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Daily Newsletter, Tuesday, 01/08/2002

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The Option Investor Newsletter                 Tuesday 01-08-2002
Copyright 2001, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


***Special Notice***

Today's newsletter includes two new sections, Index Trader
Summary and Game Plans.  The analysts at IndexSkyBox, led by
Austin Passamonte, have combined forces with OptionInvestor to
provide readers with more value than ever before.  Make sure
to check out the new sections, including the Index Trader
Game Plans, in today's newsletter.

Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
        1-8-2002           High     Low     Volume Advance/Decline
DJIA    10150.55 - 46.50 10211.23 10121.35  1.2 bln   1630/1518
NASDAQ   2055.74 + 18.64  2060.23  2027.34  1.8 bln   1993/1600
S&P 100   592.50 -  1.91   596.24   590.64   Totals   3623/3118
S&P 500  1160.71 -  4.10  1167.60  1157.46
RUS 2000  497.90 +  4.72   497.90   491.21
DJ TRANS 2823.34 +  1.95  2838.43  2800.41
VIX        22.55 +  0.38    23.09    21.87
VXN        47.45 -  0.44    48.87    47.33
TRIN        1.92
Put/Call Ratio       .64
*************************************************************

Techs Buck The Trend

Tech stocks recovered from the post holiday profit taking and 
struggled to buck the down trend on the Dow and S&P. Positive 
guidance from several companies overcame warnings from others. 
Volume was weak however as the mixed markets produced no 
conviction from traders. Semiconductors struggled to remain 
positive after mixed messages from Altera. They said 4Q sales
were worse than expected but felt the bottom had passed. What 
was that? Increasing orders and growth expected for the first
quarter? Did Santa really come to the tech sector?



 



 



 

That small statement from Altera was enough to give tech investors
that glimmer of hope and the Nasdaq, after opening down, managed
to stay positive and close right at resistance again. The SOX
led the charge at midday but weakened near the close as several
analysts made negative comments about stock prices still too high
for the expected returns over the next year. The present from
Santa may have been a lump of coal.

The fiber sector gained slightly earlier in the day as several
articles about a cautiously optimistic outlook at Corning made
the news. Corning said they were going to reopen two plants last
week but made a point of saying it was not because of increasing
demand. I questioned this contradiction in statement and actions
last week and several brokers also questioned it today. Low and 
behold, Corning said this afternoon that they expected to see 
business recover in the second half. They said telcos and cable 
operators would likely take this lull as an opportunity to upgrade 
their networks. Sounds to me like they were under pressure about 
the plant openings and had to smooth over the contradiction. 
Interestingly Corning fell after the announcement. A case of
"tell me what I want to hear" not "what you want me to think." 
Investors did not want to hear that companies "might" upgrade
later in the year. Also impacting the sector was a call out of
CIEN confirming that there were no clears signs of a recovery
in the telecom equipment market. 

Still techs forged ahead in front of a presentation by Cisco
CEO, John Chambers, after the close. Chambers touted the "dramatic
market share gains" that Cisco was making BUT said visibility 
was still severely limited going forward. That comment knocked
a few cents off CSCO in after hours but nothing serious.

Helping put pressure on the tech sector was a warning from 
Gateway saying sales lagged behind expectations in the 4Q when
Compaq reported better than expected results. Moody's jumped on
the Gateway bandwagon and cut their debt status to junk. GTW
lost -25% for the day and closed at $7.66.

The Dow suffered from a drop in Alcoa, which announced earnings 
that were only one fourth the same period last year. They said
earnings were impacted by depressed demand, low prices and 
bankruptcies of buyers. Citigroup also fell after being downgraded
because of lingering Argentina problems as well as expected credit 
losses due to the current recession. AXP and JPM also fell on the
downgrade. Caterpillar also fell on worries that new EPA standards
would cause problems for their heavy equipment business. UTX fell
on worries about a lingering recovery and credit risks in the 
industry. Weighted down by these heavyweights the Dow dropped
-46.50 and came to rest at 10150. Next support is 10100 and then
10000. Now where did that bull market go?

Contrary to today's warnings the number of negative announcements 
has decreased since the 3Q and positive guidance has gone up. Thirty
companies have preannounced better than expected results for this
quarter compared to 17 last quarter. Only 49 companies have warned
compared to 63 in the 3Q. While this may be encouraging it confirms
my previous claims that companies threw everything but the president's
mistress into their last warning to make comparisons of future quarters
easier. There are strong rumors that some companies held sales out
of the 4Q to make 2002 comparisons easier. Everyone already expects
the worst for last quarter so they have nothing to lose.

With the earnings trickle this week turning to a flood next week 
we are likely to get a lot of mixed signals. The Cisco news tonight
and the Gateway warning will not build a lot of confidence in the
investor community. The Nasdaq came to rest right under strong 
resistance at 2060 and has a better chance of slipping than rising.
The biotech sector took another bullet after the close with a warning
from DNA and is not likely to help the Nasdaq on Wednesday. 

The Dow was not looking healthy at the close even though the advances
were beating the decliners slightly on the NYSE. There is just no 
confidence among investors and the "new bull rally" is having a 
tough time finding a red flag to chase after. The broader S&P has
failed again at the 1175 level and closed below the 200 DMA of 1166
again. Not a very positive signal. Even though the S&P has traded
above the 200 DMA for two days there was no breakout rally and no
short covering. Some analysts claim that everyone who wanted to 
buy stocks has already done so. On Monday $1.7 billion came into
stock funds but the $2.3 billion in new offerings created -$528 
million of negative liquidity. The rush of cash into stock funds 
has not yet happened and without the cash the outlook is bleak.
One noted economist who researches fund trends said hedge funds had
done the majority of buying in the last month hoping to resell those
stocks to funds and retail investors in January for a profit. If
the liquidity wave turns into a ripple those same hedge funds will
be dumping that same stock to switch sides in the market. All this
prologue was to set the background for the rest of the week. Warnings
may be more prevalent then earnings and the possibility for a down 
market exceeds the chances for a rally. I would be very cautious 
opening any new positions until more favorable conditions exist. 
IF we saw positive movement from here, I would want to see the S&P
over 1175. (twice bitten, thrice shy) I would want the Dow over 10200
and the Nasdaq over 2075. These may be lofty goals but it is real 
money we play with. After several failed attempts at these levels
we really need to see the market confirm a rally by trading over 
them before we risk any new money. If we trade down from here I
would be leery about buying the dip. Support levels are 10000, 2020
and 1140 for the S&P. A bounce FROM those levels would be buyable
BUT only as a trading bounce. Do not attempt to catch a falling 
knife. Wait for the bounce. 

Enter very passively, exit aggressively!

Jim Brown
Editor


********************
INDEX TRADER SUMMARY
********************

Impatiently We Wait
Austin Passamonte

Neither bulls nor bears can muster the strength to prevail. Forget 
about all the bullish or bearish biased hype you hear in for 
direction: indexes are range-bound in sideways action going 
nowhere right now.

Trader's angst for the markets to break out and run grows each day 
as broad markets fail to do so. Indexes have made zero forward 
progress since mid-November and have spent the past eight weeks 
since trying to take higher ground. 

