The Option Investor Newsletter Monday 07-30-2001 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/073001_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 07-30-2001 High Low Volume Advance/Decline DJIA 10401.70 - 15.00 10440.50 10361.40 905 mln 1666/1428 NASDAQ 2017.80 - 11.20 2039.01 2009.94 1.34 bln 1780/1969 S&P 100 618.89 - 1.27 621.73 616.80 totals 3446/3397 S&P 500 1204.52 - 1.30 1209.05 1200.41 RUS 2000 484.71 - 0.30 485.54 481.34 DJ TRANS 2912.22 + 2.34 2918.06 2906.04 VIX 24.03 - 0.70 25.07 23.99 Put/Call Ratio 0.44 ****************************************************************** Resistance Holding, But Bulls Are Snorting With a strong open this morning, it looked like the bulls were going to take a serious run at resistance. But their enthusiasm faded almost as quickly as the sound of the opening bell and all the broad market averages fell back from their opening highs. Renewed rally attempts near the middle and end of the day were likewise rebuffed by the bears, resulting in mild losses for the day. The scorecard had the DJIA losing just 15 points, the NASDAQ Composite giving up 11.20 and the S&P500 drifting lower by 1.30. With such minor moves in the major indices, it might seem unnecessary to include any of the associated charts, but the daily chart of the big index (S&P500) looked too good to pass up. Of all the major indices, it does the best job of showing a bear market rally. The lows have been continuing to move lower and the highs are too. On top of that, Stochastics are starting to weaken and aren't even close to entering overbought territory. Earnings season is already starting to wind down, and we have yet to receive convincing news that the economy is on the mend. The past 2 days have given us classic doji candlestick patterns, which is a sign of investor decision. This is precisely what we saw in the markets today, with neither the bulls or the bears able to gain a significant advantage. Helping to keep the S&P500 under pressure were bearish comments from CSFB before the open. The brokerage firm cut earnings estimates for the big index from $55.25 to $51.50 for FY01 and from $62 to $59 for FY02. Not to be left out, UBS Warburg and JP Morgan also cut their earnings estimates for the S&P500, citing the usual list of suspects; lack of earnings visibility, strength in the dollar cutting into earnings from the big multinationals and the overall economic weakness. Yawn...no news there! So what DID happen in the markets today? Remember Jonathan Joseph at Salomon Smith Barney? He was the first chip analyst to start saying mean things about the Semiconductor sector last summer, and incurred a lot of wrath from irate investors who were long the sector. Well this morning he was out saying nice things about the chip industry again, saying he is now seeing some support for his April upgrade of the Semiconductor sector. Mr. Joseph cited relative stability in the spot market for microprocessors and general firmness in DRAM prices. Not a glowing endorsement, but the bulls tried to rally the sector. The SOX index did manage to hold above the $600 level, but owing to the directionless overall market was able to do little more than challenge the upper bound of its descending channel before pulling back in the afternoon. The SOX has been unable to sustain an upward move since topping out in late April. If the NASDAQ is going to manage a sustained advance, it will need the Semiconductors to participate, not just breaking out of the descending channel, but moving up to challenge the $700 resistance level. Retails stocks got a boost this morning from Walmart (NYSE:WMT) as the discount retailer reported on the first wave of tax refund checks. The company stated that same-store sales growth last week exceeded the 3-5% increase that was expected, driven by the first batch of tax rebate checks arriving in mailboxes across the country. WMT's ploy of cashing the checks for free seems to be paying off as 25-30% of the checks cashed are being spent in the stores. Investors ate it up, popping WMT up to test the $56 resistance again at the open, then again at 2pm ET and then a third time just before the close. The WMT enthusiasm helped the Retail sector continue its recent advance, and the S&P Retail index finished the day just below resistance in the $912-915 area (depending where you draw your resistance line). The consumer is still the anchor leg for our economy, and if the WMT news is any indication, Joe and Jane consumer are still behaving as though everything is just fine. A serious advance in the broad markets will need to be accompanied by a breakout of the RLX above current resistance and then the $932 area. The Software sector received another blow today, this time from Adobe Systems (NASDAQ:ADBE). The maker of computer graphics programs issued a warning of sorts, saying they were on track to meet their third quarter earnings target but might miss the revenue target due to the weaker-than-expected economic conditions, which are affecting all product segments. That kept the Software index (GSO.X) under pressure all day, holding the index below the $200 resistance level. Rounding out the list of sectors having a significant effect on Monday were the Biotechs. Friday's FDA panel rejection of Aviron's (NASDAQ:AVIR) FluMist gave the BTK index the flu and it led the list of losers on the NASDAQ, shedding 2.65%. Looking at the market internals brings everything back into perspective. Volume was downright anemic at 905 million shares on the NYSE and 1.34 billion on the NASDAQ. Advancers outpaced decliners on the NYSE, while decliners ruled the day over on the NASDAQ. But the margins were pretty thin. It would be just as accurate to say there was no strong bias in the market. Welcome to the dog days of summer, where light volume rules. Earnings season is winding down and while there have been some bright points, they haven't been frequent enough to really change investor sentiment and get the markets moving in a renewed bullish trend. The pattern is the same regardless of what index you look at. Resistance is holding, but bullish traders are becoming bolder and less fearful of each intraday dip. The economic calendar offers little hope for a market catalyst either. Tuesday brings the Personal Income report, Chicago PMI and Consumer Confidence. Cued up for