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Daily Newsletter, Thursday, 12/13/2001

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The Option Investor Newsletter                Thursday 12-13-2001
Copyright 2001, All rights reserved.                       1 of 2
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The Option Investor Newsletter           Thursday  12-13-2001
Copyright 2001, All rights reserved.
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
       12-13-2001           High     Low    Volume Advance/Decline
DJIA     9766.45 -128.36  9889.20  9745.07  1.4 bln   1065/2053
NASDAQ   1946.51 - 64.87  1985.79  1945.29  2.0 bln   1305/2316
S&P 100   570.60 -  9.77   580.37   569.85   Totals   2370/4369
S&P 500  1119.38 - 17.69  1137.07  1117.85
RUS 2000  468.67 -  6.64   475.31   468.67
DJ TRANS 2554.08 - 26.20  2580.46  2552.33
VIX        26.75 +  1.23    27.16    25.65
VXN        51.95 +  3.86    52.37    50.66
TRIN        1.04
Put/Call Ratio       .79
*************************************************************

Earnings Warnings Flying Faster Than Bullets in Tora Bora

The biggest news maker of the day was the Bin Laden tape which
when released caused a noticeable pause in trading as everyone
stopped to see just what was said. After seeing what they expected
they went back to begin selling again. After two weeks of much
lighter than expected earnings warnings the dam burst this week.
Bristol Meyers dropped another "daisy cutter" after the close
today saying that 2002 earnings would be substantially below
estimates and they were cutting -4000 jobs. Not a pretty picture
of what lies ahead.





The tech landscape was littered with smoking craters after several
tech giants carpet bombed traders with a barrage of warnings. The
fiber optic sector took the biggest hit after traders discovered
that the struggling recovery did not include increased demand for
fiber optic capacity. Without new demand there will not be a
recovery in earnings. What a novel concept!

Lucent warned (again) that revenues would be far less than expected
due to a continued fall off of capital spending by communication
companies. As if to emphasize the point Qwest announced another
cut in its capital spending for 2002. Qwest also warned again and
said it was going to cut an additional -7000 jobs.

The biggest hit was still from Ciena. They said "slowing sales"
were continuing to plague them and their first quarter earnings
would be -30% to -40% below the fourth quarter and it could post
a loss for the year instead of an expected profit. The massive
downward revision in their sales forecast as well the possible
loss for the year knocked nearly -17% off the stock price and
pushed it to close under $15. JDSU had started the week with a
warning which should have set off alarms about this sector.

The warnings in the fiber sector echoed in the chip sector since
slowing fiber equipment sales will mean lower chip sales as well.
AMCC, PMCS, BRCM and VTSS led the drop as communication chip
makers but the weakness was wide spread after the AMAT warning
from Wednesday. AMAT said they would cut their workforce by
another -10% and investors added 2+2 and got weaker chip equipment
sales = slower chip sales as well and sold the sector to a seven
day low. The SOX.X traded down to 536 with support still far below
at 510.

Prudential cut AMD all the way to "sell" after saying the current
run on Athalon processors was not due to demand for the processor
but a shortage of the Intel P4 processor instead. They said that
as soon as Intel caught up with demand that AMD would see a sharp
drop in sales and a drop in average selling prices. The AMD cut
only accelerated the drop in the SOX even though it should have
been a positive for Intel.

The dueling "macros" traded warnings with Macromedia (MACR) losing
-8.16 to $19 and Macrovision (MVSN) dropping -3.30 to $34.53.
Macromedia cut its estimates and said it no longer expected to
post a profit by the end of the current fiscal year. The software
maker said it expected weakness in the economy to continue and
does not see an upturn by the March as previously announced.
Macrovision fell on warnings that they expect the business
environment to remain challenging through the first half of 2002.

Adobe and Oracle both announced earnings after the bell and
each stressed the severe impact of the 9/11 attack on their
business. Larry Ellison said this was the worst quarter in a
decade. Each company met estimates and were cautious about the
immediate future but were confident that they would post huge
gains when the economy did recover. Neither however predicted
when that would be.

Microsoft rolled over and threatened to break support after the
Senate began picking apart the suggested settlement. MSFT had
experienced a short term rally but is still struggling with
the $68 level.

The Bristol Meyers warning after the bell today was just more
proof that stocks other than techs were still suffering. AXP
said yesterday that they were cutting another -6500 jobs, AET
cut -6000 and Boeing said it would drop -1700 more. These layoffs
were contrary to the jobless claims announced this morning which
dropped below 400,000 for the first time in over three months.
At 394,000 new claims we are far below the 505,750 peak reached
the week of October 21st. Analysts were pointing to the number
as evidence that a recovery is beginning but there were close
to -30,000 layoffs announced just this week. Somebody is wrong.
Over the past 25 years the initial jobless claims have peaked
very near the end of each recession. Since the October 21st
peak nearly everyone had suggested the recession to be easing.
There is however growing evidence that it may be as late as
the second half of next year before it is over.

