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Daily Newsletter, Thursday, 01/10/2002

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The Option Investor Newsletter                Thursday 01-10-2002
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)
************************************************************
       1-10-2002           High     Low     Volume Advance/Decline
DJIA    10067.86 - 26.23 10101.77 10032.23  1.2 bln   1559/1589
NASDAQ   2047.24 +  2.35  2055.89  2026.05  1.7 bln   1834/1826
S&P 100   590.56 +   .94   592.58   587.01   Totals   3393/3415
S&P 500  1156.55 +  1.41  1159.93  1150.85
RUS 2000  495.31 +  0.57   495.51   493.45
DJ TRANS 2764.78 - 10.37  2782.70  2750.71
VIX        23.13 -  0.22    24.42    22.98
VXN        48.66 +  0.31    50.17    48.29
TRIN        1.30
Put/Call Ratio       .58
*************************************************************

Trouble Brewing in Paradise

Are those storm clouds on the horizon? Did the forecast just change 
from blue skies and sunshine to lightning and hail? Those investors
with rosy outlooks are suddenly wondering what happened in paradise.
The Dow closed down for the fourth day in a row and is threatening
10,000 again. The Nasdaq gave back fifty points from yesterday's high
and came to a dead stop on recent support at 2040. It appears the
three month rally on the expectations of a first half 2002 economic
rebound slowed as expectations were pushed into the second half. It 
has now screeched to a halt after several high profile comments about
the recovery slipping into 2003. The fading recovery date has caused 
stock prices and investor confidence to fade in return.



 



 


The wheels started coming off the Dow and tech stocks in general 
today as rumors persisted that IBM may guide estimates lower. IBM 
declined comment but the stock price dropped from yesterday's 52-week
high of $126.39 to close at $122 today. IBM releases earnings on
January 17th. Currency problems are starting to return to haunt 
multinational corporations as rumors from Japan and reality from 
Argentina continues to strike home. 

The devaluation in Argentina has already started to be reported in
expected earnings. GM which upped estimates today for 2002 said they
would be higher except for a ten to twenty cent per share impact from
Argentina. Not only did Argentina devalue its currency but it has now
turned all accounts of $10,000 or more and savings of $3,000 or more
into certificates of deposit which cannot be withdrawn for at least 
one year. Argentina foreign exchange trading has been halted for three
weeks and the halt ends tomorrow. It may take several days for the real
global impact to be known since the exchange markets are used to having
the Peso pegged to the dollar. Without that peg it is unknown how low
the Peso will fall. The black market is already trading Pesos at 1.7 
to the dollar, much higher than the official 1.4 devaluation.  

While global worries increase the retailers at home are trying to 
present an upbeat picture. Wal-Mart said same store sales were up +8%
more than expected. Target, The Limited, Sears, TJX and even the Gap
reported stronger than expected December sales. The Gap said they
were going to lose less than expected. The Gap was the only retailer
that made profit statements but the fear remains that these better than
expected December sales numbers may have come at the expense of profits.

Mixed messages from the tech sector continues to confuse investors 
and throw doubt on the recovery progress. If you remember Cisco, the 
biggest tech to make forward looking statements, recently said that 
visibility going forward was still very limited. This was a very 
cautionary comment from Chambers who has taken every opportunity to
promote Cisco when possible. Reading between the lines there could be
a storm cloud in their future. After the close today two chip stocks 
announced earnings with mixed results. Rambus beat the streets lowered
estimates by two cents but said DRAM prices were still eroding in the 
4Q. This is contrary to pervious statements by analysts that DRAM prices
were stabilizing. Which is it? It apparently did not matter because RMBS 
traded up in after hours even after another chip stock, CREE, missed
estimates by a penny and whined about continued weak demand. Still the
news from Rambus is not likely to energize the chip sector which appears
to be weakening with the SOX posting the lowest close in the last six 
days of trading. 

Economically the news was good today. Jobless claims fell a more than
expected -56,000 to 395,000 for the week ended Jan-5th. The reporting
period could have thrown off the counts since many seasonal workers may
not have gotten back into the jobless line in the three days after the
New Years holiday. A rise in the maximum weekly benefit in California 
to $330 from $230 beginning this week could drive the numbers higher. 
California, as the largest state economy, will impact the national 
numbers if there is a rush to collect the higher benefits instead of 
working a lower paying job. The Wholesale Trade numbers for November 
were flat after a two month slide but inventory levels continued to 
fall with the second largest monthly decline in a year. This is very 
bullish even though the inventory-to-sales ratios fell as well. The 
lower inventory levels make it more difficult to achieve high sales 
ratios. The lower the inventory levels the stronger the rebound will
be when it comes because of the broader component requirements.

While GM was raising estimates today Ford was rumored to be announcing
a major restructuring on Friday. This restructuring will involve massive
layoffs and shrinkage of their capacity. Rumors were to expect 20,000
job cuts on Friday. Without the GM announcement today the Ford news
would have been very detrimental to the markets. By itself the Ford 
news would not support the rebounding economy theme but with the GM
announcement it will be taken as a symptom of internal corporate 
problems at specific to Ford.

Earnings turn into a flood next week but the event is not drawing a
flood of cash. The January liquidity rally is turning into a cash
drain instead. On Tuesday there was a -$7.4 billion outflow of cash
from equity funds. This is huge considering this is normally a time
of cash inflows instead of outflows. TrimTabs.com estimated that there
were -$4.8 billion in redemptions in the first week of January. This
has never happened since they have been keeping records. There was
also a record $3.5 billion in new offerings in the first week of
January. On Wednesday there was a slight negative outflow of liquidity
as well. Another measure of investor sentiment is the Ameritrade Index.
This shows the top ten daily buys and sells of Ameritrade customers
and this index has shown that retail investors have been net sellers
for the last three weeks. http://www.ameritradeindex.com/learn_more.html
It was also interesting that Enron was number six on the top ten sellers
list and number seven on the top ten buyers list. It appears that there
are still believers out there even as the negative news intensifies.