the remainder of the week are Auto and Truck Sales and the NAPM report on Wednesday and then Initial Jobless Claims and Factory Orders on Thursday. Rounding out the economic parade on Friday are Non-Farm Payrolls and the Unemployment Report. Despite the lack of a catalyst to the upside, bears need to use caution in this market. Dull and quiet would definitely describe Monday's market action, and shorting a dull market can be a recipe for disaster as dormant bulls charge forward. Wait for the market to show its true colors by either advancing or selling off with conviction (read:volume). Trade only when the reward/risk ratio is in your favor. Mark Phillips Research Analyst **************** MARKET SENTIMENT **************** ARF! The dog days of summer are upon us, and Jim Oberweis, President of Oberweis Asset Management, sums up the prevailing market sentiment, "The biggest thing on investors' minds is how busy the golf course is." Paltry Volume of 1.3 billion on the Nasdaq echoes that sentiment. Now that earnings season is drawing to a close, it's up to economic data to spur some market interest. On the slate for this week is personal income, the Chicago Purchasing Managers Index, consumer confidence, and unemployment claims. Now that we have enough rate cuts under our belt, investors want to see these numbers coming in better than they have in the past. Semiconductor Index Daily Chart But can these economic numbers spark enough interest to push sectors past resistance? The Semiconductor Index (SOX.X) was one of today's better performing sectors, up 0.65%, but look at the overhead resistance - downtrends, moving averages, retracement levels, and a stochastic that is quickly approaching overbought. That's asking a lot of economic data. If the SOX can climb above 615, it could be viewed as a small double bottom, but a trading range between 615 and 530 looks just as probable. Not all sectors have as much resistance converging in one area, but there is enough resistance nearby to limit the upside of most sectors. Listless days like today don't help. *************************Sector Watch**************************** Weekly Daily Overbought Support Resistance Trend Trend Oversold DJIA Bearish Bearish Oversold 10,200 10,600 NASD Bearish Bearish Neutral 1,940 2,125 S&P 500 Bearish Bearish Neutral 1,170 1,205 Rus 2000 Bearish Bearish Neutral 465 485 Semis Bearish Bearish Neutral 550 615 Biotech Bearish Bearish Neutral 490 550 Internet Bearish Bearish Oversold 140 170 Networking Bearish Neutral Neutral 300 365 Software Bearish Bearish Neutral 180 200 Banking Neutral Neutral Neutral 625 670 Retail Neutral Bullish Neutral 875 920 Drugs Bearish Neutral Neutral 380 410 Percent Change Last Last Last Rel Strength Point and 5 Days 10 Days 30 Days vs S&P 500 Figure Signal DJIA (1.5%) (1.2%) (2.6%) Neutral Buy NASD 1.5% (0.6%) (0.5%) Neutral Sell S&P 500 1.1% 0.2% (0.8%) N/A Sell Rus 2000 0.4% 0.2% (2.1%) Neutral Sell Semis 8.6% 8.5% (0.5%) Neutral Sell Biotech 1.8% 6.0% (11.3%) Negative Buy Internet (10.7%) (14.8%) (19.2%) Negative Sell Networking 0.4% 1.1% (5.3%) Neutral Buy Software 4.7% (3.3%) (7.2%) Negative Sell Banking 1.6% 2.4% 4.5% Positive Buy Retail 1.9% 2.6% 5.0% Positive Buy Drugs 0.8% 4.0% (2.6%) Neutral Sell ***************************************************************** ************** TRADERS CORNER ************** What's In Your Toolbox? by Mark Phillips Trading is no different from any other profession, in that we need to utilize the appropriate tools of the trade. Of course we need a chunk of cash in our brokerage account. We also need a broker that provides good service for the type of trading we do. Attractive commission prices are good, but as many of you know, good fills are at least as important. What good would it do you to save $10 on your commission, only to lose $200 because of a lousy fill in a fast moving market? Additionally, we need a reliable and accurate data provider so we have good data on which to base our trading decisions. To process that data we need a workstation appropriate to our trading approach. A long-term trader/investor can get by with a less sophisticated workstation than an agile day-trader, and there are different levels of equipment needs spread between these two extremes. For all except for the most aggressive short-term traders, a fast PC with a 17-inch monitor and a reliable internet connection is probably sufficient for all of the research and data processing necessary on a daily basis. But that is really only the first step. All it does is bring the information to you and allow you to efficiently place trades. Where the rubber meets the road is in the set of tools you use to decide which trade to take (what security and which direction), when to place the trade and when to exit the trade (either for a profit or loss). The tools you use for this aspect of the process depend on the types of trades you like to place, what your trading bias is (what you expect from the market), and what strategies and analysis tools you have found to be effective in the past. And therein lies the core of what I'd like to talk about today. We've all seen the disclaimers from brokers, advisory services, mutual funds and company prospectuses that state, "Past performance is no guarantee of future results". A trading strategy will only remain successful so long as the market conditions under which past successes occurred remains in force. If we fail to recognize the change in market conditions, we will be applying rules and decision-making processes that do not apply to the current market. Remember the runaway bull market of late 1999 and early 2000? Simple bullish strategies prevailed and we could consistently profit either by buying the dips or jumping onto breakout moves to profit wildly. Those of us that prospered in that market developed a set of tools that allowed us to profit from the current market conditions. A run into earnings was nearly as certain as the fact that the sun would rise tomorrow and split runs were equally lucrative. In essence we could look for bullish chart patterns, buy the breakout or a dip and pocket juicy profits as the stock rocketed to new highs. Then came the early stage of the bursting of the dot-com bubble and market conditions changed dramatically. Those bullish strategies of a few months before yielded only busted