Option Investor

Daily Newsletter, Monday, 09/10/2001

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The Option Investor Newsletter                   Monday 09-10-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
        09-10-2001        High      Low     Volume Advance/Decline
DJIA     9605.50 -  0.30  9671.80  9493.50 1.26 mln   1137/1963	
NASDAQ   1695.38 +  7.68  1702.12  1669.94 1.59 bln   1408/2227
S&P 100   558.58 +  4.69   560.72   546.93   totals   2545/4190
S&P 500  1092.54 +  6.76  1096.94  1073.15
RUS 2000  440.73 -  4.46   445.19   437.50
DJ TRANS 2676.49 - 36.65  2715.04  2667.97
VIX        33.95 -  0.41    37.35    33.87
Put/Call Ratio      0.87

Monday Malaise

As the gravity and severity of the current economic slowdown in
the U.S. sinks into investors' collective psyche, fear has been
rising (as measured by the VIX) and the great selling machine is
feeding on itself.  As Joe Kernan pointed out this morning on
CNBC, Friday's selloff in New York led to weakness in both the
Asian and European markets on Monday.  That, in turn pressured
our markets sharply lower at the open.  It's a dangerous game of
follow the leader.  Actually it reminds me of the children's
activity, "Ring Around the Rosie", which concludes with the
phrase, "Ashes, ashes, we all fall down".

At some point, there will be a member of the global economy that
will boldly lead us out of the current morass, and odds strongly
favor that it will be the U.S. economy.  With that being said,
it is unlikely that the recovery will be soon (as in this
quarter) or that it will be swift.  I saw an analyst on CNBC this
afternoon who equated the US economy to the locomotive that will
pull the global economy out of recession (we're already there,
regardless of what the economists or government statistics tell
us).  The point he made is that when the locomotive begins to
move out of the station, it will be a slow move due to the steep
grade that needs to be climbed.  I couldn't have said it better

Qwest Communications (NYSE:Q) got the markets started to the
downside this morning, warning for the second half of the year,
stating that they now see 2001 revenues coming in at $8.0
billion vs. estimates of $8.5-8.7 billion.  Q also announced
reductions in its capex spending plans for both 2001 and 2002,
along with 4000 job cuts.  The immediate response at the open
drove Q to another new yearly low of $16.28, although buyers
emerged to propel the stock higher for a $1.76 gain on the day.

Communications stocks weren't nearly so fortunate, with Ciena
(NASDAQ:CIEN) losing 5%, Applied Micro Circuits (NASDAQ:AMCC)
giving up 4.8% and PMC Sierra (NASDAQ:PMCS) sliding lower by
3.5%.  Of the three Telecom Equipment Provider horsemen (CSCO,
NT and LU), CSCO was the only one that managed to close in
positive territory with a measly 11-cent gain.

In the first hour, we saw all the major indices bleeding red,
with the technical damage most disconcerting on the S&P500
(INDEX:SPX.X).  The Big Index fell to an intraday low of 1073,
its lowest level since October 1998.  With weakness still
mounting on the DJIA and scant signs of life on the NASDAQ, it
is looking more and more likely that the SPX is going to break
1000 before the big bad bear goes back into hibernation.
Looking at the monthly chart below, you can see that we've
already broken the spring lows and are barely hanging onto the
1070 support level that dates back to the first half of 1998.

The historic market advance that began in late 1994 and clearly
ended a year ago paints an instructive picture when a
retracement bracket is applied.  Up until the end of August, the
SPX had managed to find support at the 38% retracement level,
but that has clearly given way in the past 5 sessions.  While we
need to be careful about drawing conclusions from a candle that
has not yet finished forming (the current candle won't be cast
in stone until the end of September), it looks like the next
major support level will be near the 50% retracement level
(988), backed up by some solid support from 1997-98 near

That's a bit of a scary prospect now, isn't it?  While it has
been fairly recently that I have come to expect the SPX to break
1000, noted money-manager and Forbes columnist Ken Fisher (son
of value-investor Phil Fisher) has been looking for a decline to
the 800-850 range since late last year.  That kind of makes me
look like an optimist, doesn't it?

