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Daily Newsletter, Tuesday, 01/15/2002

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The Option Investor Newsletter                Tuesday 01-15-2002
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)
************************************************************
       1-15-2002           High     Low     Volume Advance/Decline
DJIA     9924.15 + 32.73  9986.21  9865.61  1.3 bln   1871/1280
NASDAQ   2000.91 + 10.17  2011.25  1977.28  1.6 bln   1853/1772
S&P 100   584.85 +  3.99   586.10   579.62   Totals   3724/3052
S&P 500  1146.19 +  7.78  1148.81  1136.88
RUS 2000  485.00 +  1.99   485.21   480.53
DJ TRANS 2686.08 + 23.65  2705.11  2655.37
VIX        24.42 -  0.64    25.47    24.17
VXN        48.02 -  1.49    49.59    47.94
TRIN        1.28
Put/Call Ratio       .77
*************************************************************

Intel Drops A Bunker Buster

Intel nuked the chip sector after the close with better than 
expected earnings but less than expected spending. Leading a
busy announcement schedule after the close INTC stole the 
limelight from EBAY and JNPR with a market numbing announcement
that they were cutting capital spending for 2002 to $5.5 billion
from $7.3 billion. The 25% cut means significant problems for 
companies that make the equipment Intel uses to produce its chips.
The $64 question on analyst's minds became, "if Intel is cutting 
this much then what about the other chip companies?" Investors
were not waiting around after the close to find out and were 
dumping chip equipment stocks from their portfolios.



 



 


The chip giant posted stellar earnings and beat the previously
lowered estimates of eleven cents with actual earnings of $.15.
They beat the revenue numbers at $6.98 billion, gross margins 
and earnings per share. They claimed a bounce in PC sales in 
the fourth quarter helped them produce these numbers. This good
news was all blown away by the flood of bad news. They do not
see ANY signs of a recovery, sales for the first quarter are
expected to be flat to down, and they are cutting their spending
for new equipment by -25%. In an interview with Andy Bryant, the
Intel CFO, he was asked if this was really a warning on guidance
going forward. He said, "no, not really, we are pretty much going
to be inline with our estimates." The keyword here is "our" 
estimates. Those estimates were for flat and possibly down for
the first quarter with "no recovery in sight." This does not 
sound promising on the surface. Even though P4 processors were
in tight supply they were unable to mount any price gains and
average selling prices were flat to down. Dan Niles said last
week to sell Intel into earnings because it was fully valued
for this years projections. He confirmed this outlook after the
conference call today.

The bunker buster bombshell that rocked the sector was the
cut in capital expenditures for new chip equipment. Intel is
the largest buyer of chip equipment and a 25% drop in their 
spending means serious drops in revenue for all the equipment
makers. Andy Grove tried to spin the announcement saying that
new technology and price cuts in equipment were going to enable
Intel to get the same amount of equipment for the cheap price.
Whether this was spin or truth evaded investors who were busy
trying to execute orders to dump chip stocks in after hours.
INTC lost -$1.00, KLAC -3.60, NVLS -2.45, AMAT -3.00. Contract
manufacturers like TER, box makers including DELL, CPQ, HWP
and SUNW, chip companies MU, RMBS, AMCC and PMCS all lost ground
in after hours. Even software companies MSFT, PSFT, VRTS, SEBL
and ORCL lost ground on the negative outlook.

The ripple effect from the Intel nuke managed to immpact almost 
every PC related stock except Juniper. JNPR announced earnings 
inline with estimates at a nickel but raised guidance slightly for 
the first half. The basically flat guidance was better than analysts
had expected for the networker which had slashed its outlook 
for the fourth quarter due to falling telecom sales. JNPR stock
rose in after hours trading as the only bright spot on the tech
horizon. This enthusiasm may be short lived if other techs follow
the Intel lead and guide flat to down.

Even EBAY, which reported record 4Q earnings from strong holiday 
sales, got killed in after hours trading after failing to raise
guidance far enough for eager investors. Revenue was up +64%
over the 4Q-2000 but even that was not enough. We have seen this
over and over. When Dell was increasing earnings 50% every quarter
the stock was soaring but everyone knew there would come a point
when that type of exponential growth would quit. Otherwise everyone
on the planet would have three PCs each by 2010. You can't grow
50% forever. EBAY has 48 million registered users meaning 1 out
of 3 adults in America has an account on the auction site. 
Factoring out the over 65 crowd, which are not a strong auction 
segment, and the non-PC crowd of 40 million or so leaves very
little room for growth in the U.S.  EBAY dropped nearly $4 in
after hours trading even though they raised guidance for the
next quarter. A prime example of buy the rumor, sell the news,
since all the news was better than analysts had expected just
not better than investors expected.

Handspring also announced earnings and even though sales were
strong in the 4Q their losses widened. They expected things 
to look up in the future once their new "Treo" product hits
full capacity but the company declined to give any guidance
going forward. HAND fell in after hours to $6.95.

Doubleclick surprised analysts with a small profit when they
were expecting a loss and proclaimed the bottom in the online
advertising market. Finally somebody proclaimed a bottom in
something!! DCLK rose in after hours and the report may be
forecasting good things about the coming YHOO earnings tomorrow.

All this flat guidance in the tech sector may be a problem for
the markets going forward. I have been warning that it would
take a lot more than "wishful thinking" to continue the rally
from the first week of January once earnings began to flow. 
Without any positive guidance from the larger players investors
are faced with a problem. The terms like "no recovery in sight"
from Intel today and the bearish comments from Cisco last week
will call into question any recovery before the 4Q of 2002.
Where investors typically buy recessions at the bottom expecting
a recovery six months later, the comments by Greenspan and 
company recently may indicate the bottom may last a lot longer 
than previously expected. If the expected "V" bottom turns into
a long and protracted "U" bottom then investors may avoid stocks
completely until the 4Q of 2002 or signs of a real recovery, 
whichever comes first. 

According to TrimTabs.com cash is still flowing out of equity
funds. They estimate that $5 billion has left in the last ten 
trading days and it is the first time since they began keeping
records that flows were negative the first ten days of January.

Now that I have painted the negative picture there are some
possible surprises. Intel did say their new products were coming
online quickly along with new and better technology which would
enable them to earn in excess of $1 billion this year even if 
there was no recovery. That is not all bad. There is also a
new replacement wave expected to start in 2002 of all those 
pre-Y2K computers that were purchased in 1998/1999. The speed
and memory improvements have pushed those millions of computers
almost back into the stone age when you consider that 2 Gigahertz
processors are the new fad and memory is selling for $39 for
512MB. Those 233/333 Pentium 2 computers are destined for the 
bone pile soon. Some analysts expect that this wave will start
at the end of the first quarter. (Sure!) 