plays. Many traders who failed to recognize the change in market conditions watched like deer in headlights as their once-infallible set of tools produced one losing trade after another. After the precipitous drop in the spring of 2000, die-hard bulls continued to apply these broken tools and strategies as the markets rose in agony throughout the summer. They were easy pickings for bearish traders who had recognized that the bull market would be a long time returning. Along came Labor Day last year and with the rapidly slowing economy, the tables were suddenly reversed. Momentum trading was working again, but to the downside. Selling into the rallies or selling the breakdowns worked equally well. The tools that had worked in the runaway bull market were applicable again, but they had to be applied upside down. This runaway bear market lasted for 7 months before the decline was halted in early April of this year, thanks to the aggressive moves of the Federal Reserve. Too little, too late, in my opinion, but it did serve to change the tide of market sentiment and investors began to actually buy stocks again. Long-dormant bullish traders found their favorite momentum strategies working again, at least for a couple months, as Alan Greenspan fueled the buying with easy money. The past couple months have seen market conditions change once again as Easy Al's interest rate weapon has lost its effectiveness and the economy has continued to weaken. The much anticipated second-half recovery seems to have been pushed out to the first half of 2002...at least. The result is that the markets seem to have exhausted themselves both to the downside and to the upside and there are few catalysts to drive strong moves in either direction. Doesn't that sound like a recipe for a rangebound market? It does to me, and one thing I have been noticing over the past couple months is that rangebound strategies (like buying stocks in oversold and selling them in overbought) are working with greater consistency. Here's a quick test you can do to see if my observations hold any merit. Scan through some of your favorite charts and look for charts that have shown coiling action in recent months. It doesn't matter whether they have coiled for a breakout or a breakdown. When the stock finally poked through resistance or dipped below support, did it result in a runaway move, or was it a head-fake that resulted in a reversal? Now look at the same charts with your favorite oscillator displayed. Is it just me, or does it look like stocks are starting to trade off of overbought and oversold levels once again? Trading is a dynamic profession and one that is fraught with peril for those that become complacent. If the tools you are using to trade are proving successful, then keep up the good work. But always keep a watchful eye on the big picture. When you start to notice that your winning trades are not coming as easily, it could be an early warning that the underlying market conditions are starting to change and that it is time to re-evaluate what is in your toolbox. On the other hand, if your trading strategies are not performing as you would like, take a good look at the underlying market conditions. If you are applying momentum-based trading strategies in a rangebound market or rangebound strategies in a runaway market, you are likely to be disappointed with the results...to put it mildly. Perhaps it is time to take a trip to the hardware store and acquire some new tools. I'll be in the power-tool aisle! Mark ************* NEW CALL PLAY ************* No new calls tonight ************ NEW PUT PLAY ************ No new puts tonight ***************** STOP-LOSS UPDATES ***************** PPDI - put Adjust from $67 down to $66 ************* DROPPED CALLS ************* No dropped calls tonight *********** DROPPED PUT *********** No dropped puts tonight ********************* PLAY OF THE DAY - PUT ********************* PDII - Professional Detailing $63.12 -1.58 (-1.58 this week) As a provider of sales and marketing services to the pharmaceutical industry, PDII is divided into three operating segments; Contract Sales, Product Sales and Distribution and Marketing Services. The company provides dedicated contract sales services, sales, marketing and distribution services for companies facing portfolio optimization challenges, and commercial launch services for emerging and biotechnology companies to independently launch new brands. PDII also provides marketing research and consulting services, as well as medical education and communication services, through which clients can access continuing medical education and peer-to-peer promotions. Most Recent Write-Up The trading in PDII this week certainly didn't compare to last Friday's excitement, but it looks like the bears are still in control. Volume has been similarly sedate, only a faint shadow of last week's 15 times the ADV. But fading the intraday rallies continues to deliver attractive entry points for vigilant and nimble traders. Resistance is solidifying near the $67 level, also the site of our stop. With the highs getting lower and the lows getting higher, we have the makings of a neutral wedge. The upper bound is sitting at $66.75, while the lower border sits at $66.75. Aggressive traders can continue to target rollovers near the upper edge of the wedge as they anticipate the eventual breakdown below the $64 level. Those that would prefer to wait for confirmation before taking a position, look for PDII to drop through the $64 level on increasing volume. Comments While we can't exactly call it a screaming breakdown with volume only hitting the daily average, PDII did continue lower on Monday, falling below the $63 level for the first time since the excitement on July 20th. The late-day bounce did little to convince us that there is any serious buying interest. Lower stops to $66 and target new entries on a drop under $61.50 (near today's lows) or on a failed intraday rally near $65. Once the stock falls through $60, it looks like the bears are likely to target $50 on the downside. BUY PUT AUG-65*PKU-TM OI=43 at $6.50 SL=4.50 BUY PUT AUG-60 PKU-TL OI=61 at $3.60 SL=1.75 Average Daily Volume = 232 K ************* COVERED CALLS ************* "Following are the Covered Call and Naked Put sections that were omitted from the weekend edition." Charting Basics: