Option Investor
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Daily Newsletter, Tuesday, 01/22/2002

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The Option Investor Newsletter                Tuesday 01-22-2002
Copyright 2001, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
       1-22-2002           High     Low     Volume Advance/Decline
DJIA     9713.80 - 58.05  9842.84  9696.57  1.3 bln   1374/1758
NASDAQ   1882.53 - 47.81  1947.41  1882.14  1.8 bln   1333/2306
S&P 100   570.63 -  4.61   579.22   569.68   Totals   2707/4054
S&P 500  1119.31 -  8.27  1135.26  1117.91
RUS 2000  469.43 -  4.94   476.96   469.42
DJ TRANS 2659.70 -  7.55  2684.04  2652.40
VIX        25.10 +  0.76    25.24    23.97
VXN        50.37 +  1.48    50.76    49.31
TRIN        1.33
Put/Call Ratio       .65
*************************************************************

No Recovery in Sight

The markets gave up early gains with a quick sell off after the
underlying earnings trend was reinforced by many different companies.
"There is no recovery in sight" clause is becoming a common theme 
and analysts are claiming the stocks they loved last month are too
over valued to support the current prices. Add to that unfavorable
refrain the news of a Kmart bankruptcy and further problems in the
drug sector and investors decided to move back to the sidelines.



 



 

The news that Kmart filed chapter 11 bankruptcy sent ripples through
the retail sector as other chains came under scrutiny. Wal-Mart and
Target both spiked higher on prospects of gains in market share. Kmart
is the biggest bankruptcy in retail history. They are currently, even
in their depressed state, the seventh largest retailer in the country.
At the beginning of 1990 they were bigger than Wal-Mart but the
aggressive growth policy and marketing strategies of Wal-Mart propelled
them to six times the size of Kmart today. Problems with the bankruptcy
include non-payment of huge sums to some suppliers. A food supplier
could suffer nearly $100 million in losses from unpaid bills. Landlords
could stand to lose billions in broken leases for the more than 500
stores that will be closed outright and possible hundreds more that
will eventually be phased out. Many suppliers depend on Kmart for
up to 20% of their demand. Much of that demand will move to other 
chains in areas where stores are closed but that same demand could
be absorbed by other brands. The results of this bankruptcy will take
years to unfold but could be played out in the market prices of their
suppliers over the next two weeks.

Tyco announced today that they were going to split up into four publicly
traded companies to unlock shareholder value and put an end to rumors
that have been plaguing the stock over the last several weeks. Tyco
denied any rumors of accounting problems such as those which took down
Enron. The company said its health care, fire protection and control 
and financial services businesses would be taken public through initial
public offerings. The security and electronics businesses would be
combined as a fourth public company. The company estimated that there 
could be an upside of 50% in the current stock price based on valuations
of each of the new companies.

Bigger news than Kmart and Tyco was the earnings announcement from 
Amazon. For the first time in that companies history they posted a 
profit. Not a pro forma profit but a real GAAP profit! Under the
pro forma rules they netted $35 million or nine cents a share but
under the more stringent GAAP rules they still managed a $5 million
profit. This was a significant event for Amazon, which posted record
sales of $1.12 billion in the last quarter. AMZN appears destined 
to take on EBAY with an emphasis on its Amazon Marketplace where 
used items are sold along with new products. 15% of all orders
were place for used items in the 4Q. They are adding new products from
third parties as well. AMZN produced a 15% gain in revenue in the 4Q
and ended the year with $1 billion in cash. They are extending their
partnerships with Circuit City, Target and will have a new venture 
with AOL later this year. Now that there is an "E" in their PE it 
will become a yardstick for future stock prices. What is a stock 
worth, which makes $30 million a year in profits (their 2002 guidance)
and has 400 million shares outstanding? KKD, another high-flyer with 
a PE of 100, will net about $30 million this year but only has 50+
million shares outstanding. Their closing price on Tuesday was $37+.

Microsoft was slapped with another antitrust suit by AOL, buyer of
Netscape, the other browser people. The trust claims damages by
Microsoft because they used their monopolistic power to harm Netscape
by giving away their Internet Explorer browser and bundling it 
with their operating system. They are seeking $12 billion in damages
and remedies to prevent MSFT from continuing the practice. Investors
don't appear worried as MSFT only dropped -.20 in after hours.

In economic news the Conference Board's Index of Leading Indicators rose
+1.2% in December to 111.4. This was the largest increase since February
1996. This was the third straight month of improvement and beat 
estimates by +0.8%. This is yet another sign that a recovery is on the
horizon but as yet not seen in earnings. Eight of the ten indicators
rose in December. The board indicators are volatile and could be 
impacted in January by any drop in the S&P. 

In earnings news after the bell there was a large number of firms
beating the estimates but the consensus was the same. Companies that
beat and the amount they exceeded estimates included EMLX +.04, VTSS 
+.01, ALTR +.01, NVLS +.01, MERQ +.02, SLAB +.04, CDWC +.01. Announcing
inline with estimates were FCS, MOT and AMCC. Motorola posted its 
fourth quarterly loss in a row and predicted two more but hoped to 
return to profitability by the end of 2002. They said that "baring
any unforeseen political or economic disruptions" they would be
profitable for the full year. 

Still the consensus for most of the companies announcing today was
the same. "No evidence of a recovery in sight" was the common thread.
Most expect business to pickup in the third or fourth quarter but only 
a couple firms had positive comments about the current quarter. This
is causing investors which bought on the hopes of an immediate recovery 
to rethink their decision. 

The tech sector has gone from rational exuberance to irrational 
depression in the space of only nine days. This is not however an
uncommon occurrence. Earnings typically have this type of impact 
on the markets even in times of growth. This is called an "earnings 
run" and many investors have forgotten that expectations seldom
equal reality. Their expectations of a "V" bottom did not materialize
what we are seeing is reality returning to the markets. This is 
not a bad thing but it is something we need to work through. The
reality is that everyone now expects the economy to recover in the
third and fourth quarter. More and more companies are pointing to
signs of an economic bottom as being behind us. Yes, we still have 
a couple of questionable quarters ahead of us but many of the chip 
stocks (leaders in any tech rebound) are saying that the worst is 
behind them. Even Motorola is projecting a rebound!

