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Daily Newsletter, Monday, 10/15/2001

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The Option Investor Newsletter                   Monday 10-15-2001
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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      10-15-2001          High     Low     Volume Advance/Decline
DJIA     9347.62 +  3.46  9352.05  9238.78 1.03 bln   1517/1531 
NASDAQ   1696.31 -  7.09  1698.24  1663.78 1.56 bln   1853/1746
S&P 100   560.43 -  0.35   560.78   553.62   Totals   3370/3277
S&P 500  1089.98 -  1.67  1091.65  1078.19
RUS 2000  430.09 +  1.50   430.09   424.49
DJ TRANS 2263.26 + 28.53  2265.49  2224.13
VIX        37.15 +  0.70    38.54    36.76
VXN        66.24 +  0.26    69.44    66.12
TRIN        1.25
Put/Call    0.73
*******************************************************************

Inside Day

The major market averages, as a whole, ended Monday with a
slight negative bias.  But I got the feeling that the day's
trading was one filled with hesitation, or more of a
wait-and-see attitude.  That's because of the light volume on
the NYSE and Nasdaq markets as well as the tight trading ranges
across the averages.

The two Mondays prior to today saw relatively light trading
activity, so the light volume isn't as peculiar by itself.
But the accompanying price action today made me believe that
a lot of market participants lacked the necessary conviction to
move the market in one direction or another.  Also, I think the
closing figures of the averages reflect that hesitancy.

The news of anthrax surfacing across the country may have been
a small part of traders' reluctance to commit to positions
Monday, but I think the majority of market participants were on
hold ahead of this week's numerous earnings reports.

Although, there were a few significant reports before the bell.
Bank of America (NYSE:BAC) reported a solid quarter Monday
morning.  The stock led a rebound in the Bank Sector Index (BKX.X)
Monday afternoon, which carried the S&P 500 (SPX.X) higher into
the close.  In fact, the broader financial complex finished
strongly Monday afternoon, as measured by the BKX.X, Insurance
Sector Index (IUX.X), and the Securities Broker/Dealer Index
(XBD.X).  The financial complex, as a whole, is the largest
industry group within the S&P 500.  And, though preliminary, its
strength Monday bodes well for further upside in the S&P 500 over
the short-term.

Away from financials, the energy sector weakened in the wake of
Global Marine's (NYSE:GLM) guidance.  The company - an off-shore
oil drilling outfit - suggested that the rebound in drilling
activity would be pushed "further into the future" due to the
weakening economy.  The energy sector, like the banks, is a
metric that offers insight into the broader economy.  Demand for
energy is correlated with economic activity in many ways.  And
Global Marine's guidance suggested that demand for energy has
not yet rebounded.  The drillers were especially hard hit in the
wake of Global Marine's guidance as measured by the 3 percent
drop in the Oil Service Index (OSX.X), of which Global Marine is
a component.

With the mixed messages from Bank of America and Global Marine,
there was all the more reason for traders to wait for further
guidance from corporate America.  The hesitation I previously
alluded to was evident by the inside days traced by the Dow
Jones Industrial Average ($INDU), S&P, and Nasdaq-100 (NDX.X).
To recall, an inside day is one in which a stock/market trades
within its previous day's range.  (I've expanded the three
charts below to better depict what an inside day looks like.)

The INDU is churning around a retracement level at the 9300
level.  If it can breakout above its very short-term trading
range, as measured by an advance past the 9450 level, then it
could have upside potential to the 9650 to 9700 area.
Conversely, if the INDU breaks below its very short-term
trading range, as measured by a breakdown below 9150, then
it could have downside potential to 9000.


The SPX, too, is churning around one of its retracement levels
around the 1085 level.  The SPX's set-up is pretty similar to
the INDU's in that a retracement level lies above current
levels as a possible upside target, while a psychological and
technical support level lies below current levels as a possible
downside target.  In the case of the SPX, a breakout above 1100
could carry the index up to 1125, while a breakdown below 1072
could carry it down to 1050.  In either case, we're talking
about the potential for 25 points, which is a big move for the
SPX.  Of course I'm arguing that much on a short-term basis.