While this is all guesswork by analysts there is a good possibility
that investors will buy any dip caused by the Intel bomb. Stranger
things have happened in the past. Just when you thought the markets
were doomed the lights got brightest. Investor sentiment is strange
in that regard. If you have been following my exit points you should
be flat or short today after the Dow fell below my bullish triggers
last week and failed to bounce at the bearish triggers on Friday.
(10000, 2020) The S&P did manage a bounce on Tuesday off my 1140
support level. We are likely to get a knee jerk reaction dip at
the open on Wednesday but considering the Dow has been down six of
the last seven days, how much farther will it go? I would be cautious
about buying any dips here until we see what new earnings surprises
are ahead. We have plenty of time to wait and waiting does not
cost any money. My worst-case support level on the Dow is now
9725 and 1950 on the Nasdaq. If you have to buy any dip those
would be my choices. Should bullish sentiment appear miraculously
on Wednesday I would be very cautious about joining the party.

Enter very passively, exit aggressively!

Jim Brown
Editor


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

Pro-Forma Performance
Austin Passamonte

As usual, tonight's "new economy" darlings reported earnings in 
customary pro-forma fashion. I'm not sure what's wrong with GAAP 
accounting methods these days, but accounting departments reject 
them faster than coral snakes found in a nightcrawler bait box. 

I myself missed out on fancy new math scenarios in high school and 
college, but no matter: my trading account is not based on pro-
forma numbers. Either I pick the right direction and proper entry 
& exit or I don't. Simple as that. Corporate smoke and mirrors if 
indeed that's what it is means nothing to me, but their charts 
speak volumes.

INTC's announcement of a "slight" reduction in Capex spending 
could pressure various sympathetic suppliers in the near term. 
Heck, with INTC down more than 1.00 in post-market action, it 
might do wonderful things for the SOX and QQQ shorts, too!

(Weekly/Daily Charts: SOX)


 

Much like last night's peek at the SMH Semi-Conductor HOLDR, the 
SOX index looks weak and susceptible to decline on longer term 
charts. Weekly view (left) shows a bearish ascending pennant since 
late September lows and price action perched near 50-WMA and lower 
trendline of support. Daily chart continues to suggest the 540 
area is a high-odds point to visit soon and might be there in the 
next session or two. Stochastic values concur as they remain 
bearish tonight.

(Weekly/Daily Charts: HHH)


 

And a revisit to the HHH Internet appears ready for its next trip 
down this channel. Below resistance line and 50-WMA as well, signs 
point to favorable execution for downside plays to the 28 level in 
the next few weeks or so. EBAY shedding 2.00+ points helps our 
short shares in Sector Share trade model tracked from 
-34.00 today as well.

Summation
Earnings report season is upon us, if that's what they call such 
releases these days. No matter what method of math companies 
choose to offer us, all we need to know is present in the charts. 
Smart money begins to posture in front of the news, this creates 
action in the signals and tips us off to what happens next. While 
this is not a perfect science, it sure beats the heck out of 
getting suckered by those sell-side analyst reports urging us to 
get long in front of south-bound tech trucks all the time!

Best Trading Wishes,
austinp@OptionInvestor.com


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

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


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

More Pieces To The Puzzle
By Eric Utley

I like to view the market as one very big puzzle.  The problem is,
the puzzle is never completed.  The market is dynamic, it's always
changing, ebbing and flowing.  Naturally, so is the market's
sentiment.

The fact that the puzzle is never completed is a good thing
because it requires the market's participants to continually
learn, adapt, and adjust; to grow.  It's a process, like life,
defined by more than a series of moments.  In other words, where
we end isn't as important as how we get there.  It's the fitting
together of the pieces in the meantime that is the challenge.

Here are a few of the bigger pieces I fit together Tuesday,
specifically in tech:

Intel (NASDAQ:INTC) reported a very solid quarter, but reduced
capital expenditures by about 25 percent year-over-year.  Intel
beat estimates by four cents, a very solid quarter indeed!  But
its slashing of spending reinforced that this downturn was, and
maybe still is, corporate led.  The report was good for Intel,
bad for chip equipment companies such as Applied Materials
(NASDAQ:AMAT) and Novellus (NASDAQ:NVLS).

Among others, I listened in on the RF Micro Devices (NASDAQ:RFMD)
conference call.  The company supplies components to handset
makers, such as Nokia (NYSE:NOK) and Motorola (NYSE:MOT).  I had
been predicting a short-fall from this company through the Market
Monitor and Intraday Updates
http://members.OptionInvestor.com/intraday/010902_4.asp in the
last few weeks.  The company warned on its next quarter during
the conference call.  In addition, the company offered no
guidance beyond its next quarter, which ends in March.  Its
inability to forecast three months -- THREE MONTHS! -- out is,
I think, indicative of a lot of companies levered to capital
spending.  Intel's news makes it all the more difficult for
many of these companies.

The Nasdaq-100 Bullish Percent ($BPNDX) went Bear Confirmed,
again, in Tuesday's session.  I don't think that it was a
coincidence that the NDX went Bear Confirmed ahead of Intel's
crummy capital spending news.  A Bear Confirmed market is one
in which bulls should be very careful and bears are aggressive.

I asked over if the weekend if sentiment had shifted back into
the bear camp.  I think it did move more to the bears among you
and away from the bulls after fitting the three aforementioned
pieces together.  Only three pieces, yes.  But I think they
represent a good portion of the sentiment in tech, which
currently begs caution on the part of bulls in my opinion.

Corrections and Clarifications:

I, by mistake, omitted the prior week's S&P 500 COT Commercial
data when updating the section over the weekend.  The data for
the period ended 12/28 has been restored.  Sorry.

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

Market Averages


DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     :  9924

Moving Averages:
(Simple)

 10-dma: 10082
 50-dma:  9906
200-dma: 10106



S&P 500 ($SPX)

52-week High: 1383
52-week Low :  945
Current     : 1146

Moving Averages:
(Simple)

 10-dma: 1157
 50-dma: 1141
200-dma: 1167



Nasdaq-100 ($NDX)

52-week High: 2771
52-week Low : 1089
Current     : 1612

Moving Averages:
(Simple)

 10-dma: 1643
 50-dma: 1602
200-dma: 1613



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

Market Volatility

The VIX made another run on the 25 level in Tuesday's session, but
couldn't manage to close above.  It's interesting to note that the
VIX's 50-dma rests at 25.85.

The VXN, too, made a run of its own.  For its part, the VXN tried
to advance past 50, but again failed.  The VXN's 50-dma is currently
overhead at 51.56.