Trends, Moving Averages and Trading Volume By Mark Wnetrzak Last week's article on "Trading the Trend" in the Covered-Calls section produced some interesting comments on the use of volume analysis and moving averages to establish favorable candidates for stock positions. Since these indicators are excellent tools for new traders, a review of their basic components is in order. To be successful in the stock market, it's important to understand how to evaluate historic trends. In any exchange system based on supply and demand, there are three primary stages or phases of movement. These three phases consist of a basing or range-bound condition; an upward slope or growth stage and finally, a segment where buying interest becomes exhausted. Some experts refer to these conditions as the accumulation, markup and distribution phases. The first step in any analysis is look beyond the daily gyrations to identify the overall trend. The changes in the rate of upward and forward movement can be approximated with the smoothing effect of a moving average. The basic definition of a moving average is: the mean price of a security or financial instrument at a specific point in time. With this type of analysis tool, a shorter time span produces a more sensitive indication while a longer time span reflects a smoother history. There are a number of ways to determine a primary trend but very few technical analysis tools are as versatile as a moving average. The moving average offers an objective method for defining support and resistance and it can also help isolate cycles and identify overbought or oversold conditions. Traders often use moving averages to render buy and sell signals, based on multiple histories plotted on one chart. The crossing of moving average lines, a major topic in the study of Stochastics, is a very popular method of recognizing trend "reversals." Unfortunately, for a trader to depend solely on a moving average is comparable to using the hour hand of a watch to check the time of day. It provides a good approximation of the time but offers little guidance for specific appointments. In market terms, a moving average will help you discern whether the primary trend is up or down but it does little to help you with timing entry and exit points with regard to a particular issue. To be profitable on a consistent basis, you need to know where the instrument is in its current cycle. Is it in the accumulation phase, markup phase or distribution phase? The movement of a specific issue is generally determined by the intensity with which the shares are bought or sold. One method of measuring this effect in a prolonged trend is to use a moving average on transaction or trading volume. Trading volume, or the number of shares traded, is an important indicator in interpreting market direction and stock price. The change in stock price is the result of supply and demand; those who want to buy versus those who want to sell. The key point is that a rise or fall in price on a small volume of shares traded is far less important than a move supported by heavy volume. If there is heavy trading on an upward movement, buyers control the market, and their enthusiasm for the stock often pushes it far beyond a reasonable value. Experienced traders know that rising volume generally accompanies any substantial change in a stock's price and that is an important characteristic to be aware of when when reviewing market trends. When combined with a moving average of trading volume, a simple moving average can help confirm that the market is transitioning into a condition of accumulation or in the case of a failed rally, a new distribution stage. Of course, there are often chaotic and choppy transition phases between each cycle or trend and those can be very difficult to evaluate. The type of indicators that work best during transition periods include the Moving Average Convergence-Divergence system (MACD), or exponential (weighted) averages that are designed to be more sensitive to quick changes in market direction. Investors who develop a background in various technical analysis tools can use intricate moving average combinations to formulate different timing methods for entering and exiting the market. One popular entry technique is based on signals from a short-term MACD and confirmation from the moving average of the volume indicator. A number of exit strategies use the convergence between the price action and the volume average or diversions among different moving averages. Blending diverse mixtures of indicators is one way to discover the best system for your style of trading and for new investors, this can create a unique set of tools and intuitive techniques to help you profit in the market on a regular basis. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield SEAC 18.06 27.18 AUG 17.50 2.15 *$ 1.59 8.7% NFLD 18.45 18.52 AUG 17.50 2.20 *$ 1.25 6.7% MCAF 14.31 17.00 AUG 12.50 2.70 *$ 0.89 6.7% TERN 6.12 5.49 AUG 5.00 1.60 *$ 0.48 6.6% FFIV 16.90 15.50 AUG 15.00 3.10 *$ 1.20 6.3% NPIX 11.15 10.20 AUG 10.00 1.65 *$ 0.50 5.7% HTCH 17.80 17.32 AUG 17.50 1.45 $ 0.97 5.2% VNT 24.22 23.50 AUG 20.00 5.10 *$ 0.88 5.0% CLPA 6.08 6.15 AUG 5.00 1.40 *$ 0.32 5.0% AHAA 34.80 38.00 AUG 30.00 6.10 *$ 1.30 4.9% DSPG 23.21 23.30 AUG 22.50 1.65 *$ 0.94 4.7% GZMO 12.80 11.83 AUG 10.00 3.40 *$ 0.60 4.6% RCGI 31.16 30.21 AUG 30.00 2.35 *$ 1.19 4.5% NFLD 17.51 18.52 AUG 15.00 3.10 *$ 0.59 4.4% LU 7.61 7.01 AUG 7.50 0.75 $ 0.15 2.4% CFLO 5.20 3.67 AUG 5.00 0.90 $ -0.63 0.0% CVAS 11.80 8.11 AUG 10.00 2.35 $ -1.34 0.0% PHSY 20.98 12.31 AUG 17.50 4.50 $ -4.17 0.0% *$ = Stock price is above the sold striking price. Comments: The Roller-coaster ride continues! I just wish it was as much fun as the Millennium Force at Cedar Point. Seachange (NASDAQ: SEAC) is causing a bit of call-buying remorse (as in I should have just bought calls). Keep a close watch on F5 Networks (NASDAQ:FFIV), though it did rally strongly after Wednesday's earnings report, it stalled a bit on Friday. Network Peripherals (NASDAQ:NPIX) is again testing the bottom of its trading range and should be monitored closely. It appears Hutchison Tech (NASDAQ:HTCH) may resume its uptrend. Well, Lucent Technologies (NYSE:LU) did as expected and even weathered the Jds Uniphase (NASDAQ:JSDU) earnings miss. Monitor the position closely. Cacheflow (NASDAQ:CFLO) has