Buy & hold option attempts simply haven't worked lately, and will 
not do so until the next market trend begins. We are left with 
short-term trade attempts or very little else. SPX Jan 1175 puts 
were "bid" at 16.00 Monday morning when our Swing Trade bearish 
trigger was hit and reached a high of 23.00 sale at 3:30pm and our 
suggested stop was breached at "bid" near 21.30 not long after 
that. 

Traders may settle for 33% to 44% gains across two sessions 
such as this working within the market's noise as sideways 
direction prevails. Actually, SPX 1150 puts went from 8.00 to 
11.00 for +72% potential gains over the same period of time. Not 
bad as we while away the days waiting for something big to happen.

And just what may be next on the agenda? I wonder...

(Daily chart: OEX)


 

The OEX reached 590+ on November 15th and has done so several 
times since then, but the elusive break above that late August 
trendline has failed to materialize yet. Meanwhile, price action 
has walked up an ascending trendline to form this bullish triangle 
pattern odds favor to break higher when it does.

Fighting that scenario is the incessant overbought extreme level 
of stochastic values and more importantly a VIX reading in the low 
20s and holding. Market bulls do not want to see the VIX drop down 
lower than it is before rising higher, or the upside party will 
end in a most disappointing way for them. VIX readings of 20 or 
lower seldom come along but when they do, sideways market action 
never seems to bleed it off to higher levels.

Summation
After two successive years of the most volatile equity markets 
ever seen, we just might see a return to more sanguine conditions 
but not for twelve months straight without some fireworks mixed 
in. Looks like indexes are building their calm before the storm, 
and it might be a most interesting spring season in either 
direction starting soon!

Meanwhile, dull markets should be expected until otherwise noted.

Best Trading Wishes,
austinp@OptionInvestor.com


************************
YEAR END RENEWAL SPECIAL
************************

I am really happy to announce this years annual renewal special.
We spent considerable time and effort deciding what would be
something traders could actually use instead of something to
collect dust. Each of the editors was tasked to produce an
investor guide covering the topics that our readers have requested
most. We spent hundreds of hours compiling these five special
investor guides to help our readers be better investors. Each
is done with full color charts and graphs and is something you
can refer back to for years to come.

Winning Option Strategies - By Jim Brown

Over 200 pages of strategies from simple calls and puts to
spreads, straddles, naked puts, combination plays, leaps etc.
Each strategy is explained in detail and then followed with
real life applications of how to profit from each one. Jim
teaches entry points, market cycles and general trading
psychology as well as money management and money saving
tips for dealing with your broker when errors occur.

Swing Trading For Success - Austin Passamonte

A descriptive outline providing simple guidelines that allow
you to identify current market direction and profit from the
high-odds price swings that occur within.

The secret of swing trading is exposed: Identify underlying
price direction and wait for brief market moves counter to
that trend. Enter short-term trades at key points where price
action is poised to snap back with the trend and enjoy a large
percentage of winning trades!

This guide has been written as only Austin can and is full of
real tips and profitable trading knowledge. Lots of full color
charts enhance the readers understanding.

Point-and-Figure Charting - Jeff Bailey

In this trading guide, Jeff Bailey reveals the secrets to
interpreting those intriguing supply and demand charts
characterized by columns of X's and O's - Point & Figure
charts.

If you have never used Point-&-Figure charts in your investment
analysis you're missing a vital clue that institutional traders
have been using for years.

Jeff illustrates the basic interpretations for beginners while
also discussing more advanced concepts like the bullish percent
for advanced traders. Those readers who have seen the power in
Jeff's point-and-figure charts can now understand and profit
from this powerful charting method. Real winning tips from our
point-and-figure pro.

Technical Analysis Explained - Eric Utley

There are myriad technical analysis tools for today's trader. Eric
has sorted through the choices and found a mix that provides traders
with a solid foundation for observing and operating in the market.

Long-time subscribers of Option Investor have seen tools such as
Fibonacci retracement brackets used by Eric Utley and Bollinger bands
used by our Leaps Editor, Mark Phillips. This manual details the
aforementioned indicators and others used by the Option Investor
staff. Within the manual, subscribers will discover the philosophy,
integration, and application of many of the most effective technical
analysis tools used by the professionals. For the first time, the
tools used by the Option Investor staff will be made available in
a resource that will enrich and educate its readers.

2002 Mutual Fund Guide - Steve Wagner

Our 2002 Mutual Fund Guide has everything you need to know about
mutual funds. It covers the basics of mutual funds, such as what
they are, how they work and are traded, as well as the different
types and objectives of mutual funds. The guide also offers our
top fund choices in eight broad investment objectives for 2002
and beyond. We provide an unbiased perspective on fund performance,
risks and costs, speaking in terms you can understand and use.

As of May 2001, 93 million individuals, representing 52 percent
of all U.S. households, owned mutual funds. Whether you are an
experienced mutual fund investor or new to mutual funds, you'll
find something of value in our 2002 Mutual Fund Guide.

Aggressive, conservative or income producing, there are funds for
everyone. Where should your retirement savings be? Not in options
we hope!

2002 Options Expiration Calendar Mousepads

You will get two of these handy mousepads with the 2002 options
expirations dates including a reference of month and strike price
codes. These are very popular and this will be our fourth year
of providing these to our readers. You get two, one for home
and one for your office. This way you will never be scrambling
for that date of code.


This may be our best annual renewal special yet. Don't miss out
on this offer.

Click here for more details:

https://secure.sungrp.com/02renewal.asp


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


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

New Week, Different Year?
By Eric Utley

Market sentiment feels a little different this week.  Last week
was all out bullish.  But those bulls are acting more cautiously
this week.  Perhaps the last two days have served the purposes of
consolidation.  Or maybe there's more at play.  Only our friend
time will tell.

Tuesday's mixed market didn't reveal much in the way of short
term price direction.  Technology showed signs of strength,
with gains in Software (GSO), Internet (INX), Semiconductor
(SOX), and Optical (FOP) issues.  Elsewhere, Retail (RLX),
Airline (XAL), and Biotech (BTK) shares edged higher.  Meanwhile,
weakness was seen in Bank (BKX), Broker (XBD), Paper (FPP),
Networking (NWX), Hardware (GHA), Oil Service (OSX), and Drug
(DRG) issues.  Wireless (YLS) shares were the weakest in
Tuesday's trading; the YLS lost 2.73 percent.

The signals were once again mixed, which is normally the case
during a period of consolidation and at market tops.  That's not
to say we're at a top.  Market sentiment still feels bullish,
but to a lesser degree than last week's rampant bovine action.
Underneath the action, the market internals remained positive
during Tuesday's action.  The advance/decline line was positive,
even on the NYSE.  New highs are crushing new lows, which is
always a good thing to witness if you're a bull.

Separately, the ARMS Index continued higher in Tuesday's
session.  While far from extreme readings, where the indicator
is most effective, the tool is revealing a market that is
growing more oversold.  That's another positive for the bulls,
because stocks haven't given up much ground while growing more
oversold.  Still, the ARMS Index is far from extreme levels, so
we need to view the current levels of the index lightly.

While the market's sentiment remains bullish, there are
definitely jitters surrounding the upcoming earnings season.
Warnings are increasing in frequency and the magnitude of
some are downright bearish.  Still, until we see more signs of
bearishness, such as a significant drop in bullish percent data
in the Dow and S&P, the bulls remain in control.

