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Daily Newsletter, Monday, 10/22/2001

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The Option Investor Newsletter                   Monday 10-22-2001
Copyright 2001, All rights reserved.                        1 of 1
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        10-22-2001        High      Low     Volume Advance/Decline
DJIA     9377.03 +172.92  9392.81  9167.45 1.09 bln   1836/1266 
NASDAQ   1708.08 + 36.77  1708.09  1660.22 1.51 bln   2090/1482
S&P 100   562.52 +  8.72   562.99   551.82   totals   3926/2748
S&P 500  1089.90 + 16.42  1090.57  1070.32
RUS 2000  430.50 +  4.80   430.50   424.95
DJ TRANS 2203.58 + 29.30  2208.69  2170.63
VIX        33.11 -  2.73    36.49    32.85
Put/Call Ratio      0.59
******************************************************************

Impressive Comeback!

Try as they might, the bulls couldn't put together a decent rally
last week.  But judging from the moves on Monday, traders must
have gotten some much-needed rest over the weekend.  Despite a
mixed open this morning, due in large part to the weak SBC
earnings (they missed estimates by a penny for Q3) announcement,
there was a decided lack of follow through to the downside.  This
paved the way for the bulls to grab the ball and run for the
endzone, which is precisely what they did.

Along with the earnings miss, SBC announced thousands of job cuts
and a 20% haircut to their capital spending budget.  On any other
recent day, this would have sent the averages tumbling from the
potential fallout to the likes of Alcatel (NYSE:ALA), Advanced
Fiber Communications (NASDAQ:AFCI), Cisco Systems (NASDAQ:CSCO)
as well as Nortel (NYSE:NT) and Lucent (NYSE:LU).  But the
earnings news wasn't all negative, with several companies
reporting better than expected results.  Giving a genuine bullish
boost to the DJIA, Minnesota Mining (NYSE:MMM) posted results a
penny ahead of expectations (excluding one-time items) and tacked
on 5.1% by the closing bell.  That's right, the results used
those pesky pro-forma results, but investors didn't seem to care
and the DJIA began to solidify during the lunch hour before
seeing a sharp rise in the afternoon.  Listening to MMM's
conference call made it clear that the results came in ahead of
estimates due to successful cost-cutting estimates, rather than
a strengthening business climate, but by that time the rampaging
bulls weren't interested in pesky details and propelled the DJIA
to a nearly 173 point advance on unimpressive volume.

Good news throughout the cyclical sectors lifted Paper Products
by 2%, Chemicals by 3% and even Airlines by more than 3.7%.
Looking at a broader picture, the Morgan Stanley cyclical index
gained 2%, even though First Call is now projecting 22.4% decline
in S&P earnings.  That is the largest drop in earnings, but
investors seem convinced that that dire prediction is already
priced into stocks.  Let's just say I remain unconvinced.

That isn't to say the day's rally wasn't impressive.  It was,
especially given the breadth of today's advance.  Widely regarded
as a leading sector for the Technology market, Semiconductors
were the percentage leader on a percentage basis.  The SOX index
vaulted higher by more than 5%, helped out by a statement from
INTC that cap-ex spending for 2002 would drop by 10-20%, which
is a smaller decline than was widely expected, and the chip giant
gained nearly 5% to close back over the $25 level for only the
second time since September 11th.

Other sectors moving the markets today were Biotechs (+3.84%),
Insurance (+3.70%), Brokers (+3.47%) and Oil Services (+3.32%).
The biggest losers included Gold & Silver, Natural Gas and
Utilities, but there wasn't enough selling pressure to keep the
markets from posting a solid gain with decent internals.  Just
over a billion shares traded hands on the NYSE, and the 3:2
advance/decline ratio was enough to push the DJIA within reach
of the 9400 level once again.  As the chart below demonstrates,
the DJIA has been mired in a roughly 400-500 point range for the
past 3 weeks with the 8950-9100 emerging as the support zone and
9400 as significant resistance.





This range will eventually break one way or the other, but until
it does, we can continue to play the range.  A failure to
penetrate the 9430 level will give us the opportunity to play
the downside on the weaker Dow components such as AXP, which
disappointed investors and analysts with its earnings report
this afternoon.  A continuation of the current rally above the
9450 level gives bullish investors the chance to play the long
side on stronger components such as MMM or IBM.  Bounces from
the 8950-9100 area look good for aggressive dip buyers as well,
but wait for the bounce before playing.

The NASDAQ is making a convincing case that it is back from the
brink of irrelevance as investors have propelled the Composite
back over 1700.  Ending today's session at 1708 marks the
Technology index's second highest close since the tragedy of
September 11th.  As mentioned above, the good news from INTC
helped to drive the Semiconductor sector higher, leading to a
solid 5% SOX gain.  Chip stocks will likely be put to the test on
Tuesday after Altera (NASDAQ:ALTR) and Xilinx (NASDAQ:XLNX)
announced disappointing results after the bell tonight.
Bullish Semiconductor investors will need to overcome the
prospect of a continued slowdown in the fourth quarter if they
are going to push the SOX higher on Tuesday.