now moved below the June low and is testing the April low. Exit now or wait for a bearish move below the April low for confirmation? Corvas International (NASDAQ:CVAS) suffered from its drug testing delay and Pacificare Health Systems (NASDAQ:PHSY) was unable to complete a $1 billion debt package earlier this week; we will show the positions closed. Positions Closed: Boston Communications (NASDAQ:BCGI), Digimarc (NASDAQ:DMRC), Cytogen (NASDAQ:CYTO). NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CY 26.16 AUG 25.00 CY HE 1.95 3075 24.21 21 4.7% ELNT 38.08 AUG 35.00 UET HG 4.10 476 33.98 21 4.3% NBTY 15.45 AUG 15.00 NBQ HC 1.05 85 14.40 21 6.0% PHTN 38.17 AUG 35.00 PDU HG 4.30 299 33.87 21 4.8% POWI 22.22 AUG 20.00 QPW HD 2.85 44 19.37 21 4.7% RFMD 29.33 AUG 25.00 RFZ HE 5.20 6348 24.13 21 5.2% SPCT 15.49 AUG 15.00 QCS HC 1.25 112 14.24 21 7.7% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield SPCT 15.49 AUG 15.00 QCS HC 1.25 112 14.24 21 7.7% NBTY 15.45 AUG 15.00 NBQ HC 1.05 85 14.40 21 6.0% RFMD 29.33 AUG 25.00 RFZ HE 5.20 6348 24.13 21 5.2% PHTN 38.17 AUG 35.00 PDU HG 4.30 299 33.87 21 4.8% CY 26.16 AUG 25.00 CY HE 1.95 3075 24.21 21 4.7% POWI 22.22 AUG 20.00 QPW HD 2.85 44 19.37 21 4.7% ELNT 38.08 AUG 35.00 UET HG 4.10 476 33.98 21 4.3% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** CY - Cypress Semiconductor $26.16 *** Bottom Fishing *** Cypress (NYSE:CY) provides high-performance integrated circuit solutions to fast-growing markets, including data communications, telecommunications, computation, consumer products, and industrial control. Cypress's product portfolios include high-speed physical layer devices, network search engines, network coprocessors, net- working-optimized and micropower static RAMs; high-bandwidth multi- port and FIFO memories; high-density programmable logic devices; timing technology for PCs and other digital systems; and Universal Serial Bus controllers. After reporting dismal earnings and announcing job cuts a couple weeks ago, Cypress' shares surged this week after the CEO, T.J. Rodgers said his bookings are up for the second quarter in a row. Rodgers said he has received orders from customers that haven't ordered for months, and he believes the bottom has come and gone for his business. For those investors who feel the same, this position offers a reasonable entry point to speculate on Cypress' future. AUG 25.00 CY HE LB=1.95 OI=3075 CB=24.21 DE=21 TY=4.7% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=CY ***** ELNT - Elantec $38.08 *** Technical Breakout *** Elantec (NASDAQ:ELNT) designs, manufactures and markets high performance analog integrated circuits primarily for the video, optical storage, communication, and integrated DC:DC markets. The Company targets high growth commercial markets in which advances in digital integrated circuit technology are driving increasing demand for high speed, high performance and low power consumption analog circuits. Elantec is another semiconductor stock that reported dreary earnings a couple weeks ago. The company reported revenues of $20.5 million and a loss of $2.1 million, including several one-time charges. Though the CEO said there continues to be poor visibility, he feels that Elantec has largely stabilized and due to business improvements, even anticipates a return to profit growth in the next quarter. We simply favor the bullish move above the May high and 150 dma as analysts speculate on a turn-around in the industry. AUG 35.00 UET HG LB=4.10 OI=476 CB=33.98 DE=21 TY=4.3% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=ELNT ***** NBTY - Nature's Bounty $15.45 *** A Record Third Quarter *** Nature's Bounty (NASDAQ:NBTY) is a leading vertically integrated U.S. manufacturer and distributor of a broad line of high-quality, value-priced nutritional supplements in the U.S. and throughout the world. The Company markets more than 1,500 products under several brands, including Nature's Bounty®, Vitamin World®, Puritan's Pride®, Holland & Barrett®, Nutrition Headquarters®, American Health®, Nutrition Warehouse® and Dynamic Essentials®. On Thursday, Nature's Bounty reported net sales of $204 million, an increase of 18.5%, and net income of $13 million, or 20 cents per diluted share, a 10.9% increase. The company continues to increase its market share in all channels of distribution and is well positioned to capitalize when the industry recovers. The stock rallied to a new 52-week high as investors cheered the results. A conservative entry point on a bullish stock. AUG 15.00 NBQ HC LB=1.05 OI=85 CB=14.40 DE=21 TY=6.0% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=NBTY ***** PHTN - Photon Dynamics $33.17 *** Growing Smarter! *** Photon Dynamics (NASDAQ:PHTN) is a leading global supplier of yield management solutions for the display, electronics and glass markets. Photon Dynamics' patented image acquisition and image processing, electro-optical design, and systems engineering expertise are currently used for test, repair and inspection of flat panel displays; inspection of cathode ray tube displays and automotive glass; and inspection of printed wiring assemblies and advanced semiconductor packaging. PHTN develops systems that help manufacturers collect and analyze data from the production line, and quickly diagnose and repair process-related defects, thereby allowing manufacturers to decrease material costs and improve throughput to gain an incremental yield edge critical to success. The company also recently completed the acquisition of privately held Intelligent Reasoning Systems, a business that develops and manufactures advanced, automated optical inspection (AOI) systems utilizing its patented adaptive knowledge-based software. Photon says the acquisition will provide increased growth opportunities in yield management for printed wiring assembly and high-density interconnect (technologies in the electronics market. In PHTN's latest earnings report, cash flow was positive and their balance sheet remains strong with over $100 million in existing capital and related investments. AUG 35.00 PDU HG LB=4.30 OI=299 CB=33.87 DE=21 TY=4.8% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=PHTN ***** POWI - Power Integrations $22.22 *** More Bottom Fishing *** Power Integrations (NASDAQ:POWI) is a leading supplier of high- voltage analog integrated