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Daily Newsletter, Monday, 01/14/2002

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The Option Investor Newsletter                   Monday 01-14-2002
Copyright 2001, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
      01-14-2002          High     Low     Volume Advance/Decline
DJIA     9891.42 - 96.11  9985.38  9889.27 1.26 bln   1250/1904
NASDAQ   1990.74 - 31.72  2018.42  1979.94 1.79 bln   1215/2456
S&P 100   580.86 -  3.34   584.55   580.58   Totals   2465/4360
S&P 500  1138.41 -  7.19  1145.60  1138.15             
RUS 2000  483.01 -  6.93   489.94   482.28
DJ TRANS 2662.43 - 44.34  2705.21  2650.55
VIX        25.02 +  1.04    25.39    24.49 
VXN        49.51 +  1.14    51.44    48.94
TRIN        1.79 
Put/Call    0.66
******************************************************************

Yes, But Did He Say, "FORSEEABLE Future"?
By Buzz Lynn
buzz@OptionInvestor.com

Looks like investors have begun to sit up and take notice of the 
business conditions surrounding the world's major corporations.  
Greenspan's comments last Friday highlighted by Jim Brown over the 
weekend - rising mortgage rates, auto sales black hole for 2002, 
bottomed energy prices, increased consumer debt, rising 
unemployment - apparently had a chance to sink in.  When Greenspan 
said, "significant risks in the near term", that was all it took 
to un-nerve the markets, and carried through today.

Le me point out that the Fed has a notoriously bad record of 
gauging business strength or weakness and has always prefaced 
their comments with "in the foreseeable future", "going forward", 
or "in the near term".  Straight up question: has this Fed ever 
been correct about the foreseeable future, in the near term, going 
forward?  Hmmm - let us think. . .no.  Neither the Fed nor anyone 
else has even the slightest ability to predict the economic 
turnaround that is (oops, was) sure to come in late 2001, the 
first half of 2002, the second half of 2002, or even late 2003.  
So when you hear the words, "in the near term", you can be sure 
the Fed has no idea what's coming and is reacting to the economy 
the same as a race car driver reacts to the road using his 
rearview mirror in hopes that he'll find his way to the finish 
line.  The future is never foreseeable for the Fed.

Back to the subject - The Fed's Friday comments carried through 
further today as investors become increasingly nervous about 
valuations.  The hope is that earnings are going to have to rise 
fast (beginning tomorrow with Intel [INTC]) or prices will have to 
fall to solve the valuation puzzle.  Those fellow traders among us 
that were former Skybox subscribes know where I stand on that 
issue.  I've been harping a long time that stocks are overvalued, 
that current economic conditions would not support values, and 
that a consensus of bullish analysts are typically wrong.  If the 
charts are any indication, long-term investors in tech stocks may 
be about to get another lesson on the value of going short, 
protective puts, and/or stop losses.

Whether we want to believe it or not, we are in a primary bear 
trend, which is always marked by negative surprises - Enron 
collapse, Arthur Anderson document shredding, K-Mart's junk debt 
status with the possibility of bankruptcy, Ford laying off 35K 
employees, Merrill Lynch laying off 9K employees, Polaroid (PRD) 
files for bankruptcy, and an epidemic of Fed heads ever so 
concentrated around the central theme of "substantial near-term 
risks to the economy".  [Editorial translation:  the concept of 
the market anticipating an economic rebound is turning to vapor.]  
Anyone of these could easily be ignored (as in the past).  
However, that they all happen together is not coincidence.  That 
is what happens in a primary bear market and more are sure to 
come.  Accordingly keep your ears open for "accounting 
irregularities" as more companies are called to the mat for one-
time, extra, additional, optional, non-recurring charges purposely 
excluded in "pro-forma" earnings.  Honest people call it by its 
real name - losing money.

Speaking of which, a great parody of an earning report 
announcement by Alan T. Saracevic, who writes the "Money Talks" 
column in the San Francisco Chronicle, appeared over the weekend.  
I'll save you all the detail, but two quotes lines were so 
hilarious that they bear repeating.  It typifies analysts comments 
as they gloss over economic reality: Reporting the results of a 
Money Talks Vegas gambling junket as though it were a publicly 
traded business, "Money Talks is proud to report a pro-forma net 
profit for the first weekend of 2002, excluding one-time, after-
tax charges for incidentals such as lodging, food, binging, and 
poor gambling strategy".  Saracevic added, "We are confident that 
Wall Street's continued denial of actual expenses and losses will 
drive our stock to higher levels."  At least I thought it was 
funny!