I would expect a spike in the VIX and VXN (Read: Fear) Wednesday
morning based upon the trading in the after hours session Tuesday
night.  That should help any open put positions add some extrinsic
premium.

CBOE Market Volatility Index (VIX) - 24.42 -0.65
Nasdaq-100 Volatility Index  (VXN) - 48.02 -1.49

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.77        771,983       593,595
Equity Only    0.67        650,639       433,873
OEX            1.23         20,443        25,057
QQQ            1.10         48,099        52,339
 
-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          55      + 0     Bull Alert
NASDAQ-100    59      - 3     Bear Confirmed
DOW           70      + 0     Bull Confirmed
S&P 500       66      - 1     Bull Confirmed
S&P 100       67      + 0     Bull Confirmed

Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

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

 5-Day Arms Index  1.43
10-Day Arms Index  1.37
21-Day Arms Index  1.20
55-Day Arms Index  1.15

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      1871           1280
NASDAQ    1853           1772

        New Highs      New Lows
NYSE       86             39
NASDAQ     83             24

        Volume (in millions)
NYSE     1,384
NASDAQ   1,634

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

Commitments Of Traders Report: 01/08/02

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 interests shed 4,500 long an 8,734 short positions in
the most recent reporting period.  Their net bearish position grew
to 64,544 contracts.  Meanwhile, small traders added more than
5,000 short positions while adding a fewer number of longs, for a
net decrease in their bullish position.

Commercials   Long      Short      Net     % Of OI 
12/21/01      412,581   471,239   (58,658)   (6.6%)
12/28/01      338,288   407,017   (68,729)   (9.2%)
01/08/02      333,742   398,286   (64,544)   (8.8%)

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

Small Traders Long      Short      Net     % of OI
12/21/01      152,521     79,444   73,077     31.5%
12/28/01      127,419     55,576   71,843     39.3%
01/08/02      130,335     60,780   69,555     36.4%

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

Commercial interest remained decidedly bearish for the second
consecutive week in the Nasdaq-100 market.  Their net bearish
position grew by about 400 contracts.  Small traders remained
bullish, but reduced their net position by more than 1,000
contracts.

Commercials   Long      Short      Net     % of OI 
12/21/01       55,250     47,476      7,774    7.6%
12/28/01       29,801     37,497    (7,696) (11.4%)
01/08/02       30,786     38,913    (8,127) (11.7%)

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
12/21/01       15,810    25,687   (9,877)   (23.8%) 
12/28/01       10,649     5,913     4,736     28.6% 
01/08/02       10,073     6,404     3,669     22.3%

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

Commercial interests added a small number and a few more short
positions.  Their net bullish position dropped by a small
amount from the prior reporting period.  Small traders added
about 1,000 longs and roughly 500 short positions for a net
reduction to their bearish position.

Commercials   Long      Short      Net     % of OI
12/21/01       15,492     7,335    8,157     35.7%
12/28/01       15,820     7,553    8,267     35.7% 
01/08/02       15,921     7,981    7,940     33.2%

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
12/21/01        4,293     9,086    (4,793)   (35.8%)
12/28/01        3,368     8,668    (5,300)   (44.0%) 
01/08/02        4,380     9,188    (4,808)   (35.4%)

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


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

IS Swing Trade Model: Tuesday 1/15/2002
50-Day Support

News & Notes:
------------
It was a sideways day as partially feared. After six consecutive 
red closes for the Dow, that string was apt (but not certain) to 
be broken. Late-day buying in the Dow propped up the old index and 
S&Ps as well by the bell. All closed near or right on their 50-DMA 
values for support.

Then INTC came out with "good" earnings, if we can ever really 
tell these days. It is their announcement of cutting capital 
spending that may send late-day bulls rushing for the exits 
tomorrow as technology will feel this admission for slowing growth 
across several sectors.

We are tracking open put plays using 100% risk capital in lieu of 
stops and might see favorable direction early on Wednesday. What 
may charts have to say? Let's see:


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


 

The OEX is trading in a fairly defined descending channel since 
recent highs and is nearing resistance again. The 580 area held 
below, next we'll see if 586 is challenged again or else the floor 
probably gives way. Similar patterns are found in the SPX as well.

[Weekly/Daily Chart: OEX]


 

A long-term view via the OEX shows oscillator signals still 
bearish in the daily chart (right) and poised to fall from 
overbought zone in weekly chart (left). A break outside these 
channels in the S&P indexes would surely signal accelerated 
markets from there.


[60/30-Min Chart: QQQ]


 

The QQQ is headed down a descending pennant, which is bullish on 
its face but post-market prices closed trading near the lower line 
(red) of this pattern. A break below that study coupled with 
stochastic values turning down tomorrow could open the gates for 
solid gains in put plays ahead.


Summation:
---------
We've seen very orderly sessions for intraday entries and trades 
these past two weeks. Eventually, a large-range market move will 
emerge and drive price action strong in either direction. That 
could begin to the downside from Wednesday's opening bell, but 
remains to be seen.


*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 - NONE          Long: BREAK ABOVE - NONE
Stop: Break Below                 Stop: Break Below 
                                

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


=====

         OEX                         SPX
Jan Calls: 600 (OEY-AT)           Jan Calls: 1125 (SPT-AE)
Long: BREAK ABOVE - NONE          Long: BREAK ABOVE - NONE
Stop: Break Below                 Stop: Break Below 


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


Open Plays:
----------                                                        
Jan Puts:  39 (QQQ-MM)            Jan Puts: 99 (DJV-MU) 
Long: BREAK BELOW: 40.00          Long: BREAK BELOW 9,960
Stop: Break Above - NONE          Stop: Break Above - NONE 

Jan Puts: 575 (OEB-MO)            Jan Puts: 1140 (SPT-MH)
Long: BREAK BELOW 583.00          Long: BREAK BELOW 1143.00
Stop: Break Above - NONE          Stop: Break Above - NONE 


IS Position Trade Model: Tuesday 1/15/2002
Bounce Or Turn?

News & Notes:
------------
Market players bought or covered Tuesday's market close and popped 
the indexes green by the bell, first time in seven trading 
sessions. Wonder if they open up in the green again tomorrow? Not 
looking that way from earnings news tonight.


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


 

Still holding fast in range-bound fashion, the S&Ps grabbed 
support but will be challenged tomorrow. This is a good proxy for 
all the major indexes and most sector charts tonight.


Summation:
---------
Still tracking Feb put play contracts and would have used today's 
late-session pop to add more, but expect a gap-down move at the 
open on Wednesday and who knows what happens from there. We'll 
hold what we have and look for more when ideal conditions prevail.