While the NDX, like the SPX and INDU, traced an inside day
Monday, its current technical set-up is a bit different than
that of the SPX and INDU, but that's usually the case.  The
NDX is coiling around the upper-end of its partially-filled
post-attack gap around 1365.  If the NDX breaks out above the
1400 level, then I could foresee an advance up to 1450 to 1475.
But to the downside, the NDX has several potential support
areas.  First, there's a two-day double-bottom in place at
1333; I don't know what's special about that level, but buyers
stepped up at 1333 last Thursday and Friday.  Second, the
lower-end of the NDX's gap sits around 1310, which is another
potential support level.  Still lower is a retracement level at
1270, which could potentially serve as a downside target for
shorter-term trades.  But, unlike the INDU and SPX, there are
several potential support levels, so the downside potential
from current levels isn't as clearly defined.



An earnings report after the bell Monday should impact trading
in the Semiconductor Sector (SOX.X) Tuesday morning, which will
in turn impact trading in the NDX.  Novellus (NASDAQ:NVLS), a
component of the NDX and SOX, reported third-quarter numbers
that me expectations, but the company said, in essence, that it
has yet to see a pick-up in demand for its chip-making equipment.
The stock shed about $1.50 in the after hours sessions and
dragged most SOX components lower.

Apropos to Lehman Brothers downgrading about a dozen chip
equipment stocks Monday morning, which was the source of most
of the NDX's weakness Monday.  Good call.

I don't know if Novellus' report will be enough to breakdown
the NDX.  There are plenty of earnings reports from big tech
companies over the next few days that could either exacerbate
Novellus' news or negate it.  What I do sense, however, is that
the major market averages are once again at a pivot point, from
which I think they'll make a big move.  I had the same feeling
last Tuesday, just before the averages made their most recent
push higher.  But, like last Tuesday, I don't have any insight
into which direction the markets will break.

I can argue a pretty strong bullish case because of the
current bullish percent conditions of the INDU and NDX -- both
indexes are in Bull Confirmed mode, which is the strongest of
short-term buy signals.  I think that the current Bull Confirmed
mode of the INDU and NDX is helping to lend the bid that we
continue to see materialize following any pullback in the
averages.  They bought 'em on the dip again Monday.  Because of
that rebound, I tend to continue to lean to the bullish side.

On the other side, I keep thinking about how overbought the
averages are as measured by Stochastics.  All three averages are
grossly overbought and have come a long, long way, baby, in a
short amount of time.  If the INDU, SPX, and NDX spent a little
more time trading sideways, then I'd grow more bullish.  In the
meantime, they're all overbought insofar as a certain
oscillator is concerned.

Finally, there are several variables to contend with this week
that have the possibility to push the averages either way, yet
these unknowns are difficult to predict.  First and foremost is
earnings.  But, it's also expiration week.  There are a lot of
mysterious happenings in the market around options expiration.
And, yes, she (the market) does move in mysterious ways.

Eric Utley
Option Investor


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*****************
STOP-LOSS UPDATES
*****************

ENZN - call
Adjust from $56.25 up to $57.00

PLCM - call
Adjust from $28.58 up to $29.00

ABGX - call
Adjust from $24.00 up to $25.00

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

IP $37.70 -0.20 (-0.20) IP pulled back Monday, which was
disappointing because the Forest & Paper Products Index
(FPP.X) finished slightly higher.  IP appears to be consolidating
its recent gains.  This consolidation could lead to further
upside, especially if the company has a good earnings report
Wednesday morning.  But because IP reports Wednesday morning,
we're dropping coverage on the play this evening, giving readers
one more day to square up positions.  If the Dow follows through
Tuesday, traders with open positions might look to exit plays
into strength above the $38 level.


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

JPM $33.55 +0.66 (+0.66) JPM rebounded in a big way this
afternoon, following the lead of the BKX.X.  The stock once
again bounced right around the $32 area, which we'd been
alluding to as a support zone.  The company announces earnings
on Wednesday, and we're dropping coverage ahead of that report.
Traders with open positions might use any weakness early tomorrow
to exit plays ahead of the report.