But to the business of trading the equity markets, they did not 
perform so well today for those that were bullish.  Not too well 
for those bearish either, as the markets remained range-bound 
following a gap-down open, although traders that rolled the 
bearish dice over the weekend got a payoff for their risk.  What 
do the charts say?  In a nutshell, for investors, the bear rules.  
For the traders, the bear has ruled and may continue to do so but 
could easily be interrupted by fast bullish plays for those 
engaged in daytrade mode.  But even for traders, there is little 
bullish fruit on the tree until the daily chart oscillators 
reverse their downtrend, which has just entered oversold on the 5 
period stochastic.  Take a look.

Dow Industrial chart (INDU):


 


The Dow closed down another 96 point today to close at 9891 on 
1.26 bln NYSE shares traded.  Decliners beat advancers 3:2.  
Weekly and daily chart reflect the bears' success over the past 
six days.  Both stochastic values are pointed down suggesting 
further weakness.  The 200-dma of 10,104 was violated last week 
and the index has stopped dead at the 50-dma of 9892 which may 
provide some support especially since the odds of a seventh down 
day are about the same as tossing coin that comes up heads seven 
times in a row.  It becomes more unlikely with each successive 
toss.  So too with the indexes.  Should the 50-dma fail though, 
9835 offers lower Bollinger band support with the 50% retracement 
off May's high of 9768, another point of major support.  However, 
today's close at the low suggest tomorrow's open may continue in 
the bears' favor.  

NASDAQ chart (COMPX):


 


Similar situation for the NASDAQ - down 31 to 1990 on 1.79 bln 
shares with decliners outpacing advancers 2:1.  Were there more 
volume, I'd be concerned.  Nonetheless, Oscillators are pointed 
down on longer-term charts while bear flags have formed on 60/30 
charts.  While anticipation of INTC earnings my help to keep 
prices from sinking further tomorrow, the final bear flag is 
waiting to break down.  While we wait, the NASDAQ may trade a bit 
flatter tomorrow as it has not suffered the six negative trading 
days in a row as the Dow has.  2000 is still pivotal and may 
become resistance if bears have their way.


S&P 500 chart (SPX):


 


Surprisingly, the SPX looks more like the COMPX than the Dow.  
Weekly/daily Stochastic values are in full dive mode.  The best 
stochastic efforts of the 60/30 charts are not enough.  The 30 min 
chart broke its bear flag or perhaps formed an expanding cone 
depending on how you draw the lines.  A bounce is possible 
following five of six down days and the 50-dma of 1140 may offer 
support.  But every other signal says to look for lower prices.  
INTC cannot hold up the SPX.

The VIX is beginning to show increased pessimism after touching 22 
last week and landing today at over 25.  The contrarian in me says 
that VIX will hang here or move ever so slightly lower just to 
entice a few more bulls into the party before the horn lopping 
begins.

As for tomorrow, statistics tell us that the indexes are due for a 
bounce since nothing falls or rises in a straight line.  While 
there may be bullish fits and starts in tomorrows action, I 
personally will be targeting the downside on any strength because 
I'm not buying into the hope that tech earnings (or many others) 
are making a recovery, especially with INTC who is expected to 
report a profit of $0.11 after the close tomorrow.  Other earnings 
reports will come from RFMD, WM, JNPR, and EBAY tomorrow.  I will 
step out on a limb and suggest that no amount of spin will mean a 
thing and that the released figures will offer no cause for 
optimism for the rest of the year because most will decline to 
offer solid guidance.  Retail sales will also be reported in the 
morning and my fundamental brain thinks there will be little for 
bulls to hang their hat upon.

Again, I will be looking at any tops of intraday strength coupled 
with overbought 60/30 stochastics to be a put buying opportunity.  

See you at the bell!