circuits for use in AC to DC power conversion, primarily for the cellular telephone, PC, cable and direct broadcast satellite decoder box market, and various consumer and industrial electronics markets. Here is another company that reported bleak earnings a couple weeks ago but has rallied after saying it has begun to see its business stabilize. J.P. Morgan recently upgraded Power Integrations with a "buy" rating and set a $25 per share price target. We simply favor the bullish technicals as POWI appears ready to break-out of its Stage I base. AUG 20.00 QPW HD LB=2.85 OI=44 CB=19.37 DE=21 TY=4.7% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=POWI ***** RFMD - RF Micro Devices $29.33 *** New Uptrend *** RF Micro Devices (NASDAQ:RFMD), an ISO 9001-certified manufacturer, designs, develops, manufactures and markets proprietary radio frequency integrated circuits (RFICs) primarily for wireless communications products and applications such as cellular and PCS phones, base stations, wireless LANs, and cable television modems. The Company offers a broad array of products - including amplifiers, mixers, modulators/demodulators, and single-chip receivers, trans- mitters and transceivers - representing a substantial majority of the RFICs required in wireless subscriber equipment. Two weeks ago, RFMD posted an expected net loss though revenue grew 27.3% on a sequential basis (it declined from the year ago period). This week the company said it expects a return to profitability in the second half of the year, and that revenues would grow about 10% in the September quarter. The stock appears ready to resume its uptrend and has now completed a short-term double bottom. AUG 25.00 RFZ HE LB=5.20 OI=6348 CB=24.13 DE=21 TY=5.2% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=RFMD ***** SPCT - Spectrian $15.49 *** It's A Bottom Fishing Week **** Spectrian (NASDAQ:SPCT) is a leading designer and manufacturer of single carrier and multicarrier high-power RF amplifiers for the worldwide wireless communications industry, utilized in both wireless data and voice applications. Spectrian supports AMPS, CDMA, TDMA, GSM and 3G technologies for mobile and fixed wireless networks. A familiar pattern now, Spectrian reported less than spectacular earnings a couple weeks ago but has rallied recently as investors look to the future. The stock is forging a Stage I base and the improving technicals suggest an upside resolution. We simply favor the support area near the cost basis on this speculative issue. AUG 15.00 QCS HC LB=1.25 OI=112 CB=14.24 DE=21 TY=7.7% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=SPCT ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield SAGI 15.41 AUG 15.00 UEJ HC 1.60 220 13.81 21 12.5% NMTC 24.34 AUG 22.50 QEK HX 3.20 39 21.14 21 9.3% OPWV 24.99 AUG 22.50 UGE HX 3.80 2076 21.19 21 9.0% CSCO 19.06 AUG 17.50 CYQ HW 2.10 56284 16.96 21 4.6% NETE 28.11 AUG 22.50 UPN HX 6.30 29 21.81 21 4.6% EXTR 29.06 AUG 25.00 EUT HE 4.80 481 24.26 21 4.4% ***************** NAKED PUT SECTION ***************** Market Strategies: Income-Producing Instruments By Ray Cummins In any discussion about conservative investing techniques, the subject of bonds is sure to arise and that topic surfaced in a recent E-mail question. The majority of investors regard bonds as long-term, income-producing instruments or a "bearish" hedge in volatile markets. However, some types of bonds can be just as productive as blue-chip stocks, depending on the quality of the issue and the interest rate environment. In simple terms, a bond is a pledge made to an investor by an institution. The issuing company promises to make scheduled interest payments on the money it borrows from the investor. When the bond matures, the institution is charged with repaying the principal (the face value of the bond) in full. In theory, an investor receives interest income during the term of the bond and a total repayment of the initial loan amount when the bond matures. Bonds represent one of the safest ways to store excess capital and there are only two forms of risk with an investment of this type. The primary risk in bond ownership is the timely payment of principle. The quality of the issuing institution determines the potential for loss and in the corporate bond market, there are several grades of bonds. The best private bonds are rated AAA and as you might expect, they offer the lowest interest rates because repayment is virtually guaranteed. The system of grading begins with AAA and continues through AA, AA-, A, A-, BAA, BBB, BB, B, B-, CCC, and finally down to D with small differences for each category. The lower grades provide higher interest payments in conjunction with poor credit ratings. The "BBB" category is considered the lowest group of "investment grade" bonds and below that range, defaults are more prevalent. The Federal Government is the most credible issuer and their bonds are generally known as treasuries. The categories of treasuries include: Bills, which mature in one year or less; Notes, which mature after one year but less than ten years; and Bonds, which mature after ten years. The U.S. treasury market is considered the benchmark for bond ratings. Another form of risk with bond ownership is the loss of potential associated with rising interest rates. As the cost of borrowing increases, prices for bonds go down. This inverse effect is the primary concern for all bond investors, especially those who buy long-term instruments, because the negative consequences are most pronounced in the 10- and 30-year instruments. One way to avoid interest rate risk is to purchase short-term bills (or notes) and retain them until they mature. The downside of course, is the rates for these investments are relatively low. A decline in interest rates will boost the value of bonds but this can create a new set of problems. A most unpleasant event occurs when a bond trades at 100% (par) of its face value. At that point, the instrument becomes "callable," meaning the borrower can buy it back early, reducing the amount of interest paid and the return on investment. In layman's terms, if a bond is trading above 100% of the face value and is "called," the owner will lose the current market premium for the issue; the difference between par value and the trading price of the bond. Another dilemma arises when the bond approaches maturity. At the end of the term, the issuer pays only the face value to redeem the instrument. Obviously the value of the bond will return to par (no excess premium) because traders know the instrument will be repurchased in a short time. As you can see, bonds and treasuries fulfill a useful role in the financial markets, but they are not necessarily the best way to achieve portfolio growth. There are however, a number of other unique vehicles that offer worthwhile opportunities for investors who need current income, yet want to invest in companies that will benefit from the bullish market trends. Although this category of investing is not well known, it can offer favorable annual returns along with potentially high rewards for those that choose to learn the fundamentals of the strategy. More on that subject next week. