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Daily Newsletter, Tuesday, 01/29/2002

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The Option Investor Newsletter                 Tuesday 01-29-2002
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)
************************************************************
       1-29-2002           High     Low     Volume Advance/Decline
DJIA     9618.24 -247.55  9908.16  9616.65  1.7 bln    943/2164
NASDAQ   1892.99 - 50.92  1959.05  1883.49  1.8 bln   1178/2429
S&P 100   557.28 - 17.63   577.16   556.65   Totals   2120/4593
S&P 500  1100.64 - 32.42  1137.47  1098.74
RUS 2000  473.98 -  7.30   482.38   472.13
DJ TRANS 2738.65 - 66.19  2813.56  2731.01
VIX        26.26 +  4.49    26.68    21.74
VXN        45.90 +  2.94    46.53    43.24
TRIN        2.63
Put/Call Ratio       .90
*************************************************************

Funny Numbers Plague Wall Street

Fears of accounting problems similar to Enron's sparked fear 
on Wall Street as rumors mounted. It was open season for the 
bears as stocks were being shredded for various reasons. It 
was unknown if it was fear of accounting problems or fear of 
a political event (the "speech") or even the FOMC on Wednesday. 
This week has more potential problems than walking in Afghanistan 
with minefields around each corner.



 



 

One of the biggest losers of the day on extremely high volume,
153 million shares, was Worldcom. Rumors were flying that they
had substantial exposure to the now bankrupt Global Crossing,
and that they would announce internal accounting problems. If
that was not enough S&P was rumored to be removing them from 
the S&P-500, Moody's was going to downgrade their debt, Goldman
Sachs had downgraded them to a sell and Bernie Ebers was going
to get another margin call if the stock fell below $10. All of
these rumors were flatly denied by everyone concerned with the
exception of the margin call. Nobody was available to comment
on that one and it has happened in the recent past. The board
bailed him out on that one but rumor is that he will be on his 
own this time. Over $5.5 billion in market cap evaporated from 
WCOM on the flurry of rumors. 

Another rumor target continued to be TYCO, which accounted for 
10% of the NYSE volume at a whopping 170 million shares traded.
Even though TYC held an analyst meeting last week to diffuse
the accounting problem rumor there was another surge of concern.
The sellers said the announcement to break the company into
four separate companies did not address the potential accounting
questions. They say it was a smokescreen to cloud the issue. 
Bears also said the fact that TYC was selling/splitting assets
instead of buying more companies as they have in the past, meant
that things were not rosy behind the closed accounting doors. 
The stock dropped -20% to $33.65 and wiped out -$18 billion in
market cap.

Williams Company (WMB) dropped -22% after announcing that they
would have to delay their earnings release because of you guessed
it, accounting problems. These problems related to potential
liability from their spin off of WCG, Williams Communication Group.
Similar contingent liabilities were the problems in Enron. They
also said they had continuing exposure to Enron which exceeded
$.12 cents per share in the 4Q. They were also re-evaluating their
balance sheet due to other contingent liability exposure. 

PNC Financial Services (PNC) announced that the Federal Reserve
was forcing them to restate their 2001 earnings and consolidate
its preferred interests in three subsidiaries which differed
from guidance from its auditors. PNC dropped nearly $7 on the
news. While the adjustment was minimal it came on a bad day for
accounting concerns.

JPM, an editors put play from Sunday, got hammered again after
the Global Crossing bankruptcy and appears destined to remain
under pressure. With possible exposure to creditors suits, as
the only partner to Enron with deep pockets, the race is on to
dump shares. If it is proven that they knew about financial
problems while they were setting up offshore companies for Enron
then they could end up paying Enron's shareholders for hiding
income/assets/losses. This is just pure speculation by traders 
but the Enronitis infection is spreading. Traders are worried not 
only about the Enron and Global Crossing impact on JPM but are
speculating on what other cockroaches may be hiding in the 
woodpile.