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

Having Fun Down South 
Austin Passamonte

For weeks now as the broad markets chopped sideways trying to eke 
their way higher, it was apparent to all that the late September 
rally was a bit overdone and could not last forever. Whether price 
action is destined to retrace mildly or more is unknown, but 
retrace it shall until oscillators release from overbought to 
oversold extreme once more.

(Weekly/Daily Charts: SMH)


 

The semi-conductor HOLDR offers an interesting risk/reward ratio 
here. Prices have weakened and hold below a two-week downtrend. A 
short near 45.00 should have room to fall into at least the 43.30 
range, where 50 and 200 DMAs meet the next ascending line of 
support.

Short on a break below 45.00 and stop just overhead might be 
trailed to entry or a bit better if weak prices test the levels of 
support below. Surprisingly good news from INTC could gap them 
higher, but it's possible much of that is already marked to 
market.

(Daily chart: SWH)


 

Software HOLDRs sit on short-term support near 48 level with next 
support 2 or more points below. Stochastic values are totally 
bearish, and a break below 48 should reach 46 area before reacting 
from there. Again, tight stops at first and trailed down to entry 
or below offers an interesting way to bet this one early in its 
move.

(Daily Chart: HHH)


 

The juiciest one of all has to be HHH Internet HOLDRs. Three solid 
reasons to smack this one on the behind if it continues to head 
south. Broke (failed) a bullish triangle, which is bearish. Broke 
below its 50-DMA and stochastic values show zero sign of turning 
up. A break below 34 and we're in!

Conclusion
Broad markets have dropped a fair bit in the past two weeks but 
appear to have further downside potential to go. Expect the next 
rally attempt at any time, especially when knee-jerking earning 
reports. But as we've witnessed for nearly two years now, that may 
only be a temporary prop. Looks like we can expect more fun in the 
sun playing southbound markets before spring returns once again!

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
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Over 200 pages of strategies from simple calls and puts to 
spreads, straddles, naked puts, combination plays, leaps etc.
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Swing Trading For Success - Austin Passamonte

A descriptive outline providing simple guidelines that allow 
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The secret of swing trading is exposed: Identify underlying 
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Point-and-Figure Charting - Jeff Bailey

In this trading guide, Jeff Bailey reveals the secrets to 
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If you have never used Point-&-Figure charts in your investment 
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Jeff illustrates the basic interpretations for beginners while 
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Technical Analysis Explained - Eric Utley

There are myriad technical analysis tools for today's trader. Eric 
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Long-time subscribers of Option Investor have seen tools such as 
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used by our Leaps Editor, Mark Phillips. This manual details the
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2002 Mutual Fund Guide - Steve Wagner

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Aggressive, conservative or income producing, there are funds for
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You will get two of these handy mousepads with the 2002 options
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**************
Traders Corner
**************

More On The Application of Moving Averages
By Mark Phillips
Contact Support

Last week, I embarked down the path of sharing with you a
particular system utilizing two different moving averages to
pinpoint emerging price moves likely to provide solidly
profitable trades.  Quickly reviewing, the system consists of a
10-day moving average of the highs and an 8-day moving average
of the lows.  This creates a sort of expanding and contracting
ribbon, where we can target trades each time the stock in
question moves through the ribbon and begins to distance itself
from that ribbon.

I expected to field several questions from readers after last
week's article, but I didn't foresee what the focus of those
questions would be.  Without a doubt, the most popular question
involved how to construct the moving averages and whether they
needed to be calculated by hand.  For the benefit of all, let me
share the answer here.

If you happen to use Qcharts, as most of us here do, the
software does it very nicely for us.  Note that when you add a
moving average to a chart from the pulldown menu, it gives you
the option to base the moving average on either the open, high,
low or closing price.  Place your cursor over the chart, do a
right click and then select Studies from the pulldown menu.  The
top selection in the next menu is Moving Averages.  Select that
and in the dialog box that comes up, select Add.  The next dialog
box allows you to select the period of the moving average, along
with color and thickness.  There is also a field called Source
with a drop-down selection of High, Low, Open or Close.  Take
your pick and you're done!  By the way, for those of you that are
new to Qcharts, I highly recommend you read the series that Buzz
Lynn has started on how to use Qcharts.  He does an excellent job
of making this powerful tool easy to use.  Here is the link to
last week's article on the subject, and I expect he'll be
building on the basics this Thursday.

