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Daily Newsletter, Tuesday, 09/04/2001

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The Option Investor Newsletter                 Tuesday 09-04-2001
Copyright 2001, All rights reserved.                       1 of 2
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************************************************************
MARKET WRAP (view in courier font for table alignment)
************************************************************
  9-04-2001          High     Low   Volume Advance/Decline
DJIA     9997.49 + 47.74 10182.38 9894.88  1.18 bln 1626/1458
NASDAQ   1770.78 - 34.65  1836.19 1770.76  1.50 bln 1417/2225
S&P 100   577.75 +   .64   590.71  574.34    Totals 3043/3693
S&P 500  1132.94 -   .64  1155.40 1129.06
RUS 2000  466.96 -  1.60   472.81  466.91
DJ TRANS 2835.65 + 22.24  2865.83 2807.76
VIX        28.55 +   .70    29.83   26.84
VXN        57.15 +  4.29    57.15   54.96
TRIN        1.09
Put/Call Ratio 0.83
*************************************************************

Carly Hugs Michael!
The big news of the day was of course the merger of Hewlett
Packard and Compaq. The two companies agreed to merge in a
$25 billion stock deal that will create an even bigger PC
giant for Dell to battle. Carly Fiorina and Michael Capellas,
CEO of Compaq, hugged for the cameras and beamed smiles for
all their shareholders. However the actual results were much
different than they wanted. HWP lost -4.21 to $19 and CPQ
lost -1.27 to $11.13. Nobody seemed to like this deal, most
of all the shareholders.








The HWP/CPQ deal may prove to be a bonanza for another Michael,
Michael Dell. Since Compaq is still having indegestion over the
Digital Equipment acquisition last year, it is entirely possible
that the CPQ/HWP deal will still be undone a year from now. Getting
past the regulators both here and in Europe will likely be a challenge.
Dell was up almost a dollar on the news. Lexmark however lost
almost $5 on the news with investors expecting Compaq to now
use HWP printers instead of Lexmark printers. Does the merger
of the two giants mean the price war is over? Not hardly but the
bigger infrastructure of the combined companies could actually
add to the costs of producing their computers and give Dell and
Gateway an even bigger target to aim at. The structure of the
new company has Carly as Chairman and Michael as President.
The Compaq brand would eventually go away but not before giving
SunMicro one more dose of hearburn. The combined companies would
impact the server side area where SUNW is already struggling to
squeak out a profit. The server sale cycle is more suited to the
big business, multi pressure point, large company attack where
Dell and Gateway are specializing on the one on one individual
consumer/small business sale. Some analysts are even skeptical
that the deal will even close giving it only a 50/50 chance.

The HWP/CPQ news was not a positive factor to the Dow's +225
point gain at the open. The NAPM numbers were credited with that
spike. The NAPM number at 47.9 was much higher than the 43.9
that analysts expected. This was the thirteenth month of decline
but a significant jump over the low 40 numbers from the last
seven months. The most encouraging portion of the report was
the new orders component which jumped to 53.1 from 46.3 in July.
This means there may actually be a bottom forming in the manufacturing
sector. The prices index fell to 33.9% in August which is the
lowest since 1998. There is no fear of inflation pressure for
the Fed. The market soared +225 points on the news but came to
a dead stop at 10180. After failing to break that ceiling
three times the bulls called an end to the rally and took their
chips off the table.

The severity of the sell off from the highs of the day were
credited to several things. Dan Niles of Lehman Brothers, cut
estimates on Intel again in advance of their Thursday analyst
update saying he felt they would guide analysts lower. One of
the reasons was the news from the semiconductor assn which said
sales of chips in July were down -37% and the lowest level since
1998. They showed a continued weakness in computer chips but
a slight uptick in communication chips. Several analysts were
now calling for the rebound to not occur before 2Q 2002.

The uptick in communication chips is not helping Ericsson which
warned that the global slowdown was worse than they previously
expected and would require harsher steps than they previously
announced in their restructuring. They said the high speed phones
had been selling slower than expected. They did say they expected
U.S. sales to pick up in the last quarter. (And what crystal ball
are they looking into?)