Banks took it hard across the board because of the JPM and PNC
problems. Even the regionals were pressured as the sector appeared
vulnerable to future disclosures. GS lost -3.37 and Citigroup
fell -2.60 on volume of 22 million shares. Bank America got
hit with a -4.44 drop on no negative news.

In the earnings parade Honeywell met lowered estimates which
were less than half of the prior 4Q. They did however warn that
the "near-term economic outlook will present difficulties". 
KO, another Dow component, met earnings estimates but warned
of lower growth ahead due to tough economics conditions in key
markets. Not encouraging news for the recovery theorists!

Yet another Dow component, IBM, announced that CEO Lou Gerstner
would step down and Sam Palmisano would take over the post. Lou
has widely been credited with transforming IBM from a failing
mainframe giant into a very profitable services company. Sam
joined IBM in 1973 as a salesman and was appointed president in
2000. Gerstner joined IBM in 1993 when the stock was trading in
the $10 range. He cut top employees and non-performing units to
streamline IBM and dropped emphasis on PC equipment to focus on
servers and software services. IBM dropped more than $5 on the
news. Good job Lou, enjoy your retirement!

Economic news showed that there was better than expected results
in several areas. The monthly mass layoffs in December, 2,425,
only impacted 267,000 workers which was less than November levels.
It appears the layoffs peaked in November and recent reports 
show conditions are improving. Durable Goods orders surpassed
expectations with a +2.0% gain in December. Semiconductor orders
were stronger, +13.3% although computers and related products
were still the worst performing sector with a -2.6% drop. The
Consumer Confidence numbers were slightly better for the third
month in a row. Consumers planning to buy homes or cars dropped
but major appliance purchases were more likely.

With only two of the 30 Dow components closing positive it is
not surprising that the Dow had a bad day. With the -$5.15 drop
in IBM accounting for almost -35 Dow points and C/JPM losing 
over -15 Dow points each you can accumulate some serious numbers
quickly. The -247 point drop was the largest drop this year and
brought the Dow back to close only +13 points above the Sept-10th
pre-attack close of 9605. Under normal conditions 9550 would be
the next support level. The Nasdaq is only +13 points above
support at 1880 and the S&P is +15 points above support at 1085.
Not a pretty picture. 

Complicating the investing landscape is the "Speech" tonight
by Bush where he is expected to comment on tougher accounting
standards among other things. Investors took money off the table
due to worry that any "new standards" could force hundreds of
companies to restate financials in the futures. If this happened
and a company who previously earned $5 with a PE of 40 suddenly
restated to earn $2.50 then without a change in stock price that
PE rockets to 80. Obviously there would be an immediate change
in stock prices to reflect this "reality" math. After the close
today APC announced on their own they were going to restate 
3Q 2001 earnings and "write down" by $1.7 billion the value of
U.S. oil and gas assets due to lower energy prices. With balance 
sheets of every major corporation under scrutiny we can expect
many of these "voluntary" discoveries to see daylight soon.

Also the FOMC begin their two day meeting today and the interest
rate decision will occur at 2:PM eastern time on Wednesday. While
nobody expects another cut the guidance language will be crucial. 
The positive economic reports from the last couple weeks probably
mean we will see rate hikes instead of rate cuts in our future.
Those rate hikes will not happen until rising unemployment reverses
and clear evidence of a rebounding economy is seen. More likely
the Fed is going to be talking about the crisis of confidence and
the financial health of the accounting system. This has got to
be a major problem for the Fed and not one they can directly 
impact. 

The drops below recent support for the major averages was very
disconcerting for most investors. Those that felt there was a
recovery underway are now faced with falling stock prices from
a previously unseen problem. Yes, there is a recovery underway
but stocks could be very overvalued based on the new math. What
is an investor to do? BE PATIENT! If you are following my entry-
exit levels of 9750/1925 then you should be flat or short and 
ready for anything that comes our way. It is entirely possible
that this accounting problem could linger for quite a while and
cause serious problems with the current markets. It is also very
possible that investors will be cheered by the "speech" tonight
and start buying the dip. BE VERY CAREFUL! The dip today was not
brought about by retail investors selling a few hundred shares
each. There was serious institutional selling and there is worry
in mutual fund camps. The retirement cash has failed to appear
and funds are worried about redemptions. Massive losses from
multiple stock disasters has eroded investor confidence. With
the announcement today that pension funds had lost nearly $2
billion on Enron alone and multiple new losers like TYC, WCOM,
PNC and APC on the radar screen they are running for cover. 
Funds, who were expecting cash inflows are now scrambling to
cover cash outflows. This does not bode well for the markets.