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         


Sector Share Trade Model: Tuesday 1/15/2002
When The Chips Are Down

News & Notes:
------------
We shorted a few targeted shares to track as listed last night, 
and expect more might follow on Wednesday. I don't expect a full-
blown market decline right from this point in time but playing 
shares to the downside negates time premium decay and eating a 
wide bid/ask spread should markets suddenly rally ahead.


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


 

The SMH popped and dropped today right thru our listed trigger as 
profiled last night. With INTC slashing spending and falling 1.00+ 
points in post-market trading, we might see support area near 43 
tested here early on Wednesday.

Likewise, the HHH shares (depicted in last two nights of Index 
Wrap) may also perform well to the downside after EBAY shed –3.00 
in post-market trading as well.


Summation:
---------
Still playing further downside action after our nightly scan of 
the sector share universe turns up plenty of bearish charts and 
zero upside candidates for 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:
----------------
QQQ Nasdaq-100 HOLDr
Short: BREAK BELOW 39.50 
Stop:  Break Above 41.00 

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

XLY Cyclical Transport SPDR
Short: BREAK BELOW 28.00 
Stop:  Break Above 30.00

XLV U.S. Consumer SPDR
Short: BREAK BELOW 27.00 
Stop:  Break Above 29.00

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


Open Short Plays:
----------
01/02
XLI
Short: BREAK BELOW 27.70
Stop:  Break Above 27.60 

01/14
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 


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The Option Investor Newsletter                  Tuesday 01-15-2002
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:
*****

MCAF $36.40 -0.33 (-2.25) MCAF gapped lower in Monday's session
and continued lower through today's trading.  The stock was most
likely pressured lower this morning from Checkpoint's
disappointing guidance.  MCAF reports after the bell tomorrow
and we're dropping coverage ahead of the earnings.  Traders with
open positions should turn to any bounce in tomorrow's session
to cut losses.

PUTS:
*****

EBAY $64.03 +0.87 (+0.16) We got a nice little run for our money
in our EBAY play, as our expectations of weakness leading up to
earnings came to fruition.  By yesterday's closing bell, the
stock was resting precariously on the $63 support level and got a
bit of a bounce on Tuesday.  But most of that gain disappeared by
the closing bell and with earnings due out tonight after the
close, all positions should now be closed.  For those daring
souls that opted to hold over the announcement, it looks like you
lucked out.  EBAY is trading sharply lower in the after-hours
session and if the weakness persists into tomorrow, you ought to
take the additional profit as a gift and close this play down.
It's time to find the next winning play.

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

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

CALLS              Mon    Tue 

ACS     109.39   -0.52   2.95  Trending higher still, another dip?
MCAF     36.40   -1.92  -0.33  Dropped, CHKP news and earnings
RSTN     19.86   -0.48  -0.21  Lower on sector sympathy, JNPR news
LLY      77.05    0.60   0.05  Watching for rotation out of tech
EPNY     10.97   -0.10   0.10  Holding up incredibly well to tech
MRVL     39.69   -1.87   0.04  Bounced, will it hold after INTC?
PVN       4.79    0.27   0.19  Working higher, no problem here
BRCM     49.50   -1.34   1.52  New, big rebound on the Intel dip?
TGH      71.70   -0.42   0.70  New, HMOs on the rise, new highs
   

PUTS

ADRX     63.18   -0.67   0.03  Losing strength, watch the biotechs
ELBO     33.03   -1.87   0.33  Back at its 200-dma, consolidating
EBAY     64.03   -0.71   0.87  Dropped, lower big after earnings!!
QCOM     46.55    0.64  -0.60  Holding above $46, watch wireless
AZO      65.14   -1.01   1.29  Not going down, not going up either
KBH      38.90    0.56   0.65  Housing sector rebounding, entry pt?
THQI     43.81   -2.03  -0.04  Still working lower, watch $43 level
MMM     109.50   -2.03  -2.26  New, asbestos fears in the mix???


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

ACS $109.39 +2.95 (+2.43) We're one week away from ACS' earnings
report and the stock is trading like a champ.  Another new high
in today's session, when ACS nearly topped the $110 level.  We've
been highlighting the current level of ACS as a possible exit
point for plays entered down around the $104 to $105 area.
Whether or not you take an exit at current levels is up to you.
As for new entries, we continue favoring pullbacks for
establishing new positions.  In the recent past, ACS has had
the tendency to rebound from its 10-dma after pulling back.
Another pullback to the 10-dma, currently at $106.21, could
offer a favorable entry.  But it will most likely take broader
market weakness to pull this strong stock lower.  As observed
again in today's session, any strength in the tech and broader
market allows for ACS to work higher.  The strategy of entering
on market-related weakness and exiting on strength to new highs
has been working.  We'd like to get one more pullback in the next
week to try repeating the process.  Our stop has been raised to
$104.

RSTN $19.86 -0.21 (-0.69) Juniper, the number 2 networker
behind Cisco, met previously lowered expectations after the
bell today and said some modestly positive things about its
business going forward.  We're looking for the market to
respond positively in tomorrow's session.  Strength in the
Networking Sector Index (NWX.X) should get our RSTN play
moving to the upside as the stock remains one of the stronger
in the group.  RSTN's pullback on relatively lighter volume
this week could have worked off some of the stock's short
term overbought condition.  It could be ready to roll
higher on positive sentiment in its group tomorrow.  The key
is to monitor the NWX.X for early signs of strength.  Watch
for the NWX.X to rally back above its 200-dma in tomorrow's
trading.  The 200-dma of the NWX.X currently rests overhead
at 340.  It has grown oversold in the last week and could
be ready for another leg higher.  Watch for that move in the
NWX.X and use either a bounce from $19 in RSTN or a breakout
above $21, depending on your trading style and risk parameter.

EPNY $10.97 +0.10 (+0.00) EPNY has held up remarkably well
this week despite the seesaw action in the broader tech
space.  EPNY has spent the last two days trading in an
incredibly tight range; today's range was $10.39 to $11.15.
Today's rally to and rollover from the $11.15 level was the
second observation at that level, the first was last Friday.
Indication of further upside in this stock may come from an
advance above the $11.15 level on healthy intraday volume.
By "healthy," we mean volume that is relatively greater than
the previous periods' trading activity.  If an advance above
the $11.15 is going to grow into a rally with legs, then the
broader tech space and Software Sector Index (GSO.X) both
need to participate.  Look for the GSO.X to get above its
short-term resistance at 193.  If the market and GSO.X
pressure EPNY lower, then look for a rebound from the $10.50
area, which has held strong in the last two sessions.

