The Option Investor Newsletter Thursday 08-16-2001 Copyright 2001, All rights reserved. 1 of 2 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/081601_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 8-16-2001 High Low Volume Advance/Decline DJIA 10392.52 + 46.57 10395.21 10271.57 1.06 bln 1681/1389 NASDAQ 1930.32 + 11.43 1930.46 1879.07 1.59 bln 1755/1857 S&P 100 605.03 + 2.01 605.31 596.26 Totals 3436/3246 S&P 500 1181.66 + 3.64 1181.80 1166.08 RUS 2000 481.68 + 2.73 481.68 474.06 DJ TRANS 2864.22 + 30.56 2868.36 2826.41 VIX 23.83 + .06 24.81 23.42 Put/Call Ratio 0.96 ************************************************************* HWP Shines, Dell Struggles, Ciena Implodes! The markets were hit hard before the open with Ciena announcing results that beat the street slightly but warning that they would miss for 2001 and 2002 due to a continued slump in the economy and in their sector. Analysts expected them to meet and warn but the severity of the warning surprised everyone. CIEN dropped -8.50 or -30% on the news and sent the networking index NWX.X to a new 52-week low along with most of their competitors. The Dow fell -76 points by noon and the Nasdaq lost -40 points to a new intraday low of 1879. The day did finally get better! Investors were bombarded with conflicting economic reports and traders did not know which way to turn. The Philadelphia Fed Survey of general business conditions continued to show contraction with a -23.5% August number compared to -12.2% in July. This was well below consensus expectations and showed a sharp deterioration of manufacturing in the Philadelphia region. Estimates were -10%. New home sales continued to be strong with 1.67 million new starts in July which represented a +13% gain over last July. The lower interest rates continue to spur sales and are strongly influencing consumer sentiment. Jobless claims fell unexpectedly this week by -8,000 claims. Estimates had been for a gain of 15,000 jobs. Could it be that the labor markets are stabilizing? It is too soon to tell and the numbers are still experiencing seasonal volatility. The CPI also fell unexpectedly by -0.3% for July after posting a slight gain for June. It is a chicken/egg problem. Is the CPI falling due to lower energy prices or are the energy prices falling due to the weak economy? Either way the result is a lack of inflation and it is Fed friendly. While the economic reports did nothing to move the markets the CIEN, BRCD warnings definitely hammered the indexes. The volume was strong for an August Thursday and declines beat advances by better than 2:1 in the morning as investors fled not only the networking stocks but PC stocks as well. CIEN, TLAB, JNPR, PMTC and ITWO all hit new 52-week lows. The Internet economy was called into question yet again and analysts were trading barbs about their outlooks instead of stocks. Fear of a similar warning by Hewlett Packard or Dell kept traders from buying the dip before lunch. However exactly at 12:00 a buy program kicked in when the Dow was at the low of the day for the second time at 10271 and shorts started covering from oversold conditions. After being down eight of the last nine days the put call ratios were climbing significantly indicating that fear was coming back into the markets. After the close Hewlett Packard announced earnings that beat the street and actually forecast slightly better times ahead. Revenue was slightly below estimates at $10.1 billion. HWP said they were seeing "higher levels of channel interest" for the current quarter and they forecast sequential growth for the next quarter. A PC maker with a positive outlook? The markets cheered and HWP rose in after hours trading. Dell did not surprise traders with their earnings which only met estimates and they followed the earnings with a warning that earnings will fall as much as two cents for the 3Q. They said margins were under pressure but they did claim to garner slightly more market share from competitors. Dell fell in after hours after the COO gave cautious comments on CNBC. Analyst Ashok Kumar said he was not as optimistic as others that the sector would rebound with a seasonal trend and he said he could not see any improvement until the first/second quarter. The common thread tonight was the 1Q/2Q comments. It appears that most analysts and companies are just not seeing any bounce in orders for the last quarter of this year. HWP which said they were expecting sequential 4Q growth, further qualified the statements with "historical and seasonal" adjectives meaning they were hoping more than counting