The potential economic impact of the ongoing war in Afghanistan
and the expanding anthrax threat are taking the lion's share of
the media coverage, with the subsequent result that scheduled
economic reports are getting less attention.  Proof of that came
this morning with the release of the Leading Indicators report
this morning which was met by a collective yawn from investors.
Just the same, here is the report roster for the next few days.
On Wednesday afternoon, the Fed will release the Beige Book
survey and then Thursday gives us a full plate with Initial
Claims, ECI, Durable Orders and Existing Home Sales.

Earnings are still coming in and will provide scattered
catalysts for market movement, at least for the next couple of
weeks.  On deck tomorrow we have Amazon.com (NASDAQ:AMZN) and
Qlogic (NASDAQ:QLGC) in the afternoon, along with a long list
reporting both before the open and after the close.  Needless
to say, it's a minefield out there with numerous potential
disappointments, while the likelihood of positive surprises
uncommonly slight due to the persistently weak economic climate.
Once the supply of reporting companies has been exhausted, we'll
be at increased risk of a significant downward market event.
Except the hope of an upside surprise from a big-name company,
there just isn't anything to motivate buyers to accumulate
stocks at current levels.

Capital preservation is key in these uncertain markets, so trade
only when the risk/reward ratio is in your favor.


Mark Phillips
Research Analyst


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

Confusion Reigns in News-Driven Market...
By Mark Phillips
Contact Support

Prior to my nuptial-motivated sabbatical, we had begun to look
at how the Greeks affect option pricing, and you can rest assured
we'll return to that discussion in the near future.  But this
week I'd like to spend our time looking at current market
conditions and how a trader (namely me) can determine a safe
course of action in the minefield we are currently facing.  The
discourse will be more fragmented and disorganized than you are
used to hearing from me, but it is my hope that the somewhat
randomized discussion will provide a useful perspective for
others.

Long-time readers will recall that my recent articles have had
more of a bearish slant, owing in large part to the tragic
events of September 11th and the subsequent global political
and economic turmoil that followed.  The financial markets do
not exist in a vacuum and historical events that have occurred
in recent years (October lows and then an end of year rally),
have been relegated to relative insignificance in the big
picture.  Daily (and in many cases hourly) updates to the war
against terrorism and the enigmatic anthrax stories that seem to
change minute-by-minute are dominating the news.  As a result,
volatility has remained higher than normal and with news
dominating the market action, traditional technical tools like
oscillators, and volume and candle patterns, are presenting a
much murkier picture than I would like.

In scanning through numerous charts of the broad market indices,
industry sectors and individual equities, there are charts that
have looked weak and then went on to stage a significant advance.
Conversely, apparently strong stocks can't seem to sustain their
advance and proceed to break down on the merest hint of negative
news or lack of clarity.  Tools that have provided profitable
trades in recent months, now appear to be broken, at least in
terms of short term charts.  As Austin frequently laments on
sister-site IndexSkybox.com, pre-planning short-term swing trades
has become an exercise in futility, as the news of the day often
serves to negate the chart signals that seemed so clear the night
before.  So what possible strategies should we consider?

One possibility is fully reactionary day-trading, where we focus
on the trend-of-the hour.  I am wholly unqualified to discuss
this option, as I need my pre-planning to give me a clear plan
of action prior to the opening bell.  When that plan of action
is negated by the most recent news, I nearly always find myself
shelving the action plan and sitting out the trading day rather
than make an ill-advised trading decision.  Day-trading may seem
easy on the surface, especially when looking at past market
action.  But reality is far different, making it clear that only
the experienced market veteran can hope to consistently profit in
that game.  Given my penchant for advance planning, I am far more
comfortable finding a trade where I can anticipate a future
development and profit when that development comes to pass.  By
definition, pre-planning gives me an inherent market bias, and
that bias clouds my judgment, making it that much harder to react
to the movement from which experienced day-traders profit on a
daily basis.

Unless I choose to sit on the sidelines and watch one opportunity
after another come and go without my participation, I have to
find a financial instrument and timeframe that allow me to lay
out my plan of action and then put that plan into motion.  With
a dismal earnings period ahead of us when I left on travel in
early October, I fully expected any rally to be short-lived and
accordingly to present us with a tradable market decline through
this month.  A quick look at the major market averages shows how
wrong I was as the markets have continued to rise, albeit slowly.
So now, as I attempt to get my mind back into the markets, I find
myself reworking my market biases so that they are in concert with
what the markets themselves have already decided they WILL do.
It does me no good to argue with the markets, as that only sets
me up to place losing trades...the opposite of what we all
endeavor to do on a daily basis.

I see no fundamental basis for the markets to rally, but that is
precisely what they continue to do.  Should I place my trades in
expectation that the markets will eventually do what I expect?
That is just about the quickest possible path I am aware of to
separating me from my trading account.  Despite the market
decline of the past 18 months, P/E ratios are actually
increasing due to the fact that earnings are falling faster than
prices for many stocks, especially those in the Technology
sector.  But human emotion still drives stock prices, often in
the absence of a rational basis for that price movement.