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

Market Averages


DJIA (INDU)

52-week High: 11350
52-week Low :  8062
Current     : 10150

Moving Averages:
(Simple)

 10-dma: 10127
 50-dma:  9832
200-dma: 10095



S&P 500 (SPX)

52-week High: 1383
52-week Low :  944
Current     : 1160

Moving Averages:
(Simple)

 10-dma: 1158
 50-dma: 1135
200-dma: 1167



Nasdaq-100 (NDX)

52-week High: 2771
52-week Low : 1088
Current     : 1666

Moving Averages:
(Simple)

 10-dma: 1624
 50-dma: 1578
200-dma: 1614



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

Market Volatility

The VIX bounced from its relative lows Tuesday.  There appears to
be a floor forming in the VIX just beneath the 22.00 level,
which may reveal that while options market participants are
confident, they're not growing comfortable to the point of
irrational complacency.

Speaking of oxymorons, the VXN is approaching all-time highs of
complacency, or all-time lows of fear.  As pointed out before,
however, the trouble with the VXN is that it doesn't have enough
historical data to draw from.  While the VXN is trading near
historical lows, its history has been short: the VXN turns one
year old on January 23.

Without the necessary history to relate to, it's difficult to
draw a decisive conclusion from the recent decline in the VXN.
As a reader pointed out in an e-mail, one cannot view volatility
through a vacuum.  Another alliteration anyone?  
    
CBOE Market Volatility Index (VIX) - 22.55
Nasdaq-100 Volatility Index  (VXN) - 47.45

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.64        546,792       349,147
Equity Only    0.50        504,142       251,826
OEX            1.61          8,267        13,277
QQQ            0.86         14,891        12,740
 
-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          56      + 0     Bull Alert
NASDAQ-100    66      - 1     Bear Correction
DOW           67      + 0     Bull Confirmed
S&P 500       68      - 1     Bull Confirmed
S&P 100       67      + 0     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  1.30
10-Day Arms Index  1.23
21-Day Arms Index  1.16
55-Day Arms Index  1.10

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.

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

Market Internals

        Advancers     Decliners
NYSE      1630           1518
NASDAQ    1993           1600

        New Highs      New Lows
NYSE       98             18
NASDAQ    133             17

        Volume (in millions)
NYSE     1,242
NASDAQ   2,056

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

Commitments Of Traders Report: 12/28/01

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 dumped about 74,000 longs and 64,000 shorts
for a net increase in their bearish position.  The action was
contrary to the previous reporting period, when S&P commercials
reduced their bearish position.  Though, their net position
remains in the mid-range for the last 12 months.  Small traders
reduced their open interest, too, with a net result of a decrease
in their bullish position.

Commercials   Long      Short      Net     % Of OI 
12/18/01      391,995   456,968   (64,973)   (7.6%)
12/21/01      412,581   471,239   (58,658)   (6.6%)
12/28/01      338,288   407,017   (68,729)   (9.2%)

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
12/18/01      158,300     80,507   77,793     32.4%
12/21/01      152,521     79,444   73,077     31.5%
12/28/01      127,419     55,576   71,843     39.3%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year:  91,122 - 3/06/01
 
NASDAQ-100

Nasdaq commercial bounced back to a bearish stance in the most
recent reporting period.  The group's position has been
extremely volatile in the last three weeks, which may have been
a product of end-of-the positioning.  Small traders shed nearly
20,000 short positions, bringing the group's net position back
into bullish territory.

Commercials   Long      Short      Net     % of OI 
12/18/01       55,276     58,433    (3,157)  (2.8%)
12/21/01       55,250     47,476      7,774    7.6%
12/28/01       29,801     37,497    (7,696) (11.4%)

Most bearish reading of the year: (15,521) -  3/13/01
Most bullish reading of the year:   7,774  - 12/21/01

Small Traders  Long     Short      Net     % of OI
12/18/01       17,649    18,626     (977)    (2.7%)
12/21/01       15,810    25,687   (9,877)   (23.8%) 
12/28/01       10,649     5,913     4,736     28.6% 

Most bearish reading of the year:  (9,877) - 12/21/01
Most bullish reading of the year:   8,460  -  3/13/01

DOW JONES INDUSTRIAL

The commercial traders in the Dow Jones market held onto the
previous week's positions; the percent of open interest was
unchanged last week.  Small traders shed a number of longs and
a lesser number of shorts for a net increase in their bearish
position.

Commercials   Long      Short      Net     % of OI
12/18/01       21,919    13,810    8,109     22.7%
12/21/01       15,492     7,335    8,157     35.7%
12/28/01       15,820     7,553    8,267     35.7% 

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
12/18/01        6,790    10,943    (4,153)   (23.4%)
12/21/01        4,293     9,086    (4,793)   (35.8%)
12/28/01        3,368     8,668    (5,300)   (44.0%) 

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


***********************
INDEX TRADER GAME PLANS
***********************

IS Swing Trade Model: Tuesday 1/08/2002
What's Next?

News & Notes:
------------
Indexes reached a short-term price objective near 50% retracement 
levels of last week's low to high move. We tracked some put plays 
from Monday morning into Tuesday afternoon whereupon trailed stops 
were taken out for modest gains in the process.

Now what?

Featured Markets:
----------------
[60/30-Min Chart: OEX]


 

The very first thing all traders want to do after closing out a 
winning trade is to open another one. While there's nothing more 
I'd enjoy than that myself, the picture remains a little murky 
right now. The OEX (and others) have intraday chart signals buried 
in oversold extreme but still no signs of clear bullish reversal. 
A bounce from 590 area or 587 is likely, with several measures of 
support right there.

Will such a bounce stick, stay and turn into viable call plays? 
Tough to say, but daily and weekly charts are not looking poised 
for extended moves higher right now. I would not dare pre-guess 
the next setup ahead as it could be either direction, but we will 
refer back to these charts for pivot points in Wednesday's Market 
Monitor discussion as further action unfolds.


[60/30-Min Chart: SPX]


 

Same deal with the SPX: 1152 or 1150 area might see the next firm 
bounce if indeed there is one ahead. Question is, will it be a 
tradable call play or next high-odds put play setup from there? No 
definitive measure of bias either way tonight. 


[60/30-Min Chart: QQQ]


 

The QQQ is trading "noisily" right now and may be the wildcard. If 
it breaks higher we rally, lower we continue the decline. Hourly 
chart stochastic values (left) appear very bearish right now. I 
wouldn't be surprised to see a bounce off 40.50 zone next before a 
solid upmove can mount, if that measure of support will hold. With 
longer term chart signals looking bearish, upside plays are not a 
sure thing right now.


Summation
If the VIX weren't this low and expiration near as it is, we'd use 
Wednesday as a potential setup session. However, option prices are 
moving nicely right now for the reasons stated above and we'll 
monitor the lines drawn on these specific charts and refer to them 
within Market monitor Wednesday for POSSIBLE swing trade entries.

Current QQQ and DJX puts still tracked have stop-loss orders 
trailed closer to reduce or eliminate capital risk exposure. DJX 
puts should enjoy modest gains on a stop-loss exit minus any wild 
gap-up opens to launch Wednesday's session.


