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Daily Newsletter, Monday, 12/17/2001

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The Option Investor Newsletter                   Monday 12-17-2001
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        12-17-2001        High      Low     Volume Advance/Decline
DJIA     9892.00 + 80.90  9930.90  9798.80 1.24 bln   1783/1368	
NASDAQ   1987.40 + 34.30  1994.48  1951.45 1.80 bln   2077/1594
S&P 100   578.97 +  6.59   580.69   571.86   totals   3850/3962
S&P 500  1134.36 + 11.29  1137.36  1122.34
RUS 2000  479.94 +  8.65   479.94   470.73
DJ TRANS 2619.06 + 41.96  2619.88  2576.37
VIX        25.43 -  0.54    26.45    24.83
Put/Call Ratio      0.56
******************************************************************

Merger Monday As The Biotechs Lead The Charge

Rumors became news today when Amgen (NASDAQ:AMGN) announced that
they would buy Immunex (NASDAQ:IMNX) for $16 billion in cash and
stock in the largest-ever biotechnology merger.  The deal,
expected to close in the second half of next year, will create a
$72 billion biotech behemoth with added research strength and the
financial muscle to buy late-stage development drugs from
competitors.  Unlike the PC business, this is an industry where
size DOES matter.

The big question that seemed to be making the rounds was whether
AMGN was paying too much to acquire that size.  Whatever side of
the argument you come down on, there is no denying that the deal
was a market mover today.  At the closing bell, AMGN was up more
than 6% (recapturing most of its losses from Friday), while IMNX
vaulted higher by 13.4%, bringing its 3-day gain to nearly 19%.
The Biotechnology sector (BTK.X) benefited nicely from the action
as well, picking up more than 4% and just inching above the $585
resistance level.

So, is this the beginning of a renewed rally in the sector, or is
it a one-day merger related bounce?  Looking at the daily chart
of the BTK, I'd have to say it has the earmarks of a solid move
higher.





While the AMGN/IMNX merger definitely stole the show on Monday,
there were plenty of other mergers to keep the news hounds busy.
Vivendi (NYSE:V) announced an agreement to purchase USA Networks
(NASDAQ:USAI) for $10.5 billion.  Alpha Industries (NASDAQ:AHAA)
and Conexant (NASDAQ:CNXT) agreed to combine their wireless
businesses.  Finally, Carnival Corp's (NYSE:CCL) $4.5 billion
hostile counter-bid for P&O Princess (NYSE:POC) was rebuffed,
which sets the stage for a bidding war with Royal Caribbean
(NYSE:RCL).  Who says that Mondays are slow news days?

Oh, and I almost forgot.  As if having triple-witching expiration
this Friday weren't enough to keep things hopping this week, we
have the Nasdaq-100 shuffle taking place, effective next Monday,
December 24th.  The NASDAQ-100 (the basis of the popular QQQ
tracking stock) is re-ranked every year at this time and is based
on the number of shares outstanding and the current stock price.

In addition, the following 13 issues will be added to the
Nasdaq-100 Index: ImClone Systems Incorporated (NASDAQ:IMCL),
Charter Communications, Inc. (NASDAQ:CHTR), CDW Computer
Centers, Inc. (NASDAQ:CDWC), Symantec Corporation (NASDAQ:SYMC),
Sepracor Inc. (NASDAQ:SEPR), Invitrogen Corporation
(NASDAQ:IVGN), Express Scripts, Inc. (NASDAQ:ESRX),
Cephalon, Inc. (NASDAQ:CEPH), ICOS Corporation (NASDAQ:ICOS),
Cytyc Corporation (NASDAQ:CYTC), Protein Design Labs, Inc.
(NASDAQ:PDLI), Integrated Device Technology, Inc. (NASDAQ:IDTI)
and Synopsys, Inc. (NASDAQ:SNPS).

Needless to say, the combined effect of reshuffling the
NASDAQ-100 and triple-witching expiration could create some
interesting market dynamics as we count down towards the
weekend.

Away from the irregular events, there was some decent action
in Semiconductors (SOX.X:+2.7%), Software (GSO.X:+2.56%) and
Telecom (XTC.X:+2.28%) leading the NASDAQ Composite to a
34-point gain.  Proving that the bulls are not going to give
up this fight easily, the COMPX managed to bounce right at its
200-dma (1935) (dark grey line) on Friday and then push through
both the 20-dma (1955) and the 62% retracement (1963) of the
decline from the May highs to the September lows.  And look at
that ascending trendline.  The 20-dma (thin red line) is almost
indistinguishable from it, as both have provided support for the
past 3 months.





But there is an interesting divergence occurring here.  While it
is difficult to see on this chart, the 20-dma is flattening out
due to the recent pullback, while the trendline has continued on
its steady rise.  Monday's action brought the COMPX right back
to this trendline.  The $64k question is whether it will once
again be utilized as support, or if it is changing to
resistance.  Judging by the bullish turn in Stochastics, we'll
get one more run higher before that answer is known.