Sanmina, a contract manufacturer, said that the current quarter
will fall short of previously reduced expectations. The ongoing
slowdown in the capital equipment spending environment will
continue to hamper our performance. The warning also hit JBL,
SCI, SLR and CLS with serious drops. Ironically SCI is poised
to gain more business should the HWP/CPQ merger come to pass.

Financial markets were hit again after Providian warned that
it was cutting earnings estimates and long term growth rates.
The stock lost -$8.70 or -22% to $30.36 and the other two
major off prime card lenders fell as well. COF lost -2.85
and KRB -$2.00. These companies specialize in secured cards
and high interest rate cards to customers with previous credit
problems. Soaring unemployment and a weak job market could cause
loan losses for these lenders.

The economic calendar is still loaded with Productivity on
Wednesday and Nonfarm payrolls on Friday. Those along with
the possible Intel warning on Thursday should keep a lid on
the markets this week. The Ericsson and Sanmina warnings from
today as well as the SIA chip sales news continued to paint the
picture that things are not yet getting better and more warnings
are sure to be lurking in our future.

The severity of the market drop from the days highs is a very
bad omen for Wednesday. The Nasdaq closed at the exact low of
the day (-35) after being up +35 in early afternoon. The Dow
was even more dramatic with a 290 point range and almost a -200
point drop from the days high. The drop was so steep that the
VIX spiked to near 29 at the close and the VXN hit a five week
high of 57.15. Suddenly there is real fear starting to appear
in the markets and we still have September and October ahead of
us!

Tomorrow conventional wisdom would have us expecting a weak
open. SUNW will present at a tech conference at 8:AM in the
morning and will be only one of dozens to present this week
and next in the flurry of tech and biotech conferences. What
SUNW says, if anything, about the CPQ/HWP merger as well as
any further news on their recent warning will color the Nasdaq
for Wednesday. This looks like a real buying opportunity shaping
up for the buy and hold stock community but it could still be
several weeks before we get the bottom signal. Keep those put
plays coming! The rally today gave us some excellent exit points
for those counting on a post Labor Day rally and some great
entry points for those playing puts. While most readers may be
frustrated by the market direction there is still a lot of
money to be made by trading the trend!

Definitely, enter passively, exit aggressively!

Jim Brown
Editor


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

The Rally That Almost Was

The merger of Hewlett Packard and Compaq couldn't get the market
started, but the National Association of Purchasing Managers did.
The NAPM Index rose more than expected in August to 47.9%.  The
number still came in below 50, which marks the 13th straight
month of contraction for manufacturing, but there are signs of a
possible bottom.  One of those signs is new orders index, which
rose for the first time in nine months to 53.1.

Construction spending dropped an expected 0.1%, but new
residential completions and non-residential buildings continued
to rise.  The biggest drop came from the residential improvements
and remodeling category, which fell 3.6% in July. (Home Depot and
Lowe's?)

But that news was only good for about 6 hours worth of buying.
As has been the pattern lately, economic news is good for a pop,
but eventually the affects wear off.  And so it goes as investors
have turned into dismal scientists.

Nasdaq and S&P 500 10 Minute Charts



Perhaps it was some uninviting words from Sanmina (SANM) and
Ericsson (ERICY), or maybe the 6.1% drop in chip sales, but the
Nasdaq did not fully participate in the early rally.  While the
Dow was up 200 points, the Nasdaq was struggling to keep up.
Regardless, the bottom fell out of both indices at 3:00 p.m.  The
Dow closed up a disappointing 47,and the Nasdaq finished 34 point
lower. The Dow has support at 9,970, as well as Friday's low of
9869, if the afternoon sell off continues tomorrow morning.  The
Nasdaq has mild support at 1757.