on the rebound. In the back from the dead category Lucent said they had received permission from their lenders to proceed with a massive restructuring cutting 20,000 jobs in the hopes to return to profitability by 2002. They could take as much as a $9 billion charge in the 4Q for this restructuring. They are going to delay the Agere spin off for 6-9 months as well. The Nasdaq struggled to hang on to a new five month low of 1879. The sub 1900 number did trigger some bottom fishing as well as several buy programs. However it probably did not cause recent money outflows to reverse. TrimTabs.com said after the close that -$2.6 billion flowed out of mutual funds for the week ended on Wednesday which followed a similar -$2.5 billion outflow the prior week. $2.5B here and $2.5B there and pretty soon you have lost a lot of money. Nothing after the bell had the desired impact of stopping that outflow. It was encouraging to see the bounce from very oversold conditions and back into positive territory but even though the volume was good it was still just a short covering rally. The advance decline numbers only came back into the 17:16 range which is a basic dead heat. The Vix spiked at the open to near 25 but fell back into the mid 23 range before the close. This is not a buy signal. 1940 was upper resistance on Wednesday for the Nasdaq and now that 1900 has been breached again on the downside it may be easier to move down than up. The Dow is stuck under current resistance at 10400 and leaning toward the bottom of its trading range. There is still no reason to rush back into stocks before the Fed meeting next Tuesday. Everyone expects a 25 point cut and some analysts are worried that a larger cut now could undermine the markets. Traders are also afraid of a "no change" announcement if the Fed thinks the economy has really bottomed. The Nasdaq rally back to 1929 at the close simply brought it back to bottom support from last week. The warning from Dell may overshadow the cautiously optimistic comments from HWP and we could see another sell off attempt. The down trend from the last nine days is still intact and this oversold bounce may not have any legs. Nothing material has changed and the uncertainty about the Tuesday Fed meeting should keep big money on the sidelines. Should we get a close under 1900 all bets are off and it will become more likely we will see a retest of the April lows. You can see why August is historically the second worst month of the year for the last 30 years. Be patient and be profitable. Nasdaq 2100 is still my entry point benchmark. It will probably be revised down in the next couple weeks if the situation warrants but until then - stay tuned! Enter passively, exit aggressively! Jim Brown Editor **************************Advertisement************************** MR. STOCK: Your Expert Guide to the Dynamic World of Options Trading Options aren't easy. We know. That's why, with over 20 years of trading experience, we've designed a website specifically for options traders. With fast executions, the ability to place complex orders online, and option trades starting at only $15.50, we have the tools you need to implement your strategies. To find out more or open an account, visit our site at www.mrstock.com. Click Here: http://mojofarm.mediaplex.com/ad/ck/565-1407-1875-1 ***************************************************************** **************** MARKET SENTIMENT **************** Back From the Brink By Jeffrey Canavan Once again the market was able to pull itself back from the brink of disaster, and finish the day in positive territory. In the morning the focus was on poor future guidance from Ciena and Brocade. Perhaps it was some short covering, program buying, or traders deciding to focus on some of the positive economic news, but the major indices managed to finish in positive territory. Housing starts came in better than expected, the unemployment picture improved, and the CPI showed no signs of inflation, which allows the Fed to cut interest rates as needed. S&P 500 Daily Chart For the fourth time in 5 weeks, the S&P 500 tested 1,177, the 61.8% retracement of the April to May gains, and rallied to close above it. No bounce off of this level has gone higher than 1,230, and the last one was especially weak, failing to clear 1,204. For today's move to have any credence, we need some follow through tomorrow. Momentum would have to build off of that to clear resistance in 1,204 to 1,211 range. Nasdaq Composite Daily Chart The late-day rally in the Nasdaq came up a little shy of the previous support area at 