The Option Investor Newsletter Wednesday 08-01-2001 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/7159_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 08-01-2001 High Low Volume Advance/Decline DJIA 10510.01 - 12.80 10599.96 10484.20 1.30 bln 1817/1271 NASDAQ 2068.38 + 41.25 2078.36 2045.13 1.76 bln 2185/1528 S&P 100 623.61 + 1.45 627.45 621.82 totals 4002/2799 S&P 500 1215.93 + 4.70 1223.04 1211.23 RUS 2000 489.24 + 4.46 489.98 484.78 DJ TRANS 2933.78 + 27.60 2933.78 2894.16 VIX 22.99 - 0.88 23.91 22.84 Put/Call Ratio 0.50 ****************************************************************** Mother Merrill, Please Pass the Chips Jumpy bears and anxious bulls combined to carry the Nasdaq Composite (COMPX) above meaningful resistance Wednesday. Can the COMPX make it three in a row? We'll see Thursday, but there are a few signs pointing to profit taking over the short-term. As always, the time element of any forthcoming move is the risk to contend with. After all, the future is uncertain. And that fact alone makes trading wonderfully challenging. For its part, the COMPX advanced and subsequently SETTLED above the 2060 resistance level, which has been a focal point of this market participant. My initial stance would be one of the bullish nature following the COMPX's close above 2060. If the upside momentum persists, the COMPX could trade up to 2100 in the short-term. Thereafter, MAJOR resistance exists at 2150. At the risk of coming off incredulous, however, dare I suggest we're at a 50/50 juncture. Care for a straddle? The Ursus arctos in me noticed as of Wednesday that the COMPX stochastic is not only in overbought territory, but also beginning to rollover. Combine that fact with the resistance levels in key sectors, and it seems plausible to expect profit taking. Concerning the COMPX stochastic, it's worth mentioning that the indicator recently broke its pattern of lower highs, which had been in place since mid-June. I find that to be constructive over the intermediate-term. Furthermore, keep in mind that stochastics is an oscillator. Oscillators work in bracketed (range bound) markets. The market is range bound. Use stochastics. The largest part of my 50% bearish stance stems from the price action of the Software Index (GSO.X). The software sector is the largest within the Nasdaq, accounting for roughly 25% of the index. The GSO ran smack dab into resistance at 200 Wednesday. That much was not by coincidence as evidenced by the retracement bracket on the chart below. What's more, the single largest component of the Nasdaq and the GSO continues to trade heavily. I'm of course referring to Mr. Softee (NASDAQ:MSFT). The stock accounts for roughly 11% of the Nasdaq, and just can't seem to get out of its own way. The COMPX needs MSFT and the GSO to participate IF it's going to advance from current levels over the short-term. While the GSO is the largest sector within the Nasdaq, the Semiconductor Sector (SOX.X) continues to assume the leading role. For the day Wednesday, the SOX tacked on over 5%, while the GSO added a comparatively poor 2.3%. The exuberance in chip issues stemmed from the Merrill Lynch (NYSE:MER) upgrade. Analysts at the firm upgraded 11 chip and chip equipment makers Wednesday based upon the "Bottom Is In Place" premise. Whether Merrill is correct or not remains to be seen. And their upgrade following several others among Wall Street's sell side does not garner as much credence. Further, there's the question of whether Wednesday's sharp advance in the SOX was a product of short covering or "real" buying by institutions. If it's a case of the former, then the SOX is set up for a pullback over the short-term as shorts reinitiate positions. Also, the SOX rolled over at meaningful technical resistance at 650. The probable scenario over the short-term is for the SOX to fall back down to the 600 range, plus or minus 15 points, to consolidate its recent run-up. After all, the index is up by over 15% in just the last five days of trading. That's an awful big move and needs to be consolidated. However, should the SOX breakout above 650, we'd most likely see a capitulation on the part of the bears, which could carry the SOX up to 700 and the COMPX along with it. Like I just wrote, the SOX will probably pullback from current levels, but by no means is a breakout from current levels improbable. What was interesting is that Merrill's upgrade did NOT include any communications chip makers, and the firm made that much clear. However, shares of PMC - Sierra (NASDAQ:PMCS), Applied Micro Circuits (NASDAQ:AMCC), and the like sharply advanced. That, in turn, boosted shares of the customers of the aforementioned; namely, the networkers. Juniper (NASDAQ:JNPR), CIENA (NASDAQ:CIEN) and Cisco (NASDAQ:CSCO) all had solid days. In the case of Cisco, the stock broke