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Daily Newsletter, Thursday, 08/23/2001

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The Option Investor Newsletter                Thursday 08-23-2001
Copyright 2001, All rights reserved.                       1 of 2
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************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
       8-23-2001          High      Low     Volume Advance/Decline
DJIA    10229.15 - 47.75 10286.79 10213.52 1.03 bln   1345/1744 
NASDAQ   1842.97 - 17.84  1883.48  1842.51 1.30 bln   1303/2348
S&P 100   592.93 -  1.75   596.81   592.67   Totals   2648/4090
S&P 500  1162.09 -  3.22  1169.86  1160.96
RUS 2000  473.42 -  3.76   479.82   473.39
DJ TRANS 2797.01 -  4.91  2806.30  2794.09
VIX        24.92 -   .17    25.91    24.64
VXN        49.26 -  1.83    54.16    48.40
Put/Call Ratio      0.64
*************************************************************

Fed Surprised by Weakness!

The FOMC minutes for the June meeting were released today and it
showed that the Fed committee was still optimistic about a recovery
and surprised by the continued drop in corporate profits and spending.
Obviously behind the curve again! Despite the surprise it was a
9-1 vote to cut 25 points. Despite the increasing weakness in the
economy they were struggling with possibly ending the rate cuts.
While everyone thought a "no cut" stance at this weeks meeting could
have sent a positive message to the stock market, the fact that the
economy was continuing to fall long after the Fed expected it to
recover, changed that feeling to worry that they may stop too soon.
The markets took the minutes badly among with comments from the Dallas
Fed president and sold off after the 2:PM release.






To go along with the negative minutes the Dallas Fed president said
he expected unemployment to rise over 4.5% soon. The Philadelphia
Fed survey today predicted a 4.9% jobless rate for all of 2002. Sound
like a recovery to you? The jobless claims this morning rose by 8000
to 393,000 and while well below the 449,000 high in July they are
still trending up. This would support the forecast of rising
unemployment for the rest of the year.

Basically, trading followed the same pattern we have seen for the
last two weeks. Light volume and selling into the close on lack of
interest and random earnings warnings. The biggest news item to
impact the Dow was a -$2.71 drop in MRK after reports said their
Vioxx drug could cause heart complications. Merck issued a press
release standing behind their product. Over 40 million prescriptions
have been written for this product.

Japan continued to be a dark cloud on the horizon with analysts
fearing the fourth recession in the last ten years. The Nikkei
closed at a low not seen since 1984. Numbers leaked from a key
economic report showed a -1.9% drop in exports in the 2nd quarter
due to slowing demand for Japanese products. Japan, Brazil, Argentina,
who is next in the global hit parade? So far no country has gone
off the deep end and another $8 billion for Argentina may keep
them floating for another week or two. Now they are just storm
clouds on the horizon but distant storms have a habit of arriving
unexpectedly in the middle of the night with disastrous results.

Unexpected results were what we got from Lucent today. Holding
their first real analyst meeting in two years they laid out their
plans to bring them back to profitability by 2003 with 35% margins.
Analysts were impressed and Lucent rallied to a slight gain before
the end of day market sell off. Several analysts raised their
ratings on Lucent and started calling it the best bargain in
the market. Strong words for a stock that was bleeding money
and market share. I am an optimist and I believe them. I have
paid a lot more for options with close expirations than the
$6.65 for a share of Lucent stock today with no expiration.
Sounds like a deal if they can pull it off.

Sometimes good things come in twos and it appears CSCO jumped
into the Lucent limelight after the close. They announced a
restructuring from three divisions, ISP, enterprise and commercial,
into eleven groups to more specifically address the concerns of
each subgroup. Management was shuffled and all the obligatory
forward looking statements were uttered. The good news, spoken
by John Chambers, was that sales for the 3Q were inline with
previous estimates and it appeared that business was stabilizing.
This was the key sentence. The restructuring was immediately
ignored with everyone focusing on the "stabilizing" comment.
After hours trading was brisk in not only CSCO which gained
over $1.00 but in the entire sector as well as suppliers to
the sector. JNPR, CIEN, AMCC, PMCS even NT were gaining ground.