The minutes of the November FOMC meeting were released and showed
that the Fed expected weaker corporate earnings through early
2002. The talked about the market rebound and the need to be
aggressive as being offset by "growing risk tolerance" in the
financial markets. They felt the rate cuts already in place
along with government stimulus would be enough to produce a
2002 recovery. They disagreed on the need for more rate cuts
and several wanted to take a "wait and see" posture for the
future. The PPI dropped -0.6% in November, mostly due to
falling energy prices, but confirming that inflation pressures
remain muted.

The biggest piece of negative economic news was the -3.7% drop
in retail sales in November. Even the hot auto sector and zero
percent interest rate deals cooled and produced the worst monthly
performance in nine years. The auto sales continued to dominate
the total retail sales figures but they could not prevent the
huge drop. The growing book of information regarding holiday
sales confirms the late November numbers. The first two weeks
of December have been soft and those sales have produced only
minimal profit. There are discounts upon discounts and massive
advertising campaigns. My son in law bought a $750 snowboard
including bindings and boots at a chain sporting goods store
last week and after all the discounts, sales, coupons, etc his
total cost was only $219. The items were on sale, there
were 20% off any advertised price coupons in the newspaper and
they were giving another 10% off if you used a gift certificate
which could be bought at another register in the store. They
were practically giving away cold weather sporting gear. Our
"parking lot indicator" has registered only three days so far
this year that compare with any holiday period in 2000. Multiply
these trends across the retail sector and you can bet they will
be missing estimates for this quarter.

This explosion of negative news and earnings warnings have
collectively pushed all the major indexes below my "go flat"
zones of 9800/1950/1125 with 9758/1946/1118. The break down
of each index has produced a whooshing sound as investors
hold their breath against another possible retest of prior lows.
Should the markets move lower from here the next support levels
are 9700 on the Dow and 9550 below that. The Nasdaq could dip to
1850-1900 and 1050 on the S&P-500. Nobody wants to see this.
Remember, we expected earnings warnings last week which did
not appear. The delay has compacted the time frame remaining
for tax selling along with the warnings into only the ten
trading days remaining this year.

All the uptrend lines we have been following have been
broken with the drop on Thursday. This is a critical event.
With tax selling upon us there may be some rocky days ahead.
With many more losers than winners in mutual fund portfolios
those funds will be forced to sell winners along with the
users to prevent showing massive losses. This means that
those seemingly bullet proof stocks like SPW, BRCM, NVDA,
IBM, TOL, NVR and GNSS to name just a few, could be sold
to offset losses in stocks like CIEN, CSCO, JDSU, ORCL,
SUNW or any of the hundreds of spectacular losers for 2001.
The resistance at 10000/2000 held and there could easily be
a flood of sellers with even the slightest hint of weakness.

You should now be flat and waiting to see what Santa Claus
has in store for us. The historical Santa Claus rally (the
last five trading days of the year and first two of the new
year) has been more and more scarce as of recent. Last year
was rocky and everyone remembers the -600 point slide in
1999. Historically the five days after Christmas are bullish
which would mean the next 6.5 trading days before Christmas
would be highly suspect. Remember there is a triple witching
option expiration next week! My recommendation has not
changed. We want to be invested for any future recovery
and rebound but not unless the averages are over my entry
points of 9800/1950/1125. The last dip failed and without
those firm entry/exit points above traders would be at risk.
Stay flat until the next rally appears.

Enter very passively, exit aggressively!

Jim Brown
Editor


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

Tech Bulls On The Defensive
By Eric Utley

The technology segment of the market was whacked Thursday.  Several
key sectors lost significant support levels.  The Philly Chip
Index (SOX) broke below its 555 support level and then some.  The
SOX lost 6.78 percent Thursday.  Networking shares fared worse
thanks to Ciena (NASDAQ:CIEN) and Lame Lucent (NYSE:LU).  The
AMEX Networking Index (NWX) shed nearly 10 percent.  Of the
Nasdaq-related sectors, only the AMEX Biotechnology Index (BTK)
finished higher Thursday.

The 4 percent drop in the Nasdaq-100 (NDX) caused meaningful
internal damage to the tech sector.  The Nasdaq-100 Bullish
Percent ($BPNDX) went BEAR Confirmed.  As a refresher, BEAR
Confirmed is diametrically opposed to BULL Confirmed.  BEAR
Confirmed is the strongest of bear markets.  The bullish
percent condition generally portends weakness in the short-term.

There's a chance that Thursday's sell-off was a wash out of
weak hands whereby the bulls return in the coming days.  I
noticed a few key Nasdaq-100 stocks stopped at or very near
meaningful support levels near the close.  But those support
levels could be lost in the coming sessions, which would have the
bears pressing their bets.  The bears were pressing the QQQ
options market again Thursday.

With the reversal into Bear Confirmed in the Nasdaq-100, tech
bulls should be on the defensive.  That means taking the
necessary steps to manage risk and protect against further
downside, which is probable.  Defensive steps can be as simple
as setting tight stops on stocks that have been held since
late September or early October.  Tech bulls can get more
complicated with selling covered calls against underlying
holdings or buying protective puts.  Whatever course of action
is taken, it's important to address downside risks in the tech
sector currently.