Where does that put us today? Waiting! If you are invested in puts 
then you have been making money the last two weeks. If you want to
play calls then you should still be waiting for the "market rebound"
which precedes an economic rebound by about six months. Now if you
have been following the economic commentary and can count then you
could be saying, "rebound in 3Q-4Q, minus six months, equals Jan-Mar
as the historical market rebound months. I say historic since "most"
rebounds look this way in retrospect. Does this mean buy tomorrow?
Of course not. 

On Sunday I theorized that a rebound was coming soon as we approached 
certain critical support areas. 9700 is critical for the Dow
just like 1880 is critical for the Nasdaq. (See the traders corner
from Buzz tonight on Dow 9712, it is excellent). On Sunday I showed
how the Nasdaq could hit 1880 (1882 today) but it would take a major
event to push it below that level. Boys and girls that comment will
be tested tomorrow. Every major index is showing severely oversold
but is sitting EXACTLY on support I quoted on Sunday. S&P 1118 and
it closed today at 1119.31. Dow 9700, closed today 9715. Nasdaq at
1880, it closed today at 1882. The line has been drawn in the sand
and the battle is underway. These support levels may not be the
final bottom in this leg down. This may just be a resting point.
One thing for sure, if this level fails we could see a substantial
drop for the major indexes. (9550/1800/1085 respectively.) Use any
bounce from the current levels as an entry for a short term trade
only and stay flat or go short below it. Tuesday's levels are a 
clear-cut entry and exit point. Repeat, long above, short below
today's levels. 

Enter very passively, exit aggressively!

Jim Brown
Editor

Have you tried the Market Monitor yet?

http://www.OptionInvestor.com/itrader/marketbuzz/


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

Still Going...
Like Duracell's Energizer Bunny, current market action is on an 
inevitable path. The bunny gets sidetracked at times, but merely 
pushes his way forward while incessantly beating that drum.

So goes current market action. Despite "bullish news" in economic 
reports, Fed jawbone re-posturing of Greenspan's reality check and 
smoke & mirrors via TYC's latest solution to creative accounting, 
the trend is decidedly down.

(Weekly Chart: IBM At Last Friday 01/18 Close)


 

Here's a weekly chart of IBM I drew & captured last Friday night. 
This does not include Tuesday session so don't let the price level 
startle you. What it does clearly show is downside risk in the 
biggest tech bellwether in the market right now.

One of the giant newsletter editors and frequent host on CNBC has 
been pounding the table on IBM for two months. Said IBM was on its 
way to $150 and would still be cheap up there the first time $120 
was hit last year. I looked at this weekly chart buried in 
overbought extreme for months back then and scratched my head in 
wonderment. Could he be right? Have the universal laws of supply & 
demand been repealed again like they were for a distorted blip of 
time in 1999?

Maybe not. Beamer's now "coming in" for those bulls who lament 
missing the first ride up and I personally would not touch it on 
the long side until those weekly chart signals reach oversold 
extreme and turn bullish from there. Where might that be? My guess 
is the $100 range a few weeks (or less) from now. Currently at 
$110.50 and poised to head due south from there.

(Weekly Chart: SPX)


 

Which leads us to our next picture. When we drew this chart a few 
times before and noted 1085 as a viable downside target, a few 
emails from the bull-bias crowd scoffed at that. That's when the 
SPX was still hovering around 1163 or so if memory serves me 
right. Now that its 50% retrace is taken out and sitting up there 
as resistance, where's the next possible floor waiting below?

Summation
I've looked at long-term charts like these literally thousands of 
times in my life and couldn't believe where they project price 
action to go (both up and down) from then. Guess who's right 
almost every time: the charts or my "fuzzy feeling inside"? Place 
your money on the charts and not human emotion, history has proven 
to me.

For now we must not ask the question of where the next bounce is 
coming from. We only need to sell every failed rally attempt while 
these high-odds chart signals prove to us the trend is down, and 
wait for the inevitable reversal back up in the coming weeks 
ahead.

Last week we profiled a short in the SMH HOLDRs on a break below 
$45 where a crystal-clear wedge and moving averages were found. It 
broke, we tracked it short in Sector Share Trade model and quick 
+12.5% gains from there on these shares alone were easier than 
theft. Should have backed up the truck on Feb 40 puts as well. If 
only this methodical, predictable market action can continue 
for the balance of 2002 we can look forward to weighing our money 
at the bank!

Best Trading Wishes,
austinp@OptionInvestor.com


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

Risk Progression
By Eric Utley

The risks, to the downside that is, are slowly leaving the
technology sector.  That doesn't mean tech stocks won't or can't
go lower.  But we're starting to see some work take place that
could have bulls ready to act in the short- or intermediate-terms.

The indicator I'm referring to when gauging risk in the tech
sector is the Nasdaq-100 Bullish Percent ($BPNDX).  In December
of last year, the indicator traded as high as 78 percent, revealing
that 78 stocks in the Nasdaq-100 were on buy signals.  That's
too many for a continuation of a bull market.  A period of
consolidation, backing and filling, is necessary before the bull
can resume its advance.  In other words, some stocks need to go
on sell signals.

Those sell signals are showing up in the $BPNDX, which shed
another six stocks in Tuesday's session.  From its recent peak
in December at 78 percent, the $BPNDX has given up 38 stocks
through Tuesday, when it closed at 40 percent.  Or, only 40 stocks
in the Nasdaq-100 remain on buy signals.  (A stock on a buy signal
is bullish.)

With more stocks on sell signals than buy signals, we're
starting to see a market in which the bears are dominating the
bulls.  We're starting to see a market that is growing oversold.
Now, the bullish percent indicator can always grow more oversold.
That's why it's important to watch for some basing work ahead of
the next leg higher.  The bullish percent indicator will not help
you catch bottoms and tops, but it will help you to catch the meat
of the move.

What I'll be watching for in the $BPNDX in the coming weeks is the
indicator to slow its descent and start basing.  When that happens,
I'll be sure to let you know.  In the meantime, the risks seem more
evident in the Dow ($INDU) and S&P 500 ($SPX) based upon their
bullish percent readings.

More On The ARMS Index

Over the weekend, we highlighted one of the metrics in this
column in the Arms Index (INDEX:ARMS).  QCharts users can access
this page for the symbols for the various ARMS readings:

http://finance.lycos.com/home/qcharts/help.asp?option=breadthalizer

(This column uses the NYSE ARMS reading for its breadth.)

The indicator is notorious for being early to call a turn in the
market.  As always, the ARMS Index is only one indicator and
shouldn't be solely deferred to.  Additionally, like other
overbought/oversold readings, it can always grow more so.