Microsoft gained ground after the close as well after Nintendo
said they were delaying the release of their GameCube console
for two weeks. They claimed the delay would increase the number
of available units to 700,000 on the Nov-18th launch. This
means the Microsoft Xbox will beat Nintendo to retailers shelves
and give customers the first look at their higher priced product.
Microsoft also invited reporters to a Windows XP event on Friday
morning and it is expected to deliver the final version of XP
to computer makers on Friday. This is an important milestone
for Microsoft in trying to beat the Justice Dept and the courts
with an already released product. Kodak has already complained
that XP sends users to Microsoft's digital photo service and
is anti-competitive. The race is on!

The only economic reports on tap for Friday are the Durable
Goods Orders and New Home Sales. Neither are likely to be
market movers. What may move the market will be the Microsoft
and Cisco news. Both are up significantly in after hours and
in the case of CSCO the sector and supplying sectors are also
gaining. Friday has been short covering day as traders are
not eager to carry profits over the weekend. I would look for
a pop at the open but it will be very interesting to see if
it will hold. Traders have been selling every bounce with one
week to go in August and the lightest trading week of all.
Resistance on the Nasdaq should be in the 1900 range and
around 10300 on the Dow. The markets are still very oversold
and any serious short covering could drive prices up quickly
on low volume. We got the trading rally on Wednesday as
expected and the sell off again on Thursday as expected.
I would like to call a bottom here but I can't yet. There
is a lot more hope now than earlier in the week but we need
to see if that hope translates into buyers. Institutional
buyers are likely to want to wait until after Labor Day in
hopes of getting a better price or seeing if the bullish
sentiment will hold. They also will not want to be holding
over the holiday weekend if they can help it. Be patient,
our time will come.

Enter passively, exit aggressively!

Jim Brown
Editor


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

One Up, One Down
By Jeffrey Canavan

Back in my college days, I played a drinking game called One Up,
One Down.  A group of people would sit around the table, and the
first person would say, "One up one down."  The next person would
say "two down," and so it would go around the table with
different players giving different signals.  The newcomer to the
game had to figure out the pattern, or was forced to drink.  Of
course there was no pattern, and the game was a complete farce.
It was just a way to take advantage of some unsuspecting dolt.
Wall street is playing a similar game of up day, down day, and
it's not quite as fun.

It looked like a down day when retailers Kmart, Limited and
Intimate Brands came in with poor financial numbers and a gloomy
outlook.  Kmart even raised concerns about price deflation.
Perhaps consumers are starting to curb their spending over
concerns of unemployment.

New claims for unemployment rose 8,000 to 393,000, well below the
400,000 levels we saw in May, but continuous claims rose to 3.18
million.  That's the highest reading in over nine years.  Dallas
Fed president Robert McTeer fanned the flames when he said that
unemployment was likely to rise even further.

And speaking of the Fed, they released the minutes from the June
27th meeting.  What traders took from the report was that the Fed
might be getting close to the end of their rate cutting cycle.
But according to the Philly Fed's comments today, economic growth
continued to slow over the past three months.

That should have been enough to curtail traders' attention, but
they gulped now some of Celgene's new attention disorder drug,
and focused on pushing the Biotech Index up 4.29 percent.  That
wasn't enough to close the major indices in positive territory,
but it helped to mitigate the damage.

Nasdaq Composite Daily Chart




The Nasdaq Composite was getting ready to test resistance at 1890
in the first hour of trading, but finally succumbed to slew of
economic blather, and closed down 0.98 percent.  That kept the
index above yesterday's low of 1817, but gave us another down day
in our up/down game.

Tomorrow has the makings of an up day after some helpful words
from Cisco. The networking equipment maker sees signs that its
business is stabilizing, and is restructuring into 11 different
business groups.  The realignment is designed to increase profit
contribution, grow the business, as well as better define
customer segments.  After hours traders are buying into the
restructuring, pushing the stock up 5%.

That might be enough to get the Nasdaq through resistance at 1890
tomorrow, but it's still hard to see any significant upside with
each positive story having a negative one to offset it.
Investors vented their frustration by withdrawing $3.6 billion
from stock funds this week and placing $36 billion in money
market funds and $1.4 billion in bond funds.  Unless the current
sentiment changes, rallies are for shortin'.