MRVL $39.69 +0.04 (-1.83) The news flow from MRVL has been
quiet again so far this week.  Remember that this company
doesn't announce until late February, so we have plenty of
time to play it.  But the lack of news from MRVL in the form
of an earnings report leaves the stock to trade on news from
the rest of the Semiconductor Sector (SOX.X).  The big news
after the bell today was obviously from Intel.  Intel
reported a good number, but the company drastically slashed
capital expenditures for the current year.  That news sent
most chip shares, including Intel, measurably lower in the
after hours.  MRVL was off by between 70 cents and $1.  The
after hours news is certainly unfavorable for our MRVL play,
but it remains to be seen how the market reacts tomorrow
morning.  The dip in the chips could be bought once again
by the market, which would set-up an entry into MRVL on
weakness.  One possible set-up in the SOX.X is to look for
a bounce from its 200-dma at 554, or lower at the 542 level,
which is the current site of the 50-dma.  If the SOX.X
rebounds from the one of the aforementioned levels, then
look for MRVL to bounce from between the $38 to $38.50 area.
But if MRVL closes tomorrow's session below that area (our
stop at $38.50) all bets are off.

LLY $77.05 +0.05 (+0.65) Despite rather volatile trade over the
past week, shares of LLY are working higher, chipping away at
the $78 resistance level, as investors look forward to the
company's earnings announcement.  Initially slated for this
Thursday, the announcement is now set for January 24th according
to Briefing.com.  That gives us a little longer to play, in
anticipation of the stock heading higher, given its defensive
nature.  Underpinning this play is last week's double-bottom
reversal in the Pharmaceutical index (DRG.X) at the $374 level.
That bounce seems to be losing some steam, and we need to see
the DRG hold that level of support if LLY is going to head
higher.  LLY has actually been providing some encouraging action
over the past week though, as each day is producing a series of
higher lows.  Look for the breakout over $78 or a renewed bounce
from above the $76 level to provide entry into the play.  If
playing the breakout, make sure the DRG is trading positive and
buying volume is strong.

PVN $4.79 +0.19 (+0.46) Still in breakout mode, shares of PVN
are working higher in complete ignorance of the broader market
weakness.  The market seems to be acknowledging that the
fundamental picture for this issuer of higher-risk credit cards
isn't as bad as originally thought.  There's plenty of room to
go to undo the damage done since this summer (when the stock was
trading near $60), but the recent breakout over the $4 level is
a good start.  Remember that PVN is a slow mover (in terms
of $$), so it makes sense to play with back month (March or
June) contracts.  Dip buyers will want to look for dips to
intraday support ($4.40 and then $4.25) for initiating new
positions, while a breakout above $4.90 could make for an
acceptable entry point as well.  Near term resistance will
likely materialize near $5.25, with stronger resistance near
$6.75, the bottom of the stock's gap down in the middle of
October.  The current bullish count on the Point and Figure
chart gives us a price target of $9.50, so there is plenty of
room to run.


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

BRCM - Broadcom $49.50 +1.52 (+0.18 this week)

Broadcom Corporation is a provider of highly integrated silicon
solutions that enable broadband communications and networking
of voice, video and data services. Using proprietary technologies
and advanced design methodologies, Broadcom designs, develops
and supplies system-on-a-chip solutions for applications in
digital cable set-top boxes and cable modems, high-speed local,
metropolitan and wide area and optical networks, home networking,
Voice over Internet Protocol (VoIP), carrier access, residential
broadband gateways, direct broadcast satellite and terrestrial
digital broadcast, digital subscriber line (xDSL), wireless
communications, server solutions, and network processing.

Chip stocks are set to open lower Wednesday morning.  That's
because of Intel's news about its capital expenditure plans for
this year.  The world's largest chip maker said that it planned
to spend about $5.5 billion this year compared to $7.3 billion
during last year.  The reduction in spending was obviously big
and its scared the chip bulls in the after hours session.  The
companies most linked to Intel, the chip equipment makers,
such as Applied Materials and KLA-Tencor, traded measurably lower
on the news.  In fact, the entire sector was lower out of
sympathy.  Even the communications chip makers were lower, which
is where Broadcom enters the equation.  The stock was lower by
about $1 in the evening session, after staging a strong rebound
during the day's trading.  BRCM is not as linked to Intel's
spending as the equipment makers, and its weakness in the
after hours may be more out of sympathy than anything else.  That
could set-up a favorable entry near support tomorrow if BRCM is
pressured lower early.  What's more, Juniper reported a good
quarter after the bell and traded higher.  Once the fear of
Intel's spending cut is digested, BRCM could pop higher off of
the modestly upbeat Juniper report.  BRCM's $48 support level held
again in today's session, and that's the first spot to look for a
bounce.  If $48 fails to hold, or if BRCM gaps below that level
tomorrow morning, then look for the stock to bounce from the
$46.75 area.  Our stop is initially in place at $36, but traders
using entries around the $38 level can use a tighter stop.

BUY CALL FEB-45*RCQ-BI OI=5475 at $7.40 SL=5.25
BUY CALL FEB-50 RCQ-BJ OI=6056 at $4.60 SL=3.25
BUY CALL MAY-50 RCQ-EJ OI=4978 at $9.20 SL=7.25
BUY CALL MAY-55 RCQ-EK OI=2288 at $6.80 SL=4.50

Average Daily Volume = 15.2 mln
 


TGH - Trigon Healthcare $71.70 +0.70 (+0.28 this week)

Based in Virginia, TGH is a managed healthcare company, serving
over two million members primarily through statewide and
regional provider networks.  The company divides its business
into four segments, which include health insurance, government
programs, investments and all other.  The health insurance
segment provides a comprehensive spectrum of managed care
products primarily through three network systems with a range
of utilization and cost-containment controls.  The government
is TGH's largest customer, as the company services the Federal
Employee Program.  The 'all other' category includes disease
management programs, third-party administration for medical
and workers compensation, and health promotions.

If you've been watching the Morgan Stanley Healthcare index
(HMO.X) over the past week, you know that the group has been
seeing some concerted buying pressure.  Led higher by a breakout
in shares of OHP last week, HMO pushed through its 8-month
resistance near $450 and is continuing to power higher.  With
strength like that in the broader sector, there have to be some
stellar individual stocks to play from the bullish side.  Enter
our new play, TGH.  We've played this stock in the past due to
its solid fundamentals and well-behaved price action.  Right in
concert with the HMO breakout, TGH blasted through its own
resistance near $70 last week and has continued to power higher
in the past several days.  Adding fuel to the sector, AET got a
Lehman Brothers upgrade from Market Perform to Strong Buy last
Wednesday.  So with positive action in the sector, and TGH
breaking out to new all time highs (and on strong volume), we've
got the makings of a solid bullish play.  Now all we need are the
action points.  Notice how TGH rode its 10-dma (currently $70.11)
for a week before launching higher last Wednesday.  That's a good
sign that the 10-dma will continue to provide support and could
provide a solid entry point on a retest of the $70 support level.
On the upper end of the recent action, TGH has been struggling to
crest resistance at $72.50.  Entries can also be taken on a
breakout above this level, so long as volume remains strong.  The
first serious test of bullish resolve will come near the
late-2000 highs ($75.50), and then investors will be setting
their sights on the $80 level.  We are initiating the play with a
tight stop at $69, just below the level of last week's breakout.
Given the company's history of beating earnings estimates, we
could even have a run into the company's earnings release,
currently scheduled for February 8th.