Trade Management:
----------------
Option traders may choose listed In-The-Money (ITM) or Out-The-
Money (OTM) contracts by personal preference. They are selected 
based on volume, open interest and "Delta" values in that order. 
Our preference is usually OTM contracts except for the last few 
days of expiration when ATM or ITM contracts are preferred.

Entry triggers are points where plays are tracked when price 
action breaks above for calls or below for puts. Stops are the 
exact opposite of that. Sell targets are points to exit based on 
index levels or %gain on option contract price as noted.

*No entry targets listed mean the models are idle at that time.


New Play Targets:
----------------
         QQQ                          DJX
Jan Calls: 41 (QQQ-AO)            Jan Calls: 102 (DJV-AX)  
Long: BREAK ABOVE                 Long: BREAK ABOVE 
Stop: Break Below                 Stop: Break Below 
                                

Jan Puts:  41 (QQQ-MM)            Jan Puts: 102 (DJV-MX)
Long: BREAK BELOW                 Long: BREAK BELOW 
Stop: Break Above                 Stop: Break Above 


=====

         OEX                         SPX
Jan Calls: 600 (OEY-AT)           Jan Calls: 1125 (SPT-AE)
Long: BREAK ABOVE                 Long: BREAK ABOVE 
Stop: Break Below                 Stop: Break Below 

Jan Puts: 590 (OEB-MR)            Jan Puts: 1150 (SPT-MJ)
Long: BREAK BELOW                 Long: BREAK BELOW 
Stop: Break Above                 Stop: Break Above 



Open Plays:
----------                                                    
Jan Puts:  41 (QQQ-MM)            Jan Puts: 102 (DJV-MX)
Long: BREAK BELOW 41.50           Long: BREAK BELOW 102.50
Stop: Stop: 40.75                 Stop: 101.50


=====

         OEX                         SPX
Jan Puts: 590 (OEB-MR)            Jan Puts: 1150 (SPT-MJ)
Long: BREAK BELOW 598.00          Long: BREAK BELOW 1170.00
Stop: 592.00 [hit]                Stop: 1160.00 [hit]


IS Position Trade Model: Tuesday 1/08/2002
Back To The Future

News & Notes:
------------
Current open put plays tracked are back near their initial entry 
points from last week. Indexes continue to chop sideways and no 
break is apparent in the next session or two. We would surely 
welcome the surprise of a market break either way if it happens!


Featured Plays:
--------------
[Weekly/Daily Charts: PPH]


 

The Drug Index put play seems to be working as this index trends 
lower and long term charts look poised for continuation downward.


[60/30-Min Charts: SPX]


 

The S&Ps and other broad indexes met mild support today but may 
have further down to go.


Summation:
---------
Still tracking Feb put contracts as odds favor a continuation 
lower between now and their expiration five-plus weeks ahead. 
Nothing new on the horizon for now.


Trade Management:
----------------
Option traders may choose listed In-The-Money (ITM) or Out-The-
Money (OTM) contracts by personal preference. They are selected 
based on volume, open interest and "Delta" values in that order. 
Position Trade model usually tracks OTM contracts with several 
weeks of time premium left until expiration for buy & hold plays.

Entry triggers are points where plays are tracked when price 
action breaks above for calls or below for puts. Stops are the 
exact opposite of that. Sell targets are points to exit based on 
index levels or %gain on option contract price as noted.

*No entry targets listed mean the models are idle at that time.


New Play Targets:
----------------
None


Open Plays:
----------
DJX
Feb Puts: OTM 98 (DJV-NT)
Long: 2.00
Stop: 1.00

OEX
Feb Puts: OTM 560 (OEB-NL)
Long: 11.10
Stop:  5.50 [hit]

SPX
Feb Puts:  OTM 1125 (SPT-NE)
Long: 24.60
Stop: 13.00

RTH                         
Feb Puts: ITM 41 (RTH-NR)         
Long: 1.60
Stop: 0.90

PPH
Feb Puts: ITM 95 (PPH-NS)
Long: 1.70
Stop: 0.90

XLI                         
Feb Puts: ITM 28 (XLI-NB)         
Long: 1.00
Stop: 0.60         


Sector Share Trade Model: Tuesday 1/08/2002
Everything Looks Toppy

News & Notes:
------------
I scanned the usual 100+ index & sector symbols for possible long 
or short candidates. Nothing was a screaming long or short, but 
the overall consensus is that weekly/daily charts are extended 
once more. What else is new these days?


Featured Plays:
--------------
[60/30-mi Charts: PPH]


 

Drug Index continue to plod lower, although it approaches decision 
time soon. Support lies just below 96 and may offer a bounce when 
it gets there. a break below would usher in a trip to 90 shortly 
after should that happen.


Summation
We have very little to track and no new entries on board. All 
signs point to continued sideways action for now, but that may 
indeed end soon. Which way the next trend goes remains to be seen!
Don't fall in love with either direction right now.


Trade Management:
----------------
Entry triggers are points where plays are tracked when price 
action breaks above for calls or below for puts. Stops are the 
exact opposite of that. Sell targets are points to exit based on 
index levels or %gain on share price as noted.

No entry targets listed mean the model is idle at that time.

* Asterisk means stop-loss level changed since prior posting


New Play Targets:
----------------
None


Open Plays:
----------
01/02
XLI
Short: BREAK BELOW  27.70
Stop:  Break Above  29.00 

PPH
Short: BREAK BELOW  98.50
Stop:  Break Above  97.50 *


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The Option Investor Newsletter                  Tuesday 01-08-2002
Copyright 2001, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.



****************
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:
*****

UTX $64.84 -1.01 (-0.98) Just as UTX looked as if it would soar
on the improving news in the Airline sector, the stock now
appears to have stalled.  After failing to hold above the $66
level, we were looking for the ascending trendline ($65) to
provide support for the next run at resistance.  But that support
failed on Tuesday, as buying interest waned.  Not only that, but
UTX closed below its 10-dma for the first time in nearly a month.
With daily Stochastics rolling over once again, it is time to
disembark from the play.  Use any rebound tomorrow as an
opportunity to exit any open positions.

ACF $28.60 -1.00 (-3.40) ACF was downgraded by Robertson
Stephens Monday morning.  The firm cut its rating on ACF
to a market perform rating from a buy rating.  The analyst
cited deteriorating credit quality.  The downgrade
pressured ACF lower and that weakness continued into today's
session.  With the weakness, there wasn't an earnings run
as we expected.  Traders can look to cut losses on any
relief bounce in tomorrow's session.