-----------------------------------------------------------------

Market Volatility

VIX   24.92
VXN   49.26

-----------------------------------------------------------------

          Put/Call Ratio  Call Volume   Put Volume
Total           .64        453,230       289,187
Equity Only     .55        419,495       229,639
OEX            1.26          3,310         4,182
QQQ             .34         27,898         9,582

-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          34       -      Bear Confirmed
NASDAQ-100    24      -2      Bear Confirmed
DOW           30       -      Bear Confirmed
S&P 500       48       -      Bull Correction
S&P 100       38      -2      Bull Correction

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

-----------------------------------------------------------------


 5-Day Arms Index  1.41
10-Day Arms Index  1.32
21-Day Arms Index  1.33
55-Day Arms Index  1.29

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      1411           1686
NASDAQ    1525           2118

        New Highs      New Lows
NYSE      180             45
NASDAQ     83            128

        Volume (in millions)
NYSE       985
NASDAQ   1,424
-----------------------------------------------------------------

Advisory Sentiment

Bullish  Bearish  Correction   Net   Change
  49.0%    29.1%     21.9%    19.9%   +0.9%

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: 08/14/01
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
No significant changes (refer to graph at the bottom of the page).
Since this is the most heavily traded contract, it tends to carry
the most weight.

Commercials   Long      Short      Net     % Of OI
7/31/01      335,532   409,352   (73,820)   ( 9.91%)
8/07/01      331,881   406,210   (74,329)   (10.07%)
8/14/01      337,327   411,504   (74,177)   ( 9.91%)

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
7/31/01      129,648     54,552   75,096     40.77%
8/07/01      128,454     53,191   75,263     41.43%
8/14/01      130,432     55,750   74,682     40.11%

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

NASDAQ-100
The net bearish position of commercial traders continues to
improve.  Breaking the 7,000 level would be even better.

Commercials   Long      Short      Net     % of OI
7/31/01       28,009     39,613   (11,604)  (17.16%)
8/07/01       28,867     38,956   (10,089)  (14.88%)
8/14/01       29,909     37,822   ( 7,913)  (11.68%)

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
7/31/01       11,216     8,938    2,278      11.30%
8/07/01        9,715     8,098    1,617       9.08%
8/14/01       11,165     9,508    1,657       8.02%

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
Commercial are slowly adding more long positions, and improving
their net bullish stance.

Commercials   Long      Short      Net     % of OI
7/31/01       17,748    13,669    4,079     13.0%
8/07/01       18,644    13,733    4,911     15.2%
8/14/01       21,652    15,856    5,796     15.5%

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
7/31/01        5,049     9,079    (4,030)   (28.52%)
8/07/01        4,841     9,909    (5,068)   (34.36%)
8/14/01        4,441     8,528    (4,087)   (31.51%)

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


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

Ursus Arctos Part 1
By Eric Utley

This if the first installment of a series that will explore the
idea of shorting stocks/buying puts; that is, playing the role
of bear.

The Nasdaq Composite (COMPX) has shed about 64 percent since
hitting its peak back in March of 2000.  Yet, even after
witnessing the awesome trend of the current bear market, many
traders I speak with remain reluctant to assume the role of
bear.  When in all reality, if a trader had been willing to make
bearish bets they would've experienced one of the easiest times
to make money in the history of the market.  The period between
September of 2000 up through April of this year was especially
"easy" because of the consistency of trend and the velocity with
which the market dropped.  But because of several psychological
barriers and popular delusions, most retail traders missed out.
So it's my goal with this piece to expose some of the notions
that prevent traders from betting on stock prices declining.

When we step back, the idea of betting on stock prices declining,
or any other asset for that matter, is a bit odd.  Think about,
is there any other transaction in life that bets on an asset
losing its value?  Buying a home is diametrically opposed to that
notion.  Unfortunately, a vehicle depreciates the instant that
it's driven off the lot, but car buyers certainly don't benefit
from that.  Perhaps a car dealer is the closest thing to a
stock market bear in the real world, because she/he sells
vehicles on the offer and buys them back on the bid.  But that
situation is more synonymous with a market maker, who buys at
wholesale and sells at retail, capturing the spread.