BUY CALL FEB-70*TGH-BN OI=200 at $4.10 SL=2.50
BUY CALL FEB-75 TGH-BO OI= 30 at $1.90 SL=1.00
BUY CALL APR-70 TGH-DN OI= 56 at $6.20 SL=4.00
BUY CALL APR-75 TGH-DO OI=216 at $3.90 SL=2.50

Average Daily Volume = 192 K



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


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

ADRX $63.18 +0.03 (-0.64) The Biotech Sector Index (BTK.X) was
so very close to breaking down below short-term support today.
But the bulls came back into the biotechs and carried them
higher into the close.  A breakdown in the BTK.X would come on
a decline below the 530.00 level.  Such a decline should
trigger selling in the group, including ADRX.  For its part,
ADRX finished fractionally higher in today's session, but failed
to touch its 200-dma as it has done in the last 5 sessions.
The failure to trade up to the 200-dma may portend building
selling pressure in the stock, but it remains closely tied to
the trading in the BTK.X, which is why it's so very important
to monitor the trading in the sector.  ADRX did make some
progress to the downside before the broader sector rebounded
later in the day.  The traded down to and bounced from the
$62 level.  We'd like to see an intraday move below the $61
level to trigger more selling in this stock.  Conversely, a
rollover from the $65 level -- converged 10- and 200-dmas -- is
appealing for its ease of risk management.  Just make sure that
ADRX is trading higher out of sector sympathy when gaming a
rollover near resistance, and not on its own.

ELBO $33.03 +0.33 (-1.54) ELBO traded down to its 200-dma again
in Monday's session, just as we had been looking for after the
first test last week.  The 200-dma currently resides at the $32.55
level.  Looking forward, there was a bid in the video gaming
stocks in today's session.  ERTS finished strongly and TTWO was
fractionally higher.  The strength in the two could've contributed
to ELBO's bounce.  More importantly, the stock may bounce from its
200-dma over the next few sessions as the buyers and sellers make
up their minds over which direction this stock is heading over the
short-term.  Those who entered up around the $36 area should use
a tight stop at current levels to protect against a surprise
short covering rally.  Those still looking for entries might wait
for a rally and rollover from the $35 area, the current site of the
10-dma.  Momentum fans can watch for a breakdown below the 200-dma
on heavy volume.  If ELBO breaks below the 200-dma, there exists
the potential for support at $31.50, a level that could be used
for either an exit point or confirmation of further weakness if
broken.

AZO $65.14 +1.29 (+0.28) A far cry from the sharp declines
seen just after the first of the year, AZO has been trading in
a tight range for the past 6 days.  Support continues to
materialize near $64, while resistance now seems firm at $65.50.
While the action has been boring, it sure makes it easy to gauge
an entry point into the play.  Use any rollover below the $66
level or a volume-backed drop below $64 as your trigger for
initiating new positions.  Despite the stock's stellar
performance throughout the 2001, it appears that the Buy side has
lost interest and AZO is under distribution, a fact borne out by
the Accumulation/Distribution indicator, which has been in a
consistent decline since early December.  Once support gives way,
AZO could see its price fall sharply, at least if you believe
the picture on the Point and Figure chart.  The recent price
reversal is currently giving us a bearish price target of $52.
Protect open positions with a stop at $67.50.

KBH $38.90 +0.65 (+1.21) The housing sector ($DJUSHB) has been
stubbornly refusing to weaken, but there are storm clouds on
the horizon, highlighted by Alan Greenspan's cautionary comments
last Friday about rising mortgage rates leading to lower home
sales figures this year.  The overall sector, as well as our KBH
play showed some weakness towards the end of last week (despite
blowing away earnings estimates on Thursday), but have been
attempting to recover those losses this week.  KBH fell to just
above $37 on strong volume, but the rebound is lacking in volume,
leading us to think that the current rally attempt is destined to
fail.  Tuesday's rebound came to a halt right at the $39
resistance level, and there is more resistance near $39.50,
reinforced by the 20-dma at $39.44.  Target new positions as the
stock rolls over beneath resistance, which will give us better
control of risk.  With our stop set at $40, and expectations of
a retest of the $34 support level over the near term, that is a
nice risk/reward ratio.

QCOM $46.55 -0.60 (+0.04) The continuing negative news flow from
the Wireless sector has made for rough sledding for shares of
QCOM since the first of the year.  After breaking below the $50
level, the stock has been consolidating near the $46 support
level, but judging from the stock's trading pattern, that support
is about to break.  Each time QCOM falls through a support level,
it consolidates at the next one before the next failed rally,
which leads to the next breakdown.  Over the past week, QCOM has
tried to gain traction but has been unable to crest the 62%
retracement level ($47.63) of its October-November rally.
Traders that took advantage of yesterday's rally attempt are well
positioned for the next leg down, and that could come tomorrow on
the heels of RFMD's disappointing earnings conference call tonight
after the close.  Target new positions on a breakdown below the
$45.50 level (the low from last Thursday), targeting a drop to
the next level of support near $43.

THQI $43.81 -0.04 (-2.07) Continuing lower right from the opening
bell on Monday, shares of THQI fell to just above the $43 support
level before staging a minor bounce into the close.  And
Tuesday's session didn't do much in the way of offering hope to
bullish traders, with the stock unable to move above $45.  It's
going to take some concerted selling pressure to break the $43
support level, but as long as the highs continue to drop, the
bears have the clear advantage.  THQI has been down for the past
7 sessions, so it is likely that we'll see an oversold bounce
soon.  Use any failed intraday rally near $45 or even $47
(yesterday's high) to gain entry into the play.  We're lowering
our stop to $47.75 (the site of the 62% retracement of the
September-December gains).


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

MMM - Minnesota Mining and Mfg. $109.50 -2.26 (-4.29 this week)

Commonly known as the maker of the ubiquitous, adhesive-backed
Post-It Notes, MMM is also a leading manufacturer of a variety
of industrial, consumer, and medical products.  Reflective
sheeting on highway signs, respirators, spill-control sorbents,
and Thinsulate brand insulations are just some of the company's
industrial products.  MMM also makes microbiology products,
making it easier for food processors to test for the
microbiological quality of food.