1,934. If that level doesn't act as resistance tomorrow, perhaps the Nasdaq could approach 2,000 over the next few days. Testing 2,100 would be the longer-term, more optimistic target. Buying stocks when the situation looks bleakest has worked over the past few months, but in order for stocks to get a bounce going tomorrow, they are going to have to fight past a gloomy outlook from Dell, HP, and Gap. Should that happen, the best bounce scenario for the S&P 500 looks like a 4% gain. Bears still have the longer-term upper hand, but way want to consider lowering some stops should a bounce mount. ----------------------------------------------------------------- Market Volatility VIX 23.83 VXN 50.64 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total .96 680,315 653,498 Equity Only .85 532,716 453,303 OEX 1.18 32,792 38,551 QQQ .90 66,132 59,517 The total and equity only put/call ratios have hit levels that can mark a possible bullish turning point, but I am a bit skeptical due to options expiration. ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 34 - Bear Confirmed NASDAQ-100 40 -2 Bear Confirmed DOW 36 - Bull Alert S&P 500 54 - Bull Confirmed Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- The 10-Day Arms Index has reached a point that usually signals a bottom. This signal tends to be early, and doesn't mean the market is going to rally tomorrow. 5-Day Arms Index 1.23 10-Day Arms Index 1.52 21-Day Arms Index 1.32 55-Day Arms Index 1.26 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when the do, they can signal significant market turning points. ----------------------------------------------------------------- Advancers Decliners NYSE 1680 1393 NASDAQ 1755 1862 New Highs New Lows NYSE 156 53 NASDAQ 102 184 Volume (in billions) NYSE 1.060 NASDAQ 1.608 ----------------------------------------------------------------- Advisory Sentiment Bullish Bearish Correction Net Change 46.0% 27.0% 27.0% 19.0% +0.4% A bearish reading of 25% to 30%, combined with a bullish reading greater than 55% is typically considered bearish by contrairians. A net percentage greater than 30% is also viewed as bearish. ----------------------------------------------------------------- Commitments Of Traders Report: 08/07/01 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 The net bearish position of commercial traders increased slightly, but that was the result of more long positions being dumped than short positions, and not a significant amount of new shorts being added. The % of Open Interest for small traders is at bullish levels similar to February and March. Commercials Long Short Net % Of OI 7/24/01 317,241 392,146 (74,905) (10.56%) 7/31/01 335,532 409,352 (73,820) ( 9.91%) 8/07/01 331,881 406,210 (74,329) (10.07%) Most bearish reading of the year: (111,956) - 3/6/01 Most bullish reading of the year: ( 41,144) - 5/1/01 Small Traders Long Short Net % of OI 7/24/01 141,372 61,665 79,717 39.26% 7/31/01 129,648 54,552 75,096 40.77% 8/07/01 128,454 53,191 75,263 41.43% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 Commercial traders added a few long positions and dropped a few shorts, but the most encouraging sign is the fact that small traders are starting to give up hope. Commercials Long Short Net % of OI 7/24/01 27,396 39,198 (11,802) (17.72%) 7/31/01 28,009 39,613 (11,604) (17.16%) 8/07/01 28,867 38,956 (10,089) (14.88%) Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: (1,825) - 1/02/01 Small Traders Long Short Net % of OI 7/24/01 12,170 7,744 4,426 22.23% 7/31/01 11,216 8,938 2,278 11.30% 8/07/01 9,715 8,098 1,617 9.08% Most bearish reading of the year: (1,028) - 1/02/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Commercials continue to get slightly more bullish, small traders continue to get more bearish. Commercials Long Short Net % of OI 7/24/01 16,080 12,812 3,268 11.3% 7/31/01 17,748 13,669 4,079 13.0% 8/07/01 18,644 13,733 4,911 15.2% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 8,925 - 5/22/01 Small Traders Long Short Net % of OI 7/24/01 5,599 9,526 (3,927) (25.96%) 7/31/01 5,049 9,079 (4,030) (28.52%) 8/07/01 4,841 9,909 (5,068) (34.36%) Most bearish reading of the year: (7,572) - 5/08/01 Most bullish reading of the year: 1,909 - 1/16/01 ************** TRADERS CORNER ************** I Can Relate By Eric Utley After asking a seemingly inappropriate question the other night at the bar, a woman retorted, "Who do you think you are?" Once the beer had been wiped from my face and the crowed dispersed, I thought about her question: Who am I? I think the thought process that followed went