Truth be told, I can't think of a real world situation in which
a participant speculates on an asset losing its value.  What's
more, the mechanics of selling a stock short are even more
arcane than merely speculating on its demise.  For instance, in
order for a trader to short a stock, that stock must be borrowed
from another market participant, who's usually a broker.  After
all, one can't sell something they don't own, unless they borrow
it.  The act of borrowing something and selling it is rather
unique, and difficult for amateur traders to relate with.  Here
again, I can't think of a real world situation that justly
represents the act of borrowing and subsequently selling a stock
short.  Buying puts is a bit more detached from the borrowing
of the underlying, and for that reason puts are often easier
to relate to - options are merely a leveraged, directional bet,
assuming one is a net buyer of contracts.

In my estimation, I think some traders avoid selling stocks
short because it feels unnatural.  There's no other transaction
in the real world that compares, so individuals don't have any
reference, nor a comfort with the transaction.  It's easy to
relate to buying and holding a stock, and expecting that stock
to increase in value over time.  Isn't that what buying a home
is all about?  But the buy and hold mentality is another barrier
that prevents traders from selling stocks short.

Some of the most famous market participants are from the buy
and hold school, including Lynch, Buffett, and Grahm.  In fact,
the buy and hold mentality is perpetually pounded into the
brains of market participants through the various media outlets,
including business TV, magazines, and newsletters.  Only recently
has the media begun to address the idea of shorting stocks, but
still on a very, very limited basis.  And I can guarantee that
market participants won't hear a peep about bearish bets once the
next bull market comes around.  It's the omnipresent and overtly
bullish nature of the media that has led many market participants
to believe that the modis operandi is buying a stock and holding it.
But it's difficult to lay too much blame on the media.  After all,
advancing stocks are synonymous with a bull market, and a bull
market is synonymous with healthy economic times.  And who can't
relate with that?

It's true that the buy and hold strategy works, over time.  But
it's not the de facto market operation, which many market
participants have been led to believe.  Perhaps another reason
for the perpetuation of the buy and hold mentality is the
tendency of markets to advance over time.  The last time I looked
at Ibbottson's data, the market had averaged a roughly 10 percent
annual return for the past century.  Moreover, the following chart
of the Dow Jones Industrial Average ($INDU), which spans a mere
decade, argues a strong case against shorting stocks.



I think that the buy and hold strategy makes sense at the "right"
times, under the "right" economic conditions.  But make no
mistake about it, buying and holding a stock is an investment
strategy and not a trading strategy.  While that notion may seem
rudimentary, I've discovered that some traders have difficulty
separating the two worlds.  My point, however, is that the buy
and hold strategy is not the only option that market participants
are left with.  Remember, two sides make a market and the buy
side is only half.

Before I leave the notion of buying a stock and holding it,
consider for a moment the mire that is currently known as
Japan.  The following chart displays the past decade of a
broad-based Japanese average.




Because the chart only goes back ten years it doesn't reveal
that the Japanese markets are at 17 year lows!  That's right,
17 years!  I won't draw any conclusions from what's going on
in Japan currently, nor its similarities or differences to
the United States.  But I think the above chart makes for
some provoking thought as it relates to the buy and hold
mentality.

A mentality that I've encountered often is the notion that
betting on a stock's demise is un-American by its very nature.
"Who wants to see a business fail," responded an individual
I spoke with recently when asked why he didn't trade the
downside.  "Shorting stocks isn't capitalism," he added.  The
idea that betting on a decline of a stock's price is
inappropriate is one of the most ignorant arguments I've ever had
to disprove.  Participants are in the market place to allocate
capital to the most efficient places at any given time.  If a
business model isn't efficient (Read: CLECs), then the proprietor
of that model will not be allocated capital.  Instead, market
participants will allocate capital to the most efficient place,
thereby investing in the business model that has the potential to
add the most economic value.  Shorting stocks of companies that
shouldn't exist to begin with is capitalism at its best.  It's
Darwin, baby, survival of the fittest!

There are other perceived barriers, both psychological and social,
that prevent market participants from playing the role of bear.
But it's my hope that I've touched upon a few of the bigger
issues.  The most important point that I'd like to impress upon
readers is that there should be a disconnect from emotion and
operations in the market.  The starting point in any market
operation should be the realization that a market, sector, and/or
stock just is.  After making that discovery, trading should
become easier, whether it be to the upside or downside.