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield DTHK 14.21 14.44 AUG 10.00 0.30 *$ 0.30 10.4% NMTC 22.84 24.34 AUG 17.50 0.45 *$ 0.45 9.7% NMTC 23.00 24.34 AUG 17.50 0.55 *$ 0.55 9.3% APCS 16.93 15.45 AUG 15.00 0.55 *$ 0.55 8.9% SEAC 22.00 27.18 AUG 17.50 0.35 *$ 0.35 8.0% NTIQ 34.14 34.08 AUG 25.00 0.65 *$ 0.65 7.6% ICST 18.54 20.00 AUG 15.00 0.35 *$ 0.35 7.2% AHAA 33.47 38.00 AUG 25.00 0.55 *$ 0.55 6.6% PHTN 33.18 38.17 AUG 25.00 0.40 *$ 0.40 6.2% ZRAN 32.97 39.05 AUG 25.00 0.60 *$ 0.60 6.0% ILUM 30.30 29.97 AUG 25.00 0.40 *$ 0.40 6.0% AMZN 16.98 12.25 AUG 12.50 0.45 $ 0.20 5.6% AMZN 16.98 12.25 AUG 12.50 0.50 $ 0.25 5.6% CTXS 33.53 35.04 AUG 25.00 0.45 *$ 0.45 5.5% PCL 28.49 27.85 AUG 25.00 0.60 *$ 0.60 5.1% BRCM 41.00 43.88 AUG 25.00 0.40 *$ 0.40 5.1% AREM 17.75 11.19 AUG 12.50 0.70 $ -0.61 0.0% *$ = Stock price is above the sold striking price. Comments: It appears we may have overstayed our welcome with Amazon.com (NASDAQ:AMZN) as the company's quarterly earnings report was less than stellar and the key metric, Gross Profit, did little to impress the analysts covering the issue. Shares of AMZN fell almost 30% last week after the company posted earnings that beat expectations, but cautioned that it would see lower-than-expected revenue in the coming months. On the bright side, Amazon.com announced a deal with AOL Time Warner to help it build a web-site for America Online's 30 million users. The terms of Internet and media giant AOL-Time Warner's $100 million investment leaves open a window for a quiet takeover of the online retailer, even though analysts say such a prospect is unlikely. Traders who remained in the position have affirmed their interest in owning the issue. The speculation play in Aremisoft (NASDAQ:AREM) has taken a turn for the worse and Monday's move below the recent support area at $14 was a very suggestive indication of things to come. Traders who did not exit on the 20% drop are likely to own the stock in three weeks. Alamosa Holdings (NASDAQ:APCS) is at a key moment and should be monitored for any close below the sold strike ($15). Positions Closed: Plug Power (NASDAQ:PLUG). NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield AFCI 26.30 AUG 22.50 AQF TX 0.35 74 22.15 21 7.2% HLIT 15.08 AUG 12.50 LOQ TV 0.40 230 12.10 21 15.0% IDTI 36.14 AUG 30.00 ITQ TF 0.70 1143 29.30 21 11.2% KOPN 15.01 AUG 12.50 KQO TB 0.35 107 12.15 21 13.2% NMTC 24.34 AUG 20.00 QEK TD 0.45 20 19.55 21 11.1% SAGI 15.41 AUG 12.50 UEJ TV 0.30 8 12.20 21 12.2% SEAC 27.18 AUG 22.50 UEG TX 0.40 2 22.10 21 8.8% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield HLIT 15.08 AUG 12.50 LOQ TV 0.40 230 12.10 21 15.0% KOPN 15.01 AUG 12.50 KQO TB 0.35 107 12.15 21 13.2% SAGI 15.41 AUG 12.50 UEJ TV 0.30 8 12.20 21 12.2% IDTI 36.14 AUG 30.00 ITQ TF 0.70 1143 29.30 21 11.2% NMTC 24.34 AUG 20.00 QEK TD 0.45 20 19.55 21 11.1% SEAC 27.18 AUG 22.50 UEG TX 0.40 2 22.10 21 8.8% AFCI 26.30 AUG 22.50 AQF TX 0.35 74 22.15 21 7.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** AFCI - Advanced Fibre Communications $26.30 *** A Big Day! *** Advanced Fibre Communications (NASDAQ:AFCI) develops, manufactures and supports telecommunications access products and services that enable telecommunications companies and other service providers to connect their central office switches to end users for voice and high-speed data communications. The company's products include integrated multi-service access platforms, integrated access devices, network management systems, indoor and environmentally hardened outdoor cabinets for the portion of the telecommunications network between the service provider and their customers, often referred to as the "local loop," or "last mile." Advanced Fibre's stock rallied on Friday after the telecommunications systems maker reported strong second-quarter results and made positive comments about the future. Analysts at Lehman Brothers, U.S. Bancorp Piper Jaffray, WR Hambrecht, J.P. Morgan H&Q and Pacific Growth Equities increased future earnings estimates and several brokerages raised their price targets for AFCI's share value, based on the bullish outlook. AUG 22.50 AQF TX LB=0.35 OI=74 CB=22.15 DE=21 TY=7.2% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=AFCI ***** HLIT - Harmonic $15.08 *** On The Move! *** Harmonic (NASDAQ:HLIT) designs, manufactures and markets digital and fiber optic systems for delivering video, voice and data services over cable, satellite, telco and wireless networks. Harmonic's products fall into two principal groups, Broadband Access Networks Products and Convergent Systems Products. In addition, the company provides Professional Services and Systems Support to its customers worldwide. Last week, Harmonic posted favorable results for the most recent quarter with net sales of $49.3 million, up 22% from $40.3 million in the previous quarter. During the period, the company made the first volume shipments of its next-generation digital systems, including the new NSG for video-on-demand and MV50 encoder. The CEO said he was pleased with their strong execution and improved operating performance, despite a continued weak capital spending environment. Based on the recent bullish activity, it appears investors agree with an optimistic outlook for the company. AUG 12.50 LOQ TV LB=0.40 OI=230 CB=12.10 DE=21 TY=15.0% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=HLIT ***** IDTI - Integrated Device Tech. $36.14 *** New Trading Range! *** Integrated Device Technology (NASDAQ:IDTI) designs, develops, manufactures