30 and 10-Year Bond Yields



Today's sharp selling bonds almost had me believing that that
this rally had a chance.  As money flowed out of bonds, the yield
on the 30-year was pushed up to 5.493%, very close to the
psychological 5.50%.  The 10-year did likewise, coming up just
short of 5.00%.  The fact that the market sold off right as the
bond market closed at 3:00 has me wondering if this was a profit
taking sell-off in bonds, or truly money coming out of bonds.

Tomorrow lacks any major economic news to move bonds, but 5.50%
on the 30-year and 5.00% on the 10-year could hold the clues for
stocks.  Intel's mid-quarter update on Thursday should also be a
key event this week.

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

Market Volatility

VIX   28.55
VXN   57.15

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

          Put/Call Ratio  Call Volume   Put Volume
Total           .83        499,747       415,164
Equity Only     .71        424,278       302,702
OEX            0.87         25,222        21,897
QQQ             .27         56,943        15,637

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

Bullish Percent Data

           Current   Change   Status
NYSE          34       -      Bear Confirmed
NASDAQ-100    24       -      Bear Confirmed
DOW           30       -      Bear Confirmed
S&P 500       44      -2      Bear Confirmed
S&P 100       36       -      Bear 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

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


 5-Day Arms Index  1.34
10-Day Arms Index  1.22
21-Day Arms Index  1.27
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      1625           1463
NASDAQ    1415           2228

        New Highs      New Lows
NYSE      134             77
NASDAQ     47            128

        Volume (in millions)
NYSE       918
NASDAQ   1,228
-----------------------------------------------------------------

Advisory Sentiment

Bullish  Bearish  Correction  Net Bullish   Change
  43.9%    30.6%     25.5%       16.7%       -3.4%

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: 08/28/01
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

Commercial traders increased their net bearish by 6.9%.  This
isn't a drastic move, but (79,126) is the most bearish commercial
traders have been since 3/13/01.

Commercials   Long      Short      Net     % Of OI
8/14/01      337,327   411,504   (74,177)   ( 9.91%)
8/21/01      342,332   416,372   (74,040)   ( 9.76%)
8/28/01      342,742   421,868   (79,126)   (10.35%)

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
8/14/01      130,432     55,750   74,682     40.11%
8/21/01      134,280     58,785   75,495     39.10%
8/28/01      141,046     58,001   83,045     41.72%

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 didn't add any long positions, but did dump a
few short positions, so the net bearish position improved
slightly.

Commercials   Long      Short      Net     % of OI
8/14/01       29,909     37,822   ( 7,913)  (11.68%)
8/21/01       30,348     38,964   ( 8,616)  (12.43%)
8/28/01       29,255     36,551   ( 7,296)  (11.09%)

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
8/14/01       11,165     9,508    1,657       8.02%
8/21/01       10,499     7,576    2,923      16.17%
8/28/01       11,131     9,694    1,437       6.90%

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

Last week commercials came close to the most bullish reading of
the year, but have pulled back this week.

Commercials   Long      Short      Net     % of OI
8/14/01       21,652    15,856    5,796     15.5%
8/21/01       22,710    14,625    8,085     21.7%
8/28/01       22,141    14,959    7,182     19.4%

Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year:  8,925  - 5/22/01

Small Traders  Long      Short     Net     % of OI
8/14/01        4,441     8,528    (4,087)   (31.51%)
8/21/01        5,059    10,410    (5,351)   (34.59%)
8/28/01        5,240     9,835    (4,595)   (30.48%)

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

COT Commercial Net Position Charts












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PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****
FFIV $14.11 -1.71 (-1.71) FFIV failed to follow-through after
last week's solid rebound.  The miserably shed over 10 percent
during Tuesday's blood bath in tech issues, and could be headed
further south over the short-term.  Needless to say, we're
dropping coverage ahead of any further weakness.  Bullish traders
with open positions can use any strength early Wednesday to exit
plays.

DNA $45.34 -0.56 (-0.56) The BTK could not get above the 550
level over the past few sessions.  And if the sector can't move
higher, gravity tends to pull it back to earth.  Unfortunately,
gravity along with the BTK pulled DNA lower Tuesday.  The stock
closed just beneath our stop, so we're dropping coverage this
evening.  Look for any extended bounce from the $45 level in
Wednesday's session to exit open positions.