However, all is normally darkest before the dawn. Many times
the markets rally in the face of trouble as investors follow
the adage, "buy stocks when everyone else is selling." We have
yet to see any evidence of this and the fact that the Dow set
a nine day high this morning and a three month low at the close
shows the extreme uncertainty in the markets. Conversely the 
VIX hit a seven month low yesterday and seven week high today.
Investor sentiment did a complete 180 turn in only one day.
Obviously as investors we should watch the spectacle unfold 
with interest and yet remain detached emotionally. I am 
criticized constantly for not recommending heavy short positions
in times like this. I don't do that because things can change
for the positive just as quickly as it changed for the negative.
I could build a case for a rebound after the speech and the
FOMC decision if for no other reason than the TRIN closed near
3.0 and the put/call ratio at .90. Both of those indicators are
very bullish. However both are oversold indicators and can easily
become even more oversold. 

The key to this market is simple. We are not being driven by
normal earnings cycles. We are being hammered by news events
on a daily basis which are beyond our control. Investing in
a minefield of news events is suicide unless you are a swing
or day trader able to jump in/out on a moments notice. Longer
term investors, and I use the term loosely to include 3-5 days
to 3-5 weeks, should simply wait. I teach constantly in our
seminars that one should trade only when it is profitable to
trade and only when all the indicators line up in your favor.
This advice is perfect for 90% of all traders. Those who can
watch the markets constantly and trade the news can rake in
profits going both ways. Check out the Market Monitor for how
to do this. Most investors should however wait for the market
to digest the current news events and a new trend to emerge.
If that trend is down then by all means trade it since a down
trend from here could reap some serious profits. In the meantime,
wait patiently for the speech, the Fed and the Jobs Report on
Friday. Whichever direction the market heads after those events
will offer plenty of profit opportunities. 

Enter very passively, exit aggressively!

Jim Brown
Editor

Have you tried the Market Monitor yet?

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


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

That Was Fun!!!
Austin Passamonte

I am right up front in a long line of traders who never dreamed 
the major indexes would collapse below critical support today. 
This was supposed to happen on Wednesday via our customary post-
FOMC sell off... didn't anyone tell the market?

Must not be, as all sorts of technical support levels were 
obliterated across all indexes and sectors. But at least we are 
traders, well prepared to capitalize on the unexpected. Those who 
cautiously tested the downside today caught a beautiful move, 
while those who were flat should get their chance to enter 
profitable trades real soon.

(Daily chart: SPX)


 

Media bulls that try shrugging this action off as healthy 
consolidation for the next bull-run are kidding themselves and any 
who might listen. The VIX (not pictured) did blow off 4.50 points 
of steam today but now rests squarely in benign fashion at 26.00+

What we do see as a proxy for all the major indexes is the SPX not 
too far from the next measure of support. Retracing the yearly 
highs in 2001 to the yearly lows depicts the big index a mere 12 
points from its next Fib retracement level. Think it will stop 
there? Could be, but weekly chart stochastic values (not shown) 
are still in straight down bearish decline while daily chart 
values just made their latest bearish cross today.

No guarantees that a bottom won't be in place soon, but that's not 
how I'd bet 'em tonight.

(Weekly/Daily chart: BIX)


 

And here is one of the catalysts. While just about every sector 
took part in the red-letter day, financial sectors are getting 
gashed at the waist these days.

We profiled the XBD Broker/Dealer sector last night and indeed the 
charts were right. Tipped over again today, right down to its 50% 
retrace and moving average support. Right along with it went the 
S&P 500 Banking sector, and in dramatic fashion. First thing we 
look for and notice is weekly/daily chart stochastic values in the 
early stages of a bearish reversal. Still plenty of downside room 
to run and that's no surprise to us.