Now before you go out to buy LEAP Puts on your favorite short
candidates, we need to remember that nothing goes down (or up)
in a straight line.  The markets are deeply oversold and fear
is rising at a parabolic rate -- just like it did last October
and this past spring.  Letting history be our guide, that
indicates that we could get a nice tradable rally (although it
is likely to be little more than an oversold bounce) in the near
future.  The VIX is quickly approaching levels seen last fall
and this spring, and both times it resulted in a substantial
bear-market rally.  I don't think we're quite there yet, as I
expect the VIX will likely top 40 before we have enough
capitulation to usher in the next bullish move.

It looked like we might be seeing the early stages of the
long-awaited rebound today after the DJIA recovered all of its
early losses and moved solidly into positive territory, but the
fact that there was no follow through and the NASDAQ continued
to languish, made it clear that it was just another round of

We need a series of positive events to propel these markets
higher from current levels, and that's going to be a tall order
as we once again head into earnings warning season.

One bright spot in the markets today came from Microsoft
(NASDAQ:MSFT).  Company officials are heading to Washington and
it is widely expected that a settlement will be hammered out
this week.  MSFT shares rose more than $2 on Monday on more than
42 million shares, helping to stem the losses on all the major
indices.  But that isn't the stuff of which significant
multi-day rallies are made.  The most likely catalyst for the
markets to rise will be multiple first-tier companies in
multiple industries stating that they see a recovery in their
businesses.  But with Consumer Credit coming in at a startling
$0.0 Billion today vs. the $4 billion expectation, it seems
clear that the almighty consumer is pulling in their horns.
The dramatic selloff we have recently seen in the Retail sector
confirms that fact and with skyrocketing unemployment, finding
the glimmer of hope is hard to do.

The economic calendar this week is quiet until Thursday, when
a potential minefield appears, with Initial Jobless Claims and
Import/Export Prices on Thursday.  Friday is the real hurdle we
need to focus on, with PPI, Retail Sales, Industrial Production
and Capacity Utilization all being reported before the open.  Of
course, we can't ignore the preliminary Michigan Sentiment
report 15 minutes after the open.  The current climate of fear
in the markets makes any one of these a possible market mover,
not so much because of the actual importance of the report, but
because of the psychological impact on already-skittish

Adding to my bearish slant today were the pathetic market
internals.  Despite the rebound in price, decliners whipped
advancers by 20-11 on the NYSE and 11-7 on the NASDAQ, even
though up and down volume came in roughly even.  The capitulatory
event we are all awaiting is going to need to come on heavy
volume, and the paltry 1.26 billion shares on the NYSE and 1.59
billion on the NASDAQ aren't even close.  When we see up volume
swamp down volume, with NYSE volume pushing 2 billion shares and
NASDAQ volume in the 3 billion share range, then I'll step off
the bearish express train.  But until we see that strong bullish
move, the high odds trades still lie to the downside.  Keep your
stops in place to protect against the possibility of a surprise
positive event (can you say inter-meeting rate cut?), and fade
the near-term rallies.  The time for bullish trades will come
again, likely sooner than it appears as of this writing, but
jumping into them too soon could be disastrous to your account.

Of course, maybe I am the ultimate contrarian indicator -
stubbornly bold bulls may take my words tonight as the
"all-clear" to buy everything with abandon.  But I doubt it.

Remember to trade only when the reward/risk ratio is in your

Mark Phillips
Research Analyst

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Day of Indecision

Thanks to a mixed bag of pre-announcements it was a day of
indecision instead of a cataclysmic follow up to Friday's losses.
While I'm not necessarily rooting for the bottom to fall out,
I've always found that the certainty of misery is better than the
misery of uncertainty.

RF Micro Devices (RFMD) got the ball rolling by reporting they
would break even in second quarter instead of losing three cents
a share.

Qwest (Q) came out and lowered their revenue guidance for 2001
and 2002, as well as trimming six percent of their workforce. But
analysts were expecting a bleaker outlook and were encouraged by
the reduction in accounts receivable, so the stock closed up 9.7

The same can't be said for Avici Systems (AVCI), which plummeted
28 percent today after warning of a worse than expected loss.
The company increased their expected loss to 40 cents a share
from a previous 23 cents, and will cut 14 percent of its

Its still early in the pre-announcement season, but lets see
where we stand.