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

Market Volatility

VIX   26.75
VXN   51.95

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.79        585,824       465,427
Equity Only    0.62        506,162       313,384
OEX            1.06         19,323        20,476
QQQ            1.72         23,117        39,725

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

Bullish Percent Data

           Current   Change   Status
NYSE          50      + 0     Bull Confirmed
NASDAQ-100    68      - 6     Bear Confirmed
DOW           63      + 0     Bull Confirmed
S&P 500       63      - 2     Bull Confirmed
S&P 100       64      - 1     Bull Confirmed

Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart.  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  1.25
10-Day Arms Index  1.03
21-Day Arms Index  1.09
55-Day Arms Index  1.07

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      1065           2053
NASDAQ    1305           2316

        New Highs      New Lows
NYSE       42             40
NASDAQ     85             36

        Volume (in millions)
NYSE     1,434
NASDAQ   2,043

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

Commitments Of Traders Report: 12/04/01

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

Commercial traders shed a significant number of longs in the
prior reporting period, while the group's short position
remained relatively flat.  While the commercials' net position
is far off from the year's most bearish reading, it did increase
by a measurable amount last week.  Meanwhile, small traders
added a meaningful number of long positions and simultaneously
dumped a number of short positions.

Commercials   Long      Short      Net     % Of OI
11/13/01      381,539   421,284   (39,745)   (5.7%)
11/27/01      371,336   421,405   (50,069)   (6.3%)
12/04/01      360,315   420,919   (60,604)   (7.8%)

Most bearish reading of the year: (111,956) -   3/6/01
Most bullish reading of the year: ( 36,481) - 10/16/01

Small Traders Long      Short      Net     % of OI
11/13/01      136,047     87,645   48,402     22.0%
11/27/01      151,317     92,807   58,510     24.0%
12/04/01      159,336     86,534   72,802     29.6%

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 added to both long and short positions, with
a decrease in their net short position.  Small traders exited
a few long positions while holding their total short position
relatively flat during the prior reporting period.

Commercials   Long      Short      Net     % of OI
11/13/01       38,751     49,257   (10,506)  (12.0%)
11/27/01       37,259     48,315   (11,056)  (12.9%)
12/04/01       42,191     51,426   ( 9,235)  ( 9.9%)

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
11/13/01       11,568     6,505    5,063      28.0%
11/27/01       12,540     8,359    4,181      20.0%
12/04/01       11,808     8,311    3,497      17.4%

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

Both commercial and small traders held to their biases in the
prior week.  Commercials shed long and short positions, amounting
to unchanged % of OI.  Small traders shed long and short
positions, growing slightly more bearish.

Commercials   Long      Short      Net     % of OI
11/13/01       24,145    10,204   13,941     40.6%
11/27/01       24,243    11,496   12,747     35.7%
12/04/01       22,703    10,739   11,964     35.8%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
11/13/01        4,094    12,121    (8,027)   (50.0%)
11/27/01        4,228    10,630    (6,402)   (43.1%)
12/04/01        3,677     9,799    (6,122)   (45.4%)

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   1,909  -  1/16/01

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


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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:
*****

PMCS $23.39 (-4.03) PMCS shed more than 16% today after its
recent strength.  The CIEN and LU warnings were the root
cause for the weakness.  Traders holding open positions
should turn to any strength early tomorrow to exit plays and
cut losses.

SANM $21.99 (-1.96) The breakout attempted we witnessed last
Tuesday proved to be headfake in SANM.  The stock's reversal
yesterday wasn't a great cause for concern, but today's
slide obviously is.  The one positive from today's session is
that SANM closed on its 200-dma.  Hopefully that leads to a
bounce early tomorrow when traders can look to cut losses.


PUTS:
*****

No Dropped Puts for Thursday.


***********************************************************
DAILY RESULTS
***********************************************************

Please view this in COURIER 10 font for alignment
*************************************************


CALLS              Mon    Tue    Wed    Thr

PMCS     23.39   -0.46   0.78   0.92  -4.63  Dropped, CIEN and LU
CNXT     15.77    0.54  -0.37   0.08  -1.53  Weakness in the SOX
INTC     32.57   -0.29   0.24   0.89  -1.51  Better than the SOX
XMSR     14.04    0.01   0.55   0.53   0.01  Still very strong
AMR      22.58   -0.52  -0.07   0.25  -0.42  Cruising altitude
SANM     21.99   -0.45   2.10  -0.70  -2.91  Dropped, headfake
CI       89.74   -2.82   0.46  -1.03  -0.85  Consistent selling
FFIV     26.60   -0.30   2.30  -1.92   1.10  What a champion!!!
IBM     120.25   -0.74   1.84   1.70  -2.95  Broad market selling
LOW      45.58   -0.61  -0.19   0.63  -0.56  Quiet trading this wk
NVDA     62.81    0.61   2.17   1.95  -1.86  Relatively strong
QLGC     52.30    0.69   0.41   2.06  -3.83  Wild trading pattern
AMZN     10.58   -0.39   0.59  -0.33  -0.42  Violated the 10-dma
RATL     22.29   -0.80   1.11   1.89  -0.65  New, strong software