Secondly, the daily chart ascending channel saw price action smash 
down from upper line resistance right on thru lower line support. 
Are you kidding us? That's a significant show of weakness and 
oscillators suggest the short-side party's just getting started. 
There aren't any real liquid options to trade in this sector at 
all, but numerous iShares and HOLDRs exist. For a few symbols in 
here you can check out Sector Share model where we tracked some 
short from Monday and today as long-term charts were screaming for 
downside plays.

Summation
Sell every rally. Period. Until the VIX spikes well above 30.00, 
the trend is firmly & decidedly down. Play it all the way and 
prosper with glee. 

Best Trading Wishes,
austinp@OptionInvestor.com


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

Hope, Greed, and Fear: More On Volatility
By Eric Utley

Emotion is a very powerful force in the marketplace.  It trumps
fundamentals in the short-term.  Of the three predominant emotions,
fear is the strongest.  I don't know why, you'll need to consult
a psychologist to find the answer.  My therapist tells me that I'm
better off not knowing the answer. 

Whatever the reason, I know that fear is the strongest emotion in
the market because stocks fall three times as fast as they rise.
It's the same reason that the CBOE Market Volatility Index (VIX.X)
advances at a much greater rate than it declines: fear is
overwhelming.  And it's contagious.

Most market participants are gregarious.  Sheep are the same way.
Once fear starts spreading amongst the group, it grows at an
increasingly faster rate.  The group members' cognitive abilities
are impaired as emotion takes over rational thinking.  It usually
takes an event, or series of events, to spur such fear.

Today's "fear rally" was the result of a confluence of accounting
issues, restatement of earnings, and lingering Enron fears.  These
are all products of the excessive bubble that lasted through
the spring of 2000.  How much longer will these concerns persist?
More importantly, how much more fear will make its way into the
minds, err, stomachs of market participants?

The answers lie in the VIX.X, along with the other volatility
measures tracked in this column.  After Tuesday's 20 percent rally
in the VIX.X I would expect a short-term pullback in fear.  But
one never knows when dealing with the crowd.  No matter what
happens Wednesday, I'll continue tracking fear in this very column
and relate my findings.

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

Market Averages


DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     :  9618

Moving Averages:
(Simple)

 10-dma:  9782
 50-dma:  9939
200-dma: 10106



S&P 500 ($SPX)

52-week High: 1383
52-week Low :  945
Current     : 1101

Moving Averages:
(Simple)

 10-dma: 1129
 50-dma: 1144
200-dma: 1166



Nasdaq-100 ($NDX)

52-week High: 2771
52-week Low : 1089
Current     : 1519

Moving Averages:
(Simple)

 10-dma: 1558
 50-dma: 1607
200-dma: 1615



Securities Broker Dealer Sector ($XBD)

The $XBD was the day's worst performing sector with its 5.27
percent loss.  Notably, the index traded down to its 200-dma.
Leading the way down were SCH, MER, ET, AMTD, MWD, and LEH.

The $XBD is a gauge for the health of the market.  Its weakness
should be watched closely as further downside would add conviction
to a bearish thesis on stocks in general.

52-week High: 650
52-week Low : 318
Current     : 479

Moving Averages:
(Simple)

 10-dma: 508
 50-dma: 507
200-dma: 479


Gold and Silver Sector ($XAU)

The $XAU was the only sector that I track to finish higher in
Tuesday's session.  And did it ever finish higher.  The $XAU
climbed by 3.03 percent Tuesday!  It was led higher by components
such as HGMCY, AEM, MDG, FCX, AU, and SIL.

The rotation into the $XAU in conjunction with falling yields
reveals defensive posturing by the market.  Buyers were seeking
solace in Tuesday's session, and they found it in bonds and
gold.

