop.
But that doesn't change the fact that the daily close is getting
lower by the day.  Even yesterday's earnings release couldn't
help the stock as the company's loss widened 80% in the prior
quarter due to falling revenue and increased R&D costs.  Ouch!
Buyers are still trying to hang onto the $39-40 support level
and they made a convincing case of it today, with buying volume
picking up into the close on a heavy volume day.  So how do we
play it?  A failure to move through the $42 resistance level
will open up attractive entry points, as would a volume-backed
drop through the $39 support level.  And more weakness on the
BTK would just make for a nice insurance policy to boot.

BUY PUT AUG-40*MEQ-TH OI=907 at $2.75 SL=1.50
BUY PUT AUG-35 MEQ-TG OI=699 at $1.00 SL=0.50

Average Daily Volume = 2.66 mln



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

AHAA - Alpha Industries $38.90 +3.15 (+4.10 last week)

Alpha Industries designs, manufactures and markets proprietary
radio frequency, microwave frequency and millimeter wave
frequency integrated circuits and discrete semiconductors for
wireless voice and data and broadband communications. The
primary applications for the company's products include
wireless handsets, wireless infrastructure and broadband
communications equipment. AHAA also produces integrated
circuits, discrete components, electrical ceramics and ferrites
used in wireless base station equipment, cable television, cable
modems and other broadband applications, wireless local loop,
wireless personal digital assistants and wireless local area
networks.

Most Recent Write-Up

Buyers were definitely not in short supply on Thursday as the
recovery broadened to virtually every sector of the market.
AHAA launched higher, picking up steam (and volume) throughout
the day, closing right at the high.  Once the stock crested the
$37 resistance level, things really got moving, jumping another
$2 in the final 2 hours.  With a solid stairstep pattern higher,
AHAA is still looking good. Consider new positions on intraday
pullbacks to support (prior resistance), first at $36 and then
$35, also the new location of our stop.  Look for resistance to
now appear at $40, followed by $42.  A continuation of this
afternoon's buying spree could send AHAA through the $40 level,
making for another attractive entry point in the days ahead.

Comments

QCOM's guidance after the bell Thursday should allow for AHAA
to follow-through with its breakout into Friday's session.
Bullish traders might look to enter plays around current
levels or on a rally past the $40 level.  Our stop has been
raised to $35 to reflect the stock's breakout Thursday.

BUY CALL AUG-35*GAQ-HG OI=389 at $5.40 SL=3.50
BUY CALL AUG-40 GAQ-HH OI=395 at $2.70 SL=1.50
BUY CALL AUG-45 GAQ-HI OI=284 at $1.10 SL=0.50
BUY CALL SEP-40 GAQ-IH OI=107 at $4.60 SL=2.75

Average Daily Volume = 1.09 mln



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