Where do we go from here? The Nasdaq has support at 2020 and the Dow
around 10,000. This is not far from where the indexes closed today. If
they can hold those levels on Friday morning then we may see a gain for
the day. Should those levels fail we could be in for some rough 
sledding. The earnings pre-announcements have been more positive than
negative but without some actual positive earnings guidance the markets
will die. It is one thing to not warn that business is getting worse
when everyone expects it to be worse. It is another thing to not say 
something positive when everyone has already discounted the recovery. 
I said earlier in the week that a failure to make any progress this 
week would cause the hedge funds that normally buy stock in December,
hoping to sell into the January rally, to switch sides and dump their
stock and go short again. I think part of the Wednesday drop was that 
selling. The big gap open gave them a chance to unload and many of them 
did once the roll over came. Advancers/decliners were dead even today 
despite what the averages said. There is no conviction on either side 
of the ledger and the first group to reach a consensus will dictate 
market direction. At this point it will take much more effort to move
the markets up than down. The huge gains since September will require
strong conviction in order to build on those gains. There was a gentle
surge of buying today in the defensive issues like drugs which could 
indicate a softening in tech hopes going forward. All these things add
up to increased concern and we should be really cautious about opening 
new long positions. All the majors failed to hold over my bullish entry 
points from Tuesday, 10200, 2075, 1175 respectively. My bearish support
levels of 10000, 2020, 1140 are still below us and I would still buy
a bounce from those levels BUT ONLY AS A TRADING BUY. Trust me, you 
will not lose money by watching and waiting. If a real rally breaks 
out there will be plenty of upside left for everyone. 

Enter very passively, exit aggressively!

Jim Brown
Editor


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

Chips Ahoy!
Austin Passamonte

After the bell we had the aforementioned news out of chips heading 
either way. Considering this sector has been the tech leader both 
up and down for a few years now, we should expect that action to 
continue.

Gotta love semi-conductor analysts: there are lots of them, they 
all have varied opinions on outlook and most weeks we enjoy 
several upgrades AND downgrades within five trading session's 
time. How's that for catalyst of volatility?

(Weekly Chart: SOX)


 

A brief look at the technical picture here. Weekly chart shows a 
long-term descending trendline that has repeatedly held each 
week's close since October 2000. Six times since, including last 
week we saw price action poke above but fail to finish on top by 
Friday's 4:00pm bell. With price action pressing resistance 
tonight, will tomorrow mark the first time in fifteen months that 
a price bar can rest above this line of suppression?

(Daily Chart: SOX)


 

The inside picture via daily chart view shows weak oscillators and 
price action struggling to break above its ascending channel mid-
line resistance as well. If I were a betting man (actually I trade 
the SPX, and Vegas has no games more thrilling than that) my roll 
would be on resistance to hold tomorrow. Odds are the streak 
continues another weak, but anything can happen!

Conclusion
Big indexes went nowhere slow again today and continue the 
sideways chop. A rising VIX into benign status is welcome by the 
bulls, but broad market failure to mount any sustained rally keeps 
market bears pressing the downside whenever the chance arrives.

Don't fall in love with either direction: we'll see too much of 
both before one finally prevails.

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

Tired Bull?
By Eric Utley

Stocks are up big in the last few months.  Maybe a period of
consolidation lies ahead.  This week's rally in bonds might
suggest that money is moving out of some stocks and onto the
sidelines.  Perhaps most telling is the S&P 500's ($SPX) inability
to breakout above its immediate overhead resistance.  The 1175
level has acted as formidable resistance recently despite the
SPX's breakout above its 200-dma.  Here's a shorter term view
of the SPX's recent bump against resistance.



 

What's so special about the 1175 level?  It's the 61.8 percent
retracement level of the SPX's decline from May through September
of 2001.  The respective high is roughly 1315 and low is 945.  The
1175 level is where the SPX bounced from for about three months
during the late summer of 2001.  It's a very significant level.



 

With the broad market measure bumping against resistance and
stocks up big already, bulls could be growing tired.  Maybe a
brief pullback and consolidation is what's needed before the SPX
advances past 1175.  Then again, maybe a better-than-expected
fourth-quarter earnings season is what's needed.

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

Market Averages


DJIA (INDU)

52-week High: 11350
52-week Low :  8062
Current     : 10068

Moving Averages:
(Simple)

 10-dma: 10130
 50-dma:  9859
200-dma: 10099



S&P 500 (SPX)

52-week High: 1383
52-week Low :  945
Current     : 1157

Moving Averages:
(Simple)

 10-dma: 1160
 50-dma: 1137
200-dma: 1167



Nasdaq-100 (NDX)

52-week High: 2771
52-week Low : 1089
Current     : 1657

Moving Averages:
(Simple)

 10-dma: 1638
 50-dma: 1587
200-dma: 1615



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

Market Volatility

The VIX spiked a bit higher off of the reversal in stocks
Wednesday afternoon, reaching as high as 24.42 in Thursday's
session.  The VXN ticked higher in the last two sessions, too,
reaching as high as 50.17 in Thursday's session.  A little
more fear crept into the market in the last two days...
    
CBOE Market Volatility Index (VIX) - 23.13
Nasdaq-100 Volatility Index  (VXN) - 48.66

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.58        623,157       360,417
Equity Only    0.50        571,100       286,203
OEX            1.07          8,957         9,545
QQQ            1.03         40,152        41,420
 
-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          56      + 0     Bull Alert
NASDAQ-100    63      - 4     Bear Correction
DOW           67      + 0     Bull Confirmed
S&P 500       68      - 1     Bull Confirmed
S&P 100       67      - 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  1.30
10-Day Arms Index  1.26
21-Day Arms Index  1.15
55-Day Arms Index  1.12

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      1559           1589
NASDAQ    1834           1826

        New Highs      New Lows
NYSE       90             19
NASDAQ    106             16

        Volume (in millions)
NYSE     1,288
NASDAQ   1,736

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

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: Thursday 1/10/2002
No Follow Through

News & Notes:
------------
We tracked what were considered medium-odds puts plays on a break 
from the open that moved slightly in our favor before chopping 
sideways from there. OEX and QQQ put plays hit their tight stops 
by a whisker while SPX and DJX plays survived.