PUTS:
*****
No Dropped Puts for Tuesday


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The Option Investor Newsletter                  Tuesday 09-04-2001
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

To view this email newsletter in HTML format with embedded
charts and graphs, click here:
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********************
PLAY UPDATES - CALLS
********************

CNXT $11.34 -0.57 (-0.57) CNXT was once again pushed around by the
SOX during Tuesday's session.  The stock was up nicely prior to
the rollover in its sector and, indeed, the broader market.  And
we're going to emphasize again that it's of paramount importance
to trade CNXT in conjunction with the broader market and its
sector.  Even though the stock is relatively strong versus its
group, it needs its group nonetheless if it's going to trade
higher.  The stock is again approaching support at the $11 level
and bullish traders can use a bounce from that level to gain
new entries, but only after confirming strength in the SOX.

STJ $69.31 +0.51 (+0.51) STJ made another run on the $70 level
Tuesday but couldn't settle the day above that price.  To revisit,
an advance above that level would signal a very short-term
breakout and could carry STJ higher.  Unfortunately, the broad
market weakness pulled the stock back after its early morning
pop above $70.  The good news is that the stock once again
bounced from its ascending support line.  Going forward, we need
to see the 10-dma at $68.62 hold, which should eventually support
any breakout above $70.  As for entry points, look for a bounce
from support or a breakout above $70, depending upon market
conditions.

ADVP $72.70 -2.26 (-2.26) ADVP pulled back again Tuesday on what
appeared to be a combination of profit taking and broad market
weakness.  The stock did, however, settle right around its 10-dma
which was about the only positive attribute to Tuesday's price
action in this play.  While OI's stop lies below at the $71
level, it's important to see the 10-dma hold ADVP up because it
has done so for the past month.  A solid break below that support
would signal a possible shift in short-term trend.  As such,
we'll be on the lookout in the coming sessions for a break in
trend.  As for new entries, bounces from support look like the
bests bets currently.  The $72 level may attract buyers, but if
it doesn't look for a bounce from $70 and subsequent rebound
beyond the $71 level.

VOD $20.01 -0.14 (-0.14) VOD charged above its relevant resistance
at the $20.19 level early Tuesday only to be dragged lower by
the broader market in typical bull trap fashion.  The stock's
subsequent weakness was discouraging, to say the least.  Ideally,
we'd like to see the $20 support level prop VOD up in the coming
sessions.  If not, the stock's pattern of higher lows should
morph into support around the $19.50 level.  A bounce from either
$20 or $19.50 would offer an entry point on weakness and the
employment of an extremely tight stop in order to manage risk.

TSM $12.75 -0.23 (-0.23) TSM traded as high as $13.50 Tuesday
morning before rolling over in synch with the SOX in afternoon
trading.  However, the stock did stop falling right at its
ascending support line, which has been in place for about two
weeks.  That line currently lies right around $12.60.  As such,
bullish traders might look for a bounce in the coming sessions
from current levels if the SOX rebounds.  Slightly below that
level, TSM has strong support at $12.50.  Therefore, risk at
current levels is fairly easy to measure and manage should
traders turn bullish on TSM.  Our stop is in place at the $11.75
level and if TSM settles below there in the coming days, we'll
be letting it go.

BGEN $59.10 -1.26 (-1.26) The stutter-step rally higher in shares
of BGEN looks like it may be in trouble, as the stock has been
drifting sideways for more than a week.  While the stock has
been holding above the ascending trendline (currently $59.25),
that wasn't the case today.  The morning rally fell apart and
BGEN continued to weaken, falling below its trendline at the
close, as Stochastics continue to head south.  While a renewed
bounce near current levels could give us a nice bullish play,
we're going to need some renewed strength in the Biotechnology
sector to make it happen.  A volume-backed bounce from the $58-59
level is buyable, but keep those stops in place at $58.  The
more prudent play at this point may be to wait for the bulls to
charge back through the $61 level before playing.