out above its bearish resistance line on the point & figure chart, which has been in place since last November! (CSCO's a current OI call play!) The chip upgrade spilled over into the Networking Index (NWX.X), which like the GSO and SOX, is very close to breaking out above meaningful resistance. The NWX is riding its ascending trend line higher, in the process of forming a classic ascending wedge. A breakout in the NWX would most certainly benefit CSCO and the continuation of the latter's momentum. The PIVOTAL level to watch in the NWX is 348. Otherwise, another pullback down to its support line may offer solid risk/reward entries into the leaders of the sector (Read:CSCO). With the looming overhead supply in three of the Nasdaq's largest sectors, we arrive to the question of what catalyst can break the GSO, SOX and NWX out and above their respective resistance? It could come in the form of another upgrade, positive comments from a tech firm, or anticipation that Cisco is going to have a good quarter when it reports next week. Also, there's a growing belief that the Fed is going to cut interest rates a lot further than previously anticipated. The Fed Funds rate currently sits at 3.75%, and some have predicted that the FOMC is going to take rates below 3%! If Wednesday's National Association of Purchasing Manager's (NAPM) Index is any indication, the Fed may be far from finished cutting rates. July's NAPM index fell to 43.6, below both estimates and June's reading. While still below the waterline at 50, July's number indicated a further worsening of the manufacturing segment of the economy during the month. Greenspan monitors the NAPM closely, so could another inter-meeting rate cut be in the future? The Fed meets on August 21. Even if the Fed doesn't surprise the market, guidance, or the market's expectation, for further rate cuts could advance the GSO, SOX, and NWX above their respective resistance levels. The consensus had expected the Fed to ease off the accelerator following its August meeting in conjunction with another 25 basis point cut. But with the drop in the NAPM index during July, that consensus may begin to shift towards further easings. And if that happens, the market will rally. The media has been pretty mum about the Fed's August 21 meeting up until this point, but it should begin to garner increasing amounts of attention over the coming week. In fact, one possible scenario that could unfold over the next week is for the SOX, GSO, and NWX to pullback from current levels in a profit taking fashion before breaking out ahead of the Fed meeting. If that happens, buying the dip might not be too bad of an idea. Eric Utley Option Investor **************** MARKET SENTIMENT **************** The Worst is Behind Us By Jeffrey Canavan Construction spending fell for the fourth straight month and manufacturing contracted yet again, but according to Merrill Lynch, the worst is over for the semiconductors. Merrill anticipates that stabilizing earnings estimates, improving year over year revenue comparisons, and reduced capital spending should help semiconductor stocks outperform over the next six to twelve months. Whatever the catalyst, at least it got the SOX moving. This index has already cleared a good amount of resistance, and could be set to take off if resistance at 644 is cleared. If the Nasdaq were to rally, semiconductors would be a nice leader. Priceline posting a profit offset worms wiggling into websites, and the Internet Index finished as today's second best sector, up 3.01%. Networking, software, disk drives, and computers followed close behind. Biotechnology stocks lagged amid concerns about a federal ban on cloning. Biotechnology stocks lagged amid concerns about a federal ban on cloning. Retailers, healthcare, and drugs also finished in lower territory. Relatively strong sectors continue to perform well, but beaten down technology is starting to come alive as investors yearn for a reason, any reason, to buy. These rallies are quickly sold into, so bulls will have to keep plugging along until all the sellers are shaken out. Tomorrow we get unemployment claims and export sales to stir the pot. *************************Sector Watch**************************** Weekly Daily Overbought Support Resistance Trend Trend Oversold DJIA Bearish Neutral Neutral 10,200 10,600 NASD Bearish Neutral Overbought 1,940 2,125 S&P 500 Bearish Neutral Overbought 1,170 1,240 Rus 2000 Neutral Neutral Overbought 465 495 Semis Neutral Bullish Overbought 600 645 Biotech Bearish Neutral Overbought 490 550 Internet Bearish Neutral Oversold 140 170 Networking Bearish Neutral Overbought 300 365 Software Bearish Neutral Overbought 180 200 Banking Bullish Neutral Overbought 640 675 Retail Bullish Neutral Overbought 875 920 Drugs Neutral 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 (1.0%) (0.1%) (1.2%) Neutral Buy NASD 4.2% 2.6% 3.8% Neutral Sell S&P 500 2.1% 0.7% 0.3% N/A Sell Rus 2000 2.6% 1.2% 0.1% Neutral Sell Semis 15.1% 13.2% 8.3% Positive Buy Biotech 3.9% 1.5% (8.9%) Negative Buy Internet 2.9% (7.3%) (8.4%) Negative Sell Networking 9.9% 8.5% 4.2% Neutral Buy Software 4.6% 2.8% (6.4%) Neutral Sell Banking 2.4% 0.5% 3.9% Positive Buy Retail 0.1% 0.5% 2.3% Neutral Buy Drugs 3.2% 0.9% (1.8%) Neutral Buy ***************************************************************** *********** OPTIONS 101 *********** More on Entry Points By Mark Phillips Have you noticed what I have? Oscillators are oscillating between overbought and oversold extremes again and that is great for our trading purposes. Rangebound markets tend to make oscillators like the Stochastics and RSI (Relative Strength Index) really shine as tools for picking ideal entry points. By their very nature, markets (or stocks) that are stuck in a range tend to reverse when they reach the overbought or oversold extreme. The runaway bull market of 1999 and early 2000 had Stochastics frequently remaining glued to the ceiling in overbought territory for weeks and months at a time, making momentum strategies ideal and long-term oscillators difficult to use. Similarly, the most recent leg of the corrective bear market (September 2000-March 2001) had the oscillators of numerous stocks nailed to the floor in oversold territory, seemingly unable to recover. Since hitting its lows in early April, the market seems to be telling us that rangebound trading strategies are starting to work again as the bulls and the bears fight for dominance. While this up and down action can be frustrating to long-term buy and hold investors, it gives us exactly what we are looking for in the LEAPS portfolio, especially as we target covered calls on our LEAPS in an attempt to reduce our cost basis, preferably to zero. Helping to underscore the case for rangebound trading is the fact that many pundits are still trying to call the bottom of the market in the worst seasonal time of the year. August and September are historically the worst months of the year for the bulls, but that didn't stop Abby Joseph Cohen from grabbing a microphone this morning to reiterate her year-end targets of 12,500 for the DJIA and 1550 for the S&P500. With earnings season winding down, there are fewer opportunities for really bad news to crater the market and of course, investors are once again focused on the Fed and the expectation of more interest rate cuts to prop up our still-sagging economy. In the past couple weeks I've had a number of emails requesting further clarification on when to enter new positions -- both when to buy the LEAPS and when to sell the Covered Call. With my observations of the change in behavior of technical indicators, I thought I would use our time together to highlight a couple of plays from our Portfolio, showing the details of our LEAPS entry and what I am looking for in terms of Covered Calls entries. So let's go to the charts, shall we? After the artificial Fed-induced spring rally in the markets, I noticed that some of our old Technology favorites like Cisco Systems (NASDAQ:CSCO) and Sun Microsystems (NASDAQ:SUNW) had begun to bounce from major support (but above the spring lows) as the weekly Stochastics oscillator reversed from the oversold region. Contrary to the pattern seen in the September-March period, the weekly Stochastics oscillator is running from oversold to overbought and back again. This gives us a much better tool for gauging our long-term entries. While the stochastics oscillator continued to provide false or non-existent entries during the October-March timeframe, we can see that things have improved significantly over the past four months. Support held up nicely near $14 as the daily Stochastics posted a series of higher lows in July, helping to push the weekly Stochastics into ascent mode. We took our entry on the bounce from $14 on July 24th, and so far the stock is moving nicely, breaking out above the $16 resistance level today. Although the chart is a little different, CSCO presents us with much the same picture. The frustrating days of watching weekly Stochastics meander in the lower half of its range for months at a time are behind us, and the recent recovery from the $16 level set us up for an attractive entry in early July. With the weekly Stochastics reversing into ascent mode, all we had to do was look for a reversal of the daily Stochastics from oversold territory. And looking at the daily chart, there it is, accompanying a renewed bounce from the $16 level. The dip and bounce from $17 a week later was confirmed by a higher low in the daily Stochastics, allowing us to breathe easier with the additional evidence that our indicators are giving us good signals again. CSCO