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:
*****
MRK $68.51 -2.71 (-0.64) We cannot stress enough the importance
of booking profits in this market.  It's a simple formula: Enter
on weakness, exit on strength in the case of call plays.  We
worked hard to earn some decent gains in MRK, but they quickly
evaporated Thursday in the wake of concerns over Vioxx.  For
traders still in calls, use any strength Friday morning to exit
plays.

ABT $52.29 -0.66 (+0.00) The pressure has been building for the
past 2 weeks as ABT has gotten closer to violating its ascending
trendline.  Although the bulls have been trying to push through
the $53.50 resistance level, they haven't had any staying power,
and today the bulls finally capitulated, allowing ABT to fall
solidly below the trendline.  While still above our $52 stop,
stochastics are continuing to weaken and it looks like all hope
of a continuation of July's rally is gone.

IMPH $44.11 -1.17 (-1.87) What's going on here?  A strong 2-day
rally in the Biotech sector and IMPH just rolls over and dies?
Apparently the bullish movement of the BTK index weren't enough
to stem the profit taking, which went too far on Thursday, with
the stock falling to the ascending trendline and ending the day
just above our $44 stop.  While our stop is still intact
(barely), the sharp descent in the daily stochastics points to
further weakness.  We'll cut our losses here and move on to
healthier plays.

NTIQ $33.84 -2.18 (-0.45) After struggling mightily to keep NTIQ
above our $34 stop level, the bulls finally threw in the towel
Thursday afternoon.  The stock descended below our stop towards
the end of the day on increasing volume, and we have no choice
but to admit defeat.

PUTS:
*****

No dropped puts tonight


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The Option Investor Newsletter                 Thursday 08-23-2001
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/0823_2.asp


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


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

ELNT $37.72 -0.51 (+0.61) ELNT is essentially trading sideways
and we're content with that.  The stock continues to trade well
relative to both the COMPX and the SOX, so we're betting that
any rebound in those two will allow for ELNT to work higher.  In
other words, we're in the right stock but the wrong market.  It's
paramount that its market and sector trader higher if ELNT is
going to advance.  That being said, bullish traders should pay
special attention to the COMPX and SOX when trading this play.
In the SOX, watch for the index to bounce around the 555 level if
it continues to weaken.  If the sector does bounce from support,
turn to ELNT's support around $36 when searching for an entry
point.

PG $76.94 +1.29 (+2.19) WHOA!  What's going on with PG?  The stock
continues to display incredible resiliency in this market.  But
its out performance is a double-edged sword.  While those in call
positions at lower prices should be happy with PG's charge higher,
those on the sidelines are having a hard time gaining a favorable
entry point.  It's difficult to justify chasing ANY stock
higher in this market, and that's why we'll continue to prefer
entries on pullbacks as opposed to entering new positions on
strength.  In terms of support, PG's pattern of higher lows
should result in buyers emerging at $75 on any forthcoming
weakness.  That level is the site of our new stop and could
also serve for favorable entry points for new call positions.
Those with open positions should also note that PG topped out
around $77 earlier this year.

NVDA $82.91 -1.88 (-0.83) It's been a wild week for NVDA.  The
stock is trying to work higher but keeps running into supply
from the broader market and sector weakness.  The continued
decline in the SOX certainly isn't helping NVDA's case, and
the heavy trading in MSFT probably isn't helping too much.  We
think that NVDA would lead any rebound in the SOX and COMPX
if/when it occurs, but time is of concern to options traders
and we don't want to waste much more.  That said, if NVDA
continues to weaken into Friday's session we'll cut the play
loose.  But, traders bullish on the play might look for a
quick pop back above the $83.75 level Friday, with a quick
exit point in place at $86.

CNXT $11.05 +0.74 (+1.12) There's not much to complain about with
our CNXT play.  The name of the game has been entering on
weakness, near support of course, and booking gains into strength.
The stock is trading exceptionally well relative to the SOX and
looks poised to work higher with or without its sector.
Eventually, we'll need cooperation from the SOX, but in the
meantime CNXT is positioned to breakout above $12 over the
short-term.  While some may scoff at a $1 move in a stock, we'd
point out that CNXT's options are quite cheap due to their low
cost to carry and the low implied vol.  As such, a $1 move can
produce solid gains in an in-the-money contract.  Going
forward, it's most prudent to wait for a pullback, possibly down
to the $10 level before gaming an entry point.  While some may
choose to enter calls, in momentum fashion, on strength, the
risk in doing so is more difficult to manage.