PUTS

VZ       47.53    0.45  -0.45  -0.49   0.16  Trending lower still
FRE      64.38    0.75   0.20   0.50  -1.12  Solid rollover at $66
DYN      26.58   -2.48  -1.85  -0.84   1.47  Sentiment reversal?
CAH      63.65   -1.37  -1.07   1.28  -1.33  Getting more volatile
CB       66.27   -1.60  -0.09   0.13   0.12  Reversal or entry pt?
HGSI     33.30   -1.70  -0.35  -1.88   1.14  Short covering bounce
QCOM     55.00    0.06   0.50   0.14  -2.67  New, breakdown


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The Option Investor Newsletter                 Thursday 12-13-2001
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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**************
TRADERS CORNER
**************

Path Of Least Resistance
Austin Passamonte

Since early youth I've always had a great appreciation for fine
guns. Not those military-type models the MTV generation seems
enamored with, but classic hunting arms. I especially admire
models made in England and other parts of Europe from centuries
past that now fetch more than Enron December 40 puts at "ask".
Rare hardwood stocks, detailed checkering and fine artistic
etching in the steel make them pure Picassos to my eye.

But let's focus on the basic reason for which they were created:
launching a projectile towards various targets. In order for this
to happen the universal laws of physics take over. Projectiles
are launched by propellant when both are joined under pressure.
Add a catalyst to the mix and poof... stored energy is released
into motion.

Pour a pile of modern-day smokeless powder on the ground and toss
a match on it... not much happens other than a quick burst of
flame. Pack that same powder into a confined space and ignition
of such will create very different results. Energy explodes from
confinement towards the path of least resistance. (On a side
note, if one decides to test this dual experiment using old-
fashioned black powder instead, it will create instantaneous
removal of all facial hair and possibly worse from there!)

Whether it's a fine Purdy side-by-side rifle worth $12,000+ or
one of today's mass-produced sporting arms available at Wal-Mart
for less than $400 is irrelevant. They each perform the same as
equal conditions dictate. Load them with cartridges, point in a
safe direction and shoot: a bullet will exit the open barrel end
away from resistance.

This however creates an offsetting move as said action creates a
reaction. The firearm's recoil or "kick" pushes its gun stock
reward into the shooter's bracing shoulder. Sometimes that can be
a gentle push if a lightweight, speeding bullet flies off in the
expected direction from light calibers. Heavier calibers are
capable of punishing recoil, and I've seen some shooters actually
suffer concussions from the force of a big cartridge' recoil the
force of which their body cannot safely absorb.

Matter of fact, back in the 19th century some cartridge makers
developed the .416 Rigby, biggest round made at the time designed
to handle dangerous African game. It was (and still is) a monster
to shoot that dishes out brutal recoil to those who fire it. More
than a few safari hunters back then ineptly pulled both triggers
on their fine, double-barreled rifles as charging rhinos or
elephants bore down on them intent on making the hunter a mere
greasy spot on the plains.

This misfire mistake created enough backward force to easily
dislocate a shoulder, which was very painful if the bullets
indeed found their target. If those misfired rounds missed their
charging mark a dislocated shoulder might be the least of that
former hunter's brief aches & pains.

What does this drivel have to do with trading in the 21st
century? I promise it all comes together for those with patience
enough to remain with the story so far.

Bullets speed off in the path of least resistance, which is the
open end of a gun barrel. They do so only when under pressure in
confinement after a catalyst arrives to set them off, releasing
stored energy to motion. Make sense? Perfect sense to those who
slept through only half of 7th grade science class and remained
awake during force/inertia studies. The same universal laws apply
equally to all financial markets as well.

This Tuesday's brief article discussing put/call open interest
disparity created email questions as expected. A bunch of readers
sent me current ratios for their favored symbols and asked for my
interpretation. Truth is I haven't the time or resource to review
individual scenarios, but we can address the easy answers here
together. None of these ratios matter much UNTIL the symbol is
coiled under pressure in front of a pending catalyst to spark
action.

Catalyst such as? Such as earnings reports, conference calls and
any other expected event allowing investors & traders time to
stake their positions either way. Once that happens we can use
our trusty sentiment tools to identify the path of least
resistance for them.

When it comes to option put/call disparity the "normal" ratio is
said to be two calls for every put or a 2/1 put-call ratio. I pay
less attention to this and more towards what the weighting is in
near-money strikes for both the current expiration month and next
one out (or back). For hypothetical example only (I did not
measure MRK put/call ratios on Tuesday) if Merck was heading into
a conference call and we cared enough to possibly play it, our
first look would be at option ratio disparity. Is there a cluster
of calls at-the-money and slightly out-the-money for Dec and Jan
contracts? That would mean pressure is building to the downside.