IBM $101.49 +1.54 (+1.54) IBM led the DJIA higher this morning,
but the market once again proved that profits can disappear in
the blink of an eye.  We were playing the stock for an oversold
bounce and that is just what we got as traders returned from the
long weekend.  Propelled higher on the heels of the better than
expected NAPM numbers, IBM actually crested $103 before the
sellers returned in force the past couple days.  Apparently they
didn't like the HWP/CPQ merger news and their lack of enthusiasm
caused IBM to give up a big chunk of the intraday gains.
Fortunately, the stock was still able to post a gain and closed
above the critical $100 level.  Target new entries on a bounce
near $100 or wait for the bulls to clear $103.

IWOV $7.50 -0.65 (-0.65) Despite a strong broad market move this
morning, IWOV was never able to mount a serious advance.  And
things got worse from there, as the stock finally sold off on
increasing volume at the end of the day, giving back all of its
gains from Thursday and Friday of last week.  It looks like
sellers are going to take another shot at the $7 support level
and that will define our play's future.  Another solid bounce
from that level will give us another attractive entry, while a
fall below our $6.85 stop will have IWOV moving to the Drop list.
More cautious players may want to wait for the bulls to rally
the stock through the $8.35 resistance level before taking a
position.

LLTC $40.43 -0.65 (-0.65) Still stuck under its descending
trendline, LLTC advanced this morning with the broader markets,
only to be turned back right at the trendline during the lunch
hour.  Trading as high as $42.88, LLTC was turned back by the
combined might of the trendline and the 20, 30 and 50-dmas, all
clustered between $42-43.  It's going to take more than an
oversold bounce to clear that level, so traders will be better
served by buying near support for the foreseeable future.  That
comes near $40 and the then at the ascending lower trendline
near $39.  Keep stops in place at $38, and keep an eye on INTC's
mid-quarter update on Thursday.  It is likely to be pivotal to
the near-term direction of Semiconductor stocks like LLTC.

UNH $67.99 -0.07 (-0.07) UNH investors are trying mightily to
defend the $68 support level, but the weight of the descending
Stochastics oscillator as presenting them with an uphill
battle.  Will they succeed?  Only time will tell, but we're
hanging onto the play for one more day in hopes that they will.
We're keeping our stop in place at $67.75, and would consider a
solid (read:volume) bounce from current levels to be a decent
entry point.  But today's lack of strength (just like the broader
markets) is disconcerting.  The better approach right now would
likely be to wait for UNH to scale the $69 or even $70 resistance
levels before venturing into the play.


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

CHKP $30.00 -1.99 (-1.99) CHKP rolled over in spectacular
fashion Tuesday, ultimately tracing a fresh 52-week low.  The
stock stopped its early advance right around the 10-dma at
$32.85, which may prove to be a profitable entry point should
any future advance carry CHKP up to that level.  In addition,
further weakness below the $30 level may provide entry points
for momentum players.  Stops have been moved down to the $35
level.  Exit points for traders with open positions should be
plentiful around current levels.  For those with newly opened
positions, look to book gains down around the high $20's.

GMST $27.12 -2.54 (-2.54) GMST broke to new relative lows yet
again Tuesday, and looks poised to retest its April lows around
te $20 level.  Bearish traders can look to enter new put plays
on further weakness below current levels if the Nasdaq is
selling off, too.  Otherwise, any rally up to resistance would
provide a solid entry point.  Look for a rollover near the 10-dma
at $30.63, or near the $30 level.  Stops have been moved down to
the $31 level.

BA $49.95 -1.25 (-1.25) BA broke down Tuesday afternoon, in
concert with the rollover in the broader market, after trading
as high as $52.  The stock's rally up to its 10-dma may have
provided excellent entry points for those who chose to fade the
intraday trend.  At this point, BA has only slight support at
the $49.50 level.  A high volume decline below that level would
offer bearish put traders a solid entry point into weakness.
However, make sure to confirm weakness in the Dow before entering
on weakness below current levels.