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

Market Averages


DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     :  9713

Moving Averages:
(Simple)

 10-dma:  9917
 50-dma:  9928
200-dma: 10102



S&P 500 ($SPX)

52-week High: 1383
52-week Low :  945
Current     : 1119

Moving Averages:
(Simple)

 10-dma: 1141
 50-dma: 1144
200-dma: 1166



Nasdaq-100 ($NDX)

52-week High: 2771
52-week Low : 1089
Current     : 1502

Moving Averages:
(Simple)

 10-dma: 1604
 50-dma: 1607
200-dma: 1612



Retail Sector ($RLX)

The $RLX out performed the broader market in Tuesday's trading
despite the bankruptcy filing by Kmart (NYSE:KM).  Wal-Mart
(NYSE:WMT, Target (NYSE:TGT), and Walgreen's (NYSE:WAG) led the
$RLX higher on investor prospects that these companies would
benefit by a reduction in competition in the discount retail
business.


Hardware Sector ($GHA)

The $GHA was the worst performing sector of the day with its 5.13
percent decline.  The worst performing components of the $GHA
included Brocade (NASDAQ:BRCD) -10.18%, Emulex (NASDAQ:EMLX)
-9.85%, Sun Microsystems (NASDAQ:SUNW) -9.57%, and McData
(NASDAQ:MCDT) -9.19%.

Goldman Sach's downgrade of SUNW contributed to the weakness in
the $GHA, stemming from fears of a slower-than-expected recovery
in information technology spending, which brought current
valuations into question.  


Forest & Paper Products Sector ($FPP)

The $FPP was the best performing sector in Tuesday's trading,
gaining 2.65 percent on the day.  Shares of $FPP component
Willamette (NYSE:WLL) rallied by 17 percent after the company
said that it had reached a deal with Weyerhaeuser (NYSE:WY) to
merger for $55.50 per share.

International Paper (NYSE:IP) added momentum to the group with
its better-than-expected earnings report.  The paper giant
said that it sees better business conditions over the next
three months.  Shares of IP finished at $38.91, 69 cents higher,
or 1.80 percent. 

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

Market Volatility

The VIX closed above the 25 level that we've been monitoring as
resistance.  The close above 25 reveals that fear is building in
the options market.  The 50-dma of the VIX dropped to 25.14 in
today's trading.  A breakout above the 50-dma would reveal
increased levels of fear.

In contrast, the VXN traded above its 50-dma, the first observation
in almost three months, but failed to close above.  The VXN's
50-dma currently sits at the 50.44 level.

CBOE Market Volatility Index (VIX) - 25.10 +0.76
Nasdaq-100 Volatility Index  (VXN) - 50.37 +1.48

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.63        774,411       485,831
Equity Only    0.59        709,199       419,499
OEX            1.22         10,024        12,210
QQQ            1.22         69,836        85,401
 
-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          53      + 0     Bull Alert
NASDAQ-100    40      - 6     Bear Confirmed
DOW           60      - 3     Bull Correction
S&P 500       61      - 1     Bull Correction
S&P 100       61      - 2     Bull Correction

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  1.46
10-Day Arms Index  1.51
21-Day Arms Index  1.31
55-Day Arms Index  1.14

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      1374           1758
NASDAQ    1333           2306

        New Highs      New Lows
NYSE       90             59
NASDAQ     84             45

        Volume (in millions)
NYSE     1,312
NASDAQ   1,787

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

Commitments Of Traders Report: 01/15/02

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 traders grew less bearish last week by adding to their
long positions and subtracting from the short position.  The net
drop in the group's short position amounted to roughly 7,500
contracts.  Small traders reduced their net long position by
about 4,000 contracts.

Commercials   Long      Short      Net     % Of OI 
12/28/01      338,288   407,017   (68,729)   (9.2%)
01/08/02      333,742   398,286   (64,544)   (8.8%)
01/15/02      340,005   397,024   (57,019)   (7.7%)

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
12/28/01      127,419     55,576   71,843     39.3%
01/08/02      130,335     60,780   69,555     36.4%
01/15/02      129,987     64,311   65,676     33.8%

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

Nasdaq commercial interests reduced their net bearish position
in the most recent reporting period by more than 5,000 contracts.
The group both added longs and dropped shorts.  Small traders
adopted a neutral stance, with a net long position of only 448
contracts.  Small traders added more than 3,000 short positions,
while essentially maintaining the prior period's long position.

Commercials   Long      Short      Net     % of OI 
12/28/01       29,801     37,497    (7,696) (11.4%)
01/08/02       30,786     38,913    (8,127) (11.7%)
01/15/02       32,068     34,859    (2,791) ( 4.2%)

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
12/28/01       10,649     5,913     4,736     28.6% 
01/08/02       10,073     6,404     3,669     22.3%
01/15/02       10,230     9,782       448      2.2%

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 maintained their total long position from the
prior reporting period.  The group added about 1,200 contracts
to the total short position for a decline in their net bullish
position.  Small traders went in the opposite direction by
closing a number of short positions for a decline in their net
bearish stance.

Commercials   Long      Short      Net     % of OI
12/28/01       15,820     7,553    8,267     35.7% 
01/08/02       15,921     7,981    7,940     33.2%
01/15/02       15,866     9,175    6,691     26.7%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
12/28/01        3,368     8,668    (5,300)   (44.0%) 
01/08/02        4,380     9,188    (4,808)   (35.4%)
01/15/02        4,979     8,747    (3,768)   (27.5%)

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 1/22/2002
They Just Won't Wait!


News & Notes:
------------
While patiently waiting for the next solid trade entry to come 
along here for us at night, we continue to see active intraday 
stuff. Our level of aggression is low during the first week of 
expiration cycles and there was half an entry signal today that 
didn't seem like much at the time. Day traders who reported taking 
it were rewarded modestly and if continuation on Wednesday favors 
those still long, it could get better.


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


 

The OEX 60/30 min chart signals never rose to overbought extreme 
before the bottom fell out of the morning pop. Nimble individuals 
watching these charts would note price action failure right at 
little moving averages as 30-min stochastic values turned bearish. 
Put plays up near the session high would be aggressive but worked 
well. 

Waiting for price action to break support and fall back into its 
price channel in the 30-min chart was a higher-odds entry with 
less potential gain. Either would have worked for those who tried.