something like this: I grinned, "Huh, I'm a trader." I thought, "I fancy myself as a writer from time to time, but need a lot of work in that area." I remembered, "On my better days, I'm a decent fly fisherman." I dreamed, "Sometimes I wish I was a rock star, but who doesn't?" I paused, "Dear Lord, I'm a consumer. That's it, that's my existence, a damned consumer." I don't think that consumerism is found anywhere in Maslow's Hierarchy of Needs. If I recall correctly, the pinnacle of the pyramid and thus human nature is self-actualization - something I hope to achieve one day, but not today. Today, I'm a consumer. I've accepted that much. I define myself by the Land Rover that I drive. The last time I checked, Land Rover was a division of Ford (NYSE:F), but that doesn't concern me. What concerns me are the commercials I see on TV of the Land Rover and its adventurous driver making their collective way through the jungles of South America. I can identify with that. I don't really mind too much that The Gap (NYSE:GPS) is struggling in a big way, judging by its earnings report Thursday. But I do care about the clothing sold at the Banana Republic, which is one of The Gap's divisions. I don't know what it is about the Banana Republic brand that I like. It's just my style. And so is Kenneth Cole's (NYSE:KCP) footwear. When I'm out with my buddies, I tend to relate quite well to the brands of Anheuser Busch (NYSE:BUD) and Adolph Coors (NYSE:RKY). And once in a while I try to make like the Marlboro Man, who's the driving force behind one of Phillip Morris' (NYSE:MO) better known products. I spent the other day with my colleague Jeffrey Cananvan in search of a sexy loft in downtown Denver. I was looking for a place that I can relate to. Something that is a little edgy, with character, and that metro feel. I can no longer relate to the suburban townhouse where I currently reside. It's just not me. The loft that I found is in the financial district of Denver, near a Morton's (NYSE:MRG) that I like to frequent and just begging to be filled with a bunch of stuff from Pier 1 Imports (NYSE:PIR). It's perfect! I can't speak for others, but I tend to purchase those things that I can relate to. Things that I can identify with - I think I've made that obvious. I'm a victim of consumerism and it's a choice. And I'm not ashamed to admit that much. But what I am afraid of is letting my desire to consume and identify with products and services carryover into my trading and investing activities. And I don't think I'm alone in this perceived weakness. In fact, I think it's a common flaw of many investors and traders to relate to a stock so much as to lose objectivity. I think that investors both consciously and subconsciously identify with particular stocks, and as a result are generally unwilling to sell when a stock begins to tank. After spending countless hours of doing fundamental research, chart work, and ultimately pulling the trigger, it can be so hard to "let go" of a stock after it's purchased. To take this idea of identifying with stocks a step further, I think there's a relationship with it and investors' reluctance to short stocks; that is, playing the role of bear. I get the sense that the majority of Option Investor's readers don't short stocks or buy puts. And it's in the spirit of learning that I'm going to begin a series on playing the role of bear, starting next week. I think some traders feel that betting on a stock falling is unnatural, or even perhaps un-American. But it's not. Betting on stocks falling is as American and natural as, well, consumerism. If there are any ideas that my readers would like touched upon in my upcoming series on selling stocks short/buying puts, please feel free to drop me a line at the following address: eutley@OptionInvestor.com ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** BRCM $41.19 -0.83 (-1.36) CIEN's warning Thursday morning didn't help our bullish cause in BRCM. Although the stock rebounded into the close, it still settled well below our stop at the $42 level. We're dropping the play because of its stop violation and traders with open positions should use any strength early Friday to cut losses. PUTS: ***** CERN $53.12 +0.62 (+0.98) Sometimes things just don't go your way, and that is the case with CERN. The stock found support shortly after we added it and the buying volume has been brisk the past 2 days. Even though our $54 stop is still intact, it looks like bears are losing their conviction. We'll err on the side of caution and drop CERN tonight in favor of more attractive opportunities. 