The DJIA is at an interesting crossroads as well, currently
vacillating between heavy resistance in the 10,150 area (also
the site of its 62% retracement and the 200-dma), but holding
above the 9700 support level.  While Stochastics are favoring
another rally this week, this is another battle that is likely
to see the first casualties start to fall shortly after the first
of the year.  If you want to play the upside in the DJIA, keep
your eye on IBM and GE.  IBM has been particularly strong lately,
recently breaking out to new 52-week highs.  It is unlikely that
the DJIA will be able to crack overhead resistance without IBM's
participation.  GE is frequently viewed as a proxy for the
direction of the Dow due to its exposure to a broad spectrum of
industries.  Recall, that GE reached its apex and began to fall
back towards support ($36) about a week ahead of the rollover in
the DJIA.  Could it be that the rally in GE that has been getting
under way over the past 2 days is hinting towards another rally
attempt in the Industrials?

I don't have the answer, but it is another developing pattern
that bears close observation as we head into the end of another
year.  There is no doubt that trading opportunities will emerge
between now and the end of the year, as well as throughout the
next year.  Trade the end of the year if you can give the
endeavor your full attention.  Otherwise, you may want to follow
the lead of professional traders in taking some much needed R&R
time to spend with your family.  I know I will.  After all, if
there is one lesson we all should have learned over the past 2
years, it is always easier to find another opportunity then
recreate trading capital.

Until the markets give us a strong signal one way or the other,
I think Jim's entry targets of 9800/1950/1125 (for the
DJIA/COMPX/SPX) are as good a trade filter as any.  Stay long
above those levels and go flat or short below.

Have a profitable week!

Mark Phillips
Research Analyst


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

Protecting Your Profits With Stop Loss Orders
By Mark Phillips
Contact Support

I had originally intended to continue with our ongoing discussion
on Butterfly Spreads today, but a recent string of emails has
given me a topic that I feel is more timely and certainly more
important; namely how stop loss orders actually work, and how
best to employ them.

We frequently mention the use of stop orders to minimize loss
and protect profits, but for those that are unfamiliar with the
attendant details, unpleasant surprises are possible.  So let's
take our time together tonight to cover the two basic types of
stop orders and how they work in different market conditions.

Stop:
This order is placed with your broker to buy/sell when a
predetermined price level is reached.  Designed to limit an
investor's loss on a security position, the way in which this
order is executed is important to understand.  The best way to
understand how it works is through example.

Let's say you own 100 shares of IBM and the current price is
$121.  If you place a stop order at $118, the order will be
dormant until the Bid price reaches $118.  At that point in
time, the order is converted to a sell-to-close market order
and the stock will be sold at the prevailing market price.  In
normal market conditions, your 100 shares will be sold at $118,
although it is possible to lose a bit due to slippage, meaning
that your stock is actually sold at a slightly lower price, say
$117.75.

That brings us to the inherent risk of the stop order that many
investors may be unaware of.  What happens in the same situation
if a catastrophic event occurs before the market opens (perhaps
IBM warns of weakness in the European market, sending the stock
tumbling in pre-market trade.  This could result in the stock
opening not at $121, but substantially lower, perhaps in the $115
area.  The first bid below $118 will trigger your stop loss
order, converting it into a market-sell order.  Since IBM is a
very liquid stock, the sale would take place almost instantly,
likely at the prevailing bid.  If that bid is significantly
below the $118 level that triggered your stop order (say around
$115), it would result in a larger loss than you had anticipated
when originally placing the order.

What is important to understand about the stop order is that it
is designed to close your position at or below the specified stop
price.  In normal market conditions, the order will be filled
very near the specified price.  But in volatile markets like we
have seen in the recent past, it is possible to have the order
filled significantly below the stop price.  Fortunately there is
another type of stop order that is designed to take you out of a
position at a guaranteed price.

Stop Limit:
The stop limit order is designed to buy/sell at a specified
price or better.  This type of stop attempts to limit your loss
to a specified amount, but will not sell the stock for a price
lower than the stop limit.

Continuing with our IBM example, let's continue with the
assumption that the stock is still trading at $121, and we want
to be stopped out of the trade if it reaches $118.  But, in
addition, we do NOT want to sell for less than $117.50.  In
placing the stop limit order with our broker, we need to specify
2 prices, first the stop price and then the limit price.  For
the levels specified above, we would place a stop limit order
with a stop price of $118 and a limit price of 117.50.

Now here's the mechanics of how the trade is processed.  If the
bid price on IBM drops to $118, our order becomes active as a
limit sell, with the limit price set at $117.50.  That means that
the only way for the order to be filled is if there is a buyer
willing to pay $117.50 OR BETTER.  Taking the gap down scenario
that we outlined above, should IBM gap down to $115, the first
bid at or below $118 will activate our order, and then we would
have a limit sell order in place to sell our 100 shares of IBM at
$117.50 or better.  If the stock were to recover such that the
order can be filled at our limit price, then we will exit at no
less than $117.50.  However, if IBM opens at $115 and continues
to slide lower, our stop limit order will NOT be filled.