PUTS:
*****

None


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

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


CALLS              Mon    Tue   

ACS     105.80   -0.75   1.80  Rebounded on cue, high at $107.25
CCMP     84.24   -0.46  -0.03  Under performed the SOX.X Tuesday
MANU     20.14   -0.09   0.17  Coiling tighter around the 200-dma
MCAF     40.40    0.99   2.53  New, another earnings run ahead
ACF      28.60   -2.40  -1.00  Dropped, downgrade and earnings
EMLX     46.00   -0.14   1.65  One of the strongest tech stocks
GNSS     69.55   -0.74   1.54  Still hovering below the $70 level
NVDA     68.55   -1.87   0.80  Worrisome loss of relative strength
VRTS     48.73    0.37   0.89  Good guidance from VRTS officials
UTX      64.84    0.03  -1.01  Dropped, the stock has stalled
   

PUTS

CORR     22.63   -0.70   0.21  Continues along descending trend
EDMC     34.41   -1.09   0.45  Broke down below $35 Monday
ADRX     64.18    1.39  -1.35  Volatile.  Rebound after warning
ELBO     36.15   -2.42   1.57  Broke down big Mon, retraced Tue
CERN     48.00   -0.37  -0.23  Rolling lower, rolling lower
EBAY     67.54   -1.70   0.74  What's going on with this stock?
QCOM     48.19   -3.21   0.99  More weakness lies ahead of QCOM
AIG      76.20   -1.00  -0.60  New, insurers drifting lower
AZO      65.29   -0.86  -0.85  New, rocky start to the new year


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

EMLX $46.00 +1.65 (+1.51) Did you grab a piece of that entry
point?  EMLX dipped early this week, prompted by the profit
taking in the broader Technology sector.  After two unsuccessful
attempts at breaking below the $43 support level, the bears threw
in the towel and shares of EMLX rocketed higher to close out
Tuesday's session near the daily highs.  Now resting at $46,
EMLX is now at a new 7-month high and is closing in on the May
highs at $49.55.  With the daily Stochastics deep in overbought
territory, it is tough to quantify risk when buying forays above
current levels, so we would prefer to continue targeting intraday
dips near support for initiating new positions.  Resistance at
$45 has now been turned into mild support, and a bounce from that
level is buyable, although we'd prefer to see a dip near $44 or
even a third test of the $43 level to provide more solid entries.
The 10-dma has moved up to $42.29, just above the bottom of last
week's gap up, so we're raising our stop to $42.

GNSS $69.55 +1.54 (+0.80) As the Semiconductor sector (SOX.X)
works to digest its recent gains, GNSS is coiling for another
breakout move.  Since first testing the $70 resistance level
nearly 4 weeks ago, the stock has been posting a series of higher
lows, using the 20-dma ($66.97) as support.  Note that GNSS
hasn't closed below the 20-dma since the last week of November,
making it an important level to watch for signs that bullish
conviction is still strong.  This week has been little different,
giving bullish traders another entry point this morning, as the
stock rebounded from the 20-dma before solidifying near $68 and
rallying into the close, ending at the high of the day.  Use the
intraday dips to establish a position ahead of the anticipated
breakout.  The month-long ascending trendline is now resting at
$66, and an intraday bounce from that level could make for a
solid entry.  Raise stops to $65.50.

NVDA $68.55 +0.80 (-1.07) Our NVDA play has given us quite a run
for the money over the past month, but we're starting to see some
worrisome signs.  The stock has given up some relative strength
this week, closing below its 3-month ascending trendline
(currently $69.25) for the first time yesterday, and NVDA has
traded below its 10-dma (currently $$68.29) during the day both
days this week.  Fortunately the bulls have been tenacious,
helping the stock to regain the upper side of this moving average
each day.  But now the stock is below its trendline and needs to
see some strong buying pressure to get back above it.  This could
just be a natural period of consolidation before the next leg
higher, but we need to exercise discipline.  Our stop is
currently resting at $66, and any close below that level will
bring the play to an end.  On the bullish side of the coin
though, a rebound from above that level (ideally at the $66.75
support level of the 20-dma at $66.22) could provide a solid
entry for the next run at the $72 resistance level.

VRTS $48.73 +0.89 (+0.52) Dip buying remains in vogue, and VRTS
gave willing participants another great entry point already this
week.  Broad market weakness on Monday brought out the profit
takers, and the stock fell right to the 10-dma (currently $46.53)
yesterday afternoon.  VRTS closed at the low of the day and began
to rebound from that level right from the opening bell this
morning.  After the morning advance to nearly $49, VRTS fell back
to the $47 level before rallying strongly into the closing bell.
The wild swings today were likely due to anticipation of what the
company would say at the Salomon conference.  With comments like
"our pipeline has never been stronger", "Q4 will be even better
than Q3" and "International markets doing well", it's no wonder
that the stock finished the day near its highs.  Coming back to
the daily chart, we can see that the bullish trend is showing no
signs of slowing, with the stock once again finding support just
above the ascending trendline, now at $46.  Note that VRTS is now
solidly above its 200-dma, helped in no small part by the fact
that the Software index (GSO.X) has once again cleared its own
200-dma and is closing in on the $200 resistance level.  Continue
to buy the dips as the stock works higher, targeting bounces from
the trendline or the 10-dma.  The breakout over the $49 level
(50% retracement) could deliver some follow through, allowing
the stock to move to the next level of congestion, near $53.
Raise stops to $45.50, just below the 200-dma.

ACS $105.80 +1.80 (+1.05) The news flow has been quiet on the
ACS play.  But the stock continues to trade higher on its own.
The stock rebounded from last week's pullback so far this
week, reaching as high as $107 this morning.  We would've been
much happier with ACS' performance Tuesday if the stock would
have taken out its relative high from a week ago.  That high is
at $107.25.  It's a minor detail, but something we would've
like seen happen.  Going forward, ACS could find support at the
$104 level, which was the site of the recent breakout.  A
stable broader market and ACS down around $104 might offer
traders with a favorable entry point.  If the tech sector and
ACS continue higher, a move above the relative high could be
playable for a quick, scalp trade up to possibly the $110
level.

CCMP $84.24 -0.03 (-0.49) CCMP pulled back in today's
session after bouncing a bit higher during yesterday's
trading.  The stock under performed the Semiconductor Sector
(SOX.X) in Tuesday's session.  The SOX.X finished fractionally
higher while CCMP went the opposite direction, finishing
fractionally lower.  We don't like the poor performance from
CCMP, but it was only one day, so we're giving the play time
to perform.  One positive development in today's trading was
the ability of the stock's 10-dma to provide support.  CCMP
dipped down to its 10-dma at $81.69, then shot higher through
the rest of the day.  The bounce revealed that there are still
buyers in this stock.  A continuation of today's bounce into
Wednesday's trading could take CCMP back above $86, which
could set the stock up for testing its relative highs.  Further
bounces from the 10-dma could be used as entries.  If the 10-dma
breaks, look for a rebound from $80.  Make sure to monitor the
SOX.X when trading CCMP.

MANU $20.14 +0.17 (+0.08) MANU was trading higher early Monday
but gave all of its gains as the day wore on.  The stock did
finish fractionally higher in today's trading, which pretty
much echoed the trading in the broader software space.  The
Software Sector Index (GSO.X) added about 1% during Tuesday's
session.  MANU is hanging around its ascending trend line which
has been in place since last fall.  Entries can be taken down
around current levels, or lower to the $18 level, which is the
new site of our coverage stop.  The stock will most likely
continue to trade along with the GSO.X and the Nasdaq, so it's
important to monitor those two gauges as they relate to MANU.
In addition, the stock has been gyrating around its 200-dma,
which currently resides at the $19.71 level.  Traders might
use the 200-dma to monitor the strength of MANU.  The stock
could continue coiling around the moving average before making
another run higher.


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

MCAF - McAfee.com $40.40 +2.53 (+3.52 this week)

McAfee.com provides online personal computer management
products and services for consumers.  Through its Web site,
the company allows consumers to secure, repair, update and
upgrade their computers.