BGEN $59.07 -0.18 (+1.29) Biotech stocks have been on the
rebound over the past couple days after the BTK index once again
rebounded from the $485 level.  BGEN found support right at its
ascending trendline (then at $56.75) and rallied right to the
200-dma at $60 on Thursday.  While the stock pulled back a bit
in the afternoon, it held solidly above $59 (previous resistance)
and with daily stochastics still headed north, it looks like the
bulls are still in a buying mood.  Look for bounces off the $59
level or perhaps the ascending trendline at $57.50 to provide
fresh entries, keeping stops at $56.  Momentum players will
wait for BGEN to clear $60 on continued strong volume before
adding new positions.

LH $84.20 +1.20 (+2.55) Continuing from Wednesday's strength,
LH launched right up to the $84 resistance level early this
morning where the bulls and bears engaged in a pitched battle
for dominance.  Volume was nearly nonexistent for much of the
day, but finally began to grow in the afternoon, helping our
play to inch above the $84 level at the close.  The rising
daily Stochastic is leading the share price higher after it
bounced from the ascending trendline and solid support near
$80 on Tuesday.  Will the rally continue or fade in the days
ahead?  That's a hard one to call, but we're leaning towards
the bulls camp, possibly with some mild profit taking before
the next leg up.  Target intraday bounces from the $82 or
perhaps $81 level, the current site of the long-term ascending
trendline and the new location of our stop.  Of course a
continued advance above $84 is buyable, but make sure the
volume remains robust.


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

CHKP $31.86 -2.60 (-4.31) For the sake of discipline, those who
entered put positions at the beginning of our coverage on CHKP
should be booking some gains down here.  We've captured about
$12.50 in the play so far, and that's more than enough reason
to book some gains.  For those in at lower prices, such as the
recent breakdown below $35, a solid short-term exit point should
lie at the $30 level.  Just book 'em when you got 'em, that's
all we're trying to stress.  In terms of entry points, and
because CHKP is at a 52-week low (Read: Oversold), we'd opt for
entering new put positions on any forthcoming short covering
rally up to resistance such as the $35 level.  That way, risk
is easier to quantify and manage.

PSFT $35.20 -1.64 (-0.65) PSFT provided an excellent example of
how to enter new put plays on strength Thursday.  The stock
rallied right up to its past pivot point at $38, which also
happened to be the site of its 10-dma, and subsequently rolled
over, providing an excellent, low risk entry point.  Those who
employed that entry strategy Thursday should now be looking
towards the $34 level for further confirmation of weakness.  A
breakdown below that level would indicate that PSFT is heading
lower in the short-term.  And a trade down to $34 from current
levels should allow for an exit point of at least partial
positions.  We're moving stops down to $38.

GMST $29.56 -1.63 (-3.97) Is GMST going to retest its April
low around $20?  It sure looks that way, but in the meantime
it makes sense to be booking some gains in this play, especially
for those in puts at much higher prices.  After all, we've
captured over $6 in this play since picking up coverage.  For
those not yet in the play, new puts can be imitated at current
levels on further weakness.  But the better approach may be to
wait for a short covering rally back up to the $31.50 level.
A rollover from there would provide a solid new entry into
plays.  Because GMST violated the $30 level Thursday, it may
well be headed to $25 over the short-term.  Look for a print
down around that level for another exit point if your risk
preference and time horizon dictate that much.

EBAY $55.06 -1.85 (-3.94) We gotta' concede, the volatility in
EBAY is humbling.  This play is growing difficult to game, and
is testing emotions on a daily basis.  The stock's wild swings
are offering plenty of trading opportunities for those on the
"right" side of things, but if you've been attempting to enter
puts on weakness you're probably getting swung around like a
sack of potatoes.  The stock, not by coincidence, closed right
on the pivotal $55 level Thursday and any further weakness
below this level should offer new entry points, but only after
confirming weakness in the Internet Sector (INX.X) and the
COMPX.  Otherwise, look for a bump up against $59 on any
future strength.  Although $59 is a long ways away, we must
let the stock come to us.  Our stop has been moved down to
$61, which is very liberal.  As such, readers should use their
own best judgment when determining their unique stop levels.