Whether that's a good thing or not remains to be seen. Friday's 
action could go either way, so a look at the charts should help us 
figure out tentative plans for tomorrow:


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


 

The OEX clings desperately to its 50% retrace target of 590 we've 
watched all week. Today's action formed an ascending channel, 
which may carry higher into Friday, but it is a bear flag pattern 
in the short run. Stochastic values are topping but haven't 
reached overbought extreme zones yet. 

I would look for an early pop to the 592 - 595 zone where any 
failure from there as both stochastic values turn bearish would be 
a high-odds put play. That marks a 50% upside retrace from 
Wednesday high to Thursday low, a measure plenty of floor traders 
have now written on their pads.


[60/30-Min Chart: SPX]


 

Same thought for the SPX. Chart signals getting toppy along with 
bearish long-term charts (not shown) may be setting up a tradable 
put play. A failed pop to 1160 area and break back below would 
make an ideal put-play entry. We will watch for that as well.


[60/30-Min Chart: QQQ]


 

Similar story with the QQQ. An attempt to fill the gap between 
41.50 and 42.00 is likely, and failure from there is a short I'd 
play in a heartbeat.


Summation:
---------
We have no viable entry targets either way right now, as the high 
odds look to be upside pop and failure near short-term resistance. 
Make no mistake: we are trying to play within very tight ranges 
that grow smaller all the time and offer little room for margin of 
error. This is not ideal swing trade action by any means, but we 
will monitor the levels of resistance noted within each chart and 
suggest viable play entries should our parameters materialize 
tomorrow. 

Under no circumstance should long Jan contract index option calls 
or puts be held over this weekend. Theta decay will greatly erode 
value and without a monstrous gap-open Monday in their favor, the 
same Jan options will be available much cheaper then.


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: 100 (DJV-MV)
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: 580 (OEB-MP)            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: 100 (DJV-MV)
Long: BREAK BELOW 41.00           Long: BREAK BELOW 100.80
Stop: Break Above 41.75 [hit]     Stop: Break Above 102.00

Jan Puts: 580 (OEB-MP)            Jan Puts: 1150 (SPT-MJ)
Long: BREAK BELOW 589.00          Long: BREAK BELOW 1155.25
Stop: Break Above 592.25 [hit]    Stop: Break Above 1162.00


Sector Share Trade Model: Thursday 1/10/2002
Doji Day


News & Notes:
------------
Markets opened flat, dropped a bit, popped a bit and finished 
where they began. A real "doji" stalemate day to borrow from 
Japanese candlestick terminology.


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


 

Our lone surviving short share play has its stop-loss order 
trailed down to entry and is now a "free play" barring any wild 
gap-up opens. Support lies close below but weekly chart stochastic 
values look mixed to weak from here.


Summation:
---------
All long-term charts pretty much look the same. Extended, toppy 
but no clear signs of an imminent drop or pop. We are idle on new 
play attempts until into next week as no high-odds buy & hold 
setups exist 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 Short Plays:
----------
01/02
XLI
Short: BREAK BELOW  27.70
Stop:  Break Above  27.60 


IS Position Trade Model: Thursday 1/10/2002
More Of The Same


News & Notes:
------------
Lest we thought directional guidance might be given today, no such 
luck. Range-bound and going nowhere for now. Unless a serious 
catalyst appears to push markets either direction soon, more of 
the same is likely.


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


 

We are tracking DJX Feb puts via the Dow and see no reason to 
abandon ship yet. Weekly chart price action is below 62% Fib 
retrace from May highs to Sep lows and oscillators across both 
time frames are weak to bearish as well. A trip to 98 or 97 in 
this index is the best bet right now from evidence we have on hand 
tonight.


Summation:
---------
All long-term charts looking mixed to weak, just like broad market 
action. We have no further buy & hold plays to attempt right now 
as signs of a directional move do not exist.


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

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         


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The Option Investor Newsletter                 Thursday 01-10-2002
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:
*****

NVDA $65.99 -1.62 (-3.63) We've had quite a little momentum run
from NVDA over the past month, as it has posted one new high
after another, leading the Semiconductor index (SOX.X) to its
highest levels since last August.  But it looks like both NVDA
and the SOX are losing strength.  The bulls tried mightily to
defend the $66 support level today, but in the end they lost the
battle as the stock closed a penny below our stop and violated
the 20-dma for the first time since early October.  We're
dropping NVDA tonight and locking in our gains.


PUTS:
*****

AIG $77.90 +0.20 (+0.10) The bulls held tough after the drubbing
they took on Monday and Tuesday, successfully defending AIG's
$76 support level.  Since bouncing yesterday morning, shares of
the insurance giant have worked steadily higher, closing in on
the $78 level.  Although this could be a fresh bearish entry
setting up, we don't like the solid advance in the stock while
the rest of the market is weak.  Rather than wait for our $79.50
stop to be triggered, we'll drop AIG tonight, lest we be tempted
to take a less than ideal entry.

CERN $49.65 +2.45 (+1.05) Just when it looked like the bulls
were finally going to give up the ghost, they came back with a
vengeance.  Wednesday's trading saw CERN close below the 200-dma
for the first time since late September, but rather than sell on
that development, the bulls bought with vigor all day Thursday,
posting more than a 5% gain and erasing nearly all the stock's
losses this week.  Our $50 stop hasn't been broken yet, but given
the strong buying volume right into today's closing bell, it
looks like that level will fall to further bullish action
tomorrow.  We're cutting our losses and removing CERN from the
playlist tonight.