Milking Q-Charts, Part I, An Owners Manual

For those of you that use a different program, the process should
be similar.  I've used several different charting programs over
the years and all of them provide the ability to base moving
averages and other indicators on any of the four price fields
(Open, High, Low, Close) that we choose.  And for those of you
that prefer to do it the old fashioned way, here is the basic
procedure to follow:

All you have to do is create an 8-day moving average (add the
lows for the last 8 days and divide by 8) of the lows and a
10-day moving average (add the highs for the last 10 days and
divide by 10) of the highs.  Then compare the daily prices (Open,
high, low, close) to the calculated moving averages.  When you
have 2 consecutive days with all prices above the 10-dma or
below the 8-dma, you have your entry signal.

Alright, now that we've dispensed with that, let's move on to
learning something new.  Afterall, that's why we get together
for these discussions every week, isn't it?

Apart from having the prices close above or below the ribbon,
there are some valuable clues that we can gather based on the
motion of the two moving averages relative to one another.  As
stocks go about their business of rising and falling with the
ebbs and flows of the market, the two moving averages will
converge and diverge from one another in a fairly orderly
fashion.  But at significant turning points, the action of these
moving averages can frequently give us a preview of what to
expect.

As a rally becomes more mature, the lower moving average will
tend to move closer and closer to the upper moving average,
causing the ribbon to become more narrow.  Each leg of the rally
shows price moving higher, dragging the upper moving average
further away from the lower one, causing the ribbon to expand.
This is entirely normal. (By the way, have you figured out yet,
that these two moving averages never cross?)  

But what we are looking for is the point where the ribbon between
the moving averages begins to expand rapidly.  This is usually
accompanied by the price moving down to and possibly below the
lower moving averages.  While it isn't a trading signal, it
frequently gives us a warning signal that the primary bullish
trend is about to change in favor of the bears.  Let's look at
an example.



 

I've gone back to our IMCL example from last week and we can
walk through the birth of a bearish play setup together.
Throughout the post-9/11 period, the stock was in a solid
bullish trend.  Each dip was buyable, with the daily Stochastics
stubbornly refusing even to touch the oversold region.  You can
see how the stair-step pattern of upward price movement kept the
ribbon expanding and contracting, with nothing exciting from a
bearish standpoint until the end of November.  There we see the
ribbon getting very narrow, a very early sign that the move may
be running out of steam.  Then on the last candle shown we can
see the possibility of the bears gaining traction.  This was the
most negative 2-day period of the entire chart shown.  No action
to take yet, but we should be paying attention.



 

Look how quickly things change.  One week later we can see a
sharp expansion of the ribbon, as the lower moving average has
peeled off and price is barely hanging onto the lower moving
average.  Daily Stochastics have finally broken into the
oversold region, and the oscillator recovery looks weak and
could be subject to failure.  At this point, I'd be watching the
stock very carefully and doing more in-depth research to see if
there was any pertinent news.  Recall that it was about this
time that the first rumors were starting to emerge that IMCL
might not get FDA approval on its pending drug application.



 

And then it happened.  Four days later (just under 2 weeks from
our first hint of trouble brewing), we got a solid entry signal,
with 2 consecutive days' price action unable to touch the lower
moving average.  Take the entry the next day and manage the play
with a stop just above the upper moving average, ratcheting it
down as the play progresses.  # days after our entry, it is off
to the races as the bad news mounts, with only one touch of the
lower moving average since the move got underway.  Clearly this
is an extreme example, but I think it does a good job of
highlighting how this moving average ribbon system can identify
strong play candidates early, allowing us to play the stock in
an anticipatory, rather than reactionary mode.

The bullish case materializes just the opposite of the bearish
case, and while I don't have time to analyze it in detail, I
think the chart below (also IMCL) shows what we are looking
for.