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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Thursday 08-16-2001 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/081601_2.asp *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.IndexSkybox.com ************************************************************ ******************** PLAY UPDATES - CALLS ******************** MRK $69.99 +1.09 (+0.96) MRK continues working higher and its bounce from the 10-dma Thursday was encouraging. Traders should still be watching the Drug Sector Index (DRG.X) when trading MRK. For its part, the DRG is having trouble with the 400 level, and it should be noted that its 200-dma is just above around 404. So traders with some gains built up in MRK should be thinking about pairing back positions around current levels IF the DRG can't get past 400 in the next few days. In terms of new entry points in MRK, traders should be looking for entries on pullbacks. With resistance overhead in the DRG, it's a bit more risky to use a momentum-based strategy in MRK, such as buying into strength. We're moving OUR stop up to $68. ELNT $39.33 +2.64 (+2.71) Intelligent speculation! When stocks refuse to go lower when the broader market is slipping, those stocks tend to out perform once the broader market lifts. Case in point, our play on ELNT. The stock provided several entry opportunities, from its dip down to support around $35 early Thursday to its strong advance above resistance at $37.50. Either entry approach should have traders sitting pretty currently. Therefore, it's prudent to start thinking about exit points. The stock has near-term resistance around $40, and slightly higher around $41.50; above those two levels, there's blue sky up until $47. But to reiterate, in order for ELNT to continue advancing, the SOX MUST also advance. For support, bullish traders can now turn to the 200-dma at $37.75. We're sliding our stop up to $35, which is very liberal; traders with open positions should determine their own unique stops. PG $74.19 +2.01 (+2.32) Weak dollar, strong PG! Goodness, we certainly didn't expect PG to pop for $2 in one day, but we'll certainly take it! Because of its large move and the low cost of its options, traders should be thinking about locking in some gains after Thursday's advance. Call us crazy, but booking gains is just a smart thing to do in this market. Although our short-term price target is just above current levels at $75, traders should be thinking about taking profits in this case. Furthermore, at this point, new entries should only be taken on pullbacks, as opposed to chasing PG higher. The first site to turn to when looking for support, thus an entry point, is $73. Just make certain to confirm light volume with any weakness from this point forward. And keep an eye on the dollar! Stops have been moved up to $72. ABT $52.97 -0.18 (+0.69) Falling at the open with the rest of the market, ABT found buying support just above our $52 stop and rebounded from there, closing just under $53 and a short hop away from a retest of resistance at $53.80. While it is anything from a pretty chart with all those long wicks, ABT is holding its 8-week ascending trendline, which has now risen to $52.35. Once again providing support on this morning's dip, it should be clear the trendline needs to hold on intraday dips in order to keep the play alive. Target either a dip above $52 or a breakout over $54 for initiating new positions and keep stops in place at $52. IMPH $46.45 +0.60 (+1.86) Investors in IMPH don't seem to care which way the Biotechnology index (BTK.X) trades, as they continue to push our play a little higher every day. By contrast, the BTK has been vacillating about the $500 level for the past week. After rebounding from the 30-dma (near $43.50) last week, IMPH has climbed back over the 20-dma (currently $45.78) and just managed to crest the 200-dma ($46.43) by today's closing bell. $46 resistance is now in the rear-view mirror and we are looking for it to provide support as IMPH continues higher. The stock has been riding a more aggressive uptrend (now at $46) for the past 7 days and intraday dips near this level should continue to provide attractive entry points. Significant profit taking could hand us the gift of a dip to $45 or even $44.50, but don't chase it too low -- remember to keep stops at $44. IBM $105.75 +0.74 (+0.80) What a rebound! After falling to the $104 level in the midst of market-wide selling this morning, IBM launched higher into the close and is once again setting up for a test of the $106.50 