EDMC $35.47 +0.61 (+0.42) EDMC edged higher again in today's
session.  The stock has a bullish three day trend working and
is approaching its converged 10, 50, and 200-dmas at $35.50.  A
rollover from here is possible, but at the risk of the stock
breaking out, we're dropping coverage this evening.  Open
positions can be managed with a tight stop at the 10-dma at
$35.64.

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

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

CALLS              Mon    Tue    Wed   Thr

ACS     108.53   -0.75   1.80   2.18   0.55  Steady trend-new high
CCMP     83.77   -0.46  -0.03   0.98  -1.43  Trading with the $SOX
MANU     20.06   -0.09   0.17   0.13  -0.21  Still coiling tighter
MCAF     40.40    0.99   2.53  -0.48   1.06  Quick rebound today
EMLX     45.62   -0.14   1.65   0.43  -0.81  New relative high Wed
GNSS     71.54   -0.74   1.54   2.96  -0.97  Above $70 yesterday
NVDA     65.99   -1.87   0.80  -0.94  -1.62  Dropped, pulling back
VRTS     46.95    0.37   0.89  -1.67  -0.19  Sliding along 200-dma
RSTN     20.44    1.13   0.07   0.28   0.49  New, strong networker
LLY      76.80   -0.85  -1.20  -0.28   1.48  New, rotate in drugs
   

PUTS

CORR     22.63   -0.70   0.21  -0.31   0.31  Stalling above $22
EDMC     35.47   -1.09   0.45   0.45   0.61  Dropped, recovering
ADRX     64.16    1.39  -1.35  -0.92   0.90  Bump against 200-dma
ELBO     35.40   -2.42   1.57  -1.56   0.81  Hit 200-dma, rebound
CERN     49.65   -0.37  -0.23  -0.80   2.45  Dropped, big rebound
EBAY     65.99   -1.70   0.74  -0.65  -0.90  Rolling over from $69
QCOM     46.69   -3.21   0.99  -1.98   0.48  Lower relative low
AIG      77.90   -1.00  -0.60   0.90   0.20  Dropped, on the mend
AZO      65.20   -0.86  -0.85  -1.09   1.00  Sector sympathy bounce
BBOX     49.26   -2.66  -0.08  -0.74  -1.48  New, broken networker


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

ACS $108.53 +0.55 (+3.78) ACS continued along its path higher in
today's session.  The stock continues to display an impressive
amount of relative strength versus the broader market.  Its
advance past its most recent relative high in yesterday's
session and subsequent follow-through in today's session bodes
well for higher prices in the short-term.  Ideally we'll get
some strength from the broader market that will help to push
the stock higher.  The company reports on January 22nd, so we
have another week to play ACS.  In that time, hopefully we'll
get another pullback to support for a good entry point.  For
those with open positions entered down around $105, or lower,
look for strength in tomorrow's session up to the $110 area
to book gains.  Those waiting for a pullback might consider an
entry down around $105 on weakness.

MCAF $40.98 +1.06 (+4.10) Legg Mason initiated coverage on MCAF
yesterday morning with a market perform rating and issued
positive comments on the company.  The brokerage boost and
strong market helped MCAF higher in yesterday's session, but
the late-day rollover pressured the stock lower.  The stock
continued lower in today's session, but rebounded from the $38
level to trade higher throughout the day, closing just off of
its day high by about 30 cents.  The stock's performance today
could portend further upside ahead of the earnings report next
Wednesday.  Watch the software sector (GSO.X) closely and gauge
sentiment in the broader tech space.  If the Nasdaq is
advancing, MCAF could work higher into its earnings report.  Look
for intraday weakness near $38, or lower around the 10-dma at
$37.21.

CCMP $83.77 -1.43 (+0.02) CCMP continues to trade closely with
its sector, the semiconductor sector index (SOX.X).  We need to
keep close watch on the SOX.X as it relates to CCMP.  Use the
index when gaming entry points and managing risk.  For its part,
CCMP is coiling around the $84 level.  Its highs have been
getting lower and lows higher as the stock rotates around the
$84 level.  The sideways trading could lead to a good move in
the short-term to the upside, but that will be predicated on the
SOX.X moving higher too.  If the SOX.X does pullback and pressure
CCMP lower, then look for a bounce from the $80 level on that
weakness.  In the meantime, traders with open positions might
consider tightening stops to protect against any potential
breakdown spurred by weakness in the SOX.X.  

MANU $20.06 -0.21 (+0.00) Software shares shot higher in
yesterday's session on the good news from SAP.  The bullishness
in the Software Sector Index (GSO.X) bolstered MANU above the
$21 level we had been monitoring.  But the big rollover in the
broader tech space didn't allow MANU to stay above its resistance
level.  And with its weakness in today's session, we're back to
churning around the $20 level.  The stock will most likely
remain tied to the trading in the GSO.X, so it's important to
continue monitoring sector sentiment.  The bullish earnings
report from RATL after the bell could serve as the catalyst to
get the GSO.X moving higher again in tomorrow's session.  New
entries can be taken in MANU between $19.70 and $20 on any
market-related weakness, or on an advance back above the $21
level in a bullish sector and market environment.

EMLX $45.62 -0.81 (+1.13) Consistent as the rising sun (well
almost), EMLX charged to another new 7-month high on Wednesday
north of $48 and has spent the past day and a half driven by
profit taking.  This is the pattern we have seen repeatedly in
recent weeks, as the stock charges to a new high, consolidates
and then repeats the process.  EMLX appears to be building
intraday support in the vicinity of $45, and entering near
current levels might make for a decent entry.  A sharper dip on
Friday could allow us to enter in the $43-44 consolidation area,
(also the site of the 10-dma at $43.50) but that brings us
awfully close to our $43 stop.  Buy the dip, but only when you
can see solid buying volume on the bounce.  Don't forget that
EMLX will likely see some selling as it works closer to its May
high ($49.55) and will need strong buying to push through that
level.  Buy the dips, in anticipation of the breakout.