and SUNW are just a couple of recent examples of how my favorite indicator is once again providing reliable entry signals. The convergence of buy signals on the daily and weekly charts gives us strong long-term LEAPS entries and then all we have to do is focus on the daily charts to gauge our entry points for selling the covered calls. While the high-odds entries on these plays have passed into history for this cycle, there are other plays on the Watchlist that look like they are quickly approaching our desired entry points. Barrick Gold (NYSE:ABX) has almost fallen back to the $14 level and the daily Stochastics have dropped back into oversold territory. I'm betting we get a tradable bounce in the next week, and if it comes above our entry target, we'll step into another attractive long-term play. With weakness still keeping the Oil Service stocks under pressure, we're similarly setting up for an attractive entry in our Global Marine (NYSE:GLM) play as daily Stochastics head back for another reversal in the oversold region. I'll finish up this discussion on entry points next week with an equally detailed analysis of how to target the Covered Call side of the position. Who knows, in the intervening time, we may see some weakness emerge on the CSCO and SUNW plays, providing us with some attractive setups that that we can dissect to our heart's content. The key to successful trading is to recognize what is working and what is not working in the current market environment. Now that we can see oscillators providing reliable signals again, that gives us some valuable information for planning our trades. Happy Hunting! Mark Contact Support ************* NEW CALL PLAY ************* BRCD - Brocade Communications $37.70 +4.70 (+6.16 this week) Brocade Communications Systems is a supplier of open Fibre Channel Fabric solutions that provide the intelligent backbone for Storage Area Networks. For the 6 months ended 4/28/01, revenues totaled $280.2M, up from $104.8M. Net income totaled $44.5M, up from $20.6M. Revenues reflect higher demand for the SAN switching products and an increased customer base. Net income also reflects lower component and manufacturing costs. BRCD broke through short-term resistance today with a strong move through both its 20 and 100 DMAs. The storage sector has been pretty hot over the last few days and if this recent uptrend in NASDAQ continues, BRCD is almost certain to be one of the beneficiaries. Three consecutive days of increasing upside volume have prepared the stock for a test of the 50 DMA at $38.36. A breakout above this level could portend better things to come with short-term resistance not arriving on the scene until the early to mid $40s. MACD has crossed over as of yesterday and a positive close tomorrow will likely push the indicator past breakeven. Stochastics show that the stock is still within its trading range and On Balance Volume indicates that a breakout of the recent consolidation phase should have gas to continue the upside moves. Short-term traders should keep an eye on two trading levels in BRCD. First, the 50 DMA is very close on the horizon at $38.36. While we don't think that level will pose any real threat, the stock hasn't traded at this average in nearly one month. Second, the $40.00 price could function as a psychologically important level, given that shares haven't seen this level in about as long. Those with a long-term focus will notice that the area between $45.00 and $49.00 is cluttered with recent highs. These could be tuff to get past and one might consider taking gains at this level. Don't forget to protect your downside with a stop at $33.00. BUY CALL AUG-35 UBF-HG OI=6718 at $5.20 SL=3.00 BUY CALL AUG-40*UBF-HH OI=4439 at $2.50 SL=1.25 BUY CALL SEP-35 UBF-IG OI=4003 at $7.00 SL=5.00 BUY CALL SEP-40 UBF-IH OI= 479 at $5.00 SL=3.00 Average Daily Volume = 14.0 mln ************ NEW PUT PLAY ************ No new puts tonight ***************** STOP-LOSS UPDATES ***************** AHAA - call Adjust from $36 up to $38 CSCO - call Adjust from $18.25 up to $19 JBL - call Adjust from $30.50 up to $31 PHCC - call Adjust from $22 up to $23 MEDI - put Adjust from $41 down to $40 PDII - put Adjust from $66 down to $65 ************* DROPPED CALLS ************* WLP $103.25 -3.75 (+0.24) Cigna dropped a bomb Wednesday morning that adversely impacted our WLP call play. In fact, WLP gapped lower and never really regained its footing. Obviously the gap lower prevented entry into this new play. As such, we're dropping coverage tonight and may reconsider initiating bullish coverage if WLP rebounds in the next week or two. ************ DROPPED PUTS ************ No dropped puts for Wednesday ********************* PLAY OF THE DAY - PUT ********************* ADBE - Adobe Systems $37.49 -3.05 (-5.57 this week) A long-time leader in