Stocks trade ahead of the company's fundamentals.  If you
were to look at this company's earnings history alone, you'd
think that the stock would've performed poorly last year.
But MCAF was far from a poor performing stock last year.  In
fact, it was up by almost 500% in 2001.  In the first two
earnings reports last year, MCAF actually lost money from
operations.  But in the last two earnings reports, it
surprised to the upside in a big way.  In its most recent
two earnings reports, MCAF trounced estimates.  The company
is due to report again next week, on Wednesday, January
16th.  Estimates are calling for a profit of 5 cents per
share.  But if recent history is any guide, the company
should beat its estimates by a big margin.  With a little
help from the broader tech sector, MCAF could have a nice
run into its earnings announcement.  The stock looks like
it's ready to run judging by Tuesday's breakout to a new
52-week high.  The stock closed near its day high on good
volume.  Momentum traders can look for a continuation of
that trend into tomorrow's session.  Remember to watch for
strength in the Nasdaq and target the $45 level by next
week.  Stops are in place at $36.

BUY CALL JAN-35 CFU-AG OI=453 at $6.00 SL=4.75
BUY CALL JAN-40*CFU-AH OI=282 at $2.65 SL=1.75
BUY CALL FEB-40 CFU-BH OI= 55 at $4.70 SL=3.25 
BUY CALL FEB-45 CFU-BI OI= 51 at $2.95 SL=1.75

Average Daily Volume = 565 K



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

CERN $48.00 -0.23 (-0.60) Rolling, rolling, rolling.  Shares of
CERN continue to work lower, although they certainly aren't
setting any speed records.  Intraday rallies are topping out at
successively lower levels, with Tuesday's bounce running out of
steam just above the $48 level.  Notably, CERN found support
this morning right at its 200-dma (currently $47.45), and this
will likely be an important level to watch in the near term.
With oscillators buried in oversold territory, it wouldn't be
out of the question to see a more substantial bounce, taking the
stock back to the $49 or possibly $50 level.  Given the sharp
increase in volume today, it could mean that the stock has a bit
more upside in store before the next opportunity for a bearish
entry.  Wait for the rollover before initiating new positions,
and keep stops in place at $51.  Once the 200-dma is broken,
support will likely come in at $46 and then $44, the latter of
which will provide a good level to lock in profits.

EBAY $67.54 +0.74 (-0.96) What's going on here?  With the
Internet index (INX.X) attempting to push through its 200-dma
($149) yesterday, we would expect more participation from EBAY,
one of the strongest Internet stocks over the past year.
Instead, the failure of the INX to breakout yesterday elicited
some selling in EBAY over the past 2 sessions, taking it briefly
below the $66 level this morning.  But the bulls aren't willing
to concede defeat just yet.  The last high (just above $69) was
met with eager sellers, indicating that the $70 level is unlikely
to be crested anytime soon.  Rumors that EBAY may be getting
ready to make some acquisitions could have contributed to
Tuesday's weakness, but that is a secondary factor when compared
next to the stock's recent weakness.  Of note is the fact that
the 10-dma ($66.92), 20-dma ($66.92) and 30-dma ($67.09) have all
converged, and may be providing support.  A daily close below
that level will set the stage for EBAY to challenge its first
meaningful support level at $64.  Use intraday rallies to
resistance, first at $68 and then $69.50, to provide lower risk
entries into the play as EBAY rolls over.

QCOM $48.19 +0.99 (-2.22) While it is still fairly new to the
playlist (this time around), QCOM has already provided nimble
traders with a profitable trade.  Jumping in as the stock fell
from the $50 level on Monday was the entry, and the exit came
this morning as heavy buying came in just above the $46 level.
While the stock rallied into the afternoon, conviction was
lacking.  The late-day rollover is all the evidence we need, and
it looks QCOM could be signaling another rollover and attempt by
the bears to breach the $45 support level.  We'd prefer a bit
more upside before jumping back into the play.  A failed rally
near the $50 resistance level (old support) would be ideal.  But
we'll take what we can get.  The heavy volume on Tuesday (nearly
double the ADV) indicates there was actually some enthusiasm
behind the bounce, so we may yet see the $50 level before the
bears return to dominance.  Once again, look to harvest profits
in the $45-46 area on signs of buying strength.  Selling the
rallies remains an easier way to make a buck than jumping aboard
on the breakdowns.

CORR $22.63 +0.21 (-0.49) The name of this game is entering
puts near resistance and exiting those positions near support
or at a new relative low.  MLNM, who is buying CORR, continues
trading lower in a descending channel.  CORR, obviously, is
tracking the same line.  The Biotech Sector (BTK.X) did finish
in positive territory slightly, but didn't make any upside
progress.  The BTK.X is near key support levels and if they
give way, we could see the downward trend in CORR really
accelerate.  But until that happens, a good strategy to
consider is entering put plays near resistance levels, with
ultra tight stops to manage risk.  There's not as much profit
potential in playing a rolling stock such as CORR, but the
play could offer some decent short-term gains if the descending
pattern persists.

EDMC $34.41 +0.45 (-0.64) EDMC broke down the way we wanted in
Monday's session, below the $35 level.  The stock traded down
to the $34 level the same day.  Its bounce higher in Tuesday's
session appeared to be a routine retracement of yesterday's
big down day.  Volume was much lighter on Tuesday's fractional
gain, which added to idea of short covering at play.  Traders
looking for new entries should continue monitoring the others
in the education group, such as CECO, COCO, and UOPX.  The
unfilled gap down to $32.50 might offer short-term traders a
decent exit point in the next few days if EDMC continues lower.
Look for intraday volume to pick up on any further weakness as
a sign that the selling has returned.

ADRX $64.18 -1.35 (+0.04) It's been a volatile couple of days
in ADRX.  The company said this morning that it expected
fourth-quarter earnings to be much lower than previously
expected.  ADRX blamed its short fall on significant delays
in delivering its generic versions of several drugs and on
sales of its asthma drug.  The stock gapped substantially
lower Tuesday morning on the news, which hopefully allowed
readers to book some solid gains after entering on Monday's
rebound.  But ADRX traded higher in Tuesday's session after
the gap down.  It could've been a knee-jerk short covering
reaction to the bad news.  Going forward, we'll be looking
for the stock to rollover early tomorrow around its 200-dma
at $64.67 or slightly higher at $65.  Any follow-through
beyond that resistance zone could spell trouble for the
bears.  Also, keep a close watch on how the BTK.X trades
in tomorrow's session.  Our stop has been lowered to $67.

ELBO $36.15 +1.57 (-0.85) ELBO reported less than impressive
December sales figures Monday which caused the stock to
trade substantially lower.  We were obviously pleased with
the way our bearish play began on ELBO.  But the stock
rebounded in today's session.  Two others in the group traded
higher in Tuesday's session, MGAM and TTWO.  There may have
been a sector sympathy bid in ELBO or simply a retracement
of yesterday's big drop.  Because of ELBO's gap lower
yesterday morning, the stock may have not offered the most
ideal entry point.  Those looking for new entries might
consider rollovers near the site of the gap, around the
$36.50 level.  Also look for a breakdown below $35.50 after
confirming weakness in others, such as ERTS, ATVI, and THQI.