GNSS $71.54 -0.97 (+2.79) It took nearly a month to get the job
done, but yesterday shares of GNSS finally broke above the
$70-71 resistance area and charged almost to the $75 level
before dropping back a bit towards the close, driven by the
sharp broad market decline.  Traders that took a position before
the breakout should have been harvesting at least partial profits
on the stock's sharp rise yesterday in anticipation of the next
entry point.  Judging by the intraday charts, that opportunity
is approaching.  While GNSS fell a bit more on Thursday, intraday
support appears to be building just above $71.  And we have
strong support (prior resistance) at $70.  Allow the
profit-taking to finish running its course and then buy the
bounce from the $70-71 area.  Note that we raised our stop to
$68 last night.  A dip to this level is still buyable, but only
if it is short lived and followed by strong buying, both in GNSS
and the broader Semiconductor sector (SOX.X).  Earnings season is
here, and GNSS will throw its numbers into the pot on January
17th.  So we've only got 5 more trading days to profit from the
play.

VRTS $47.43 +0.29 (-0.78) Entry point forming?  VRTS has had one
heckuva run from the $17 level in late September, and amazingly
continues to find support at its ascending trendline, currently
resting at $46.75.  That's just below the supportive 10-dma
($46.90) and today's closing price of $46.95.  Add in recent
intraday lows just above $46.50 and the 20-dma ($45.57) crossing
up through the 200-dma ($45.65), and we have a potential entry
point in the making.  Risk is fairly easy to manage here too.
Target new entries on a dip near $46 and leave your stop set at
$45.50.  Resistance at the $49 level has been a tough nut to
crack over the past week, but entering near support gives us
some cushion as the bulls stage their next breakout attempt.
Look for confirmation from the Software sector (GSO.X), which
is currently trying to push through the $200 resistance level.


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

RSTN - Riverstone Networks $20.44 +0.49 (+1.96 this week)

Riverstone Networks builds routers that convert raw bandwidth
into profitable services for Metropolitan Area Networks.  The
company's products enable the creation of profitable services
and the delivery of these services over next-generation and
legacy networks.

Some networking companies are doing well despite the fact that
capital spending among telecom carriers has fallen off.  Cisco
is one of the companies doing well because its taking market
share from its competitors.  Others are operating in the sweet
spot of the network, such as Riverstone.  The company supplies
revenue adding products to the carriers building the networks
in metropolitan areas.  Riverstone continues to win big
contracts, most recently from a major Korean concern.  The niche
market that the company serves has allowed Riverstone to continue
to perform from a strong financial position, which has been
reflected in its stock price.  The stock is one of the strongest
in networking and could be on its way to testing the all-time
high at $24.10.  Traders bullish on networking shares can look
for RSTN to work above the $21 level in an advancing market.
Confirm strength in the Networking Sector Index (NWX.X) before
entering plays into strength overhead.  A pullback on profit
taking down to between the $18 and $18.50 area could offer a
favorable entry.  Our coverage stop is initially in place at
$18.

***January contracts expire next week***

BUY CALL JAN-17 RQJ-AW OI=3257 at $3.10 SL=1.75
BUY CALL JAN-20 RQJ-AD OI=4030 at $1.15 SL=0.50
BUY CALL FEB-20*RQJ-BD OI= 467 at $2.40 SL=1.25 
BUY CALL FEB-22 RQJ-BX OI= 767 at $1.35 SL=0.75

Average Daily Volume = 3.37 mln


LLY - Eli Lilly $76.80 +1.48 (-0.90 this week)

LLY discovers, develops, manufactures and sells Pharmaceutical
products targeted at the diagnosis, prevention and treatment of
human diseases.  The company's best known commercial product is
the anti-depressant Prozac, although there are numerous other
lesser-known drugs that treat conditions such as Parkinson's
disease, diabetes, osteoporosis along with a broad range of
antibiotics.  The company also conducts research to find
products to treat diseases in animals and to increase the
efficiency of animal food production.

Traders looking for a bullish play in the Pharmaceutical sector
(DRG.X) need wait no more.  Shares of LLY have been drifting
lower with the DRG index for the better part of a month, but got
a sharp lift on Thursday after the company announced last night
that sales of its Sepsis drug, Xigris, were right on target.  The
buying interest today lifted the stock from its $75 support level
(the site of the long-term ascending trendline) to gain 2%.  The
rise in price propelled the daily Stochastics out of oversold
territory and sets the stage for the stock to once again
challenge its 200-dma ($79.73), just below the $80 resistance
level.  We're playing this one for an extended bounce, partially
based on the afore-mentioned support and partially on the
successful double-bottom reversal in the DRG index at $375.  As
such, we're initiating the play with a tight stop at $75.  Target
new entries on a renewed dip and bounce at the $75.50-76.00
support level or on a breakout over the $77.25 intraday
resistance level.  Watch for potential resistance at the 10-dma
(currently $77.61) and make sure the DRG index continues to see
bullish action.  Note that LLY reports earnings next Thursday,
January 17th, so it'll be a quick play.  We won't be holding over
the announcement.

*** January contracts expire next week ***

BUY CALL JAN-75 LLY-AO OI=4950 at $2.75 SL=4.50
BUY CALL FEB-75 LLY-BO OI= 163 at $3.60 SL=1.75
BUY CALL FEB-80*LLY-BP OI= 602 at $1.35 SL=0.75
BUY CALL APR-80 LLY-DP OI=6413 at $2.90 SL=1.50
BUY CALL APR-85 LLY-DQ OI=3105 at $1.20 SL=0.75

Average Daily Volume = 3.59 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!