666 total announcements
407 negative
123 positive
136 in line

That's better than the first two quarters, but not exactly
encouraging.  Neither are the market internals.

NYSE/NASD Advance Decline Charts

While up trends in stocks were being broken, the advance/decline
line (5-day moving average) was holding up.  That changed in late
August, and now the selling is starting to spread.

NYSE/NASD New Highs/New Lows Charts

The new high/new low picture is also starting to deteriorate.  A
five-day moving average of the NYSE has dipped into negative
territory for the first time since April, and the Nasdaq has
broken its up trend.

So the situation is bleak, is it going to get bleaker?  This week
should prove pivotal, especially the later half.  As PPI, retail
sales, and consumer sentiment data starts to roll in, economists,
I mean investors, should start to place their bets.  Until then
keep an eye on the markets reactions to negative warnings.  If
there are more reactions like Qwest's than Avici's, it might be a
good time to start lining up some bullish candidates, or lowering
stops if short.


Market Volatility

VIX   33.87
VXN   63.84


          Put/Call Ratio  Call Volume   Put Volume
Total          1.01        639,152       644,233
Equity Only     .89        536,402       476,131
OEX            1.16         24,040        27,938
QQQ             .93         54,893        51,233


Bullish Percent Data

           Current   Change   Status
NYSE          32       -      Bear Confirmed
NASDAQ-100    12       -      Bear Confirmed
DOW           28       -      Bear Confirmed
S&P 500       38       -      Bear Confirmed
S&P 100       30       -      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  1.42
10-Day Arms Index  1.47
21-Day Arms Index  1.36
55-Day Arms Index  1.30

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


        Advancers     Decliners
NYSE      1137           1966
NASDAQ    1407           2231

        New Highs      New Lows
NYSE       59            190
NASDAQ     19            253

        Volume (in millions)
NYSE     1,253
NASDAQ   1,604

Advisory Sentiment

Bullish  Bearish  Correction  Net Bullish   Change
  44.3%    30.9%     24.8%       13.4%       +0.1%

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: 09/04/01
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

Commercials increased their net bearish position, but not by any
significant amount.

Commercials   Long      Short      Net     % Of OI
8/21/01      342,332   416,372   (74,040)   ( 9.76%)
8/28/01      342,742   421,868   (79,126)   (10.35%)
9/04/01      350,626   430,613   (79,987)   (10.24%)

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
8/21/01      134,280     58,785   75,495     39.10%
8/28/01      141,046     58,001   83,045     41.72%
9/04/01      147,080     62,004   85,076     40.69%

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


The net bearish position of commercial traders increased, but
that is subject to change weekly as institutions are having
trouble making up their minds.

Commercials   Long      Short      Net     % of OI
8/21/01       30,348     38,964   ( 8,616)  (12.43%)
8/28/01       29,255     36,551   ( 7,296)  (11.09%)
9/04/01       28,757     38,119   ( 9,362)  (14.00%)

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
8/21/01       10,499     7,576    2,923      16.17%
8/28/01       11,131     9,694    1,437       6.90%
9/04/01       12,341     9,806    2,535      11.45%

Most bearish reading of the year:  (1,028) - 1/02/01
Most bullish reading of the year:   8,460  - 3/13/01


Institutions are the most bullish they have been all year.

Commercials   Long      Short      Net     % of OI
8/21/01       22,710    14,625    8,085     21.7%
8/28/01       22,141    14,959    7,182     19.4%
9/04/01       23,459    14,099    9,360     24.9%

Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year:  8,925  - 9/04/01

Small Traders  Long      Short     Net     % of OI
8/21/01        5,059    10,410    (5,351)   (34.59%)
8/28/01        5,240     9,835    (4,595)   (30.48%)
9/04/01        6,952    12,744    (5,792)   (29.41%)

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



Bollinger Bands - Putting It All Together

Over the past few weeks, we've been dissecting the Bollinger
Band indicator, beginning with the basic theory and definition
and then moving on into concrete rules that can be used for
predicting future direction of the equity in question.  Towards
the end of our visit last week, I cautioned against trying to
apply Bollinger Bands on their own without looking at other
indicators for confirmation.  Both price and volume action are
important, so we want to be sure and utilize indicators/signals
that incorporate data from both of these sources.