desktop publishing software, ADBE provides graphic design, publishing, and imaging software for Web and print production. Offering a line of application software products for creating, distributing, and managing information of all types, the company generates nearly 75% of sales through publishing software products such as Photoshop, Illustrator, and PageMaker. Its Acrobat Reader, which uses portable document format (PDF) is popping up all over the Internet, as businesses shift from print to digital communications. In addition, ADBE licenses its industry standard technologies to major hardware manufacturers, software developers, and service providers, as well as offering integrated software solutions to businesses of all sizes. Most Recent Write-Up Doing its part to put a damper on the Software sector, ADBE issued a revenue warning yesterday, citing weakness in all of its business segments due to the continuing global economic weakness. Even though the company said they would meet their earnings forecast, the damage to investor psychology was done, as evidenced by the price action on Tuesday. The $40 support level failed at the open and continued right up to the closing bell, with the stock posting its first close below $38 since April 9th. With selling volume heavy at nearly 6 million shares, it looks like a significant breakdown in the share price is in process. The Point and Figure chart agrees with a double-bottom breakdown today painting a bearish picture. The recent breakdown forecasts a bearish price target of $29. Significant support exists at $37, and a drop through that level will likely galvanize the sellers to take aim on that $29 level in the days ahead. Weakness is developing on the Software index GSO.X) as well, as it has been unable to break through the $200 resistance level and we now have bearish stochastics divergence developing on the daily chart. Target failed intraday rallies in the $39-40 level for new positions and place stops at $41. Alternatively, wait for confirmation of the stock's weakness as it falls through the $37 level on continued strong volume. Comments ADBE rolled over in concert with the Nasdaq Wednesday afternoon, but never really recovered into the close. Its weakness may offer a solid put trade if the COMPX weakens Thursday. In terms of entry points, look for either a rollover near the $39.50 range or a breakdown below the $38 level, depending on market conditions. BUY PUT AUG-40*AEQ-TH OI=2196 at $2.95 SL=1.50 BUY PUT AUG-35 AEQ-TG OI=1387 at $1.00 SL=0.50 Average Daily Volume = 3.85 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** As The Market Churns... By Ray Cummins Chips stocks led the NASDAQ higher today after a bullish forecast from Merrill Lynch spurred new buying interest in the group. The brokerage raised its recommendation on a number of semiconductor issues, suggesting that although the chip industry continues to struggle with over-capacity and weak demand, the worst of the downturn is over. The brokerage also upped its long-term view on some Asian and European chip outfits as well as several equipment stocks. In a research note entitled "The train is pulling into the station, climb aboard," Merrill detailed that chip-equipment issues generally begin to see improvement several months before the orders make a "bottom" and thus these stocks are unlikely to test previous lows. Shares of broadband companies also rallied even as Lucent Technologies (NYSE:LU) slumped after announcing it will sell $1 billion through the sale of convertible stock. The troubled company also saw its debt rating downgraded by Standard & Poor's and UBS Warburg said the new offering, issued to satisfy existing debt holders, was done on "very unfavorable" terms for Lucent. Internet stocks moved higher on news of Priceline.com's (NASDAQ:PCLN) better-than-expected earnings report. The online travel company reported a second-quarter profit of $0.05 a share, well ahead of consensus analyst's estimates on strength in hotel bookings and a climb in the volume of airline tickets sold. The company also raised its EPS target for the third quarter. Among blue-chip technology issues, hardware shares were popular with Intel (NASDAQ:INTC), Hewlett-Packard (NYSE:HWP) and International Business Machines (NYSE:IBM) leading the way. Citigroup (NYSE:C) and American Express (NYSE:AXP) also saw increased buying interest and the positive activity in the financial giants helped limit losses on the Dow. In the broader market, biotechnology issues were bolstered by positive news from Biogen (NASDAQ:BGEN), which reaffirmed that 2001 earnings will be in the range of $1.90 per share. In other S&P 500 sectors, gold, natural gas, brokerage, bank and utility issues experienced buying pressure while retail, drug, paper, oil, oil service and select consumer product