resistance level. Intraday dips in the $103-104 area are still providing attractive entries and we might get another shot at that level on the heels of DELL's less-than-stellar earnings report tonight. Just remember to keep those stops set at $102 as a drop below that would clearly break the fledgling uptrend (pattern of slightly higher lows). Additional entry points will materialize as the bulls push IBM back above $107, setting the stage for a run at the $109-110 resistance level. NTIQ $35.29 -1.37 (-1.11) Profit taking has been the rule for the past couple days in shares of NTIQ as the NASDAQ has continued to weaken. Dipping to just above the 20-dma (now at $34.48), the stock found willing buyers, but not a lot. Closing near the lows, our play needs to head up again to keep the pattern of higher lows intact. That may be a tough trick to manage with daily stochastics now rolling over without even getting into overbought territory. Our stop is still resting at $34, and intraday dips above that level can be used for initiating new positions, but only if volume begins to strengthen. Resistance at $40 is still intact and now the bulls will need to scale the $37 obstacle before contemplating a breakout to new recent highs. WAG $36.41 -0.06 (-0.91) Another day, another entry point. WAG was kind enough to dip back to the $36 level today in the midst of the early market weakness. Once again the bulls stepped forward and we saw buying volume increase into the close, lifting our play off the lows. It remains to be seen whether WAG can re-establish its uptrend, but things are looking promising with the stock holding above the 50-dma and approaching the month-long ascending trendline, now at $35.50. Target new entries above this level as buying volume picks up or wait for the stock to clear intraday resistance at $36.50. Stops are still at $35. ******************* PLAY UPDATES - PUTS ******************* CHKP $38.14 +1.18 (-1.06) Hopefully CHKP's early weakness Thursday allowed for traders to book some gains. Remember, greed is out of fashion in this market. Book 'em when you got 'em. The software stocks had grown oversold going into Thursday's session, so a bounce is not out of the ordinary. However, we must be careful going forward. We need to see CHKP's pattern of lower highs persist over the coming sessions in order for this play to continue working. That means CHKP should rollover somewhere between $40 and $41 IF it continues advancing into Friday's session. On the other hand, if the stock weakens Friday we can breathe a little easier. Bearish traders should keep an eye $35 as it marks CHKP's relative low. But, even after Thursday's bounce, we've got about $6 in downside since picking up coverage on this play. We therefore disagree with Mr. Gordon Gekko; greed is NOT good. PSFT $38.19 -0.90 (-0.65) Down, up, and back again. PSFT's been a real whipsaw as of late, making the stock most difficult to trade. PSFT's price action Thursday reinforced that in this market it's best to buy puts when the stock is rallying and sell them for profit into weakness. Nevertheless, it's NO coincidence at all that CHKP closed where it did Thursday. Recall that our "pivot" point lies around $38.25. Ideally, we'd like to see the stock rollover from this level early Friday morning, which should, in turn, send the stock down towards the $35 level. If PSFT continues climbing, however, the 10-dma around $40.50 could serve as resistance. Our stop has been move down to $41. GMST $34.57 -0.02 (-1.29) Call it lucky, but we're happy with the "mistake" we made holding GMST over its earnings announcement. Since gapping higher up around $38.50, GMST has fallen as low as $32.76 in short order. The stock's breakdown below $35 Wednesday should've allowed for a solid entry point. And its subsequent weakness Thursday hopefully allowed traders to book some decent gains in a short-term trade. But GMST did bounce back along with the Nasdaq late Thursday, so we'll want to keep close watch on its price action around $35 going into Friday's session. This level should now serve as support and we'd like to see GMST rollover at it, which should provide a solid entry point for those not already in the play. Stops have been moved down to $36. AIG $81.18 -0.26 (-0.50) Reacting to the sharp drop on Tuesday, anxious bulls snapped up shares of AIG yesterday, pushing the stock up, but not enough to touch our $82 stop. The descending 10-dma ($81.37) continues to pressure AIG as it has for the past month. The Insurance index (IUX.X) is trying to firm near the $726 level, and this is