As long-time readers know, one of my favorite tried and true
indicators is the Stochastics oscillator, as I have written
about before in this column.  While the oscillator itself
provides some really useful information, it really becomes
powerful when we begin looking for instances of divergence
between the oscillator and price action.  For the uninitiated,
I described the basics of Stochastics divergence in my June
25th article, Simplify Technical Analysis By Using Divergence.
While divergence occurs much less frequently than simple
overbought and oversold extremes, when it does appear, it can
be a powerful primary or confirming indicator.

So let's come back to our discussion of Bollinger bands.  My
article two weeks ago outlined four refinements to the use
of these bands, and I have duplicated them here for reference:

1. If the angle of the upper band rises in response to
   approaching price, then we can expect the upward trend to
   continue, riding higher along the top band.
2. Rising price that strikes a horizontal or declining upper
   band foretells of resistance and a pending reversal.
3. If the angle of the lower band falls in response to
   approaching price, we can expect a series of declining
   candles, each pushing lower along the bottom band.
4. Declining price that strikes a horizontal lower band predicts
   support and a reversal to the upside in the near future.

We can browse charts and find numerous examples where one of
the above rules is satisfied, but to increase our odds, we want
to see a confirmation of the Buy or Sell signal with other
technical indicators.  Starting out in familiar territory, I
added my old friend, Stochastics to my daily chart and went
hunting for a good example of a high-odds trade.  It didn't
take long before I stumbled across a great example in the
AOL-Time Warner (NYSE:AOL) chart.

In the space of 3 short months, we got 3 high-odds trades on
AOL, labeled 1, 2 and 3 on the above chart.  The first trade
provided a solid rollover on the daily Stochastics, just as
the price was rejected from a flattening upper Bollinger band.
It was an easy entry and provided a nice little profit.

The second trade was even stronger, approaching the level of
lead-pipe lock.  We had the rollover on the daily Stochastics
at the same time that price was once again rejected from a
nominally-flat upper Bollinger band.  But this time we get the
added bonus of bearish divergence between the oscillator and
price action.  It was hard to go wrong with that trade, and
late-comers got a chance to use the Bollinger band to their
advantage, as price fell through the 20-dma (thin red line)
and proceeded fall all the way to the low $40s before finding
any buying support.

The third trade in this series gave us a nice, polite entry
as well.  Stochastics rolled over just as price neared the
upper band, inviting us to buy some puts.  The hidden nugget
of wisdom on this third instance was the weakening price trend.
Notice on the three labeled tests of the upper band, that each
test is weaker?  This is another form of divergence that I have
noticed -- the oscillator continues to push well into overbought,
yet the price is having a harder time getting close to that
upper band.

Finally, the rise in price in January saw a change of trend.
Stochastics didn't turn south with enough conviction to have us
looking to buy puts, and in response to this strength, the upper
band reluctantly turned up.  But I can see where eager bears
might have jumped into the play early and gotten burned.  Isn't
there a way to confirm the strong signals and reject the
questionable ones?  I thought you'd never ask!

Mr. Bollinger tends to favor volume-based indicators for
confirming the buy and sell signals generated by the interaction
of price with the Bollinger band indicator.  So, in deference to
the indicator's inventor, let's incorporate On-Balance Volume
into our chart and see what it tells us.  On Balance Volume is a
running total of volume.  It seeks to show if volume is flowing
into or out of a stock.  If the stock closes higher than the
previous day, all of the day's volume is considered up-volume.
Likewise, all of a down day's volume will be indicated as down

Adding the On Balance Volume to our chart, you can see that this
indicator confirms each of our entry signals at 1, 2 and 3.  We
even get a confirmation of the bearish divergence between points
1 and 2.  But what I like about this indicator used for
confirmation is the way it clearly warns us not to attempt to
fade the rally in January.  The steep ascent in the On Balance
Volume line tells us that there is significant buying volume,
and hints towards a change of trend.  It informs us that this
fourth trip into overbought does not present a high-odds entry
to the downside, keeping our account balance safe.