issues generally retreated. Summary of Previous Candidates: Covered Calls: (Margin not used in calculations) Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield MSCC AUG 50 46.00 66.93 $4.00 7.1% Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield TARO AUG 37.5 36.88 42.53 $0.63 8.2% Adj 2-1 Split MU AUG 32.5 31.95 43.70 $0.55 7.3% GMST AUG 35 34.40 42.27 $0.60 6.2% PLMD AUG 30 29.40 33.50 $0.60 5.9% Monitor Closely BRL AUG 65 64.10 85.04 $0.90 5.0% Sell Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield IMCL AUG 35p 33.85 43.68 $1.15 11.5% IMCL AUG 60c 60.80 43.68 $0.80 8.3% Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield ENZN AUG 75 75.90 65.00 $0.90 10.0% BBOX AUG 70 70.60 54.10 $0.60 5.3% NVDA AUG 100 100.80 85.84 $0.80 5.1% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status STJ $69.94 $68.50 AUG60p/65p $0.60 $64.40 $0.60 ALERT! SZA $57.49 $55.30 AUG50p/55p $0.70 $54.30 $0.70 ALERT! TEVA $68.79 $69.90 AUG60p/65p $0.80 $64.20 $0.80 ALERT! Watch the above positions closely as they consolidate! Debit Straddles: Stock Position Debit Target Value Gain Status DST AUG55c/55p $5.75 $7.19 $7.19+ $1.44+ Closed * CVS AUG40c/40p $3.25 $4.06 $4.06+ $0.81+ Closed * EMR AUG55c/55p $4.35 $5.44 $3.80 ($0.55) Open * The DST debit straddle traded over $9 this week. * The CVS debit straddle traded at $5 today. New Candidates: This following group of plays is simply a list of 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 are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations *************** ADI - Analog Devices $50.00 *** Merrill Upgrade! *** Analog Devices (NYSE:ADI) is engaged in the design, manufacture and marketing of high-performance analog, mixed-signal and digital signal processing (DSP) integrated circuits (ICs) used in signal processing applications. The company offers a generic list of approximately 2,000 products, with the highest revenue product accounting for approximately 4% of its revenue in fiscal 2000. Analog also designs, manufactures and markets a range of assembled products. Applications for its products include communications, cellular telephones, computers and computer peripherals, consumer electronics, automotive electronics, factory automation, process control and military and space systems. Semiconductor stocks rallied today after Merrill Lynch said it raised its opinion on the global semiconductor sector and upgraded its recommendations on 12 chip stocks worldwide. In a research note, the brokerage said a combination of more realistic earnings projections, a drop in spending on chip-making equipment, and an expected recovery in chip sales make many semiconductor stocks a good buy. The Merrill analysts heaped their greatest praise on companies that manufacture chips for mobile telephones, analog chipmakers, and the foundries that are contracted to build chips. Analog Devices was included in this select list of stocks and conservative traders can profit from future bullish movement in the issue with this combination position. ADI - Analog Devices $50.00 PLAY (conservative - bullish/credit spread): BUY PUT AUG-40 ADI-TH OI=1230 A=$0.40 SELL PUT AUG-45 ADI-TI OI=4978 B=$0.90 INITIAL NET CREDIT TARGET=$0.60-0.75 PROFIT(max)=14% B/E=$44.40 http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=ADI ***** BRCM - Broadcom $46.23 *** Chip Sector Rally! *** Broadcom (NASDAQ:BRCM) is a provider of highly integrated silicon solutions that enable broadband communications and networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies system-on-a-chip solutions for applications in digital set-top boxes and cable modems, high-speed local, metropolitan and wide area and optical networks, home networking, Voice over Internet Protocol (VoIP), carrier access, residential broadband gateways, direct broadcast satellite and also terrestrial digital broadcast, digital subscriber line (xDSL), wireless communications, server solutions, and network processing. The company's quarterly earnings are due on July 18. As I noted last month, traders are always asking for our favorite companies in specific sectors and when it comes to issues in the Integrated Semiconductor group, Broadcom is a leading contender. The company has solid fundamentals and from a technical viewpoint, this position offers a reasonable risk-reward ratio, based on the technical support at the sold strike ($40). In addition, today's rally was accompanied by good volume and the move above resistance near $44 suggests there is additional upside potential. Traders who want to speculate conservatively on the future movement of BRCM should consider this position. BRCM - Broadcom $46.23 PLAY (conservative - bullish/credit spread): BUY PUT AUG-35 RCQ-TG OI=11022 A=$0.40 SELL PUT AUG-40 RCQ-TH OI=31118 B=$1.00 INITIAL NET CREDIT TARGET=$0.65-$0.75 PROFIT(max)=15% B/E=$39.35 