[60/30-Min Chart: SPX]


 

Same goes for the SPX. In near resistance via mid 1130's or for 
sure on a break inside the channel and failure of Friday's close 
at 1127+. Decent scalp trade, but no real setup for Wednesday 
either way.


[60/30-Min Chart: QQQ]


 

The QQQs traded in unique fashion as they often do, and broke 
below support, which then served as resistance. A half-decent 
entry when this line first broke near 38.50 area was possible.

Summation:
---------
One or two intraday entry decisions not suited for this model but 
some traders attempted with moderate success. Still looking for a 
consolidation session to signal a solid entry ahead, but might see 
a bit more volatility as the VIX continues to rise and selling 
action intensifies.


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
Feb Calls: 40 (QQQ-BN)            Feb Calls: 98 (DJV-BT)  
Long: BREAK ABOVE - NONE          Long: BREAK ABOVE - NONE
Stop: Break Below                 Stop: Break Below 
                                

Feb Puts:  38 (QQQ-NL)            Feb Puts: 96 (DJV-NR) 
Long: BREAK BELOW - NONE          Long: BREAK BELOW - NONE
Stop: Break Above                 Stop: Break Above


=====

         OEX                         SPX
Feb Calls: 580 (OEY-BP)           Feb Calls: 1150 (SPT-BJ)
Long: BREAK ABOVE - NONE          Long: BREAK ABOVE - NONE
Stop: Break Below                 Stop: Break Below 


Feb Puts: 570 (OEB-NN)            Feb Puts: 1100 (SPT-NT)
Long: BREAK BELOW - NONE          Long: BREAK BELOW - NONE
Stop: Break Above                 Stop: Break Above  



Open Plays:
----------
NONE


IS Position Trade Model: Thursday 1/22/2002
Trending Down


News & Notes:
------------
Get short on any failed bounce and stay short for a while. That's 
the best advice we have to offer buy & hold option players. We 
keep waiting for a bounce to stick and EOD setup to occur, but the 
market continues to slide methodically lower. Any failed rallies 
ahead are still high-odds put play entries until weekly charts 
turn bullish again.


Featured Plays:
--------------
None


Summation:
---------
We do not go short "in the hole" on oversold markets near-term if 
possible, and that cost us from shorting too soon last time 
around. Intraday traders have a distinct advantage right now to 
catch setups better, but the next failed bounce is due to arrive 
soon.


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: 1.50

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 1/22/2002
Short Every Pop!

News & Notes:
------------
Another failed rally attempt this morning as the early pop dropped 
like a rock. Shorted shares are working fine for now, and we'll 
stay short or become even more so as circumstance permits.


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


 

The SMH has sunk like a rock after breaking below its wedge and 
moving-average support last week. Almost too easy tracking +12.5% 
gains on the shorted shares since then... if only they were all 
like that! Weekly chart stochastic values (left) indicate the SMH 
has plenty of downside room to fall.


Summation:
---------
Trading the trend means shorting every feeble attempt to rally 
right now. When in doubt, follow the trend and sell every chart 
with apparent weakness visible.


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 26.00 

01/14
SPY S&P 500 SPDR [*Bailey Play]
Short: BREAK BELOW  114.80 
Stop:  Break Above  113.00 

DIA Dow Industrial Diamond
Short: BREAK BELOW  99.00 
Stop:  Break Above  98.00 *

SMH Semi-Conductor HOLDr
Short: BREAK BELOW 45.00 
Stop:  Break Above 42.00 *

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

01/15
IAH Internet Architecture HOLDr
Short: BREAK BELOW 39.00 
Stop:  Break Above 38.00 *

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

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


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The Option Investor Newsletter                  Tuesday 01-22-2002
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:
*****

BRCM $43.55 -4.97 (-4.97) USB Piper Jaffray issued negative
comments on BRCM this morning, based upon increased competition
from Intel in the server platform market.  The news weighed on
BRCM from the opening bell and the weakness accelerated into the
close on increased selling in the broader tech space.  The
company reports earnings after the bell tomorrow and we're
dropping coverage with the more than 10% drop today.  Look for
any pre-earnings announcement bounce tomorrow to cut loss if
you didn't get stopped out today.


EPNY $10.66 +0.06 (+0.06) The broader market never allowed our
play on EPNY to get off the ground.  The stock continues to
trade incredibly well relative to the rest of technology,
specifically the Software Sector (GSO.X).  Its big rebound from
the $10 level today was most encouraging, but not enough for us
to hang around and watch time value erode further.  With
earnings after the bell Thursday, we're dropping coverage this
evening.  Look for a pop up to the $11 level to exit open
plays.


PUTS:
*****

AZO $64.89 +0.47 (+0.47) Trading interest in our AZO play just
seems to have dried up.  The volume is still there, but neither
the bulls or the bears have had sufficient clout to drive the
stock out of its ever narrowing range.  This is the type of
action that can chew up an option trader's account due to time
decay, especially on front-month options.  We still like the
stock to the downside, but have run out of patience waiting for
something to happen.  There are better plays available, so we're
pulling the plug on AZO tonight.


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

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


CALLS              Tue    

EPNY     10.66    0.06  Dropped, earnings after the bell Thursday
MRVL     43.53    1.08  Still very, very strong, needs the SOX.X
PVN       3.90   -0.64  14% drop, entry point at support at $3.50
BRCM     43.55   -4.97  Dropped, earnings after the bell Wednesday
TGH      71.42    0.01  Classic sector rotation on weak technology
LPNT     35.25    0.48  Slowly working higher, watch the $36 level
LLL      91.88   -1.67  Pullback on weak market, watch for entries
PNC      61.13   -0.13  Right sector, right stock, needs market
LTR      60.67    0.52  Trading strongly, breakout above $60 level
   

PUTS

ADRX     60.49   -0.47  Remains pressured, waiting on $60 breakdown
QCOM     41.40   -3.55  Very nice day, earnings Thursday evening
AZO      64.89    0.47  Dropped, done watching the time value erode
THQI     42.30   -0.73  Moved down to relative lows, breakdown???
PCSA     21.98   -2.87  Orderly sell-off, very week, watch YLS.X
IVGN     56.26    0.00  New, big support level soon to be broken???
SMTC     32.21   -1.70  New, chip sector coming undone after INTC
SGR      18.81   -0.81  New, Calpine news didn't help last week