After riding the bullish wave up from the September trough,
large conglomerate corporations like MMM are coming under
concerted selling pressure.  With asbestos liability concerns
hitting the likes of DOW, HON and HAL, investors may be eyeing
shares of MMM as having similar skeletons hiding in the closet.
Whether that is the root cause or not, it is clear that
investors are getting nervous about the stock, judging by the
recent price action.  After topping out near $122 in late
December, the stock has been on a sharp downhill slide for the
past 2 weeks.  And the rate of decline has picked up over the
past 2 days as selling volume has increased, nearly doubling the
ADV on Tuesday.  While it looked like buyers might try to rally
from the level of the 200-dma ($111.63) yesterday, those hopes
were dashed Tuesday morning, as MMM plunged below that level,
closing very near their low of the day, a 2-month low.  An
important point to note is that MMM was outperforming the broader
market throughout the October-December rally, but its relative
strength has since been replaced with significant relative
weakness, giving up far more ground than the broader averages
over the past 2 weeks.  Previous support near $111.50 should now
act as resistance, and we can target fresh entries on a failed
rally near that level.  MMM has support near $107, but when that
fails we can initiate momentum-based positions with an eye on a
drop to $104 (50% retracement of the recent rally) and then $100
(62% retracement).  We're initiating the play with our stop set
at $114.  Keep in mine that we're in the heart of earnings
season, and MMM is set to release its quarterly results before
the opening bell on January 23rd.  That gives us just 5 short
market days to play.

BUY PUT FEB-110 MMM-NB OI=1088 at $4.50 SL=2.75
BUY PUT FEB-105*MMM-NA OI=4784 at $2.70 SL=1.25
BUY PUT FEB-100 MMM-NT OI= 784 at $1.35 SL=0.75

Average Daily Volume = 1.61 mln



************************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                 Tuesday 01-15-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


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

QCOM - Qualcomm, Inc. $46.55 -0.60 (+0.04 this week)

Based on its proprietary CDMA technology, QCOM is engaged in
developing and delivering digital wireless communications
services.  The company's business areas include integrated
CDMA chipsets and system software and technology licensing.
QCOM owns patents that are essential to all of the CDMA
wireless telecommunications standards that have been adopted
or proposed for adoption by the worldwide standards-setting
bodies.  Currently, QCOM has licensed its CDMA patent portfolio
to more than 80 telecommunications equipment manufacturers
around the world.

Most Recent Update

The continuing negative news flow from the Wireless sector has
made for rough sledding for shares of QCOM since the first of
the year.  After breaking below the $50 level, the stock has
been consolidating near the $46 support level, but judging from
the stock's trading pattern, that support is  about to break.
Each time QCOM falls through a support level, it consolidates
at the next one before the next failed rally, which leads to
the next breakdown.  Over the past week, QCOM has tried to gain
traction but has been unable to crest the 62% retracement level
($47.63) of its October-November rally.  Traders that took
advantage of yesterday's rally attempt are well positioned for
the next leg down, and that could come tomorrow on the heels of
RFMD's disappointing earnings conference call tonight after the
close.  Target new positions on a breakdown below the $45.50
level (the low from last Thursday), targeting a drop to the next
level of support near $43.

Comments

QCOM has been bouncing from the $46 support level in the last
six sessions.  We're looking for selling tomorrow to
overwhelm demand at the $46 level.  The warning from RFMD could
trigger the selling.  Confirm early weakness in the YLS.X and
look for a decline below the $45 level, which should welcome
more sellers.

BUY PUT FEB-50 AAO-NJ OI=2213 at $5.30 SL=3.50
BUY PUT FEB-45*AAO-NI OI=5755 at $2.70 SL=1.50
BUY PUT FEB-40 AAW-NH OI=2902 at $1.20 SL=0.75

Average Daily Volume = 14.7 mln



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Anatomy of a Failed Exit
Buzz Lynn
buzz@indexskybox.com

Rookie mistake: Distractions.

As outlined in the Wrap last night, I was prepared for some 
positive action today and was equally prepared to take advantage 
of what I felt would be misplaced bullishness if the 60/30 minute 
charts cycled up (overbought or close) then rolled over.  I got 
what I was looking for.  What specifically did I see when I came 
to that decision?  Glad you asked!  Perhaps the answer in this 
column will head a few questions off at the pass.

First, recall the premise that I was following - six down days for 
the Dow and five of six down days for the NASDAQ and SPX might 
very well result in some upward relief pressure.  Nothing goes up 
or down in a straight line, and it was time for an up day.  

Second, the major indexes nonetheless were nearing an overbought 
condition so I reasoned that any strength would be short-lived.  I 
was thus ready for a bearish play should the play show itself.  
After some indecision on which index to trade, I finally decided 
on the SPX deep in the money puts?  Why deep ITM and not ATM or 
OTM?  Personal preference.  Fundamentals Guy will not let me use 
100% risk premium.  I like to have something left over even if I'm 
wrong.  I'm way too happy to make an exit to preserve capital if 
the market doesn't prove me right.  Like Austin P. and I are wont 
to say as a general rule, "if the trade isn't going with us, it's 
going against us."  Not only that, I hate the notion of rapid time 
decay so close to expiration.  

About that time decay, here are the numbers as I looked at earlier 
this morning.  As the SPX was trading at about 1145, the JAN-1140 
puts showed roughly $5 bid/$5.50 ask ($5.25+/- time premium); the 
1150 ($5 ITM) showed $11.50/$13.50 - huge spread and nearly $8 of 
time premium with two days until expiration; or the 1160 DITM that 
traded at about $16/$18 ($2+/- time premium).  To minimize decay 
and get something back if I had misjudged, I targeted the 1160 
puts.  Think, "preserve capital for another day" (unless it's 
expiration week and you are comfortable with using 100% risk 
capital).  Every trader has his or her own style and this becomes 
a matter of personal preference.

I began to see the signs of a rollover on the 60/30 min charts 

SPX entry chart (60 min/30 min):


 


It arrived about 11:30 ET.  But the big kicker for me was the note 
posted by Austin in the Market Monitor window noting that somebody 
with a far better information than most of us sitting at home had 
just shorted 5000 SPX 1150 call contracts for $2.5 in collected 
premium and bought 5000 SPX 1150 puts paying $7.5 mln in premium 
for contracts that would expire in three days - a $5 mln bet.  On 
the "Pro Plays", I pay attention and follow the leader, as I'm 
pretty confident that his news source is better than mine.