helping AIG to hold above the $80 level. Attractive entries for the next leg down can be taken either on another failure to penetrate the $82 level or a volume-backed move under $80. Keep an eye on the IUX, as further weakness in the broad sector will push AIG lower. VRTS $32.95 -1.45 (-5.71) There's nothing like being in the right place at the right time. It's too bad we didn't initiate coverage a couple days earlier, but we're more than happy to take a chunk of gains from the middle of the move. Analysts from Morgan Stanley and Banc of America Securities have been duking it out in the press about the company's second quarter performance. The outcome of the feud isn't important, just that it creates uncertainty. Investors hate uncertainty and have taken leave of the stock, driving it as low as $31 this morning. With the late day recovery, VRTS is nearing the $34 intraday resistance level, and we could be setting up for another rollover and subsequent entry point. Stops are being tightened to $36 this evening, just in case the bulls wake from their slumber and charge higher from here. ************** NEW CALL PLAYS ************** NVDA - NVIDIA $89.57 +3.62 (+4.93 this week) NVIDIA designs, develops and markets graphics processors and related software for personal computers and digital entertainment platforms. NVIDIA provides a "top-to-bottom" family of performance 3D graphics processors and graphics processing units that, in the company's opinion, has set the standard for performance, quality and features for a broad range of desktop PCs. If you're looking for multiple catalysts in a play then read on. This one has earnings, a new application, and a split, too. Two days ago, NVIDIA announced second-quarter earnings that were impressive indeed. The company recorded 50% earnings growth over the year ago period. What's more, its officials raised guidance during the conference call by a measurable amount over their last guidance back in February. NVIDIA also makes chips that are going into the Microsoft XBox video game console, which is due for release in the near-future for the upcoming holiday season. That alone may continue to drive shares of the stock higher. Finally, in conjunction with its earnings release, NVIDIA set a 2-for-1 stock split. With several catalysts in the mix, the stock should continue working higher so long as the Nasdaq cooperates. For entry points, bullish traders can use any advance above the $90 level in an advancing market. For those who prefer entering call plays on a pullback, look for NVDA to find support around the $87 level, or lower around $84, the latter of which is our stop initially. For market confirmation, keep close tabs on the Nasdaq, and watch the Semiconductor Sector (SOX.X) for sector confirmation. BUY CALL SEP-85 RVU-IQ OI=1438 at $10.50 SL= 7.50 BUY CALL SEP-90*RVU-IR OI=2370 at $ 7.30 SL= 5.25 BUY CALL SEP-95 RVU-IS OI=1439 at $ 5.10 SL= 3.50 BUY CALL DEC-90 RVU-LR OI= 319 at $15.40 SL=11.50 BUY CALL DEC-95 RVU-LS OI= 348 at $13.00 SL=10.00 Average Daily Volume = 4.60 mln BGEN - Biogen, Inc. $58.64 +0.76 (+1.00 this week) Biogen is a biopharmaceutical company primarily engaged in the business of developing, manufacturing and marketing drugs for human healthcare. BGEN currently derives revenues from sales of its Avonex product for the treatment of relapsing forms of multiple sclerosis and from royalties on worldwide sales by the company's licensees of a number of other patented products. Other products include certain forms of alpha interferon, hepatitis B vaccines and hepatitis B diagnostic test kits. In order to maintain its leadership role in the industry, BGEN continues to have an active research and development program. Comments from BGEN officials stating that rival multiple sclerosis drugs do not present a serious threat seemed to give the stock new life this week as it once again bounced from the $57 support level. The stock got a boost late last month after posting solid earnings and since then has been building a series of higher lows, using the 20-dma (currently $56). With the lows getting higher and resistance sitting at $59, we have a nice bullish wedge forming and there are two ways to play it. First we can wait for the bulls to crank up the volume and push the stock through $59. The concern here is the 200-dma, resting at $60.11, and a potential roadblock for the bulls. The better entry point will likely be to target a pullback near $56, but the rebound needs to come on solid volume. Risk can be pretty easily managed in BGEN by setting a stop at $55, the site of solid