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


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

MRVL $43.53 +1.08 (+1.08) MRVL introduced a new product for
broadband communications applications this morning.  The new
wireless application is expected to drive revenue growth.  The
announcement helped MRVL to once again buck the overall and
very weak trend in the broader tech space.  We very much like
MRVL's relative strength versus the broader semiconductor
sector, as measured by the SOX.X.  For its part, the SOX.X
finished lower by 4.57%, while MRVL tacked on another 2.54%.
However, we still feel that it's going to take participation
from the SOX.X for a sustained advance to take place in MRVL.
You can still try bullish plays in MRVL without the SOX.X, but
we would feel more comfortable with confirmation from the sector
before entering a bullish play.  If you do play against the trend
in the SOX.X, make sure to use a tight stop appropriate to your
risk tolerance to manage risk.  As for new entries, continue to
watch for support to prop up MRVL at the $42 area.  A pullback
on weakness in the SOX.X to the $42 level in MRVL could offer a
favorable entry point.  If the SOX.X rebounds in the coming days,
look for MRVL to advance past its relative high at $43.75, traced
in today's session.  On a sustained pullback, look for weakness
down to the $40 level when considering an entry.  Our coverage
stop has been raised to $39.

LLL $91.88 -1.67 (-1.67) Defense issues finished fractionally
higher in today's trading as measured by the fractional gain in
the Defense Sector Index (DFI.X).  However, the DFI.X finished
well off of its day highs.  The index traded up to as high as
525.65 in today's session, but finished near its low around the
519 level.  The trading in LLL followed the trading in the DFI.X
very closely today.  The weakness in the DFI.X and, consequently
LLL, was most likely the combination of profit taking and broad
market weakness.  The strong performance late last week in the
defense sector led to a short-term profit taking pullback so far
this week.  If the weakness continues, it may set-up a favorable
entry into LLL near support.  Watch the DFI.X for weakness in the
coming sessions, and look for bounces in LLL first at the $90
area, reinforced by the 10-dma at $90.63 or a rebound from the
$89 area.  The fundamentals remain in place for LLL as the
newly enforced aviation security is implemented in airports
across the country.  LLL supplies the airports with many of the
new, necessary products to heighten security.  The stock should
continue higher if the broader market doesn't weaken measurably
in the short-term, which is why an entry near support is attractive.
The stock my face near-term congestion at the $95 level before
relative highs at $98.

PNC $61.13 -0.13 (-0.13) The Bank Sector Index (BKX.X) finished
the day in positive territory despite the overwhelming weakness
in the broader market.  The BKX.X finished 0.15% higher in today's
session.  We mention the BKX.X because PNC is a component of the
sector index and accordingly tracks it very closely.  The broader
bank sector was bolstered by a report from Bank of America
(NYSE:BAC) and what is positive for the rest of the sector is
positive for our PNC play.  The stock worked higher early this
morning, but was dragged back lower by the broad market weakness.
Today's pullback reinforced that while the BKX.X was higher, we
still need the broader market to advance if this play is going to
be successful.  We're in the right sector and right stock, but
still need the market to be bullish if we're going to win in this
play.  That said, if the broad market weakness continues, start
looking for PNC to pullback to support.  The first level to look
for a bounce is from the $60.75 to $61 area, which would keep the
short-term ascending wedge intact.  If the market falls under
further pressure, look for PNC to firm up at the $60 level.  On
market and sector strength, watch for PNC to test its 200-dma at
the $62.23 level.  A breakout on heavy intraday volume could set-up
PNC to move substantially higher in the short-term.

LPNT $35.25 +0.48 (+0.48) It has been slow going since we added
LPNT to the call list in the wake of the stock's strong rally
through the $34.90 resistance level, but the bulls are starting
to make some more headway.  The past 2 days have seen the stock
struggling to hold above the $35.75 level, but the lows are
gradually moving higher.  In fact, Tuesday's price action all
took place above the $35 level, something LPNT hasn't been able
to manage since October.  This doesn't look like a good candidate
for momentum traders, but instead looks attractive for those that
are willing to wait for the intraday dip to establish positions.
Use a dip to $35, $34.50 or even $34 to establish positions on
the bounce in anticipation of the breakout over the $36 level.
Another reason chasing the stock higher doesn't look like the
best approach is the looming 200-dma ($36.95).  It's a pretty
good bet we'll see some profit taking before the bulls can plow
through that level.  Keep stops set at $33.

LTR $60.67 +0.52 (+0.52) Bullish investors followed through on
Friday's buying enthusiasm by gapping shares of LTR higher at
the opening bell.  But even with the strong volume, the trading
was not convincing.  After the early morning buying, LTR drifted
lower, closing slightly below the opening price, bringing up the
likelihood that the stock will need to fill Tuesday's gap before
proceeding higher.  That dip could give us a nice bounce of
conviction from the $60 level, but we wouldn't rule out a retest
of the $59 support level in the process.  Target new positions
on the bounce, so long as buying volume is solid.  Today's price
action is a perfect example of what can happen if you chase a gap
open higher -- you frequently end up paying the high price of the
day.  Move stops up to $58, just below the lows from last
Thursday.

PVN $3.90 -0.64 (-0.64) Was that an entry point today?  PVN got
knocked back right to support near $3.90 on Tuesday and closed
just off its lows for the day.  This looks like a sympathetic
drop with the rest of the market and could be giving us another
shot at an attractive entry.  But we want to see renewed buying
interest before initiating new positions.  If buyers return
tomorrow, consider new positions on the rebound, but stand aside
if the stock dips below the $3.75 level.  That would be a strong
sign that the bulls have lost their edge.  We'll need to see PVN
regain the $4.40 level before it is clear that the bulls are
still charging ahead.  Keep in mind that the company reports
earnings on January 29th, so we've only a got a week left to
play.

TGH $71.42 +0.01 (+0.01) A quiet rangebound day in shares of TGH
did not show the bullish conviction we were hoping for, but the
fact that the stock held its ground while the broad markets were
bleeding red means that we've got our familiar friend, relative
strength helping out on the play.  Even the Healthcare index
(HMO.X) suffered a slight loss, while TGH eked out a gain of a
penny.  As good as that sounds, there wasn't a prudent entry to
be taken as we wait for the stock to either bounce from the $70
level again or break out above last week's highs of $72.70.
Target the bounce or breakout according to your trading style in
anticipation of a possible run into earnings on February 8th.
Given the weakness we've been seeing in the broad market,
Healthcare related stocks like TGH could very well benefit from
a flight to safety.