 

After a nearly 5-month decline, IMCL appeared to be nearing an
important bottom.  This could be seen on the weekly chart (not
shown) as the Stochastics were reaching their most oversold
level in over 3 years.  That was enough to get my attention
focused on the possibility of a bullish trade.  Notice how the
ribbon on the chart above was expanding all the way through the
end of March.  Then it finally started to narrow by early April.
That is the warning setup we look for in trying to find bullish
trades.  An expanding ribbon that starts to narrow significantly.
And then right there in mid-April, we got 2 days above the upper
moving average and we have our first entry signal.  We get into
some trouble in late April/early May, but notice that each dip is
met by solid buying, bringing the stock back into the interior of
the ribbon.  And then in mid-May, we get the second entry,
labeled Entry 2.  Note the expansion and then sharp contraction
of the ribbon just before Entry 2 -- that's another early warning
sign that there is another entry brewing.  That's useful in case
we missed the April entry or got stopped out on the relatively
flat action between the 2 entry signals.

Once again, I've covered a lot of material, and run out of time.
Hopefully this helps to fill in the blanks we left last week.
Next time, we'll talk about another little-known trading pattern
that I've found useful over the years.  I hope you do too!

See you next week.


Mark Phillips
Contact Support


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

IS Swing Trade Model: Monday 1/14/2002
Clearer Picture

News & Notes:
------------
"Buy puts on the open" was the best advice we could offer for 
today, and that wasn't considered very high odds. With short-term 
chart signals all in oversold extreme zones, a reflexive bounce 
was due. We saw that near 2:43pm as noted in Market Monitor, but 
it was what I deem a small-position play entry. 

From there the indexes popped a tad higher and promptly sold off 
to session lows at the close as chart signals told the tale. From 
here we have a decent picture of how to handle the markets next.


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


 

More than one version of chart pattern can be drawn in the S&Ps 
tonight, and we'll mix it up. Suffice it to say that results are 
still the same: bearish consolidations look to be continuation 
patterns from here.

The OEX has stopped near 580 level several times the past two 
days. A break below may send it to 575 in a hurry, offering 
decent returns should that happen. I could see it reaching 570 
area before making a strong bounce, which should double (or 
better) long put options right now.


[60/30-Min Chart: SPX]


 

Same idea for the SPX as always. Here we have a bigger bearish 
triangle drawn in the 60-min chart (right) than the OEX showed. 
The 30-min chart (right) shows a neutral wedge that broke below 
1140 at the close, which would have been our ideal entry. 


[60/30-Min Chart: QQQ]


 

The QQQ offers a similar wedge and bear-flag pattern as well. 
While the QQQ seldom traces "clean" price patterns without spikes, 
we could either say that the 30-min pattern had today's close just 
above or just below support. But that's splitting hairs and if it 
moves lower from here we'll track open puts with room to the 38 
area ahead.


Summation:
---------
Traders playing Jan option contracts have an excellent chance for 
high multiple gains or total loss for the remainder of this week. 
We will not list stop orders thru Friday's action, suggesting 100% 
risk capital instead. That means whatever dollar amount any trader 
would risk to loss on a stop is the exact amount to buy options 
with right now. Instead of risking -$1,000 on a play, only buy 
$1,000 worth of option value instead.

Now the loss has already been factored in and we can hold one side 
until 4:00pm on Friday with greater chance of success than trying 
to use stops at a time when price values fluctuate wildly. Just 
remember not to risk larger amounts of capital than 100% loss 
amount, hit the right direction and one may have a very good week 
in the process!

*Note* Both SPX and DJX Jan option contracts cease trading 
Thursday night at 4:15pm EST and settle in value on Friday's 
calculated open.


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:  39 (QQQ-MM)            Jan Puts: 99 (DJV-MU) 
Long: BREAK BELOW: 39.75          Long: BREAK BELOW 9,880
Stop: Break Above - NONE          Stop: Break Above - NONE 


=====

         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: 575 (OEB-MO)            Jan Puts: 1140 (SPT-MH)
Long: BREAK BELOW 580.50          Long: BREAK BELOW 1138.00
Stop: Break Above - NONE          Stop: Break Above - NONE 



Open Plays:
----------                                                       
None


Sector Share Trade Model: Monday 1/14/2002
No Sign Of Strength

News & Notes:
------------
Markets continue to bleed off in the face of earnings season and 
no sign of sustained upward strength is visible tonight. A slew of 
short-share candidates are listed for entertainment, and 
weekly/daily charts suggest sell & hold is the way to play for 
now.