I hope this little series on the definition and application of
Bollinger bands has been useful.  Now the rest is up to you.
Set up your indicators and start browsing charts.  As an
incentive to put your new-found knowledge to work, next week at
the beginning of my article, I'll publish the best example of a
high-odds trade that I receive over the next week.  I don't care
if its bullish or bearish, just that it's current.  That way we
can all continue to learn together.

Happy Hunting!


No new calls tonight


No new puts tonight


BA - put
Adjust from $50 down to $48

GMST - put
Adjust from $30 down to $28

TSG - put
Adjust from $43 down to $42


No dropped calls tonight


No dropped puts tonight

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BA - Boeing $43.46 -1.72 (-1.72 this week)

The Boeing Company, an aerospace company, operates, together
with its subsidiaries, in three principal segments: Commercial
Airlines Operations, Military Aircraft and Missiles, and Space
and Communications. Commercial Airplanes Operations is involved
in the development, production and marketing of commercial jet
aircraft. The segment also provides related support services,
principally to the commercial airline industry worldwide. The
Military Aircraft and Missiles segment is involved in the
research, development, production, modification and support of
military aircraft, including fighter, transport and attack
aircraft; helicopters; and missiles.

Most Recent Write-Up

We could think of about a dozen different puns concerning
BA and its crash landing last Friday.  We could write about the
failure of its landing gear and its lack of lift-off.  But we
won't.  Instead, let's focus on the facts.  In the holiday
shortened trading week - a mere four days - following our
initiation of coverage on BA, the SEP 50 puts went from being
offered at $1.10 to being bid at $4.80 last Friday.  You can
do the math, but we'll emphasize that traders, for the sake of
discipline, should book some of those gains early next week,
if that hasn't been done already.  While BA may be headed
lower over the short-term, such a big gain over such a short
period of time should be met with discipline.  Don't let the
excitement of a home run cloud objectivity!  Volume last Friday
felt a bit like capitulation in BA, so traders might want to
keep an eye on BA's intraday low around the $45 level.  It may
well serve as support going forward.  Conversely, continued
weakness below that level on high volume would offer bearish
momentum traders new entries.  The stock doesn't have any
resistance to speak of until up around the $48.50 level, so
gaming rollovers near resistance may be a practice in
patience.  We're sliding stops down to the $50 level, which
is rather liberal.  Individual traders should take into
account their specific entries and risk tolerances when
determining their own stops.


The leading US airplane manufacturer's woes just got worse on
Monday when company officials stated that they would take a $1.4
billion pre-tax charge related to the Navy's cancellation of
their A-12 stealth fighter contract.  While the issue is in the
courts, it is yet another sign that the future isn't nearly as
rosy for BA.  Add that to the dramatic slowdown in the
air-travel industry, and the spectre of cancelled or postponed
airline orders further pressuring BA's profits is not very hard
to imagine.  Selling volume continues to be brisk, coming in on
Monday at double the ADV.  With all the gains we've accrued in
this play, make sure to either take some profits off the table
or tighten those stops to prevent giving profits back.  The
stock is now deeply oversold and a reflexive bounce is likely
not far off.  It is that bounce that we will want to target for
fresh entries.  With the stock now solidly under major resistance
(previous support), first at $46, and then $48.  Wait for a
failed rally below our $48 stop before venturing into fresh

***September contracts expire in two weeks***

BUY PUT SEP-45*BA-UI OI=2009 at $2.40 SL=1.25
BUY PUT SEP-40 BA-UH OI=  71 at $0.40 SL=0.00
BUY PUT OCT-45 BA-VI OI= 967 at $3.20 SL=1.50
BUY PUT OCT-40 BA-VH OI=  58 at $1.10 SL=0.50

Average Daily Volume = 3.30 mln

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Stop Losses based on the option price or the stock price.
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Anything else is too slow!



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