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

None


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


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

ADRX $60.49 -0.47 (-0.47) The Biovail (NYSE:BVF) court ruling
from last week appears to be filtering over into this week's
trading, judging by ADRX's trading in today's session.  The
stock traded in a tight range today on relatively active volume.
Today's consolidation may be a sign of a forthcoming breakout in
either direction.  The big level to watch to the downside is the
$60 support level.  ADRX has rebounded from the $60 level
several times in the last six months.  If the support gives, it
could spark a deep sell-off in shares, possibly down to the $55
level.  But the breakdown needs to take place first.  The stock
could rebound once again from the $60 level, which is why traders
need to have the necessary risk management measures in place to
protect against any short-term rally.  Depending upon your
specific entry point and risk tolerance, a breakout above the
$62 level could be used as a protective stop.  The $62 level has
served as resistance in the last two days, and a advance above
could spark short covering.  Use the 10-dma at $62.82 as
confirmation, as a rollover from the 10-dma could be used as an
entry point into new plays.  Conversely, if ADRX breaks down
below the $60 level in the coming sessions, watch for heavy
volume to accompany the move.  

PCSA $21.98 -2.87 (-2.87) The breakdown continues unabated,
driven by concerns that the series of earnings out from the
Wireless sector this week (QCOM, NOK and ERICY) will not be
glowing with signs of growth.  If those earnings reports don't
inspire the bulls, we're looking for PCSA to continue southward
into its own earnings report on January 29th.  Trading on
Friday left off at the low of the day, just below $25 and the
carnage continued right from the opening bell on Tuesday,
gapping lower and continuing to fall throughout the trading day.
While this is a classic bearish momentum play, we want to be
careful initiating new positions on further weakness.  PCSA has
lost more than half its value in the past 12 trading days and
could be due for an oversold bounce.  Use any weak bounce to
initiate new positions as sellers reassert their influence and
the stock rolls over from below $24.  Momentum traders can chase
the stock lower, trailing a tighter stop just above today's open
at $24.40.  We're lowering our stop to $26.50 tonight.

QCOM $41.40 -3.55 (-3.55) What do you know?  Patience is
rewarded!  After meandering just above the $46 support level for
close to 2 weeks, shares of QCOM got the week started off right
(at least for the bears) completing the breakdown that began on
Friday by smashing the next level of support near $43.  Falling
nearly 8% on the day on heavy volume, QCOM closed near its low
of the day, amid concerns that the series of earnings
announcements expected from the Wireless sector this week (Nokia
on Thursday and Ericsson on Friday) will not be all wine and
roses.  Given the sharp decline, we're comfortable dropping our
stop to $46 (failed support and the current level of the
10-dma), as it would take some concerted bullish action to push
the stock back over that level.  Look for the stock to start
finding support in the $38-40 area, the site of the October
lows.  This would make for an ideal time to harvest some
profits.  Earnings from QCOM are due out Thursday night, so
we'll want to have all positions closed by that time.

THQI $42.30 -0.73 (-0.73) All things considered, it was a rather
quiet day for shares of THQI, as the video-game maker meandered
slightly lower on unimpressive volume, coming to rest just above
the $42 support level.  Last week's earnings report from MSFT did
little to inspire bullish confidence and Tuesday's negative
action in the Technology sector exerted a constant downward
pressure.  The tight range over the past several days has defined
our action points clearly.  Target new entries on a rollover
below the $45 intraday resistance level or on a breakdown below
the $42 level (so long as it isn't a gap move).  The Software
index (GSO.X) is threatening to break below the $310 level, and
if it does, will create more downward pressure on the THQI.
We're lowering our stop to $46.


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

SGR - Shaw Group $18.81 -0.81 (-0.81)

The Shaw Group Inc. (Shaw) is a vertically integrated provider of
complete piping systems and comprehensive engineering, procurement
and construction services to the power generation industry. Shaw
has supplied fabricated piping systems in over 375 power plants
with an aggregate generation capacity in excess of 200,000
megawatts of piping systems in the United States and worldwide.
The Company also provides services to the process industries
(including petrochemical, chemical and refining industries), and
the environmental and infrastructure industries.

Calpine (NYSE:CPN) recently reported that it would dramatically
reduce its capital expenditure plans for fiscal 2002.  The
company had already been struggling, so its recent guidance
revealed even more difficulties for the utility giant.  Calpine
said that it would reduce its planned spending budget by about
$2 billion this year.  The reduction in spending directly
impacts the construction firms that build power plants, such as
Shaw Group.  For its part, SGR has been in a negative for the
last 12 months.  That trend doesn't look to change in the near
future.  SGR broke below and closed below the $20 level last
week and continued lower into today's session.  Volume continues
to remain active on the downside as SGR slides lower, revealing
continued institutional selling.  The $20 level can often act
as a psychological support level before a stock heads into the
teens.  Institutions will often sell a stock from the portfolio
once it breaks below the $20 level.  We're looking for that
selling to continue in the short-term.  Momentum traders can
look for weakness to persist in the power plant makers such as
the aforementioned Calpine as well as Duke (NYSE:DUK).  Also,
monitor the price action of the broader utility space by watching
the Dow Jones Utility Index ($UTIL).  In SGR, look for weakness
below current levels for a momentum-based entry.  For rollovers
near resistance, watch for a rally and subsequent weakness up to
the $20 level.  Our stop is initially in place at the $21.25,
which is right around the stock's 10-dma.

BUY PUT FEB-20*SGR-NB OI=245 at $2.20 SL=1.00
BUY PUT FEB-17 SGR-NW OI= 62 at $0.90 SL=0.25

Average Daily Volume = 1.03 mln


IVGN – Invitrogen Corporation $56.26 +0.00 (+0.00 this week)

IVGN develops, manufactures and markets more than 10,000
products for the life sciences markets.  The company's products
are principally research tools in reagent and kit form,
biochemicals and media, which the company sells to corporate
academic and government entities.  IVGN focuses its business on
two principal segments, Molecular Biology and Cell Culture
Products.  The company markets a broad portfolio of products
that are designed to enable rapid, efficient cloning of DNA
fragments and eliminate certain time-consuming steps in genetic
research.