So here we have the tale of two orders, each with advantages and
disadvantages.  The simple stop order will take you out of a
position as soon as the price moves against you through the
level of your stop.  The problem is that on a gap move, you may
be filled well below your stop price.  Adding insult to injury,
it sometimes seems as though the moment you are filled (seemingly
at the low of the day) the price begins to recover and you watch
in agony as it recovers to near the level where you originally
had your stop.

So you decide next time to utilize the stop limit order.  This
order guarantees that you won't sell your position for less than
your specified price, but you run the risk that your order will
never be filled should the stock continue to slide from the
opening move.

Unfortunately there is no way to get the best of both worlds and
this is a part of what keeps the trading profession both
challenging and frustrating, frequently in the same day.  My
intent here is not to tell you which type of stop order to
utilize for your trading, but to clarify how each of them work
so that you can make an informed decision as to which best suits
your trading needs.  In the long run, either approach will
probably serve you well, so long as you go in with your eyes
open.  And of course the most important point here is that even
with the attendant limitations of both types of stop orders, it
just doesn't make sense to play this game without them.

I hope you found this useful.


Mark Phillips
Contact Support


***********************************************************
Stop-Loss Adjustments
***********************************************************

MDT - call
Adjust from $45.50 up to $47

NVDA - call
Adjust from $60 up to $62

DYN - put
Adjust from $28.50 down to $26

QCOM - put
Adjust from $59 down to $58


***********************************************************
DROPS
***********************************************************

calls
^^^^^

None


puts
^^^^

HGSI $35.55 +1.95 (+1.95) Sure enough, the bounce late last week
was a precursor of more strength to come, and HGSI continued to
rally Monday morning.  The strong open took the stock to $35 and
after a midday lull, it vaulted through our $35.50 stop and held
above that level all the way through the closing bell.  While
HGSI gave us some nice short-term profits last week, it is clear
that the bears have loosened their grip on the stock.  We'll
follow suit, dropping HGSI from the playlist tonight.


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

NVDA – NVIDIA Corporation $68.00 +2.36 (+2.36 this week)

NVIDIA Corporation designs, develops and markets 3D graphics
processors, graphics processing units and related software that
set the standard for performance, quality and features for
every type of desktop personal computer user.  Used in a wide
variety of application including games, the Internet and
industrial design, the company's products were the first to
incorporate a 128-bit multi-texturing graphics architecture.
This design approach delivers to users a highly immersive,
interactive 3D experience with compelling visual quality and
stunning effects at real-time frame rates.  NVDA sells its
products to major PC manufacturers such as Compaq, Dell,
Gateway, Hewlett-Packard and IBM.

Most Recent Write-Up

NVDA is the gift that keeps on giving, as it's seemingly endless
rally continues to propel the stock to new all-time highs on a
seemingly daily basis.  Friday was another one of those days,
with the stock closing above $65 for the first time.  Buying the
intraday dips is paying off handsomely, while chasing the
breakouts can cause a fair amount of heart burn.  Each time NVDA
moves to a new all time high, it pulls back to allow another set
of anxious bulls onboard.  Since we got another breakout on
Friday, logic would indicate that next week will provide another
buying opportunity.  Look for a dip to the $64 level, or
possibly $62 to provide an attractive entry.  Keep an eye on the
Semiconductor sector (SOX.X), as we'll need to see the broad
sector continue to work higher, supporting NVDA's bullish move.
We're moving our stop up to $60 this weekend.

Comments

Blasting to another 52-week high on Monday, NVDA led the
Semiconductor index (SOX.X) on another solid rally.  While the
stock is definitely becoming extended at current levels, today's
action proves once again that buying the dips on this momentum
run are profitable.  Volume was average as NVDA tacked on
another 3.6%, and we need to be careful about chasing the stock
higher at these extended levels.  There is nothing to look at in
terms of overhead resistance, so momentum players will want to
enter new positions on a break above Monday's highs near $69.
Buying the dips is definitely a lower risk proposition, so if
that fits your style, look to enter new positions on a bounce
from intraday support at $66.75 or on a stronger bout of profit
taking near $63-64.  We're raising our stop to $62.

BUY CALL JAN-67 RVU-AC OI=1200 at $5.70 SL=3.75
BUY CALL JAN-70 RVU-AN OI=2245 at $4.50 SL=2.75
BUY CALL JAN-75 RVU-AO OI= 710 at $2.65 SL=1.25
BUY CALL MAR-70 RVU-CN OI=1123 at $8.40 SL=6.00
BUY CALL MAR-75 RVU-CO OI= 361 at $6.40 SL=4.50

Average Daily Volume = 9.75 mln



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Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!

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**************************************************************


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