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

FFIV - F5 Networks $15.75 -0.05 (-0.05 this week)

F5 Networks is the leader in Internet Traffic and Content
Management (iTCM), and delivers application aware networks
through its open Internet Control Architecture. F5 features the
industry's leading set of integrated products and services that
manage, control and optimize Internet traffic and content. Our
solutions automatically and intelligently deliver the best
possible Internet performance, availability and content
distribution for service providers, enterprises and e-businesses.
Our products remove bandwidth congestion and optimize the
availability and speed of mission-critical Internet servers and
applications, including web publishing, content delivery, e-
commerce, caching, firewalls and more. Our solutions are widely
deployed in large enterprises, the top service providers,
financial institutions, government agencies, healthcare, and
portals throughout the world. The company is headquartered in
Seattle, Washington.  (source: company press release)

Most Recent Update

At first glance one might think that the horse has already left
the stable on this stock.  When you consider that the stock was
trading at $7 just two weeks ago it should make traders cautious.
More than doubling in ten days without much consolidation has
been due to massive amounts of short covering.  A quick glance
at other second tier networking stocks also show a similar pattern
with massive gains as bears run for cover and bulls trying to
stampede them all the pain and suffering over the last several
months.  It would appear that market sentiment has changed
drastically and now in this damn-the-economy bullish environment
may keep the momentum going.  Yet at the same time we have to be
cognizant of the potential dangers to trading with many gov't
officials expecting a terrorist reprisal at any time.  While we
absolutely refuse to trade without stops they could be rendered
ineffective (or less effective) if the stock gaps down due to
another attack.  Traders looking at FFIV should be willing to
take some heat as the stock could produce +10% swings as soon as
it attempts to digest these gains.  On a positive note the stock
has blasted through all moving averages and through resistance
at $13 and $15.  Friday's close near its high for the day is bullish
for Monday but we would be cautious on picking an entry point.
We would prefer to see the stock come back to $14.50 or $15 on
a dip as a potential entry.  However, a close over $16 may be
our only option.  It's hard to imagine but the point-and-figure
charts predict a bullish price objective of $33.  Obviously, this
could take some time to be achieved but it probably scares any
shorts who have yet to cover.  The MACD turned up a few days ago
and the fast moving average has just crossed the zero line which
could further scare the bears into retreating.  The big concern
now is where will the bulls decide to take some money off the
table?  Price resistance appears to be $17.50 and 18.00 to $19.00.
This is still another 10% to 15% higher from current levels which
should be enough to make these call options profitable (buying on
a dip is definitely preferred).  On a newsworthy note, the company
announced last Tuesday that their 3Q earnings would be affected by
the September attacks but you can see this has had little affect
on the share price.  Investors have almost two weeks before the
company announces earnings on Thursday, October 25th.  We are
going to start our play with a stop at $13.90, which is about 12%
below Friday's close.  One spot we consider was $14.25 as it was
just below Friday's intraday support.

Comments

FFIV traded comparatively well today, consider the Networking
Index (NWX.X) shed more than 1.5%.  The stock rebounded from the
$15 early today and that level may be a good site to look for
entries on any future pullback.  Or, a breakout above the $16
may serve the purposes of a momentum trader.  The stock edged
right up to that level today, but was held back by the broader
market.  Any strength in the Nasdaq Tuesday should help FFIV to
breakout.

BUY CALL NOV-12 FLK-KV OI=109 at $4.20 SL=2.20
BUY CALL NOV-15 FLK-KC OI=172 at $2.60 SL=1.25
BUY CALL NOV-17*FLK-KW OI=165 at $1.50 SL=0.50
BUY CALL JAN-17 FLK-AW OI=290 at $2.80 SL=1.25
BUY CALL JAN-20 FLK-AD OI=236 at $2.05 SL=0.88

Average Daily Volume = 530 K



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