There have been few bright spots in the Biotech sector (BTK.X)
since the beginning of the year, and the bearish sentiment can
be clearly seen in the daily chart.  Plagued by negative
FDA-related issues, the BTK index is off more than 13% since
late December, while the broader NASDAQ has lost less than 5%.
That is the definition of relative weakness.  One stock that
stands out within the Biotech space as both weak and ready for
a breakdown in IVGN.  It recently broke the $58 support level
and is currently resting near $56, a nearly 7-month low.  Should
the weakness in the BTK persist as we move through earnings
season, IVGN looks like a prime candidate to break below the
current $55-56 support area and retest its March-April lows near
$45.  The PnF chart bears this out, with its current bearish
count pointing to a target of $45 as well.  Additionally, there
is a lot of overhead resistance near $60 (also the site of the
declining 20-dma), making it fairly easy to manage risk in the
play.  We want to either target a failed intraday rally near the
10-dma (currently $58.65) or a breakdown below the $55 support
level for initiating new positions.  Events to keep an eye on are
the USB Piper Jaffray Healthcare Conference on January 29th, and
the company's earnings date, January 30th after the markets
close.  Given those dates, we're obviously constrained by having
a short timeframe in which to play, as we'll want to have all
positions closed before the earnings release.  We're initiating
the play with our stop set at $60.  This is a play on sector
weakness, so make sure the BTK is still in the bears' clutches
before playing.

BUY PUT FEB-60 IUV-NL OI=426 at $5.10 SL=3.00
BUY PUT FEB-55*IUV-NK OI=235 at $2.50 SL=1.25
BUY PUT FEB-50 IUV-NJ OI=164 at $1.05 SL=0.50

Average Daily Volume = 1.23 mln


SMTC – Semtech Corporation $32.31 -1.70 (-1.70 this week)

Semtech is a supplier of analog and mixed-signal semiconductors
for commercial applications, the majority of which are sold to
the communications, industrial and computer markets.  SMTC's
semiconductors enable power management, test, protection and a
wide range of other functions in products that require analog or
mixed-signal processing.  End customers are primarily original
equipment manufacturers (OEMs) that produce and sell electronics
devices.

Our Wireless put plays have been performing well recently, and
with the breakdown in the Semiconductor sector (SOX.X) on
Tuesday, now seems like a good opportunity to add to our success.
SMTC builds semiconductors that are used in the communication
markets, and poor expectations for earnings results from
companies like NOK, ERICY and QCOM this week should keep the
stock on the defensive.  And with even strong Communication IC
stocks like BRCM getting knocked back on heavy volume on Tuesday,
SMTC looks like easy pickings.  After putting in a lower high in
early January, the stock has been in a steep decline, falling
through several levels of support in the past 3 weeks.  Breaching
the 200-dma ($33.61) today on heavy volume just adds to the bulls'
burden.  SMTC came to rest just above the 62% retracement ($32.22)
of its October-December rally today, and a drop below $32 will
likely have the stock visiting the $30 support level in short
order.  The best entry will likely come from an oversold bounce
up to the 50% retracement near $34.50, but we may not be so
fortunate.  We may have to settle for a rollover near $34, the
most recent support level to give way.  With earnings set for
February 19th, that won't be a factor in our play over the near
term.  But we'll want to keep an eye on the market's reception to
BRCM's earnings tomorrow night after the close.  If BRCM can't
impress the street, the negative reaction there could motivate
renewed selling in shares of SMTC.  And a rally on the news would
likely just provide us with a better entry into the play.
Initial stops are in place at $36.

BUY PUT FEB-35 QTU-NG OI=613 at $4.70 SL=2.75
BUY PUT FEB-32*QTU-NT OI=  0 at $3.40 SL=1.75
BUY PUT FEB-30 QTU-NF OI=150 at $2.15 SL=1.00

Average Daily Volume = 1.30 mln



************************Advertisement*************************
BARRON'S SAYS OPTIONSXPRESS HAS "a lot of bang for the buck"

* IRA Accounts Available
* 8 different FREE options pricing, strategy, and charting tools
* Real-Time Buying Power, Account Balances or Cancels
* EASY screens for spreads, collars, covered calls or 
butterflies!
Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor013

Note: Options involve risk. Risk disclosure: 
http://www.optionsxpress.com/welcome_risk_index.htm
**************************************************************


**********
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 01-22-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


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

MRVL - Marvell Tech $43.53 +1.08 (+1.08 this week)

Marvell Technology Group designs, develops, and markets integrated
circuits utilizing proprietary communications mixed signal and
digital signal processing technology for communications-related
markets.  The company's products provide the critical interface
between analog signals and the digital information used in
computing and communications systems and enables its customers to
store and transmit digital information reliably and at high
speeds.

Most Recent Update

MRVL introduced a new product for broadband communications
applications this morning.  The new wireless application is
expected to drive revenue growth.  The announcement helped MRVL
to once again buck the overall and very weak trend in the
broader tech space.  We very much like MRVL's relative strength
versus the broader semiconductor sector, as measured by the
SOX.X.  For its part, the SOX.X finished lower by 4.57%, while
MRVL tacked on another 2.54%.  However, we still feel that it's
going to take participation from the SOX.X for a sustained
advance to take place in MRVL.  You can still try bullish plays
in MRVL without the SOX.X, but we would feel more comfortable
with confirmation from the sector before entering a bullish
play.  If you do play against the trend in the SOX.X, make sure
to use a tight stop appropriate to your risk tolerance to manage
risk.  As for new entries, continue to watch for support to prop
up MRVL at the $42 area.  A pullback on weakness in the SOX.X
to the $42 level in MRVL could offer a favorable entry point.
If the SOX.X rebounds in the coming days, look for MRVL to
advance past its relative high at $43.75, traced in today's
session.  On a sustained pullback, look for weakness down to
the $40 level when considering an entry.  Our coverage stop has
been raised to $39.

Comments

When the SOX.X rebounds, MRVL could trade measurably higher.
The difficulty lies in determining when the SOX.X is going to
trade higher.  MRVL is clearly one of the strongest stocks in
the semiconductor sector as evidenced by the stock's action in
the last three trading days.  It's perhaps more important in
this play to give the SOX.X the most attention.  Spot the
turnaround in the SOX.X and look for MRVL to fly higher.  The
rebound in the SOX.X could begin as early as tomorrow.