As discussed last week, unwinding profitable calls pushes price
action down. Good news from Merck that may have touched off a new
round of buying is akin to the recoil from an English rifle:
noticeable but limited in range by pure, simple physics. But if
Merck came out with shockingly good news it might be akin to
touching off both triggers on an elephant rifle. Limited but very
powerful in counter-move magnitude.

However, the open end to MRK's gun barrel was down. A large call
option disparity would mean expectations have built pressure and
upside is resistance. Should bearish news emerge, what happens
next? Longs race to cover their fading calls which creates even
more selling pressure on the stock itself as market makers unwind
their hedge. See which way the gun barrel is pointing? Down. The
path of least resistance is away from all that bullish sentiment,
now isn't it?

Price action on a chart has consolidated and a pre-known event
for that symbol approaches. With ingredients in place for a
market move to occur we only need to find those that have
pressure built to one side or the other. Will our directional
plays always be right? Heck no... at least not for me! However,
this does allow us to make higher-odds wagers than mere 50/50
guesswork while letting proper account management and the law of
large numbers take over.

The Setup: FOMC Event
A good example of known events creating trade opportunities came
along two days ago at the latest FOMC event. Those of us who've
endured a few year's worth of these special sessions know that
the first 4.5 market hours are worthless to trade or even watch.
I never booted up my chart program until almost noon and even
that was too early. A great morning to sleep in and avoid CNBC's
inane noise about Fed rumors and market affect as well.

But that all changes around 1:00pm EST. We begin scanning the
charts across different time frames to see what bias (if any) the
markets have developed. First I looked at weekly & daily chart
stochastic values of all major indexes and noted they were poised
to begin bearish reversals from overbought extreme. Where is the
path of least resistance? Down. Where is the gun barrel pointing?
Down. Then I flipped to 60/30-minute charts and noted their
stochastic values were rising into overbought extreme as well. We
have four different time frames across several major indexes all
telling us pressure has built to be released downward.

That is the path of least resistance if markets do not get
surprised. Make no mistake: if the Fed announces a .50-point
reduction and state a bigger one is due next week, market action
is going up! But maybe not too far because most of the buyers who
wanted to get long already were and scared shorts had covered
accordingly. A shock to the market would make for significant
counter-move just like both barrels fired in the elephant gun
kicked back into the shoulder of resistance. Make sense?

[60/30-Minute Charts: SPX]




But markets were not surprised... they got exactly what was
already priced in. No strong catalyst existed to pressure upside
resistance at all so price action drifted sideways to down, the
path of least resistance.

And what happens to this compressed price action if a bearish
catalyst comes along to drop a spark on the gunpowder? No need to
wonder: that's what Merck did shortly after 3:00pm and delivered
the hottest lead-pipe lock trade we've seen all week. As depicted
in the charts above, 60/30/10/5 minute time frames all went
overbought extreme and reversed down in high-odds sequence with
one hour left to trade. Considering weekly and daily charts
looked just the same, what more is there to wonder from here? Buy
puts/sell naked calls/short e-mini futures with reckless
abandon... it's practically free money!

Cover by the closing bell, hold into Wednesday, hold into
Thursday, it all worked quite well. These "perfect trades" do not
arrive all the time but they do setup frequently in front of
known, expected events. Sometimes the unexpected touches them off
but it is the KNOWN EVENT that packs gunpowder and price coils
for explosive reaction when sparks fly.

FOMC events arrive every six weeks. Earnings season comes four
times a year with pre-warn preceding that. Conference calls are
sprinkled within. Government and economic reports release every
month with calendars of times scheduled. These are the catalysts
momentum traders use to capture max-gamma moves in the markets
when pressure builds and sparks fly!

Hope This Helps,
austinp@OptionInvestor.com


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********************
PLAY UPDATES - CALLS
********************

CNXT $15.77 -1.53 (-1.28) CNXT pulled back by a large amount
today.  The stock shed more than 8%!  The chip sector (SOX) has
given back a lot of ground in recent sessions and may be due for
a little more downside.  Readers searching for entries into CNXT
absolutely need to closely monitor the SOX when doing so.  What
we need to see is stabilization in the SOX before attempting
to target entries in CNXT.  Look first for the SOX to rebound
from the 530 level early tomorrow.  If that level is broken, the
SOX could work down to the 510 area, which would most likely
pressure CNXT lower.  For CNXT's part, a bounce could materialize
around current levels, or as low as the $14.70, which is below
our current coverage stop.  If we do get stopped out of the play
with a move in CNXT below $15.50, then readers who still like
this play can look for an entry around the $14.70 area.

INTC $32.57 -1.51 (-0.67) INTC traded lower on the negative
tech news today, but managed to slide less than the SOX.  The
SOX slipped by almost 7%, while INTC lost 4.43%.  The relative
strength of the stock is encouraging, but we still need to see
the SOX stabilize and rebound if INTC is going to have any
chance of working higher over the short run.  The stock broke
below its recent consolidation range with the sell-off today,
but is nearing another key support level at $32, which is also
the current site of our stop.  A potentially high reward/low
risk entry may materialize at the $32 level, a tight stop
should accompany such an entry.