52-week High: 67
52-week Low : 46
Current     : 60

Moving Averages:
(Simple)

 10-dma: 59
 50-dma: 55
200-dma: 56


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

Market Volatility

One of the biggest one-day rallies in recent history occurred in
the VIX.X Tuesday.  The index advanced past its 10- and 50-dmas
with little hesitation.  The 200-dma rests overhead at the 27.53
level, which I'll monitor as the next inflection point in the
market's sentiment.

The VXN.X didn't advance as much as the VIX.X Tuesday, but ended
higher by 6.84 percent nonetheless.  Its advance came only one
day after retesting its all-time low!

CBOE Market Volatility Index (VIX) - 26.26 +4.49 (20.62%)
Nasdaq-100 Volatility Index  (VXN) - 45.90 +2.94

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.90        728,764       652,812
Equity Only    0.76        651,686       495,360
OEX            1.25         21,547        26,969
QQQ            2.62         21,578        56,577
 
-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          53      - 1     Bull Alert
NASDAQ-100    41      - 2     Bear Confirmed
DOW           60      + 0     Bull Correction
S&P 500       59      - 3     Bull Correction
S&P 100       59      - 5     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  1.23
10-Day Arms Index  1.34
21-Day Arms Index  1.36
55-Day Arms Index  1.16

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       943           2164
NASDAQ    1178           2429

        New Highs      New Lows
NYSE       93             49
NASDAQ     87             53

        Volume (in millions)
NYSE     1,770
NASDAQ   1,854

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

Commitments Of Traders Report: 01/22/02

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 added to their longs and subtracted from their
shorts for a decline of about 6,000 contracts in their net bearish
position.  Meanwhile, small traders grew less bullish by reducing
their net position by more than 9,000 contracts.

Commercials   Long      Short      Net     % Of OI 
01/08/02      333,742   398,286   (64,544)   (8.8%)
01/15/02      340,005   397,024   (57,019)   (7.7%)
01/22/02      342,841   394,041   (51,200)   (6.9%)

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
01/08/02      130,335     60,780   69,555     36.4%
01/15/02      129,987     64,311   65,676     33.8%
01/22/02      125,451     65,423   60,028     31.4%

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

The commercial interests' net bearish position modestly grew in
the last week.  The group shed more longs than shorts.  Small
traders grew more bullish by adding to their longs and reducing
their short position.

Commercials   Long      Short      Net     % of OI 
01/08/02       30,786     38,913    (8,127) (11.7%)
01/15/02       32,068     34,859    (2,791) ( 4.2%)
01/22/02       30,671     34,103    (3,432) ( 5.3%)

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
01/08/02       10,073     6,404     3,669     22.3%
01/15/02       10,230     9,782       448      2.2%
01/22/02       11,885     8,787     3,098     15.0% 

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 increased both long and short positions last week.
The result was a net increase in the group's bullish position.
Small traders reduced their net bearish position by about 200
contracts.

Commercials   Long      Short      Net     % of OI
01/08/02       15,921     7,981    7,940     33.2%
01/15/02       15,866     9,175    6,691     26.7%
01/22/02       18,152    11,013    7,139     24.5% 

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
01/08/02        4,380     9,188    (4,808)   (35.4%)
01/15/02        4,979     8,747    (3,768)   (27.5%)
01/22/02        5,424     8,969    (3,545)   (24.6%) 

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 1/29/2002
Exactly As Scripted

News & Notes:
------------
From last night's post: "The OEX lies below resistance right now. 
Look for it to trade back up to the 577 – 578 area and quite 
likely fail from there. This would be an excellent place to look 
for shorts if/when stochastic values go overbought in unison as 
well." "... Same deal for the SPX. The 1138 area may pose another 
challenge and send price action right back down or chopping 
sideways along."

Is this too good to be true, or do we actually have markets acting 
very methodical and predictable again? I recall too many volatile, 
whipsaw sessions the past two years where trades got blown out of 
the water on wild intraday swings. None of that these days as 
price action behaves very nicely... let's hope it keeps moving 
this way forever!

That being said, I never expected a total meltdown in the Dow 
today nor did anyone else I know. We might have expected this 
action after 2:15pm on Wednesday but looks like the sellers began 
dumping early. 