BUY CALL FEB-40 UVM-BH OI=1460 at $5.90 SL=3.75 
BUY CALL FEB-42*UVM-BR OI= 396 at $4.40 SL=2.75 
BUY CALL FEB-45 UVM-BI OI= 882 at $3.10 SL=1.75 
BUY CALL MAY-45 UVM-EI OI=1801 at $6.80 SL=4.75 

Average Daily Volume = 2.65 mln
 


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A Silent Turning Point
Buzz Lynn
buzz@indexskybox.com

Much has been said and uttered nearly to the point of exhaustion 
about support, resistance, overhead, bullish/bearish count, high 
valuations, lousy fundamentals, and such.  I have certainly made 
my contribution as have the good folks I have the privilege to 
work with including, Jim, Eric, Austin, Jeff, Mark P., Ray, and 
Mark W.   You can bet that we all get a ton of great ideas and 
helpful hints from each other through osmosis generated by daily 
trading, and hopefully you see that come shining through in the 
useful knowledge we put out every day.

A little side note:  We view our responsibilities as providing 
"been there, done that" experience and knowledge at a very 
reasonable cost.  Do not confuse the knowledge gained with 
information spouted.  There is a big difference.  As Frank Zappa 
(unlikely source, I know) once said, "Information is not 
knowledge".  First and foremost, our job is to educate and help 
our readers develop knowledge of the trading business and 
hopefully, to help our fellow traders and readers avoid many of 
the pitfalls and financial alligators that take bites of our 
accounts as we learn the business of trading.

That side note out of the way, and with respect and 
acknowledgement of the good folks we all work with, I want to 
dove-tail two things together in this column that I am spending 
perhaps a bit too much time on, though I'm not sure there is any 
such thing as "too much" time spent doing what we love to do - in 
our case, trade.  See, Fundamentals guy believes it important to 
have multiple sources of information - to always be seeking out 
new blood and ferreting out new information and ways to apply it 
as knowledge.  I listen more closely to those folks that write 
columns than to those who jabber on TV.  The ones who write are 
ones who have a track record, good or bad, more easily preserved 
for posterity.  It's a bunch easier to stick your neck out on the 
line with a comment that few will remember than with the written 
word that can be flaunted in the writer's face.  Now you know why 
I spend a lot of time reading.

However, just as Austin pointes out, he is agnostic about the 
markets and follows simple chart basics.  Even so, he is perfectly 
capable of and good at turning solid fundamental information into 
usable trading knowledge.  Such was the case with information 
garnered from his former life in the telecom business.  Likewise, 
though I have a bent for fundamentals, I have the utmost respect 
for technicians and utilize technical information every day to 
arrive at equally usable trading knowledge.  

The point here?  Each of us have outside sources - other than 
ourselves - which we use every day to evaluate knowledge and turn 
it into wisdom.  In the business of successful trading, it is our 
obligation to use them.  Much as I have spent countless hours 
looking at charts looking for the nuances, it took a guy whose 
wisdom I trust to cut through the noise and capture the essence of 
the primary trend of the market and the economy on the charts.  
From that, all else flows.

A long time stock market commentator (written, not spoken) and 
publisher of the Dow Theory Letters by the name of Richard Russell 
has an interesting and simple hypothesis about the current market.  
He talks about it every year, but thank God, few listen.  
Otherwise it would cease to be valuable since the majority can 
never be correct.  

Quite similar to the "January effect", but more instructional, 
here it is: If the Dow in the first quarter of the new year breaks 
below the December low of the preceding year, it's a negative 
indicator for the new year.

Now to zoom in on that (and not explode it to the point of 
absurdity), Russell points out that the Dow struck down to 9743 on 
December 3, 2001.  Uh oh.  On January 16, 2002, the Dow struck 
down to 9712 - bearish.  My note:  We now have support levels 
established at 9743 and 9712, 9712 being a whopper if violated.

Friday's Dow was back up to 9771.  Russell wrote then, "I would 
consider it bearish if the Dow closed below 9743, and extremely 
bearish if the Dow closes below 9712".  Call it an uncanny twist 
of fate, but today's Dow closed at 9713 is, in my opinion, not 
coincidental.  9712-9713 appears to be a pivotal level for the Dow 
that has flown silently under the radar.  Maybe it's not so silent 
after all.  Take a look at the following daily Dow chart

Dow Industrial chart (INDU - daily):


 


Russell comes uses this theory based on experience and a simple 
rule.  It does not have to be complicated.  I like that.  But just 
in case, note that the lows on late November offered support (and 
thus a pivot level for later) as does the 50% retracement off the 
May 2001 highs to the late-September lows.  Hmmm. . .funny that it 
registers 9712 as well.  The point is that technical information 
works as though the hand of our maker were guiding us to it.  (bet 
he/she won't whisper in our ear what happens next though!).  No 
matter how we slice it - retracements, historical support, 
Russell's rule - each tends to corroborate the other.  That should 
tell all of us that there is something more than just a random 
number about 9712 on the Dow.

One thing Russell doesn't mention is the daily stochastic.  If 
there is a case to be made in favor or the bulls from here, this 
is it.  The daily stochastic is buried in oversold with a slightly 
deeper swoon on each occasion since late-November.  

Let's see, candles remain flat while the stochastic falls to a 
greater degree of oversold.  That would seem to say that the 
candles may be finding a floor at this level even as negative 
sentiment rises, which also says that a deep selloff from here 
might not materialize.  Definitely a hidden sign of strength 
there.

For those wondering if I'm going to draw any conclusion off this, 
the answer is no.  But here is my thinking for now.  9700 +/- may 
provide a level of support to bullish traders.  I'm thinking that 
the stochastic is due for a cycle back up to, or near, the 
overbought area.  Still, fundamentally, seasonally, 
bullish/bearish percent, point & figure charts, and because The 
Great Humiliator (Ken Fisher theory that says the market's job is 
to humiliate as many as possible) says so, I would expect an 
eventual decline in the market below these levels.  

The tale of tail-spinning wireless telecom is telling too (say it 
3 times real fast!).  As a former growth engine and once shining 
light, the sector ought to be doing better.  If it isn't looking 
good, the anticipated recovery of the economy is dubious.  

Thus I would look at any bounce from 9712 as a bullish position or 
swing trading opportunity only, and that is based solely on daily 
support and an oversold stochastic begging to turn up if only for 
a week or so.  I am not anxious to load up in hopes of coming 
long-term gains - not going to happen this year in my opinion.

Anyway, let this level act as guide.  Russell makes a good point 
of keeping it simple, as does Ken Fisher.  We try to do the same 
here in all our collective abilities too, with education as the 
cornerstone of trading success.

Until tomorrow, keep your wings level and trust your instruments!


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