VZ $49.95 -0.05 (-0.05) VZ, like nearly every other large cap
issue, rolled over in a big way Tuesday.  From current levels,
bearish traders need only see the stock breakdown below the $49.50
level to confirm that further short-term weakness lies ahead of
VZ.  A breakdown below $49.50, on heavy intraday volume, would
offer an excellent entry point for those who favor the momentum
approach.  But to enter VZ on a breakdown below $49.50, one must
confirm further weakness in the market and the stock's sector.
For the market, bearish traders can monitor price action in the
COMPX - for its telecom attributes - and the S&P 500.  Insofar
as sector confirmation, bearish traders can monitor price action
in either the XTC.X or the YLS.X, which track telecom and wireless
specific issues, respectively.

JPM $39.83 +0.43 (+0.43) Looking for a bounce in shares of the
Financial stocks was looking like a smart move...at least until
the strength vaporized shortly after the lunch crowd returned to
the floor.  Selling volume increased in the afternoon, cutting
JPM's $1.28 intraday gain to a mere $0.43.  That's when we knew
we were on the right side of the trade, looking for a continued
selloff.  Even though Stochastics are near oversold, the
declining price trend is showing no sign of a meaningful
reversal.  In fact, today's rollover from $40.60 provided traders
with an attractive put entry.  Continue to target failed rallies
below $41 for fresh aggressive entries, but keep in mind we'll
end the play if the stock closes above our $40.25 stop.  More
cautious investors will want to wait for JPM to drop below the
$39 level before taking a position.

PHA $40.00 +0.40 (+0.40) The reflexive morning rally did nothing
other than provide us with an attractive entry point to our PHA
play.  After briefly cresting the $40 level, the stock succumbed
to selling pressure, falling back under that level by the close
and is once again testing its recent lows near $39.50.  Repeated
failed rallies below our $41.50 stop look attractive for new
entries, as does a drop below last week's lows.  Note that the
selling volume was increasing into the close, and it would seem
a logical conclusion that this activity will continue in the
morning.

QCOM $54.30 -4.55 (-4.55) Hungry bears made a feast out of
Wireless stocks on Tuesday after Ericsson made dejected comments
about the demand for its handsets.  The selling pressure hit the
entire sector and QCOM took a big tumble, falling to $54 for the
first time since late June.  Volume was heavy too, adding to the
bearish picture.  But daily Stochastics are once again deep in
oversold and the stock could be due for a bounce.  Traders with
open positions will want to tighten up stops to preserve profits
in the face of a possible oversold bounce.  We are doing the
same, cinching ours up to $59.  We'd consider a failed rally
below this level to be providing another attractive entry, but
wouldn't chase the stock, lower from current levels due to the
solid support near $52.

QLGC $28.59 -1.42 (-1.42) QLGC is continuing to perform for us,
walking lower along its lower Bollinger band.  Tuesday's
weakness in shares of Tech stocks knocked QLGC back for another
5% loss and it is now testing the lows from last week near $28.
Traders that bought puts on the heels of Fridays short-covering
rally are smiling tonight.  The stock is now resting on
significant support at $28, and will need a fresh push from the
bears to move significantly lower.  We are tightening our stop
to $32 and would look at failed rallies below this level for
initiating new positions.  If you would rather sell continued
weakness, look for QLGC to drop through the $26 support level
on its way to testing the April lows near $20.

SEBL $20.85 -0.75 (-0.75) So much for a rebound in Software
stocks!  There just weren't enough bulls in the market today to
give more than a brief lift to shares of SEBL.  After gradually
creeping up to the $23 level by early afternoon, the stock found
itself back in free fall mode on increasing volume.  By the time
the closing bell rang, SEBL found itself at another yearly low,
still effectively trapped under the 10-dma (currently $22.57).
Look for renewed intraday rallies near the 10-dma to provide
additional entry points as we continue to ride the stock lower.
To preserve our gains, we're ratcheting our stop down to $23,
just above the day's highs.