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


 

Here's another look at the chart patterns from last night. First 
of all, let me apologize for "my bad" in lacking clarity of 
instruction last night. My decision to post entries or not hinged 
on the fact of getting chopped on Monday trying to catch a big 
move and the likelihood of similar action today. It was left that 
aggressive traders might buy puts at pattern resistance if price 
action failed and conservative traders at pattern support if price 
action fell thru there.

It did both. Note how the OEX sailed right up to resistance, met 
firm rejection and plunged thru support. This is the action we 
hoped to catch yesterday instead. My mistake for not being clearer 
to all about how to handle today's potential action based on last 
night's foresight alone.

[60/30-Min Chart: SPX]


 

The SPX followed suit perfectly as well. Went up to 1137+ and died 
right there. Daring traders could get short near that mark while 
others waiting for pattern confirmation get short near 1130 – 1129 
instead. Both would have worked out quite well for those who did.

[60/30-Min Chart: QQQ]


 

The Qs shorted up near resistance offered solid reward, but a 
break below support at 38.40 or so would have served up less than 
1.00 index point's downside gain from there. As usual lately, the 
S&Ps offer greater dynamic range for profit opportunity.


Summation:
---------
Tonight there is nothing even close to a swing trade entry. Swing 
Trades happen on market moves counter to the trend when it appears 
price action is about to resume the trend direction. By definition 
we need a relief bounce to give high-odds trend following short 
from here. That does not exist in any fashion tonight. Playing the 
market break after 2:15pm EST tomorrow should offer the next good 
trade. We will preface the action in Market Monitor and see what 
develops from here.


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: 38 (QQQ-BL)            Feb Calls: 98 (DJV-BT)  
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop: Break Below                 Stop: Break Below 
                                

Feb Puts:  36 (QQQ-NJ)            Feb Puts: 96 (DJV-NR) 
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break Above 


=====


         OEX                         SPX
Feb Calls: 570 (OEY-BN)           Feb Calls: 1125 (SPT-BE)
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop: Break Below                 Stop: Break Below 


Feb Puts: 560 (OEB-NL)            Feb Puts: 1075 (SPQ-NO)
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break Above 


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


IS Position Trade Model: Monday 1/28/2002
180 Degrees Off

News & Notes:
------------
From last night's summary: "This remains a sideways market right 
now, persisting until past the FOMC (non)event if not beyond. No 
viable option play entries exist right now."

If that wasn't the worst market call I've ever made, it sure is 
one of them! After being lulled to sleep for days and certain that 
the fireworks would begin on Wednesday, today's monster move 
caught me totally by surprise. If it weren't for some impromptu 
put plays taken on a short-term basis it'd have totally passed me 
by.


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


Summation:
---------
Just when our stop-loss points were hit on put plays open for 
several weeks, the next session smashes down and works like crazy. 
One lousy day! All of the previous plays would be working like 
crazy if plays had been tracked without any stops using 100% risk 
capital only as our basis. That will be the new approach in here 
as directional action infrequently occurs and time decay becomes a 
bigger challenge now than the past few years presented.

We have no trouble booking gains in Sector Share devoid of adverse 
time decay by nature. Adjusting to an approach using 100% risk 
capital and no stops in here will allow the same ease of operation 
as well.

No buy & hold entries tonight after a huge move and large spike in 
the VIX, but we expect the next round of plays to offer themselves 
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. 

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


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


Open Plays:
----------
XLI
Feb Puts: 28 (XLI-NB)
Long: 1.00
Stop: 2.50


Sector Share Trade Model: Tuesday 1/29/2002
Major Meltdown!

News & Notes:
------------
We easily found a bunch of financial sector shares poised for 
bearish reversals and tracked them short yesterday and today. We 
should never doubt weekly/daily charts and sometimes I'm still 
guilty of that, but thankfully not this time and hopefully never 
again!

Next in line with the exact-same setup appears to be the Retail 
sector tonight.