XMSR $14.04 +0.01 (+1.10) Another day, another relative high in
XMSR.  The stock punched into its historical resistance range
with the advance up to $14.35 today.  The move could've allowed
traders to book short term gains in this play.  Those who haven't
done so, and holding entries down around the $13 level, might
look to further strength above current levels to book partial
gains or set tight stops.  A move up to the $14.50 to $15 range
is possible in the coming days, and would be more likely to
occur with the support of the Nasdaq.  XMSR has been moving up
on its own merits recently, but would probably trade higher with
help from the market.  The $14.50 to $15 area seems like a logical
place for the stock to pullback and consolidate its recent gains,
which is why it's a good spot to look for an exit over the short
run.

AMR $22.58 -0.42 (-0.76) AMR has spent the last several sessions
trading sideways.  The stock traded in a $1 range in today's
session and didn't make any progress in either direction.  The
XAL has been trading in a similar fashion.  The XAL has strong
support at the 85 level.  If the XAL continues to drift lower,
look for a bounce and rebound from the 85 level and consider
targeting entries in AMR at the same time.  Such a bounce in the
XAL may occur in conjunction with a bounce in AMR from the $22
level.

AMZN $10.89 -1.02 (-0.82) The past 2 days have not been kind to
Internet stocks, as can be plainly seen on the AMZN daily chart.
After topping out again just below $12.50, the stock has fallen
sharply.  Violating the 10-dma ($11.60) and then the 200-dma
($11.56) on Thursday, AMZN finally found support at the 20-dma
($10.80).  While still above our $10 stop, the picture is not so
pretty, especially with the stock closing at the low of the day.
The only possible support between current levels and our $10
support level is the $10.50 low that was put in place on December
3rd.  A bounce from current levels is buyable, as is a bounce
from the $10.50 level.  Just make sure that there is buying
volume backing up the bounce, so you don't get caught in a
head-fake move.  More cautious investors might want to wait for
strength to return, entering new positions as the stock rallies
through the $12.50 level.  Keep stops set at $10.

CI $89.74 -0.85 (-4.56) Uh-oh!  Things are not looking good for
our hero.  After last week's strength, the consistent selling in
shares of CI this week does not look good.  The bears have been
walking the price lower every day, and now it is sitting just
above our stop at $89.  But due to the strong support in the
$89-90 area, we are willing to give the stock one more chance to
make good.  While a bounce near current levels could make for an
attractive entry, don't forget to pay attention to the action
over on the Insurance index (IUX.X), which is getting closer and
closer to the critical $700 level.  If the IUX can't hold support
and bounce, it is a safe bet that CI will be violating support as
well, and that will have the stock moving to the drop list.

FFIV $26.60 +1.10 (+1.15) Wow!  What a champ!  Even with the
Networking sector (NWX.X) getting taken apart today to the tune
of -9.6%, FFIV continued to rocket higher.  Although the stock
was trading north of $28 again during the middle of the day,
late-day selling pressure pulled the stock back for a gain of
"only" 4.3%.  That's not bad when the rest of the Technology
market is being sold.  Intraday support has been building near
the $25 level, while resistance is firming up near $28.50.  This
pattern is likely to break soon, and it is hard to argue with
the recent pattern of higher highs and higher lows.  Target new
positions near the $25 level and raise stops to $24.  While it
looks like FFIV could continue higher, the proximity of firm
resistance at $30 and the increased volatility on heavy trade
hints that the bullish move could be losing steam.  Don't chase
FFIV higher at this point, as you might get stuck paying the
high price for this move.  If the NWX can't get moving up again,
it will eventually put a drag on shares of FFIV and bring our
play to an end.

IBM $120.25 -2.95 (-0.15) The bulls did it again!  Just scooting
past Tuesday's high yesterday, the stock closed at another
yearly high ($123.20), proving the bears wrong again.  Of
course, the broad market weakness was more than the bulls could
stand today, and IBM fell back to just above the $120 level by
the close.  So is it another entry point, or is the rally over?
Nobody knows right now, but the closer we get to our $117 stop,
the easier it becomes to manage risk.  Look to initiate new
positions on a bounce from the vicinity of $119-120 (confirmed
by the 10-dma at $119.29).  Those looking to really keep a tight
reign on risk, may want to wait for a dip into the $117-118 area
before playing.  While that sort of dip takes the stock closer
to a breakdown, it also makes the risk much smaller, as we would
know much sooner that the play has gone solidly against us.

LOW $45.58 -0.56 (-0.73) After last week's breakout move, LOW
has had a pretty quiet trading pattern this week, locked between
$45-46, awaiting the next catalyst.  This could be just normal
consolidation, as indicated by the falling Stochastics while
price is holding steady.  Since this uptrend began in early
October, the 20-dma has been the support level of last resort.
Now resting at $44.20, it could give us a great entry near $44.
More modest entry points can be had by targeting intraday dips
near $45 for fresh entries.  LOW is not a fast-moving stock, so
chasing a breakout over $47 is not the best course of action.
Keep stops set at $43.50

NVDA $62.81 -1.86 (+2.86) The past two days have provided more
evidence of NVDA's relative strength.  With the Semiconductor
sector (SOX.X) outperforming most sectors (but to the downside)
today with a 6.8% decline, you might have expected a huge
selloff in shares of NVDA, but the loss was kept to less than
3%.  The daily chart presents a truly impressive ascending
trend, and we'll continue to play it as long as it lasts.  While
intraday support exists near $62, further weakness in the SOX
could give us another pullback near the $59-60 level (also the
site of the 10-dma at $60.20), which would be a great entry
point for the stock's next assault on the $64 resistance level.
Keep in mind that we have our stop set at $59, and a close below
that level will send NVDA to the drop list.  Until that time
though, we'll continue to target new entries on bounces near
support.