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


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

AZO $65.20 +1.00 (-1.80) Compared to the excitement from last
week, trading in AZO has been fairly quiet this week as the
bulls and bears jockey for dominance.  Yesterday, it looked like
the bears had the upper hand, as they finally pressured the
stock to close below $65 for the first time since mid-December.
But the buyers came back today, recapturing most of yesterday's
losses, despite a fairly weak overall market.  But the recent
battle is defining our action points for us rather nicely.  $64
is a solid level of support and momentum traders will want to
wait for a drop below that level before entering new positions.
On the other hand, the $67.50 level is solid resistance, and is
about to be reinforced by the sharply declining 10-dma ($68.10).
More passive traders will want to target new entries on a failed
rally near the $67.50 level.  Either way, stops should be set at
$68.

CORR $22.63 +0.31 (-0.82) MLNM and CORR have appeared to found
a short-term bottom near today's intraday lows.  The downward
trend is still very much in place, but the stocks may be slipping
into a consolidation of the recent losses.  CORR is lower by
a little less than $1 this week, following its loss last week.
Traders with small gains in this play might try to lock in partial
profits on any weakness down around the $22 level if the biotech
sector looks like it's going to rebound.  The Biotech Sector Index
(BTK.X) continues to hover above its current support, which alone
could lead to a short covering rally in the biotech stocks.  Be
on the watch for such a rally.  On the other hand, if the selling
continues in the biotech stocks, CORR and MLNM should continue
marching lower.  As for new entries, wait for MLNM and CORR to
rally up to resistance.  A rollover near the 10-dma in CORR at
$23.35 could be used as an entry.

ADRX $64.16 +0.90 (+0.02) ADRX rebounded in today's session on the
strength in the Biotechnology Sector Index (BTK.X).  The BTK.X
tacked on better than 1% in today's session, with ADRX adding
about 1.4%.  The stock ran into its 200-dma as resistance again
in today's session.  ADRX has rolled over from its 200-dma three
times in as many days.  A good indication that the stock is going
higher might come on a breakout above the 200-dma.  Traders with
open positions might consider using a stop at the 200-dma, which
is currently at $64.88, to manage risk.  Additionally, the rollovers
at the 200-dma, if they continue, might be used as low risk,
potentially high rewarding entry points.  Take your cue from the
BTK.X either way.  Those wanting more confirmation of weakness
might wait for a decline below $63.

ELBO $35.40 +0.81 (-1.60) ELBO was fast and wild following its
release of holiday sales figures this morning.  The stock traded
as low as $31.55 at the open, below the 200-dma.  But the stock
only stayed down there for less than 10 minutes.  It headed
higher for the rest of the day.  Hopefully the early morning
weakness offered a quick exit point, but quickness was essential
early today.  Looking forward, the negative trend is still very
much in place in this stock.  In fact, today's recovery may have
set up another put entry opportunity in the coming sessions.
Another rollover from the $36.50 to $37 area could offer favorable
entries into this play.  Again target the 200-dma to the downside.
The 200-dma currently sits at $32.33 and could be revisited in
the coming weeks.

EBAY $65.99 -0.90 (-2.51) Just as bullish traders liked EBAY for
its relative strength last year, the stock is becoming a bearish
target this year due to its relative weakness.  The Internet
index (INX.X) was the top-performing sector on Thursday, and
where was EBAY?  Drifting lower by 1.3%.  While it is a fairly
tepid move for the stock, it is notable for its divergence from
the INX.  The stock is now under its 10-dma ($67.10), 20-dma
($66.71) and 30-dma ($67.19), and that makes the $67-68 area look
like pretty firm resistance.  Daily Stochastics are heading
towards oversold in a nice, orderly fashion, bringing up the
likelihood of a test of the $64 support level in the near future.
The 50-dma is resting at $63.57, and we would expect to see some
buying interest near that level (read: good place to harvest some
profits).  Target new entries on a rollover near resistance,
especially if the INX starts showing signs of weakness.

QCOM $46.69 +0.48 (-3.72) Nimble short-term traders managed to
squeeze in another profitable play on QCOM yesterday, as the
opening spike above $49 quickly faded, providing a preview of the
stock's late day slide back near the $46 level.  Once again, that
level proved to be a level of support on Thursday, and the stock
managed a tepid 1% gain on the day.  Normally, we'd dismiss that
rebound as noise and advocate initiating new positions on the
next failed rally, and that might be the right play.  But there
is something interesting shaping up here.  Volume has been huge
in QCOM all week, and it looks like the $46 level is going to be
pivotal.  Add in that the daily Stochastics are just starting to
emerge from oversold, and bearish traders need to exercise
caution.  Continue to target rollovers from resistance (ideally
near $48, but possibly as high as $49), but only if solid selling
volume accompanies the rollover.  Lower stops to $50.


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

BBOX – Black Box Corporation $49.26 -1.48 (-5.06 this week)

As a technical services company, Black Box Corp. designs, builds
and maintains network infrastructure systems.  The Black Box
team serves more than 150,000 clients in 132 countries,
providing technical services on the phone, on site and online.
Through its catalogs and Website, the company offers more than
90,000 infrastructure and networking products, and designs and
builds more than 650,000 custom products each year.