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


 

The Retail HOLDR is less than two years old, and the weekly chart 
(left) retraces its historical high to low. I'd guess that the 62% 
retrace level may be the next downside target now that both charts 
begin to look bearish. Going short near 94.50 gives about 2.00 
points breathing room to next support and potential for 6.00 
points gain if the next level is hit.


Summation:
---------
All shorts tracked are looking fine right now and some have modest 
gains locked in on a stop, barring any upside gap moves off an 
open. In any event we are following the trend and doing our best 
to catch significant moves as they unfold.


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:
----------------
1/30
RTH Internet HOLDR
Short: BREAK BELOW 94.50 
Stop:  Break Above 97.00 



Open Short Plays:
----------
HHH Internet HOLDR
Short: BREAK BELOW 34.00 
Stop:  Break Above 32.00 *

01/25
IYF Dow Jones U.S. Financial
Short: BREAK BELOW 80.00
Stop:  Break Above 78.00 *

IYR Dow Jones Real Estate
Short: BREAK BELOW 79.75
Stop:  Break Above 80.00 *

01/28
IYG Dow Jones Financial
Short: BREAK BELOW 91.50
Stop:  Break Above 89.00 *

RKH Regional Bank HOLDR
Short: BREAK BELOW 115.00
Stop:  Break Above 110.00 *

1/29
XLF Financial SPDR
Short: BREAK BELOW 26.00
Stop:  Break Above 27.00

FFF Fortune 500
Short: BREAK BELOW 80.00
Stop:  Break Above 82.00


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The Option Investor Newsletter                  Tuesday 01-29-2002
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:
*****

PNC $56.08 -5.79 (-5.92) In a word: Ugly!  PNC was advised by
the Federal Reserve to restate its earnings.  PNC restated its
earnings.  The stock was crushed once it reopened for trading
Tuesday.  Traders with open positions can look for any bid to
salvage positions early tomorrow.


LLL $97.23 -2.77 (+0.53) LLL said Monday that it would release
fourth-quarter numbers tomorrow morning, before the market
opens.  The company moved up its earnings announcement, which
can be a sign of a favorable quarterly number.  Nevertheless,
look to exit plays on strength early tomorrow morning.  Judging
by other reports in the group, LLL's should be a bullish
number.  The company will deliver guidance later in the morning,
after the market opens.  After the earnings report, we may look
to add LLL back on the call list as the stock remains very
strong.  Its advance to $100 yesterday and again today reveals
as much.

LPNT $34.61 -0.62 (-2.63) After following through on its breakout
move last week, LPNT has had a rough go of things this week,
beginning with yesterday's 5% decline.  That sharp reversal took
out most of the gains since we added the play, but the rebound
from the lows had us looking at the drop as a potential entry
point.  Those hopes were dashed this morning, as LPNT rolled over
again shortly after the opening bell and spent the day
consolidating below our $35 stop.  The breakout above the $35
level has now been nullified, so we're dropping the play tonight.

LTR $58.64 -0.62 (-2.88) It's tough to manage a breakout move
when the whole market is heading south, and that environment
describes the fate of our LTR play.  After breaking out on
Friday, the stock did an about face yesterday, dropping to close
just above our $59 stop.  That failure continued today, and our
stop fell victim to the bears' assault.  With Stochastics now in
full bearish roll and a violated stop (as well as recent
support), we have no choice but to remove LTR from the playlist
tonight.


PUTS:
*****

THQI $43.56 -0.19 (+0.87) We've had several opportunities to
harvest gains from our THQI play during the time it has been on
the playlist, but it looks like the party is over.  The stock
continues to find support near $43, and despite the meltdown in
the broader market on Tuesday, THQI only gave up a paltry 3
cents.  Relative strength is starting to build, and we don't want
to take the chance that the bulls start playing in this arena
before we can get out.  So we're dropping the stock from the
playlist tonight, as there are certainly better bearish
candidates available.


