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Daily Newsletter, Monday, 10/08/2001

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The Option Investor Newsletter                   Monday 10-08-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
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      10-08-2001          High     Low     Volume Advance/Decline
DJIA     9067.94 - 51.83  9144.81  9012.30  976 mln   1717/1894	
NASDAQ   1605.95 +  0.65  1621.11  1574.65 1.40 bln   1511/1975
S&P 100   544.88 -  4.50   549.38   541.53   Totals   3228/3869
S&P 500  1062.44 -  8.94  1071.37  1056.88
RUS 2000  412.18 -  2.79   415.13   410.25
DJ TRANS 2183.24 - 26.18  2212.78  2148.31
VIX        25.91 +  1.25    37.55    35.88
VXN        66.13 +  2.78    66.76    62.93
TRIN        1.09
Put/Call    0.62
*******************************************************************

Post Attack Pullback

The major market averages ended Monday's session mixed in the
wake of U.S.-led strikes against Afghanistan.  But once again,
the Nasdaq out performed to the upside.

Last week, I wrote about how the Nasdaq-100 (NDX.X) had the
potential to out perform to the upside.  I suggested that the
Nasdaq was less overbought than two other major market averages:
Dow Jones Industrial Average ($INDU) and S&P 500 (SPX.X).  For
that reason, I felt that the Nasdaq had some catching up to do
to the upside.  And we've seen that happen over the last few
sessions.  As a result, the INDU and SPX have given up some
ground.  But, that's not necessarily a bad thing.

The rally off the bottom two weeks ago was sharp, fast, and
furious by any measure.  Anytime a market moves that quickly,
naturally there's going to be some backing and filling.  It's
my sense that the INDU and SPX are entering that phase now.  If
the INDU and SPX are entering a consolidation phase, there's
obviously going to be the variables of how long it lasts and
just how low the markets pullback.

But, we can use some shorter term retracement brackets to get
a better handle on just how much, if at all, the INDU and SPX
will pullback.  I've set up some 60 minute charts of the INDU
and SPX that I think give a good view of the last few weeks
worth of trading.  We can see from where the INDU and SPX have
come, and hopefully where they're going.  (Readers might wonder
if they can continue using retracement brackets on a daily
timeframe for the INDU and SPX.  And I say absolutely!  But,
the one problem with retracements on the INDU and SPX on a daily
timeframe is that the two are trading in the lower end of their
ranges, so traders are left with only one retracement level
that is quite a distance from the current levels in each
index.  So, by the using the 60 minute interval, I'm simply
retracing smaller moves in the INDU and SPX, but moves worth
measuring nonetheless.)

The SPX traded as high as roughly 1085 last week, which should
be a point of resistance going forward.  At the same time,
though, the SPX has held its 19.1 percent retracement level
around the 1055 to 1060 area.  (The 19.1 and 80.9 percent
retracement levels are simply half of the ranges between 0 and
38.2 percent and 61.8 and 100 percent, respectively.  38.2
divided in half is 19.1.)

The longer the SPX holds that level, the more likely it is
to resume advancing after near-term supply is absorbed.  But,
if the SPX does lose the 1055 to 1060 area, it will most likely
make its way down to the range between 1015, plus or minus 15
points.  That's a wide range, I know, but it should help to
get a better handle on potential downside.


The INDU is trading similar to the SPX over the 60 minute
interval, perhaps marginally stronger.  The INDU, like the
SPX, rebounded from its 19.1 level last week right around the
9000 level.  In this case, 9000 acts as both psychological
and technical support.  Below there, 8760 and 8625 are
possible support levels, while the relative high at 9190 can
be used as a resistance reference.



The SPX and INDU are beginning to work off their overbought
nature judging by Stochastics on the DAILY timeframe.  That's
the bigger picture view of overbought versus oversold as
opposed to monitoring Stochastics over a 60 minute interval,
where whipsaws and false signals are frequent.  The best case
scenario for dip-buying-bulls is for the INDU and SPX
Stochastics to move into oversold territory, while the two
find support at their respective retracement levels.  That way,
risk is shifted away from the downside to the upside.  But, for
the time being, risk is still weighted to the downside in the
INDU and SPX in my opinion.

Part of the reason I think the INDU and SPX are suspect to
further downside is due to their still relatively overbought
conditions.  Another reason is the recent weakness in the
KBW Bank Sector Index (BKX.X).  The BKX is a good gauge for
the health of the broader economy because banks are so closely
tied to economic activity.

The BKX has taken a nose dive in the last three sessions.  I
think part of the weakness stemmed from last week's employment
figures, the warning from U.S. Bancorp last Friday, and
possibly the military action over the weekend may explain
Monday's weakness.  Whatever the reason(s), the BKX has gone
from overbought to quickly approaching oversold in the space of
three days.



The BKX led the rally to the upside once the markets found
bottom a few weeks back, so I'm wondering if the BKX is
foreshadowing the path that the INDU and SPX are going to
take over the short-term?  What's more, it's going to be
interesting to see if the BKX traces a higher relative low
when it finally reverses, or if it traces a double-bottom,
or takes out its relative lows.  Again, I think the price
action in the BKX could be telling of the future short-term
direction of the SPX and INDU.