http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=BRCM ***** HIT - Hitachi $88.30 *** Technicals Only! *** Hitachi (NYSE:HIT) is Japan's largest diversified manufacturer of electronic and electrical products. Hitachi divides its primary operations into five segments: Information Systems & Electronics, Power & Industrial Systems, Consumer Products, Materials, and Services. The Information Systems & Electronics segment makes and sells computers, semiconductors, communications equipment, display tubes, and liquid crystal displays. Hitachi's Power & Industrial Systems segment manufactures and sells power plants, industrial machinery, transpiration equipment, construction parts and machinery and other products for power utilities and industry. The Consumer Products segment manufactures and sells products in two main categories: home appliances and consumer electronics. The Materials segment includes fabricated chemical and metal products supplied as materials to downstream manufacturers of mainly electric and electronic products. Is Hitachi forming a technical "double-bottom" pattern? From a long-term perspective, it appears the recently beleaguered stock is in the early stages of completing the right side of the "W". In the short-term, the chart indications suggest a possible rally towards resistance near $95. A move through the 30-dma (near $89) will be the first test of the current recovery. The rebound above the recent highs near $85 and increasing trading volume on the rally raise the probability of a favorable outcome and we are going to speculate on that result with a limited-risk combination position. HIT - Hitachi $88.30 PLAY (aggressive - bullish/credit spread): BUY PUT AUG-80 HIT-TP OI=12 A=$0.75 SELL PUT AUG-85 HIT-TQ OI=37 B=$1.75 INITIAL NET CREDIT TARGET=$1.10-$1.25 PROFIT(max)=28% B/E=$83.90 http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=HIT ***** MXIM - Maxim Integrated Products $48.90 ** On The Rebound! *** Maxim Integrated Products (NASDAQ:MXIM) designs, manufactures and markets a range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits. The company provides a range of high-frequency design processes and capabilities that can be used in custom design. The analog market is highly fragmented and characterized by many diverse applications, a great number of product variations, and as to many circuit types, relatively long product life cycles. Maxim's objective is to develop and market both proprietary and industry-standard analog integrated circuits that meet the increasingly stringent quality standards demanded by customers. Maxim is another of analog companies that was included in the list of favorable semiconductor issues published today by Merrill Lynch. Analysts said that industry fundamentals suggested global demand has hit a trough and supply was stabilizing after strong growth. A combination of stabilizing earnings estimates, reduced capital spending and bottoming year-on-year revenue change should cause semiconductor stocks to begin outperforming, albeit slowly, over the next few months and that is a good reason to speculate on the best issues in the group. From a technical viewpoint, MXIM is one of those stocks and today's rally above the resistance area near $44-$46 suggests there is excellent potential for future upside activity. MXIM - Maxim Integrated Products $48.90 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put AUG 40 XIQ TH 7834 0.55 39.45 9.3% *** Sell Put AUG 45 XIQ TI 4805 1.35 43.65 15.1% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=MXIM ***** NVDA - Nvidia $85.84 *** New Entry Point? *** Nvidia (NASDAQ:NVDA) designs, develops and markets 3D graphics processors, graphics processing units and related software that set the standard for performance, quality and features for every type of personal computer user, from professional workstations to low-cost PCs. The company's 3D graphics processors are used in a wide variety of applications including games, the Internet and industrial design. Its graphics processors were the first to incorporate a 128-bit multi-texturing graphics architecture designed to deliver to users of its products a highly immersive, interactive 3D experience with compelling visual quality, with realistic imagery and motion, stunning effects, and complex object and scene interaction at real-time frame rates. The company sells its products to major OEMs such as Compaq, Dell, Gateway, Hewlett Packard, IBM, micronpc.com, NEC, Packard Bell and Sony and add-in board manufacturers such as ASUStek, Creative Labs, Elsa, Guillemot and Leadtek. Nvidia appears to have made a positive test of its support near the March high, which coincides with its 200-dma. The recovery rally above its 30- and 50-dmas bodes well for the short-term, though it is unlikely the stock will move through