From there, it was only a matter of hitting the entry right.  One 
of the tools I use for that is a 1-min chart and the NYSE tick 
($TICK for Q-Chart users) showing how many stocks traded up on 
their last trade net of stocks that traded down on their last 
trade.  It's pretty normal to see a range of +400 or -400 at any 
given time of day, which usually indicates no heavy buying or 
heavy selling.  However, above 500 in either direction tells me 
there is a current bias in that direction.  At over 1000 in either 
direction, the bias is so high in that direction that it almost 
always signals a pending reversal in the opposite direction.  
Thus, when I saw a plus 550 on the NYSE tick, that indicated some 
moderate to high buying activity that would likely soon fade.  

The reversing stochastics, the pro play in the bearish direction, 
and the relatively high tick all had me convinced that I had a 
good entry as long as I was willing to watch the play and exit at 
the appropriate time - maybe today, likely tomorrow.  So I set a 
limit entry splitting the bid/ask at $17 on the Preferred Trade 
screen.  I was filled pretty quickly.

I had also thought out the "just in case I'm wrong" part and 
reasoned that intraday resistance at 1148 from where the index 
turned down would be a good place to enter a "stop on stock" 
order.  That's where if the SPX traded up against my put position 
and broke out later in the day over 1148, I would know I was 
clearly wrong and make an exit.  Just to be safe, I entered the 
stop at 1150 so I wouldn't get taken out on a spike up or even 
through 1148.  I figured if it hit 1150, the market meant to do 
that and I'd be gone without hesitation.  So far, so good.

As soon as I made the entry, I entered the profit zone.  YIPPEE!  
Or so I thought

With a stop in place, I felt comfortable that I could escape for 
an hour and not have any worries.  Oh yeah, but what if the market 
spikes and I miss the profit?  I'd like to try to protect it once 
I earn it.  It sure would be great to keep my stop on the downside 
but simultaneously have a profit target to hit on the upside.  But 
how do I do that?  No sweat!  First pick a profit target, and then 
call the broker (Preferred in this case, who will allow you to 
have an "order cancels order", but you have to call them to place 
it - no ability to do it from your screen.).  So now I had a stop 
at 1150, but where to place the limit?  

I arbitrarily chose $25, but on reflection, I concluded that a 
"contingent on stock" order would be better.  The reasoning went 
that there was downside support 1136, the low from January 2nd and 
that a downside violation of that number would be much harder to 
hit since SPX have to violate that level support.  If it got to 
1136, I should be happy.

HA!  What a coincidence!  If I own SPX-1160 puts and the SPX hits 
1136, I will be $24 in the money with a miniscule time premium of 
perhaps $1 - voila' $25.  I had intuitively swerved right into it 
earlier, and through a small mental exercise arrived at the same 
number using support levels, which I thought would make a 
sufficient profit for a day's work.  This served to confirm that I 
was on the right track.

OK, stop placed at 1150 and a limit sell at 1136.  Life is grand!  
Let's eat!  Bet you think this is where I get killed in the trade.  
Not quite.  I get back from errands and the price of my puts has 
moved up nicely.  Hmmm. . .wonder how nicely?  Drat!  The SPX 
moved down to 1136.88 while I was gone.  Great guess on the limit 
out profit target.  But too bad it was 0.88 points away from 
triggering my limit!  For the record, shortly after 2:00 pm ET, 
the option price peaked at $23.80/$25.80 - what could have been a 
nice 38% profit on the trade.  However, at SPX 1136, I definitely 
would have missed my $25 price target and was glad I'd opted to 
limit out on the index price, not the option price.  I likely 
would have missed the target by $0.50 to $1 so my thinking was 
correct

Lesson: if you set stops or limits to protect yourself or take 
profits, use the index or stock price and not the option price to 
get you out.

Lesson 2: give yourself some leeway or fudge factor.  Just as I'd 
set a stop at 1150, 2 points above 1148 resistance as a fudge 
factor, I should have done the same for the limit out at some 
number slightly greater than 1136, say 1137 or 1138 just incase it 
didn't quite get there (like this time).

I still had the bear flag forming and a topping 5-min stochastic 
to keep me in the play.  Then came the big, ugly mistake - yakking 
on the phone thinking I'll have another shot at 1136, a simple but 
effective distraction.

SPX chart (10/5 min):


 


This where I blew it.  I should have exited this trade when the 5-
min chart fell to a higher low around 1138 then bounced at roughly 
3:00 ET.  Missing that, I should have exited when the first green-
circled white candle pierced the upper flag line, a technical 
break of the bear flag pattern.  My final chance at a profitable 
escape came as the long, white candle (the second green circle) 
exploded above the flag.  Option markets being what they are, all 
time premium on my puts vaporized when that happened.  I would 
have been glad to get out at break even and again had the chance, 
but was unconcerned (because of my simple distraction).  I figured 
I'd still have another chance for greater profit.

Until I hung up the phone, I did realize the gravity of the 
situation.  Here is a technical reality:  When counter-move occurs 
directly opposite of what is conventional chart wisdom, such as a 
breakout of a bear flag, that counter move is extremely powerful.  
Were I not talking it up on phone, I would have paid more 
attention to this truism and confirmed it by intentionally noting 
the improving internals - advancers closing the gap on decliners 
and significant volume increase into the close.

Lesson 3: exit quickly on a counter move to the technical 
indicator.  The move is generally for real and quite strong.

Lesson 4: don't procrastinate when the obvious stares us in the 
face.

I reasoned then that once SPX passed up through 1142 (and I'd 
regained my wits), I darn well better get out because I no longer 
wanted to wait for 1150 to stop me out.  Remembering that 
countermoves are quite strong, I figured it was only a matter of 
time before we saw 1150.  "Knowing" it was coming, I tried to 
squeeze a few pennies in the flat spots on the chart over the next 
15 minutes by splitting the bid and ask - no bites, then the 
market spike up again.

Long story short, I made an exit at $15.20, which in the grand 
scheme of things was not a significant loss from $17.  But I can't 
tell you how much it ticks me off that I let a profit fritter away 
because I let myself get distracted rather than pay attention to 
the business of trading.  Blinded with distraction to the gravity 
of the situation had me nonchalantly thinking, no hoping, things 
would turn out fine.

Lesson 5: eliminate hope by paying attention by working and 
thinking during the business of trading.

Lesson 6:  Don't talk on the phone in the middle of a trade!

Hopefully, I will not twist my knee too badly as I kick myself in 
the you-know-where for the remainder of the day.  Thankfully, the 
past does not equal the future and I can re-apply tomorrow the 
learnings/rememberings of today, starting now.

See you tomorrow as Fundamentals Guy!


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