resistance (now support) throughout the month of July. BUY CALL SEP-55 BGQ-IK OI=1418 at $5.70 SL=3.75 BUY CALL SEP-60*BGQ-IL OI=1621 at $2.75 SL=1.50 BUY CALL SEP-65 BGQ-IM OI= 573 at $1.20 SL=0.50 BUY CALL OCT-60 BGQ-JL OI=3224 at $4.20 SL=2.50 BUY CALL OCT-65 BGQ-JM OI=4017 at $2.25 SL=1.00 SELL PUT SEP-55 BGQ-UK OI=1162 at $1.60 SL=3.25 (See risks of selling puts in play legend) Average Daily Volume = 2.89 mln ************ NEW PUT PLAY ************ CPN - Calpine Corporation $30.44 -0.56 (-1.65 this week) Calpine Corporation is engaged in the generation of electricity in the United States and Canada. Involved in the development, acquisition, ownership and operation of power generation facilities, CPN also sells the electricity and its by-product, thermal energy, primarily in the form of steam. The company has ownership interests in and operates gas-fired cogeneration facilities, gas fields, gathering systems and gas pipelines, geothermal steam fields and geothermal power generation facilities. Each of the generation facilities produces and markets electricity for sale to utilities and other third-party purchasers. Profits have continued to come in strong for the independent power producers, but that hasn't motivated buyers in the least. It appears the fat profits were already priced into the stock and now investors are locking in their gains from the sharp rise in price earlier this year. With the power problems in the Western U.S. apparently easing up, CPN has been headed down for months now. Lower lows and lower highs have led the stock down to the $30 level, just above critical support at $29, the site of the intraday lows in early January. While there is some support near $28 (dating back to the first half of last year), the most likely level where bulls will step forward to defend the stock is $24-25, and we want to take a piece of that decline. Overhead resistance will be a tough nut to crack with sellers lying in wait at $32, $33 and then $34. The safest entry will be to initiate new positions on a failed rally in the $32-34 range. Further weakness could keep us from getting so lucky, and if that is the case, then we'll target fresh entries as the stock falls through the recent double bottom at $30. Set stops at $34. BUY PUT SEP-35 CPN-UG OI= 889 at $5.60 SL=3.50 BUY PUT SEP-30*CPN-UF OI=4417 at $2.35 SL=1.25 Average Daily Volume = 5.04 mln ********************* PLAY OF THE DAY - PUT ********************* VRTS - Veritas Software $32.95 -1.45 (-5.71 this week) As an independent supplier of storage management software, VRTS develops and sells products that protect against data loss and file corruption, allowing rapid recovery after disk or computer system failure. The company's products provide continuous data availability in clustered computer systems with shared resources. This enables IT managers to work efficiently with large file systems, making it possible to manage data distributed on large computer network systems without harming productivity or interrupting users. VRTS provides products for most popular operating systems, including UNIX and Windows NT, as well as a full range of services to assist its customers in planning and implementing their storage management solutions. Most Recent Write-Up There's nothing like being in the right place at the right time. It's too bad we didn't initiate coverage a couple days earlier, but we're more than happy to take a chunk of gains from the middle of the move. Analysts from Morgan Stanley and Banc of America Securities have been duking it out in the press about the company's second quarter performance. The outcome of the feud isn't important, just that it creates uncertainty. Investors hate uncertainty and have taken leave of the stock, driving it as low as $31 this morning. With the late day recovery, VRTS is nearing the $34 intraday resistance level, and we could be setting up for another rollover and subsequent entry point. Stops are being tightened to $36 this evening, just in case the bulls wake from their slumber and charge higher from here. Comments VRTS rebounded in concert with the Nasdaq late Thursday, but still finished well into negative territory. Its under performance could portend further weakness in Friday's session. Bearish traders can look for rollovers near the $34 resistance mentioned above, or on a breakdown below $32. BUY PUT SEP-35*VIV-UG OI=4375 at $5.00 SL=3.50 BUY PUT SEP-30 VIV-UF OI=1309 at $2.45 SL=1.50 Average Daily Volume = 12.0 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. 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