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


 

As witnessed in tonight's Index Wrap, the SMH offers a nice 
risk/reward ratio setup. a short below 45 and stop above 47 with 
first target to 43 area gives 50/50 price, with scales tipped in 
our favor via bearish weekly/daily stochastic values.


[Weekly/Daily Charts: QQQ]


 

The QQQ is similar, with a neutral wedge forming amidst somewhat 
bearish charts. Short entry on break of support and tight stop 
lets us test further downside action should it continue.


Summation:
---------
We have a solid string of short candidates tonight while looking 
for downside continuation ahead. All weekly and daily charts look 
weak but after several negative sessions in a row there is always 
the chance that an upside pop could emerge. We would prefer to 
take short entries on a failed effort like this rather than 
further drop from here, but the markets may not bounce for days.

As usual, these tracked entries are educational in purpose and 
will be fun to see how many of them admirably perform. The ability 
to trail tight stops and reduce risk gives us confidence to press 
the downside should it further emerge from here.


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 

01/14
QQQ Nasdaq-100 HOLDr
Short: BREAK BELOW 39.50 
Stop:  Break Above 41.00 

DIA Dow Industrial Diamond
Short: BREAK BELOW  99.00 
Stop:  Break Above 102.00 

SMH Semi-Conductor HOLDr
Short: BREAK BELOW 45.00 
Stop:  Break Above 47.00 

SWH Software HOLDr
Short: BREAK BELOW 48.00 
Stop:  Break Above 50.00 

HHH Internet HOLDR
Short: BREAK BELOW 34.00 
Stop:  Break Above 36.00 

IAH Internet Architecture HOLDr
Short: BREAK BELOW 39.00
Stop:  Break Above 41.00

XLY Cyclical Transport SPDR
Short: BREAK BELOW 39.00
Stop:  Break Above 41.00

XLV U.S. Consumer SPDR
Short: BREAK BELOW 39.00
Stop:  Break Above 41.00

XLF Financial SPDR
Short: BREAK BELOW 26.00 
Stop:  Break Above 28.00


IS Position Trade Model: Monday 1/14/2002
Still Going South

News & Notes:
------------
Markets fell again today, upping the value of tracked put plays a 
bit. had we entered right at the top it would be a wonderful 
story, but were about one day (tow maximum) early in the process. 
Catching market turns in buy & hold fashion is tough, so we'll see 
if continuation persists over the next four-plus weeks until Feb 
expiration.


Featured Plays:
--------------
(Weekly/Daily Charts: DIA)


 

The Dow looks like many other indexes and sectors right now: 
sitting on support or just below. With oscillators barely begun 
the trip from overbought to oversold extreme, our Feb 98 put play 
left for awhile might fare nicely indeed.


Summation:
---------
The first failed rally from here would be an excellent place for 
new Feb and March contract puts, but we could use a bounce from 
near-term oversold conditions first. That may not happen until 
lower market price levels from tonight, and higher-risk traders 
may consider using Sector Share short-play triggers for new Feb or 
March contracts before our next inevitable bounce.


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

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


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The Option Investor Newsletter                   Monday 01-14-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

To view this email newsletter in HTML format with embedded
charts and graphs, click here:
http://www.OptionInvestor.com/htmlemail/0114_2.asp



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

PVN - call
Adjust from $3.25 up to $3.50

EBAY - put
Adjust from $66 down to $64

ELBO - put
Adjust from $37.00 down to $35.50

QCOM - put
Adjust from $50 down to $48.50

THQI - put
Adjust from $50 down to $48.50


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

EMLX $42.60 -3.01 (-3.01) What started out as a continuation of
Friday's profit-taking this morning turned into an all-out rout
for the bulls as one support level after another gave way.  By
the time the closing bell rang, EMLX had plunged more than 6.5%,
taking out our $43 stop on solid volume.  Not only did we get
stopped out, but daily Stochastics are now in full decline,
indicating there will be more weakness ahead.  We have no choice
but to pull the plug on EMLX tonight.  While the stock is
currently below the point where we picked it, traders that bought
the dip and sold near resistance last week managed to pocket a
nice gain.  Proof positive that timing is critical in this
market.