QLGC $52.30 -3.83 (-0.67) Is anyone else getting dizzy?  The
trading pattern in shares of QLGC is getting more erratic by the
day, indicating that we could be approaching a near-term top.
The bulls have tried to clear the $56.25 level 5 of the past 7
sessions, and they have be turned back every time.  The daily
range continues to expand, and as of Thursday's closing bell,
the stock is back near the $52 support level.  With our stop
also sitting at $52, QLGC will either provide another entry or
move to the drop list in short order.  Target new entries on a
bounce near current levels, but make sure to keep that stop in
place.  We're playing for a return to the recent highs and
possibly higher, but would use any serious weakness near the
highs ($56-57) as an opportunity to harvest profits and then
move to the sidelines.


**************
NEW CALL PLAYS
**************

RATL - Rational Software $22.29 -0.65 (+1.49 this week)

Rational Software is a provider of integrated solutions that
automate the software development process.  The company's
integrated solutions include unified tools, software
engineering best practices, and services that allow customers
to successfully and efficiently develop and deploy software.

Software stocks held up relatively well during Thursday's
tech sell off.  The Software Sector Index (GSO) finished 2.73%
lower.  In comparison, the Hardware Sector (GHA) lost 5.43%,
the Network Sector (NWX) shed 9.63%, and the Semi Sector (SOX)
dropped by 6.78%.  The strength in the software sector may
have come from anticipation of Oracle's earnings report.  The
company said mildly bullish comments on its future quarters,
which had shares of the ORCL modestly higher in the afterhours.
Software stocks may get a pop higher off of the ORCL report in
tomorrow's session.  One stock to look for strength in is RATL.
The stock has been a beacon of strength in the broader software
sector recently and could continue higher if sentiment remains
positive in the sector.  The stock broke out in yesterday's
session, but pulled back on market related weakness today.  A
pullback down around the $21.50 level would offer a favorable
entry point into this strong software stock.  Momentum fans
might consider entries on a breakout above relative highs at
$23, but only in a strong sector and market environment.  Our
stop is initially in place at the 200-dma at $19.50, where a
bounce would provide an entry opportunity following extended
market and sector related weakness.

***December contracts expire next week***

BUY CALL DEC-20 RAQ-LD OI=6269 at $2.60 SL=1.25
BUY CALL JAN-20 RAQ-AD OI=1197 at $3.70 SL=2.50
BUY CALL JAN-22*RAQ-AR OI= 782 at $2.20 SL=1.00
BUY CALL JAN-25 RAQ-AE OI= 935 at $1.25 SL=0.50

Average Daily Volume = 3.65 mln



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

VZ $47.53 +0.16 (-0.30) VZ reaffirmed its capital expenditures
budget for next year late today, which gave the stock a late
day boost into the close.  Prior to the news, VZ was lower and
retesting its near term support at the $47 level.  The stock
remains in a descending trend after today's late day buying.
The pattern of lower highs and lows is indicative of selling
and could lead to a breakdown in the coming sessions.  Momentum
traders looking for new entries might consider a break below
the $47 level.  Look for weakness in the YLS when pursuing such
a strategy.  For rollovers, look for selling to emerge near the
10-dma at $47.81.

FRE $64.38 -1.12 (+0.13) Mortgage rates rose to a five month
high recently, which may be pressuring FRE lower as demand may
ease off with higher rates.  From a technical perspective, FRE's
rollover below the $66 level earlier this week has lead to
continued selling.  We were discouraged with the stock Tuesday
and its strength, but the last two days have reversed the
sentiment.  The stock bounced from the $64 level today, where
traders might look for a breakdown in the coming sessions.
Below $64, FRE's relative low sits at $62.50, which is another
potential level of support.

DYN $26.58 +1.47 (-3.70) The fears in the energy sector were
muted today with companies reaffirming their financial
positions and creditworthiness.  It remains to be seen whether
today's strength in DYN was a reversal in sentiment or merely
a one-day pause in the recent sell-off.  Traders in this play
may want to keep close tabs on the news flow and developments
concerning Enron.  Negative news could quickly reverse today's
positive trading and resume the selling in DYN.  If the strength
does continue into tomorrow's session, look for DYN to rollover
from its 10-dma at $28.26.  If the selling returns early
tomorrow, watch for DYN to decline back below the $25 level.