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

AIG – American International Grp. $76.20 -0.60 (-1.60 this week)

Engaged in a broad range of insurance and insurance-related
activities through its subsidiaries, AIG's primary focus is on
its general and life insurance businesses.  Additionally, the
company is growing its presence in financial services and asset
management.  Other operations include auto insurance, mortgage
guaranty, annuities, and aircraft leasing.  With operations in
130 countries, AIG generates more than half of its revenues
outside the United States.

While Insurance stocks have been drifting lower for the past
couple months, that weakness is nothing compared to what has
happened to shares of AIG, one of the largest diversified
insurers.  It took a couple months of get it done, but the bears
finally succeeded in producing a substantial breakdown below the
200-dma ($80.61) a couple weeks ago and added to their success
over the past week by breaking the back of $78.50 support (also
the site of the 38% retracement of the September-October gains).
The past 2 days have seen increasing selling pressure, with the
stock resting on solid support at $76, the site of the 50%
retracement.  Daily Stochastics are just starting to roll over
again without getting anywhere near overbought, adding to the
bearish picture and the likelihood that AIG will break the $76
level.  We've got a couple ways to play this one.  Either a drop
below $76 on continued heavy volume or a failed rally below the
$78.50 level can be used to usher us into new positions.  After
$76, the next level of support will likely come in around $73.75,
the site of the 62% retracement.  We're initially placing our
stop at $79.50, right at the 20-dma ($79.53), which has been
providing resistance for the past month.

*** January contracts expire in less than two weeks ***

BUY PUT JAN-80 AIG-MP OI=8612 at $4.10 SL=2.50
BUY PUT JAN-75*AIG-MO OI=6101 at $1.10 SL=0.50
BUY PUT FEB-75 AIG-NO OI=2113 at $2.45 SL=1.25

Average Daily Volume = 5.03 mln


AZO – AutoZone, Inc. $65.29 -0.85 (-1.71 this week)

AutoZone is a retailer of automotive parts and accessories,
primarily focusing on do-it-yourself customers.  Each of its
more than 2900 stores in 42 states and Mexico carries an
extensive product line for cars, vans and light trucks,
including new and re-manufactured automotive hard parts,
maintenance items and accessories.  Approximately half of its
domestic stores also have a commercial sales program, which
provides commercial credit and prompt delivery of parts and
other products to local repair garages, dealers and service
stations.

One of the market's strongest stocks throughout 2001, AZO has
gotten off to a rocky start in 2002.  While last some of the
weakness could be due to deferred tax selling, bullish traders
have got to be as nervous as a cat in a room full of rocking
chairs when they look at the daily chart.  AZO is back at the
$65 level, from which it launched considerably higher early in
December.  Now all those gains are history, daily Stochastics
are buried in oversold, and the stock looks like it wants to
break down again.  Now below all of its moving averages (except
the 200-day), AZO will likely find firm resistance overhead,
first at the 50-dma ($67.95) and then at the 10-dma ($69.89).
We'd like to see a short-term rally near the 50-dma (a failed
rally near the 10-dma would be a dream come true) to get us into
the play, but given the bearish picture on the daily chart, we
may have to content ourselves with entering on the breakdown
below the $65 level.  If accompanied by volume, that breakdown
could quickly see the stock testing the $60 (and then $58)
support levels.  Point and Figure aficionados will notice that
the recent sell signal gives us a bearish price target of $56.
Our stop is initially in place at $70, just above the 10-dma.

*** January contracts expire in less than two weeks ***

BUY PUT JAN-65*AZO-MM OI=1521 at $1.65 SL=0.75
BUY PUT JAN-60 AZO-ML OI= 689 at $0.55 SL=0.00
BUY PUT FEB-65 AZO-NM OI= 846 at $3.10 SL=1.50

Average Daily Volume = 1.42 mln



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The Option Investor Newsletter                  Tuesday 01-08-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


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

MANU - Manugistics $20.14 +0.17 (+0.08 this week)

Manugistics is a global provider of Enterprise Profit
Optimization solutions, which is a category of solutions for
enterprise management.  Manugistics is also a provider of
solutions for supply chain management, pricing and revenue
optimization and electronic marketplaces.

Most Recent Update

MANU was trading higher early Monday but gave all of its gains
as the day wore on.  The stock did finish fractionally higher
in today's trading, which pretty much echoed the trading in
the broader software space.  The Software Sector Index (GSO.X)
added about 1% during Tuesday's session.  MANU is hanging
around its ascending trend line which has been in place since
last fall.  Entries can be taken down around current levels,
or lower to the $18 level, which is the new site of our
coverage stop.  The stock will most likely continue to trade
along with the GSO.X and the Nasdaq, so it's important to
monitor those two gauges as they relate to MANU.  In
addition, the stock has been gyrating around its 200-dma,
which currently resides at the $19.71 level.  Traders might
use the 200-dma to monitor the strength of MANU.  The stock
could continue coiling around the moving average before making
another run higher.

Comments

MANU traded in a tight range in the last five sessions.  The
stock is coiling around its 200-dma on the daily chart.  It
acts as if it's ready to make a big move and using the recent
trend as a guide, that move could be to the upside.  We may be
early in highlighting this play, but we think MANU warrants
close watching in the next few trading days.  It could rollover,
but a breakout, if it happens, could lead to a big move higher.
Watch for an advance past $21 in an advancing market and sector,
the GSO.X.

***January contracts expire in less than two weeks***

BUY CALL JAN-20*ZUQ-AD OI=1386 at $1.30 SL=0.75
BUY CALL JAN-22 ZUQ-AR OI= 578 at $0.50 SL=0.25
BUY CALL FEB-20 ZUQ-BD OI= 373 at $2.70 SL=1.25 
BUY CALL FEB-22 ZUQ-BR OI=  41 at $1.70 SL=1.00

Average Daily Volume = 2.95 mln



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

Compound Interest
Buzz Lynn
buzz@indexskybox.com

Albert Einstein had it right and "it" had nothing to do with 
physics.  Once asked what the most powerful force in the universe 
is, Einstein thoughtfully replied, "compound interest".  This from 
a physicist (who could have doubled a finance professor at 
Wharton)!

So what is the big deal and why do we as traders care?  The point 
is two-pronged.  The first prong is that by compounding, we get 
rich.  That's pretty simple.  This comes from Warren Buffet, The 
Dow Theory Letters and Richard Russell, the editor of 42 years.  
Both are smart and practical dudes.  Russell opines that we all 
can't be Warren Buffet or Bill Gates so we have to make money the 
old-fashioned way - earn it, save it, and compound it - very UN-
sexy and borrrrrr-ing to boot.  But let me offer an example from 
straight from the mouth (or pen) of Mr. Russell.

"Assume that investor (B) opens an IRA at age 19. For seven 
consecutive periods he puts $2,000 in his IRA at an average growth 
rate of 10% (7% interest plus growth). After seven years this 
fellow makes NO MORE contributions -- he's finished.  

"A second investor (A) makes no contributions until age 26 (this 
is the age when investor B was finished with his contributions). 
Then A continues faithfully to contribute $2,000 every year until 
he's 65 (at the same theoretical 10% rate)."