Fear is clearly alive and well in our beloved markets and nowhere
is this more apparent than in the VIX which still hovers in the
mid-30 range.  But this fear is simply serving to give the bulls
a wall of worry to climb as they continue to push stock prices
higher.  The never-ending debate over whether we have seen THE
BOTTOM in the market and what the shape of the recovery will be
only serves to further confuse the issue of what is the state of
the economy and what will truly pull us out of the recession it
is currently in.

I have gone through this rambling description, not to provide
concrete trading information, but to touch on many of the issues
I am considering as I attempt to form my plan of action for the
remainder of the year.  I have no answers as to market direction,
and anyone that tells you precisely where things are headed has
an ulterior motive and is after at least a portion of your
trading account.  My intent is to perhaps give you a glimpse of
the contradictory thoughts that must all be reconciled before I
place my next trade.  We should never place a trade based on
what someone else tells us.  We are each responsible for the
success or failure of our trading decisions, and the conflicting
information we are each presented with on a daily basis only
serves to heighten our awareness of the myriad factors that must
be considered.

Discussing my thought process with you is my way of working
through this process of discovery, and it is my hope that
sharing my thoughts will somehow help others to see that
developing a trading plan is never a simple or linear process.
The unavailability of my charting program for much of the past 2
trading days has only made it that more difficult to "see" what
is happening and to draw rational conclusions from that
information.

In summary, my bias is still to the downside.  But the market is
refusing to give a tradable indication that I am correct.  I
will not trade against the market without a plan for how to
enter and exit profitably, and that means that for now I remain
on the sidelines.  Getting back to the basics of looking at
charts and applying my tried and true technical indicators is
part of that process and is helping me to see the market for
what it is and not for what I wish it to be.  Of all the times
in my trading career, this is perhaps the best example of the
value of the advice, "When in doubt, stay out".  But it won't
last for long.  I'll make my decisions when I have processed
enough evidence and I know when I do reach that point, the
market AND my trading account will be available for the endeavor.

Until then, my best trading wishes go out to all those on both
sides of the never-ending bull/bear debate.

Mark Phillips
Contact Support


*************
NEW CALL PLAY
*************

No new calls tonight


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

No new puts tonight


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

JNJ - call
Adjust from $54.50 up to $56


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

No dropped calls tonight


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

No dropped puts tonight


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

NVDA - NVDIA $45.41 +1.05 (+1.05 last week)

NVIDIA designs, develops and markets graphics processors and
related software for personal computers and digital
entertainment platforms.  NVIDIA provides a "top-to-bottom"
family of performance 3D graphics processors and graphics
processing units that, in the company's opinion, has set the
standard for performance, quality and features for a broad
range of applications.

Most Recent Write-Up

NVDA remains one of the stronger semiconductor stocks in the
market.  The stock has out performed the Philadelphia
Semiconductor Index (SOX.X) in a big way since the beginning of
October.  It looks like that trend of out performance may
continue over the next several weeks, especially if NVDA can
breakout above the $45 level.  The stock spent the latter half
of last week consolidating its recent gains.  And while the
consolidation was brief, NVDA is poised to breakout above the
$45 early next week.  A breakout above that level would most
likely cause the remaining shorts in the stock to capitulate to
the upside and drives NVDA higher, possibly towards its 52-week
high at the $50 level.  NVDA has a good chance of breaking out
if the Nasdaq and SOX.X continue higher.  Broad market and
sector-based demand should allow for the stock to advance past
the $45 level, so make sure to confirm direction in the two
aforementioned averages when entering a breakout above $45.  If
the Nasdaq and SOX.X weaken early next week, a pullback in
NVDA down to the $42 to $43 range would offer a favorable entry
point for those who like to enter bullish plays on weakness.
The company reports earnings on November 8, which could act as
a catalyst to help the stock breakout over $45 if buyers begin
to show up in anticipation of a good report.  Our coverage stop
is initially in place at $40.

Comments

More dire news on the anthrax front kept the broad market
averages under pressure up until the traditional lunch-time
lull.  Then the bulls shook off their stupor and NVDA benefited
from strong buying volume right into the close, pushing through
the $45 resistance level.  The stock isn't out of the woods yet
with more resistance at $47, $48 and then $50.  But it looks
like the bulls could make a determined push higher, especially
if the SOX index continues to lead the NASDAQ higher.  Look for
the $43 to continue providing support and an attractive level
for initiating new positions.  Alternatively, continued strong
volume that pushes prices above $46 could be just the ticket
for momentum bulls to add new positions.

BUY CALL NOV-45*  RVU-KI OI=4448 at $5.00 SL=3.00
BUY CALL NOV-50   RVU-KJ OI=2123 at $2.75 SL=1.50
BUY CALL DEC-47.5 RVU-LW OI= 689 at $5.80 SL=4.00
BUY CALL DEC-50   RVU-LJ OI=2246 at $4.60 SL=2.75
BUY CALL DEC-52.5 RVU-LT OI= 632 at $3.80 SL=2.025

Average Daily Volume = 6.75 mln



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