What the short-term future holds for the NDX is a little
harder to discern, at least for me.  The NDX finished higher
again Monday, outperforming both the INDU and SPX, as well
as its brother the Nasdaq Composite (COMPX).  The COMPX only
tacked on 0.04 percent Monday while the NDX added 0.62
percent.  I know we're dealing with fractions of a percent,
but the NDX's out performance Monday once again revealed that
big cap tech traded stronger than most other stocks.



But, the NDX is now growing more overbought on the daily
timeframe and its turn to rollover in similar fashion to the
INDU and SPX may be around the corner.  Here's where it gets
interesting.  Keep in mind that the NDX didn't really advance
until about a week after the SPX and INDU found bottom on
September 21.  In fact, the NDX's out performance is only a
week old -- it began last Tuesday, one day before Cisco's
(NASDAQ:CSCO) comments.  It would be too easy if the NDX's
out performance ended after one week, but based on technicals
alone, I expect that the NDX will pullback in the next few
days.

While the technicals of the market give us a better handle
on risk versus reward, in the end, stocks are moved by
earnings.  This week kicks off third-quarter earnings
season.  And the usual early-announcing-suspects are on deck,
including Motorola (NYSE:MOT) and Yahoo (NASDAQ:YHOO), among
others.  I would think that this third-quarter is going to
be an ugly one, especially for tech.  But we won't know for
sure until we hear the reports.

There were a few smaller reports and warnings after the bell.
First Data (NYSE:FDC) reported a good quarter on the surface,
with the stock climbing more than $1.50 in the after hours.
Meanwhile, Commerce One (NASDAQ:CMRC) lowered the bar.

While earnings are the primary foundation for stock prices,
emotions tend to have an impact, too.  But, the one variable
that is the most difficult to quantify is psychology.  With
ongoing military action, out breaks of anthrax, and the
potential for further terrorist attacks, the markets are
likely to remain on edge.  Monday's tepid response to the
weekend military action is hard to read into because the
bond market was closed for Columbus Day.  We'll know more
about how the market feels about the U.S. strikes against
Afghanistan tomorrow.  But, I'm not going to try to guess
how the market will respond, I don't know.

In the meantime, we're faced with an overbought market that is
due for a pullback.  But, that's not to say that the INDU,
SPX, and/or NDX won't continue advancing.  Catalysts can
emerge when least expected as Cisco and Dell proved last week.
However, neither stocks nor markets move in a straight, so
a routine pullback would be natural over the next few days.

Eric Utley
Option Investor


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STOP-LOSS UPDATES
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ATK  - call
Adjust from $83 up to $87

MO   - call
Adjust from $48 up to $49

TEVA - call
Adjust from $60.50 up to $61

JPM  - put
Adjust from $35 down to $34

AIG  - put
Adjust from $83 down to $80

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DROPPED CALLS
*************

No Dropped Calls for Monday.


************
DROPPED PUTS
************

No Dropped Puts for Monday.


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

QCOM - Qualcomm $41.22 +2.76 (+2.76 this week)

Qualcomm is engaged in developing and delivering digital wireless
communications products and services based on the company's
CDMA digital technology.  The company's business area include
integrated CDMA chipsets and system software; technology
licensing; Eudora email software for Windows and Macintosh
computing platforms; satellite-based systems including portions
of the Globalstar system and wireless fleet management systems,
OmniTRACS and OmniExpress.

Most Recent Update

QCOM traded exceptionally poorly last week.  In fact, the
stock hit a new 52-week low during Friday's session at a time
when the Nasdaq was actually climbing higher.  The stock is
now below all of its meaningful near-term resistance, which
makes this play a momentum play into further weakness.
Although QCOM is trading relatively weak versus the broader
tech sector, ideally we'd like to see the Nasdaq pullback
from current levels in order to make this play a success.
Bearish traders looking for new entries can turn to further
weakness below QCOM's intraday low last Friday at the $38.31
level.  A declining Nasdaq and a breakdown below $38.31
in QCOM would offer momentum traders an entry point into this
play.  But because QCOM is oversold, a rebound in the Nasdaq
may lead to a short covering rally in the stock.  A rally,
on lighter volume, from current levels would offer bearish
traders a chance to enter put plays at higher levels.  A
bounce back up to the $42 level, which is the site of QCOM's
unfilled gap, would offer traders a favorable entry point.
However, the stock could very well rollover at the $40
level if in fact it does rebound from current levels.  Our
stop is initially in place at the $44, which is liberal, so
traders will want to take into account their own risk
tolerance when setting stops.

Comments

QCOM's short covering rally Monday may have offered new bears
a favorable entry point into put plays.  The stock rolled over
at the $41.75 level and that could be a price area to look for
entries in the short-term.  Momentum traders might find favorable
entry points on a decline back below the $40 level.

***October contracts expire in two weeks***

BUY PUT OCT-40*AAW-VH OI=9719 at $2.30 SL=1.50
BUY PUT OCT-35 AAW-VG OI=2144 at $0.90 SL=0.25

Average Daily Volume = 11.8 mln



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