Table courtesy of Dow Theory Letters and Richard Russell"
">http://www.OptionInvestor.com/oin/images/commentary/newsletter/2002-01-08/oitc010802_01.gif">

 


"Now study the incredible results. B, who made his contributions 
earlier and who made only seven contributions, ends up with MORE 
money than A, who made 40 contributions but at a LATER TIME. The 
difference in the two is that B had seven more early years of 
compounding than A. Those seven early years were worth more than 
all of A's 33 additional contributions."

I'll take $930K behind Investor B, Bob!  That folks is the power 
of compounding interest.  Pretty interesting and powerful in my 
opinion.  Starting a little late?  No worries, contribute a little 
longer.  I'm 39 and started this process only 6 short years ago.  
I don't miss the money and can already see the results (yes, last 
year hurt).  I can't wait to turn 80!  It appears to be infectious 
as I already have my 8-yr-old daughter telling me that she wants 
to spend only $10 of the $250 she got for Christmas from her Great 
Grandparents and put $240 "into my mutual fund so it turns into 
more money" (very Big Grin from her dad).

OK, we got that point - compounding is better than sliced bread 
and crushed ice - what's the second prong?  Glad you asked.

NEVER LOSE MONEY!  This is - I'll go on record here and say 
"impossible" - for traders to do 100% or the time.  After all our 
objectives given the nature of the markets are to cut losers and 
ride winners with the wins outscoring the losses.  However, it is 
imperative that we take a piece of our winnings (10% minimum) and 
put it somewhere that it can't, or is at least unlikely to lose 
value over a long period of time.  This is the part that you 
divorce from your gains and stick into your IRA or other tax-
deferred account.  Think of what compounding can do in a tax 
deferred environment.  Top tax-rate payers (as much as 45% 
including state taxes) can nearly double their annual rate of 
return by sheltering it from the taxmen in such an account.  
(Disclaimer: see your tax professional)  Over the years, the 
difference is staggering.  

Back to the point, effectively setting money aside removes the 
marked money from the arena subject to trading losses.

I'm not the only one preaching the virtues of never losing money.  
That is Warren Buffet's Rule #1.  But people do it every day in 
real estate deals, oil deals, gambling, even in their businesses.  
It is very easy to lose money, yet preserve it we must for that is 
the stuff that compounding is made of.  Every $100 lost today is 
lost 10-fold or more for the future.  So when you make some money 
in your trading, be sure to take some off the top that becomes 
"untouchable", which allows the value of compounding to continue 
uninterrupted.  

To the extent we minimize our losses, we magnify our compound 
return.  If you are 20 years old and about to buy that new 
Corvette from the bequest left by your rich uncle - STOP!  Think 
of the millions you will forego in your older years for your 
indulgence of $50K today.  A Corvette now or $920K in 40 years 
($50K at just 8% compounded) - the choice is yours.  But that is 
the most expensive car you will ever buy.

Hmmm. . .8% that leads me to my next point - dividends.  Dividends 
are another boring topic, but they are a way when appreciation 
disappears to make sure that compounding continues to function 
positively on our net worths.  They are a safe way to fortify 
appreciation.  

Ever heard of the rule of 72?  It's a simple math exercise that 
relates interest rates and time to the number, 72.  In its simples 
form, it says that 72 divided by the annual interest rate yields 
the amount of time in years to double the principle.  So if we 
want to know how long it will take $1000 to turn into $2000 at 8%, 
72 divided by 8% = 9 years.  That is with no appreciation at all 
in the stock or bond price, just dividend compounding and yield.  
The point is that dividend paying stocks in your IRA should be the 
safety net and turbo-charger of your long-term financial plan 
using the power of compounding.  Or we can sit on CSCO while 
letting it lose more than half its value, which requires a four-
fold gain to double our purchase price?  So how long will it take 
CSCO to reach $80 while paying no dividend on 10-12% annual growth 
(if they are lucky)?  I'll stick with stodgy dividends or bond 
yields compounding for me, thank you very much.  

That brings me to my final point in closing - where to find 
dividends, especially reliable dividends.  Reliability comes from 
good forward-thinking management finding the best possible way to 
make and sell a product that everyone needs or wants.  Sounds like 
a great business model!  Note that dividends are nothing more than 
providing the business owners with a return on their invested 
capital.  If it can't be used to grow the business and thus 
increase owner (shareholder) value, it ought to be returned to the 
shareholders in cash.  That's exactly what GM, Phillip Morris, 
Coke, Gillette, insurance companies, utilities (except Enron, but 
where was the good, conservative management there?) and food 
companies.  MO in my opinion is one of the best-managed companies 
out there that currently yields about 5%, which also increase 
nearly every year.  To those buying Kraft cheese, Best Foods mayo, 
and Miller beer (yes, and Marlboro cigarettes too), MO owners 
thank you, as the stock appreciates and the compounders grow 
wealthy off this stodgy company with an evil stigma.  CAG and UST 
as well.

Want better dividends that that?  Go to the REITs (Real Estate 
Investment Trusts) that can yield 7-10% on the average.  There are 
REITS that engage in apartments only, shopping centers only, 
office building only, or commercial and residential property in 
general.  They are required by trust law to distribute 90% of 
their income in the form of dividends to thus avoid taxation at 
the corporate level, aka double taxation.  NNN, PNP, BPP, DDR, 
SPG, and EOP are a few that I'm looking at for the IRA right now.  

Full disclosure:  I own none of these right now and cannot bring 
myself to pull the trigger until I see some price pullback from 
technically overbought that I expect may result in a deflationary 
environment.  I am not loading up the truck, nor should anyone 
else unless they have done the homework and are comfortable with 
their conclusions.

Be careful though of dividends that look too good to be true.  
Eastman Kodak (EK) yields over 6% but has falling market share and 
no real hope in my opinion of staving off the challenge from Fuji 
and Agfa, not to mention their tepid reception in the digital 
imaging market.  That to me is a recipe for a dividend cut or 
complete elimination much like AT&T had to last year when it 
bumbled its broadband strategy while losing its cash cow phone 
business to more forward thinking competitors.  REITS too have 
some high payers that unfortunately are burdened with too much 
debt or are contemplating one-time dividends with the intention of 
liquidation, or that have fallen upon hard times.  A 38% dividend 
on KPT is unappealing.

But the point of all this is to cram the concept of good 
management producing reliable dividends in a business with 
products that everyone can use, that compounds our returns for us 
reliably over a very long time, and that can be bought with a 
margin of safety covering the downside.  

I know I sound like a wannabe Warren Buffet.  While I love 
trading, I would rather take the sure thing by compounding early 
and often.  That is why I take a piece of my trading gains and 
sock some away "untouchable" never to be lost to Mr. Market in a 
bad trade.  Too many of the best, and seemingly invincible traders 
fall on hard times or even go broke from one bad move.  Remember 
Jesse Livermore, one of the most successful, and later destitute 
traders who ended his own life.  Or remember Warren Buffet and the 
power of compounding.  Choose one.  Better yet, if you choose to 
be a trader (as all of us do, otherwise we would not likely be 
reading this web site), do not neglect the freedom FROM the market 
that becomes possible with not losing principle and compounding it 
over time as its heart and focus.


************************Advertisement*************************
Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
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!

http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN
**************************************************************


**********
DISCLAIMER
**********

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