resistance near $95 without significant news or a change in the outlook for the overall market. In the near-term, the stock appears to be creating a support area near $80, which would make a move towards our target strike price (and cost basis) unlikely. The company's earnings are due August 14. NVDA - Nvidia $85.84 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put AUG 65 RVU TM 999 0.40 64.60 4.3% Sell Put AUG 70 RVU TN 1813 0.80 69.20 7.9% *** Sell Put AUG 75 RVU TO 1032 1.50 73.50 11.4% Sell Put AUG 80 RVU TP 1620 2.70 77.30 16.5% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=NVDA *************** Neutral Plays - Straddles & Strangles *************** SNE - Sony $50.00 *** Probability Play! *** Sony (NYSE:SNE) is the ultimate parent company of the Sony group. In the Electronics business, Sony is engaged in the development, design, manufacture and sale of electronic equipment, instruments and devices. In the Game business, Sony develops, manufactures, markets and distributes home-use entertainment hardware and other related software. In the Music business, Sony is engaged in the development, production, manufacture, marketing and distribution of recorded music. In the Pictures business, Sony is engaged in the development, production, distribution and broadcasting of image-based software, including film, video, television and new entertainment technologies. In the Insurance business, Sony now conducts insurance operations primarily through Sony Life and Sony Assurance. In addition, Sony is engaged in other businesses, such as banking, leasing and credit financing, satellite broadcasting and location-based entertainment. Profitable debit straddles are relatively simple to uncover and there are three rules to identifying favorable conditions for a straddle purchase. First, the trader should select options that are undervalued (cheap). Next, the underlying security must have the potential to move (high or low) enough to make the straddle profitable. Finally, the underlying stock should have a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk/reward of the position. SNE has acceptable values in all three categories and traders who think the issue is a good candidate for future volatility can profit from that outcome with this conservative position. Our initial target debit in the play will be slightly lower than the current quoted price, due to the large BID/ASK spreads. SNE - Sony $50.00 PLAY (conservative - neutral/debit straddle): BUY CALL SEP-50 SNE-IJ OI=45 A=$3.10 BUY PUT SEP-50 SNE-UJ OI=36 A=$2.80 INITIAL NET DEBIT TARGET=5.70-$5.75 TARGET PROFIT=30% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=SNE *************** BEARISH PLAYS - Naked Calls & Combinations *************** AHC - Amerada Hess $76.73 *** Oil Sector Slump! *** Amerada Hess (NYSE:AHC) explores for, produces, buys, transports and sells crude oil and natural gas. These exploration and production activities take place in the United States, United Kingdom, Norway, Denmark, Gabon, Algeria, Azerbaijan, Indonesia, Thailand, Malaysia, Brazil and other countries. The company also manufactures, purchases, transports, trades and markets refined petroleum and other energy products. The company owns 50% of a refinery joint venture in the United States Virgin Islands, and another refining facility, terminals and retail outlets located on the East Coast of the United States. Stocks in the Oil and Gas Refining segment have performed poorly over the past few weeks and although Amerada Hess recently posted second quarter earnings that surpassed the consensus estimates, the company also said softening energy prices may make this the last quarter of windfall profits in the oil industry. Amerada Hess, which produces oil and gas and also holds a 50% interest in the largest oil refinery in the Western Hemisphere, said earnings rose over 75% on strong natural gas prices and higher profits from gasoline production. Unfortunately, AHC's solid performance has not translated into higher share values and the issue is well below the yearly highs (near $90) achieved in May. The stock has managed to recover from recent lows but the decline in early July came on increasing trading volume and a major support level at $80 was violated. Now that area becomes "resistance" and AHC's share value should have some difficulty reaching (and remaining above) our sold strike price prior to the August expiration. AHC - Amerada Hess $76.73 PLAY (moderately aggressive - bearish/credit spread): BUY CALL AUG-85 AHC-HQ OI=901 A=$0.25 SELL CALL AUG-80 AHC-HP OI=4591 B=$0.90 INITIAL NET CREDIT TARGET=$0.75-$0.80 PROFIT(max)=17% B/E=$80.75 http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=AHC ******************* 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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