After their sharp 2-month rebound off of the $40 level in
September, shares of BBOX have been weakening.  We attempted to
play the stock to the downside in December, but a sharp rebound
from the $50 support level thwarted our attempt.  After that
bullish move exhausted itself, the stock rolled over near $55
and the bears took a fresh shot at the $50 level.  Their initial
thrust seems to have been successful, as the stock fell below
$50 on Thursday on slightly more than average volume.  If this
breakdown is for real, we should see the stock work down to the
$45 level in the near term, which would make for a nice, tidy
profit.  There's some heavy overhead resistance now, and a failed
rally near that resistance will make for the best entries.
Historical resistance (failed support) at $52.75 is reinforced
by the 200-dma ($53.48) and the declining 20-dma ($52.97) and
10-dma ($52.70).  On the downside, momentum types can target new
positions on a drop below the $49 level, but only if volume is
strong.  Regardless of your entry strategy, consider harvesting
profits or at least tightening stops BBOX approaches the $45
support level.  Initial stops are in place at $53.50.  Note that
this play has a rather short fuse, as the company will be
reporting earnings on Tuesday, January 15th.  We'll be looking
to close the play prior to the announcement.

*** January contracts expire next week ***

BUY PUT JAN-50 QBX-MJ OI=497 at $2.20 SL=1.00
BUY PUT FEB-50*QBX-NJ OI=156 at $4.10 SL=2.50
BUY PUT MAR-45 QBX-OI OI=100 at $2.95 SL=1.50

Average Daily Volume = 347 K



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

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


**************************************************************
ADVERTISING INFORMATION

For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support
The Option Investor Newsletter                 Thursday 01-10-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.





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

EBAY – eBay, Inc. $65.99 -0.90 (-2.51 this week)

After developing a Web-based community in which buyers and
sellers are brought together in an efficient format, EBAY has
emerged as the dominant online auction site.  The eBay dynamic
pricing format permits sellers to list items for sale, buyers to
bid on items of interest and all eBay users to browse through
listed items.  Items listed on eBay include collectibles,
automobiles, art objects, jewelry, consumer electronics and a
host of practical and miscellaneous items.  Although based in
the United States, through its subsidiaries, EBAY also operates
trading platforms in Germany, the United Kingdom, Australia,
Japan, Canada, France, Austria, Italy and South Korea.

Most Recent Update

Just as bullish traders liked EBAY for its relative strength
last year, the stock is becoming a bearish target this year due
to its relative weakness.  The Internet index (INX.X) was the
top-performing sector on Thursday, and where was EBAY?  Drifting
lower by 1.3%.  While it is a fairly tepid move for the stock,
it is notable for its divergence from the INX.  The stock is now
under its 10-dma ($67.10), 20-dma ($66.71) and 30-dma ($67.19),
and that makes the $67-68 area look like pretty firm resistance.
Daily Stochastics are heading towards oversold in a nice, orderly
fashion, bringing up the likelihood of a test of the $64 support
level in the near future.  The 50-dma is resting at $63.57, and
we would expect to see some buying interest near that level
(read: good place to harvest some profits).  Target new entries
on a rollover near resistance, especially if the INX starts
showing signs of weakness.

Comments

EBAY rolled over from the $69 level again Wednesday, and followed
through to the downside in Thursday's session.  The selling could
pick-up in tomorrow's session if the tech sector weakens.  Watch
for EBAY to breakdown below the $65 level in conjunction with
weakness in the Internet Index (INX.X).  A move in the INX.X below
the 142 level could pressure EBAY lower in the short-term.

***January contracts expire next week***

BUY PUT JAN-70*QXB-MN OI=1314 at $4.90 SL=3.25
BUY PUT JAN-65 QXB-MM OI=5599 at $1.95 SL=1.00

Average Daily Volume = 7.79 mln



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Milking Q-Charts, Part I, An Owners Manual
Buzz Lynn
buzz@indexskybox.com

This may be old news to former Indexskybox subscribers and seminar 
attendees, as a version of it ran there last March.  But a good 
refresher never hurts.  And for those new to OIN and Q-charts, 
this will be extremely helpful in getting started with charting so 
that you can make trades based on immediate and current chart 
signals using detailed information instead of 15-20 minute delayed 
charts with minimal usefulness.  

Besides that, the SEC does not make it possible to operate in 
daytrade mode under parameters of a web site.  Thus we focus on 
the educational part of trading in this column so you can identify 
the trades on your own.  A familiar refrain:  Give a man a fish, 
feed him for a day.  Teach him how to fish, feed him for a 
lifetime.  The following is the first step to fishing, 
metaphorically speaking.  I'll leave the real thing to experts 
like Eric Utley, Jeff Bailey, and Austin Passamonte for another 
occasion.

One caveat, this is not a plug for Q-Charts.  It's just that we 
use it almost exclusively because we think it offers the best 
combination of charting, graphics, functionality, and usefulness 
for the money of any of the charting programs we have found.  We 
often get reader questions asking from where do we get our charts, 
and Q-Charts is the answer.  You can access it at:

http://finance.lycos.com/home/subs/default.asp

No need to get fancy, the "Q-Charts Basic" does just about 
everything you'll need it to do, and that's what we almost 
exclusively use around here.  Monthly service plus exchange fees 
amount to just under $85 per month.  Of course, if you want to 
spend more for the extra features, feel free.

Anyway, ever wonder what black box we use to give us our technical 
signals for entry and exit on our plays, both index and individual 
equities?  If so, today is your lucky day!  Cut, paste, copy, and 
archive this on your favorites list so you can access it anytime 
you like or need it.  By the time we finish here, you will have 
the basic framework

The truth be known, once we lay it out, and once you set it up, 
you’ll never have to think about it again.  So forget that archive 
thing – just follow the column!

You’ll notice that we use primarily four indicators at Index 
Skybox and derive a fourth.  Including candlesticks, we stick to 
the Bollinger bands, MACD (moving average convergence-divergence), 
and stochastic(s).  From these we draw lines noting bullish or 
bearish divergence, but that’s topic #5 for another column.  
Tonight, we stick with the Bollinger bands, MACD, and Stochastics.

Of course there are many charting programs out there.  We 
gravitate to Q-Charts, but a few of us also use e-signal or 
TC2000.  It really doesn’t matter as long as your signals use the 
same inputs so that you see on your charts what shows up in the 
pages here.  That way, you can see the move coming and act on it 
before it legally posts to the web page for all eyes to see with 
equal opportunity.