GS $77.70 +0.20 (+0.45) Entry point!  GS popped back up to the
$78 level Thursday, but the stock looks like it's beginning
to rollover.  Bearish traders looking for new put entries can
use any weakness from current levels to enter plays, but make
sure to confirm weakness in the AMEX Broker/Dealer Index (XBD.X)
before pursuing such a strategy.  If the stock continues to
firm, look for a rollover near $79, or slightly higher around
the $80 level, which is the site of our stop.

AIG $77.40 -0.18 (-1.81) Cruising ever lower, AIG just can't
seem to find any sustained buying interest.  Even reaching
the $77 support level this morning was insufficient to do much
more than produce a weak intraday bounce to just over $78.  It
didn't last long, as the sellers piled in again, driving the
stock down towards the day's lows.  We are rapidly approaching
major support in the $74-75, and we would suggest taking profits
if AIG falls that low, especially with both daily and weekly
stochastics now deep in oversold territory.  Until then, we
can continue to use intraday bounces as opportunities to
initiate new positions.  We're keeping our stop tight, now at
$79, just in case of a surprise rebound, which would likely be
led by a recovery in the Insurance index (IUX.X).

CLS $38.58 -0.52 (-0.89) The attempted rally in Semiconductor
stocks didn't even last 2 days, but it was long enough to set us
up for a fresh entry into the CLS play.  The bulls managed to
push the stock right up to just below the $40 level before the
bears started to flex their muscles this afternoon.  CLS fell
back into the close, ending the day with a fractional loss and
the increasing selling volume in the final half hour points to
more downside from here.  Look for CLS to continue to find
resistance at the $40 level and target new entries as the stock
rolls over from there.  Additional resistance at the 10-dma
($40.97) should keep any exuberant bulls in check, so we are
leaving our stop in place at $42.  Alternatively, target new
entries as CLS falls back under intraday support near $38 on
its way back to test its recent lows just above $36.

LEH $64.00 -0.95 (-0.00) After falling sharply throughout the
month of August, LEH is trying valiantly to consolidate between
$64-65, just above the long-term ascending trendline.  But the
bulls are going to have their work cut out for them with
weakness throughout the Brokerage sector due to a continued
decline in trading volumes and investment banking business.
All of the stock's moving averages are arrayed overhead, with
the 10-dma ($65.67) continuing to keep the bulls in check.  We
can target any failed rallies below the 10-dma for new entries,
with our stop still resting at $68.  Alternatively, wait for
increased selling volume to push LEH below the $64 level before
adding new positions.  This would represent a violation of the
long-term ascending trendline and could set the stage for a
more protracted decline.

VRTS $31.32 -0.54 (-1.63) Call it a software stock or a storage
stock, but there is no arguing that VRTS is firmly in the grip
of the bears.  Deep in oversold territory, the daily stochastics
just can't get any upward movement as the price continues to
fall south.  Intraday rallies continue to provide attractive
entry points, and another downgrade on Wednesday (this one from
First Union Securities) didn't help the case for long term
investors.  The stock is nearing the $31 support level and a
volume backed move below that will provide for additional entry
points.  Alternatively, target any failed rallies below our $35
stop for new positions.


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

QLGC - QLogic Corporation $30.41 -4.42 (-5.09 this week)

Somebody has to make the equipment that lets your computer talk
to all its peripheral equipment, and QLGC does it well.  A
leading designer and supplier of semiconductor and board-level
input/output (I/O) management products, QLGC has been providing
SCSI-based connectivity solutions to this market sector for over
12 years.  QLGC's I/O products provide a high performance
interface between computer systems and their attached data
storage peripherals, such as hard disk and tape drives,
removable disk drives and RAID (redundant array of independent
disks) subsystems.  The company is also the market share leader
in Fibre Channel host bus adapters, a market segment that is
receiving tremendous attention from investors.