GNSS $67.14 -4.97 (-4.97) All good things must come to an end
and it looks like the bullish run in shares of GNSS is over from
now.  Last week delivered our much-anticipated breakout before
the stock ran almost to $75.  The profit taking started gradually
before becoming a flood on Monday, knocking the stock back for a
nearly 7% loss.  In the process, the stock took out our $68 stop
and it is with a heavy heart that we move GNSS to the drop list
tonight.  But fear not.  Given the strength of the stock in
recent months, it's a safe bet that we'll feature it again real
soon.

MANU $18.04 -2.11 (-2.11) After just over a week on the playlist,
we need to pull the plug on MANU.  Unable to retest its late
December highs, the stock crept under its 6-week ascending
trendline before breaking down in a big way on Monday.  Starting
with its drop below the 200-dma shortly after the opening bell,
the stock headed straight south throughout the day, closing at
the low of the day and taking out our $18.25 stop in the
progress.  File this one under the heading of "busted plays".


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

BBOX $49.19 -0.80 (-0.80) While it was a quick play, those that
chose to partake were not disappointed, as BBOX gave us a quick
drop from the $50 area to as low as $47 this morning.  The
rebound actually had some volume behind it, and those with open
positions should have been locking in their profits near the
lunchtime lull.  While the stock looks like it may have some
more downside left, we don't want to hold over the earnings
announcement tomorrow morning.  There's too much risk from the
unknown.


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

THQI – THQ Inc. $43.85 -2.03 (-2.03 last week)

THQ Incorporated is a developer, publisher and distributor of
interactive entertainment software for hardware platforms in
the home video game market.  The company publishes titles for
Sony's Playstation 2, Nintendo 64, Nintendo Game Boy Color and
personal computers in most interactive software genres,
including children's, action, adventure, driving, fighting,
puzzle, role playing, simulation, sports and strategy.  Its
customers include Wal-Mart, Toys "R" Us, Electronics Boutique,
Target, Kmart Stores, Best Buy, as well as other national and
regional retailers, discount store chains and specialty
retailers.

Most Recent Write-Up

Despite encouraging sales numbers from the likes of Best Buy,
shares of game-maker THQI have been in a steady decline since
running out of gas in early December.  Since tagging an intraday
high of $65.10, the share price is down nearly 30%.  And judging
by the way selling volume has been on the rise, the end is not
yet in sight.  The first week of the new year saw the stock
battle back above its 200-dma and it looked like it might have
put in a bottom near the $46-47 level.  But bullish enthusiasm
was short-lived as the stock rolled over at its declining 20-dma
(now $51.09) last week and headed sharply lower, breaking below
the 200-dma ($49.28) on Thursday and closing on Friday below $46.
So much for support.  With the 10-dma ($49.17) crossing below
the 200-dma and the 20-dma not far behind, it looks like the
stock is going to have a hard time regaining the half-century
mark.  A bounce and rollover in the vicinity of the 200-dma
would make for an ideal entry, but we may not get that lucky. 
Looking at a retracement of the stock's rise between
mid-September and early December, we can see the 62% level
resting at $47.73, and a failed rally near that level certainly
makes sense as an entry into the play.  While momentum traders
can take advantage of a continued decline below $45, they'll
want to keep a sharp eye out for buying support near the $42
support level, also the site of the 81% retracement.  We're
initially placing our stop at $50.

Comments

After the painful slide in shares of THQI so far this year,
Friday's action brought the stock right to the cusp of a
breakdown under the $46 level.  Eager bears got their wish on
Monday, as the stock plunged as low as $43 before a mild end of
day recovery.  Now that the tepid holiday spending season has
passed, investors are rotating out of stocks tied to the retail
market, and THQI should continue to feel the pinch from that
effect.  Look to initiate new positions on a drop below the $43
support level if volume remains heavy (nearly double the ADV on
Monday).  Otherwise, wait for the oversold bounce (yet to come)
to run out of steam and target new positions near the $47 level
(the site of Monday's high).  Lower stops to $48.50.

BUY PUT FEB-45*QHI-NI OI=283 at $4.50 SL=2.75
BUY PUT MAR-40 QHI-OH OI= 42 at $3.50 SL=1.75

Average Daily Volume = 1.59 mln



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