CAH $63.65 -1.33 (-2.49) The trading pattern in shares of CAH
has certainly gotten more volatile over the past couple days, as
the bulls try to defend support near the $63 level.  Yesterday's
rally ran out of steam even before the closing bell and the
rollover that began in the final hour continued throughout
Thursday's session.  With CAH closing near the low of the day
and the Health Care index (HCX.X) continuing to slide into
an abyss, it looks like the bears are just getting warmed up.
Target any failed rally below the $66 level for new entries, or
else enter on weakness as CAH falls through the $63 level.
Monitor the HCX for continued sector weakness before playing.
Keep stops at the $66.75 level.

CB $66.27 +0.12 (-1.44) Was that a reversal bottom in shares of
CB today, or did the stock just give us a nice intraday profit
in anticipation of handing us another attractive entry point?
Thursday's morning drop was met with eager buyers near the
$63.50 level (coincidentally the site of the lows in March and
April), and they quickly propelled the stock back up near the
$66 level.  That level has been somewhat of a price magnet over
the past week, and it could be an indication that the bears are
losing their momentum.  We're keeping the play active though, as
the pattern of lower highs and lower lows remains intact.
Continue to target failed intraday rallies for new positions,
ideally near the $68 resistance level, which is sandwiched
between the 10-dma ($67.47) and the 20-dma ($68.56).  Keep stops
at $69.

HGSI $33.30 +1.14 (-2.79) Following the abuse seen over the past
week, the Biotech sector (BTK.X) was due for a bounce, and the
50-dma ($553) provided just the action point for anxious bulls
to charge from.  That bullish action helped shares of HGSI to
halt a 4-day slide near the $31 level.  Perhaps this is just
what we've been waiting for to gain entry into the play.  The
bounce certainly wasn't convincing, as it seemed to run out of
steam before reaching even the $34 level, much less resistance
at $35.  This should come as no surprise as the BTK rolled over
near $575, failing to get back near the $585 resistance level.
This looks like a good opportunity to enter new positions on an
intraday spike near $34-35.  Look for the BTK to confirm
weakness in the sector by falling below the 50-dma.  That will
likely push HGSI below $30, possibly near the late-September
lows near $28.  Look for any strength near that level to begin
the process of harvesting profits.  For now, keep stops in place
at $35.50.


*************
NEW PUT PLAYS
*************

QCOM - Qualcomm $55.00 -2.67 (-1.97 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, and satellite
based systems.

Nokia's relative upbeat guidance recently should've boosted
wireless stocks if all is truly well in the business.  But
the stocks in the wireless space have recently pulled back
and some even broke down below key support levels today.
QCOM is a perfect example.  Since tracing a double-top up
around the $62 area, QCOM has slipped into a descending trend.
The stock broke and closed below support in today's session.
That support was at the $56.40 level.  Below current levels,
there's support in $2 increments to the $47 level.  The stock
has a relative low at $53, and again at $51, which are the
two levels to focus on to the downside over the short term.
In order for QCOM to trade lower, the Nasdaq will have to
continue to pullback.  QCOM is one of the bigger stocks on
the Nasdaq market and is impacted by the price action of the
broader market.  Make sure to confirm weakness in the broader
Nasdaq before pressing bearish bets in QCOM.  One possible
strategy is to look for a breakdown below the $55 level
where QCOM closed in today's session.  Then turn to the $53
level for bearish confirmation.  If the stock does bounce in
the coming sessions, look for a rollover at the $58.50 level.
Our stop is in place just above that resistance, at the $59
level.

***December contracts expire next week***

BUY PUT DEC-55 AAO-XK OI=14307 at $2.00 SL=1.25
BUY PUT JAN-55*AAO-MK OI=13605 at $4.20 SL=2.75

Average Daily Volume = 16.7 mln



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

FRE - Freddie Mac $64.38 -1.12 (+0.13 this week)

Freddie Mac is a stockholder-owned corporation that was
established by Congress in 1970 to support home ownership
and rental housing.  Freddie Mac purchases single family and
multifamily residential mortgages and mortgage related
securities, which it finances primarily by issuing mortgage
passthrough securities and debt instruments in the capital
markets.

Most Recent Update

Mortgage rates rose to a five month high recently, which may be
pressuring FRE lower as demand may ease off with higher rates.
From a technical perspective, FRE's rollover below the $66 level
earlier this week has lead to continued selling.  We were
discouraged with the stock Tuesday and its strength, but the
last two days have reversed the sentiment.  The stock bounced
from the $64 level today, where traders might look for a
breakdown in the coming sessions.  Below $64, FRE's relative
low sits at $62.50, which is another potential level of support.

Comments

FRE rolled from the $66 level earlier this week and has
traded lower since.  The daily stochastics turned today which
could indicate further short term weakness.  Look for today's
selling to follow-through into tomorrow's trading.  Watch for
the break below $64.

***December contracts expire next week***

BUY PUT DEC-65 FRE-XM OI=2420 at $1.45 SL=1.00
BUY PUT JAN-65*FRE-MM OI=3453 at $2.50 SL=2.00

Average Daily Volume = 3.23 mln



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