Investors that expected QLGC to find support at the $33 level
were in for a rude awakening this morning as the stock continued
its 3-week plunge, ending the session at its lowest point since
April 17th.  QLGC gave up nearly 13% on heavy volume, dragging
the rest of the Fibre Channel stocks in its wake.  Motivating
the selloff were comments from the company at Wednesday's
conference call that the company was offering rebates in order
to gain/maintain market share.  Price war, anyone?  The stock
has strong support at $30, but the bears have built up quite a
head of steam to the downside.  Despite the fact that daily
Stochastics are now in oversold territory, QLGC could be headed
significantly lower, first to test support at $26.50 and then
the April lows near $18-20.  The stock is due for an oversold
bounce and CSCO's reorganization announcement after the close
could provide just that tomorrow morning.  Any bounce should be
short-lived, so we'll target the rollover for new positions, so
long as it occurs below our $36 stop.  Likely levels of
resistance are $33.50 and $35.  A drop through $30 on continued
strong volume looks attractive for momentum-oriented entries as
well, so long as selling volume remains strong.

BUY PUT SEP-35 QLC-UG OI= 717 at $6.60 SL=4.50
BUY PUT SEP-30*QLC-UF OI=7373 at $3.50 SL=1.75

Average Daily Volume = 6.98 mln



SEBL - Siebel Systems $21.90 -2.09 (-3.56 this week)

Siebel Systems is a provider of eBusiness applications.  The
company's products enable organizations to sell to, market to,
and service their customers across multiple channels, including
the Web, call centers, resellers, retail, and dealer networks.
SEBL's eBusiness applications are available in
industry-specific versions designed for the pharmaceutical,
healthcare, telecommunications, insurance, energy, apparel,
automotive, and finance markets.  Through SEBL's applications,
companies can create a single source of customer information
that sales, service, and marketing professionals can use to
tailor product and service offerings to meet each of their
customer's unique needs.

Proof that oversold can become more so, SEBL has seen little in
the way of buying interest since the beginning of August.
Starting with a rollover from the 20-dma (then at $37.32), the
stock has punctured support at $29, and then today, fell through
the $23 level, the site of the April low.  There just isn't any
love for Software stocks right now, as the GSO index has now
fallen back to its April lows.  Adding insult to injury, selling
volume has been on the rise all week, hitting 50% above the ADV
on Thursday.  With SEBL trading at new yearly lows, we have to
go all the way back to late 1999 to find possible levels of
support now.  There is some mild support near $20.50 and then at
$19, but we need to go all the way down to $16.50 to find firm
support.  Previous support in the $25-26 area should now act as
formidable resistance, so we are placing our stop at $26.  Use
weak intraday bounces to provide entry into the play, so long as
resistance remains intact.  Further weakness (a decline below
$20.50), accompanied by new lows on the GSO index (a drop below
$155) can be used for entries by momentum traders, but beware
of a possible oversold bounce.

BUY PUT SEP-22.5 SGQ-UX OI=3749 at $2.45 SL=1.25
BUY PUT SEP-20.0*SGQ-UD OI=1026 at $1.35 SL=0.75

Average Daily Volume = 14.4 mln



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

ELNT - Elantec Semi $37.72 -0.51 (+0.61 this week)

Elantec is a designer, manufacturer and marketer of high
performance analog integrated circuits, which provide specific
analog solutions to manufacturers in the high growth markets for
video, optical storage, communications and power management
products.

Most Recent Write-Up

ELNT is essentially trading sideways and we're content with that.
The stock continues to trade well relative to both the COMPX and
the SOX, so we're betting that any rebound in those two will
allow for ELNT to work higher.  In other words, we're in the
right stock but the wrong market.  It's paramount that its
market and sector trader higher if ELNT is going to advance.
That being said, bullish traders should pay special attention to
the COMPX and SOX when trading this play.  In the SOX, watch for
the index to bounce around the 555 level if it continues to
weaken.  If the sector does bounce from support, turn to ELNT's
support around $36 when searching for an entry point.

Comments

Cisco's announcement after the bell Thursday could set the IC
chip makers up for a decent day Friday.  Bullish traders can
look for ELNT to pop back above the $38 level early Friday
morning, and look for an advance up to the $39 area.  Confirm
any advance in ELNT with the SOX moving above the 570 level.

BUY CALL SEP-35 UET-IG OI=219 at $5.30 SL=3.50
BUY CALL SEP-40*UET-IH OI= 77 at $2.75 SL=1.50
BUY CALL NOV-35 UET-KG OI=611 at $7.90 SL=5.75
BUY CALL NOV-40 UET-KH OI=355 at $5.20 SL=3.50

Average Daily Volume = 521 K




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