and markets a broad range of high-performance semiconductor products. Applications for the company's products include: data networking and telecommunications equipment, such as routers, hubs, switches, cellular base stations and other devices; storage area networks; other networked peripherals and servers; and personal computers. IDT fabricates substantially all of its semiconductor wafers using advanced CMOS process technology in the company's own fabrication facilities. IDTI assembles or packages the majority of its products in manufacturing facilities in Malaysia and the Philippines, where it also conducts product test operations. The semiconductor sector is receiving some new attention among technology buyers and this issue has one of the better technical patterns in the group. Speculate on its future movement with this conservative position. AUG 30.00 ITQ TF LB=0.70 OI=1143 CB=29.30 DE=21 TY=11.2% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=IDTI ***** KOPN - Kopin $15.01 *** Big Mover! *** Kopin (NASDAQ:KOPN) manufactures advanced semiconductor materials and miniature flat panel displays. Kopin uses its proprietary technology to design, manufacture and market products used in wireless communications and high-resolution portable consumer electronics applications. They produce two types of performance components; a heterojunction bipolar transistor wafer and also some unique CyberDisplay products. Kopin's HBT transistor wafer product consists of an array of vertically oriented transistors that its customers use primarily to produce integrated circuits for wireless communications products. Current applications of the company's CyberDisplay products include viewing images in camcorders and digital cameras, and the company is targeting new applications such as reading e-mail and browsing the Internet using wireless handsets, pagers and other consumer electronics devices. Kopin shares rallied Friday after CIBC World Markets upgraded the issue to a "Buy" rating with an $18 target, based on an expected 20% sequential growth over the next two quarters. AUG 12.50 KQO TB LB=0.35 OI=107 CB=12.15 DE=21 TY=13.2% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=KOPN ***** NMTC - Numerical Technologies $24.34 *** Rally Mode! *** Numerical Technologies (NASDAQ:NMTC) is a commercial provider of proprietary technologies and software products that enable the design and manufacture of sub-wavelength semiconductors. The company offers a comprehensive solution that enables the basic production of smaller, faster and cheaper semiconductors using existing equipment. This solution enables its customers and industry partners to realize increased return-on-investment, and deliver new high-performance semiconductors more quickly. The company's patented phase-shifting technology, combined with its proprietary optical proximity correction and process modeling technologies form the foundation of its sub-wavelength solution. NMTC recently announced record revenues and profitability for the second quarter of 2001. Revenues were amazing at $11 million, an increase of 147% compared with the second quarter of last year and an increase of 13% over the previous quarter. There has also been some speculation the company will announce a major design win from Advanced Micro (NYSE:AMD) and that is likely the reason for the high-volume rally on Friday. AUG 20.00 QEK TD LB=0.45 OI=20 CB=19.55 DE=21 TY=11.1% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=NMTC ***** SAGI - Sage $15.41 *** Second Chance Entry! *** Sage (NASDAQ:SAGI) is a leading provider of digital display processors, enabling superior picture quality for a variety of consumer technology and PC-display products ranging from web appliances to TVs and flat panel monitors. Sage is developing products that bring the home theater experience to the mass consumer and PC-display market through digitally enhanced TV, projection displays, DVD players and internet appliances. NEC Corporation has recently selected Sage's Jaguar processor for their new Valuestar monitors. SAGI made another powerful move on Friday and the rally is in conjunction with bullish activity in their industry sector. Sage also recently announced sales growth of 21% compared to last quarter and an increase in IC revenue of 49% sequentially. In early July, the issue was added to the Russell 2000 Index and this position offers a favorable cost basis in the issue at a price near recent technical support. AUG 12.50 UEJ TV LB=0.30 OI=8 CB=12.20 DE=21 TY=12.2% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=SAGI ***** SEAC - SeaChange $27.18 *** New Trading Range! *** SeaChange (NASDAQ:SEAC) develops, manufactures and sells systems that automate the management and distribution of both short-form video streams (advertisements) and long-form products (movies), and related services and movie content to television operators, telecommunications companies and broadcast television companies. In May, SeaChange reported record revenues of $30.2 million, up 35% and net income of $182,000 or $0.01 per share. SeaChange believes it has established itself as the leader in Video-on- Demand as it recorded a record $11.0 million in revenue. The company continues to improve its product, recently shipping its new IMC 4000 video server configurations. In early July, Adams Harkness initiated coverage of SEAC with a "buy" rating and on Friday, SEAC shares rallied on news of an LA Times report that Vivendi Universal has inked deal to license its movies to cable operators for new video-on-demand services. According to the article, the agreement could make video-on-demand films viable. We favor the bullish technical indications as SEAC has recently moved to a new, 6-month high on heavy volume. AUG 22.50 UEG TX LB=0.40 OI=2 CB=22.10 DE=21 TY=8.8% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=SEAC ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ONIS 24.75 AUG 20.00 EMU TD 0.80 1435 19.20 21 19.5% NPSP 31.11 AUG 25.00 QKK TE 0.85 398 24.15 21 17.1% TQNT 23.07 AUG 20.00 TQN TD 0.65 1383 19.35 21 13.8% AFFX 25.95 AUG 22.50 FIQ TX 0.70 239 21.80 21 13.3% IMPH 47.06 AUG 45.00 QPH TI 1.50 80 43.50 21 11.9% PCS 26.90 AUG 25.00 PCS TE 0.55 2642 24.45 21 8.5% ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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