So without further delay, lets start with Bollinger bands.  Those 
are the two thick blue lines that contain the candlestick movement 
with 95% certainty.  That means with 95% accuracy, the price will 
remain with two standard deviation of the mean, which in this case 
just happens to be the 20-pma (period moving average – dma if you 
use the daily chart).  Here’s how we set that up in Q charts.

Once the charts are open, from the top menu select “Studies”, then 
highlight and click on Bollinger Bands.  It looks like this:



 


Once you click “Bollinger Bands”, another box pops up that 
automatically defaults to “20,2 – close”.  It is possible to 
adjust the "Source" as open, high, low, or close.  Close is the 
default - keep it there.  Experts can noodle with this in their 
spare time to fine tune a personal preference.



 


Simply click OK, and a hypothetical SPX chart should now look like 
this (minus the black scoreboard in the upper left and oscillators 
at the bottom – more on those in a minute):



 


How to use that information?  Simple.  The bands will contain 95% 
of the candles’ move.  Any moves outside the bands are extremes, 
and markets hate extremes, thus they tend to correct in the 
opposite direction and return to the mean.  Bands should not be 
your only indicator.  They work best when used in conjunction with 
Stochastic and MACD, which we turn to now.

Austin Passamonte's Index Skybox section uses a Stochastic setting 
of 5(3),3.  The rest of us mostly use 5(3)3 too, however, I like 
to use a 5(3),3 and 10(5)3 simultaneously.  I'll explain that in a 
future article.  For the curious, a stochastic actually sets two 
moving averages to work with each other, hence the plural, 
stochasticS.  What’s it mean?  It’s just an indicator of 
overbought or oversold.  An index or equity is overbought when 
above 80% and oversold when less than 20%.  Generally we target 
calls when the 30/60/daily charts all emerge stochastically from 
oversold to head back up again.  Generally, we target puts when 
the 30/60/daily charts rollover back under 80% and head down from 
overbought.

Here’s how to set up your stochastic indicator.  Again, click on 
“Studies” from the menu, and then select “Stochastic”.  It looks 
like this.



 


It will automatically pop into your chart – simple as that.  The 
trouble is, we now need to adjust the setting.  To do that, place 
your cursor over the stochastic part of your graph, right click, 
and select “preferences”.  In the example below, you can see a 
10(3)5 setting, but simply substitute 5(3)3 instead.  Everything 
else can be "seasoned to taste", but keep the upper band at 80 and 
the lower band at 20.




 


Click OK and your chart will now contain the stochastic indicator 
with the same settings we use.

Last but not least, we set the MACD.  Same steps all over again.  
Go to the menu at the top of the chart, select “Studies”, and then 
select “MACD”.  It will automatically pop into the chart.  Now 
place your cursor over the MACD portion of the chart and right 
click, then select “preferences”.  Like filling in the stochastic, 
fill in the MACD blanks with the following numbers - 8,18,6 just 
as it appears on the image below:




 


Click OK and you should have a chart that looks like this:



 


Well, looky there!  We accidentally swerved straight into a 
bullish chart!  Too bad it was from March of last year where SPX 
values were significantly higher and the market was about to tank.  
What we see first is a nice pop up from the lower Bollinger band, 
which indicates that investors felt enough pain at the lower 
extreme.  

The next thing we see is the stochastic poking up from the 20% 
oversold mark – not only the fast stochastic (blue), but the slow 
stochastic too (red).  Investors are tired of heading south since 
February 1st, 2001 and are psyched up about finding some relief.  
There is a nice trajectory headed up the chart to overbought.  
Again, too bad it was a false signal.

Finally, MACD, the laggard, confirms the stochastic move.  It too 
has finally gone positive - sadly for the bulls, another headfake.  
Unlike the stochastic, which moves between 0-100%, the MACD 
fluctuates positive or negative around a “zero” line.  That’s the 
magenta colored part of MACD and is nothing more than graphical 
difference between the red MACD line minus the blue MACD line.  
The trajectory here has just crossed over from negative to 
positive too, usually considered bullish.

The trick here will be to watch the candles as they approach the 
20-dma and/or the upper Bollinger band.  It is at that point that 
we would start to collaborate again with a stochastic entering 
overbought territory at 80% or more, and watch the MACD to see if 
a magenta slope starts heading down again.  Hindsight showed that 
the 20-dma proved resistance and down she went.  Even when a play 
enters overbought (though not the condition of the current market) 
it can move up in price while the stochastics are limited to 100%.  
In other words, the index can move up while the stochastic remains 
flat in overbought for a while.

To finish it up, we would use our trailing stop loss order to get 
us out and re-enter the SPX with a put position just as soon as 
the price turns away from the upper Bollinger band or even the 20-
dma (redline between the blue Bollinger bands), and the 
stochastic and MACD oscillators emerge down from overbought.

NOTE:  This is only for longer term and Position trading.  Swing 
trading and daytrading are much faster and we must rely on the 
conjunction of shorter-term charts falling into just the right, 
but similar, setup.  While principles are the same, the time frame 
setups vary depending on the type of trade – day, swing, position, 
or share trading.  The time horizon determines the montage of 
charts.  Perhaps that is stating the obvious, but don’t try to 
daytrade the SPX using just the daily chart to “confirm” your 
entry.  It isn’t enough information

There you have it.  Now you should be able to set up your charts 
(or closely approximate) to see the same things we see before we 
execute a trade.  Next time, we’ll dissect the montage time frames 
for the different trade styles mentioned above.

Until then, eat, drink, breathe and sleep technical indicators.  
(Sirens should be going off – Fundamentals Guy said THAT?)  In 
time, with the exception of support and resistance, price will 
begin to matter less and less, while oscillator trends will bring 
reliable profits.

Keep your wings level and trust your instruments!


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