TSG $42.05 -0.13 (-0.13) Still managing to cling to the $42
support level, TSG was buoyed this morning by the bullish
economic news.  But the enthusiasm wasn't enough to propel the
stock significantly higher.  After briefly clearing the $42.50
level, sellers pushed shares of TSG lower into the close.  The
critical level is $40 however, as once the stock falls through
that level, there is little to point to in terms of support.
Intraday bounces in the $43-44 look great for initiating new
positions as the stock rolls over, and momentum traders will
want to step into the fray as the $40 support level gives way.
For now, our stop is resting at $44.75.


************
NEW PUT PLAY
************

AIG - American International Grp. $76.50 -1.70 (-1.70 this week)

Engaged in a broad range of insurance and insurance-related
activities through its subsidiaries, AIG's primary focus is on
its general and life insurance businesses.  Additionally, the
company is growing its presence in financial services and asset
management.  Other operations include auto insurance, mortgage
guaranty, annuities, and aircraft leasing.  With operations in
130 countries, AIG generates more than half of its revenues
outside the United States.

AIG gave us a nice profitable put play last month, and with the
market weakness that materialized today, it looks like it could
be a repeat performer.  Last time we looked at the stock, the
Insurance index (IUX.X) was starting to firm up near $712 and
AIG seemed to be finding support in the $76 range.  In fact,
AIG managed to creep all the way back up to the $79 level last
week before the selling started in again.  Bullish traders were
trying to challenge the $77.50 level this morning, but that all
came crashing down around 2pm ET.  The stock went into freefall,
falling all the way to $76.50 at the close.  Adding to the
bearish picture was the sharp drop over on the IUX index, as it
declined to a nearly 5-month low at $704.  The great thing about
this play is the reluctant advance in both the stock and the
sector last week dragged the daily Stochastics out of oversold.
And today's selloff gave us a bearish cross of the fast over the
slow lines...and there is now plenty of room to fall.  Intraday
rallies that fail to crest the $78 level will provide the best
entry points and we are initially placing our stop at $79, right
at the highs from last week.  Momentum traders will focus on the
$76 level, as a drop below there will have the stock looking for
a new bottom.  Mild support could materialize near $75, but it
looks more likely that AIG will soon be testing its March lows
near $73.  That would likely coincide with Stochastics once
again reaching oversold -- a great time to take some profits off
the table.

BUY PUT SEP-80*AIG-UP OI= 6176 at $3.90 SL=2.50
BUY PUT SEP-75 AIG-UO OI=18497 at $1.10 SL=0.50
BUY PUT OCT-75 AIG-VO OI=  904 at $2.20 SL=1.00
BUY PUT OCT-70 AIG-VN OI=  685 at $0.90 SL=0.25

Average Daily Volume = 5.24 mln



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*********************
PLAY OF THE DAY - PUT
*********************

CHKP - Check Point Software $30.00 -1.99 (-1.99 this week)

Check Point Software is the worldwide leader in securing the
Internet.  The company's Secure Virtual Network (SVN)
architecture provides the infrastructure that enables secure
and reliable Internet communications.

Most Recent Write-Up

CHKP rolled over in spectacular fashion Tuesday, ultimately
tracing a fresh 52-week low.  The stock stopped its early
advance right around the 10-dma at $32.85, which may prove to
be a profitable entry point should any future advance carry
CHKP up to that level.  In addition, further weakness below
the $30 level may provide entry points for momentum players.
Stops have been moved down to the $35 level.  Exit points for
traders with open positions should be plentiful around current
levels.  For those with newly opened positions, look to book
gains down around the high $20's.

Comments

CHKP, once again, traded rather poorly Tuesday.  The stock
looks poised to break lower to a new distribution, which
should carry it down to the $25 area.  Look for entries at
current levels early Wednesday if the COMPX and GSO are
weak.

BUY PUT SEP-35 KEQ-UG OI=3593 at $5.70 SL=3.55
BUY PUT SEP-30*KEQ-UF OI=4278 at $2.20 SL=1.50

Average Daily Volume = 10.5 mln



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