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

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

CALLS              Mon    Tue

MRVL     42.51   -0.27  -2.18  Unfounded accounting rumors surface
PVN       4.02   -0.02  -0.30  Earnings report Thursday, hold on
TGH      72.46   -0.81  -0.23  Consolidating after big breakout
LPNT     34.61   -2.01  -0.62  Dropped, routine profit taking
LLL      97.23    3.30  -2.77  Dropped, earnings tomorrow morning
PNC      56.08   -0.13  -5.79  Dropped, restatement of earnings
LTR      61.52   -2.26  -0.62  Dropped, earnings on Thursday, bail
MMM     108.65   -0.69  -1.89  At support, raising stop up to $108
DPMI     47.98    0.62  -1.35  Holding up in bad tech environment
RATL     24.15   -0.02   0.25  New, impressive relative strength


PUTS

ADRX     59.09   -3.26   1.26  Finally broke down, follow through
THQI     43.56    1.06  -0.19  Consolidating before new leg lower?
IVGN     54.81   -2.91  -0.17  Breakdown in biotechs, BTK at 500
NTIQ     30.28    1.03  -1.22  Higher relative low Tue, bounced
GNSS     58.01    4.08  -2.24  Tied to tech, weak SOX is needed
CCMP     61.01    0.26  -2.65  Weakling in Semis, new relative low
MRCY     34.41    1.12  -0.18  Coiling tighter and tighter, break?
CIMA     26.70   -1.12  -0.03  Trending lower still, watch BTK
GS       84.48    0.55  -3.37  New, brokers breakdown, watch XBD
AT       54.62   -0.25  -1.63  New, wireless stocks under pressure


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

DPMI $47.98 -1.35 (-0.73) As Semiconductor stocks continued to
rebound, as measured by the Semiconductor index (SOX.X) on
Monday, DPMI pushed as high as the $50 level in early morning
trade before consolidating near the $49 level going into the
close.  The big event last night was the earnings report from
TXN, which managed to beat estimates.  That seemed like good
news until the company revealed that they would be slashing
their Cap-Ex budget from $1.8 billion to $800 million for the
year.  That's more than a 50% reduction and the effect wasn't
lost on investors in the sector this morning, as the SOX
reversed and headed lower shortly after the open.  By the end
of the day, the SOX had given up nearly 2.5%, which isn't bad
when you consider the broad-based selling that was the theme of
the day.  While DPMI gave up some ground, it was encouraging to
see that the selling was fairly orderly and came on rather light
volume. The stock came to rest just above the 20-dma ($47.68),
after that level provided support earlier in the day.  We only
want to initiate new plays on a successful bounce from above the
$47 support level, as a close below there would likely spell the
end of the current rally.  We're raising our stop to $47 tonight.
Watch the SOX for confirmation of bullish sector sentiment as
well.

PVN $4.02 -0.30 (-0.32) The moment of truth is close at hand.
We've been playing PVN for a rally into earnings, and it has been
rather disappointing to see it fail to materialize thus far.  The
stock has really been confined to an ever tightening range since
hitting the $4.85 level 2 weeks ago.  But support has been
building too, with the lows moving up in the past couple weeks.
If you guessed neutral wedge, then you win the prize.  PVN is
likely to break one way or the other soon, and we're betting it
is going to be up.  This is based on the expectation that when
the company reports earnings on Thursday evening, they'll reveal
that their financial situation isn't nearly as dire as many have
speculated in recent months.  In a deviation from our normal
practice, we'll be holding PVN over earnings, in expectation that
the stock could pop following the news.  Target new entries near
current levels, but keep stops in place at $3.90.  A close below
that level will mean we are wrong, and PVN would be making its
way to the drop list.

TGH $72.46 -0.23 (-1.04) A rare pocket of strength today, shares
of TGH fared rather well when the rest of the market was in sell
mode.  Although they gave up some of last week's gains on Monday,
shares are finding support near the $72 level, as the company's
earnings date of February 8th approaches.  It's no great surprise
that TGH performed rather well on Tuesday, as the HealthCare
sector (HMO.X) did too, giving up only 0.5%, keeping the current
bullish run intact.  Profit taking was to be expected near the
$480 level as we pointed out over the weekend, and it is
encouraging to see the selling volume on the light side.  Use the
current weakness as entry opportunity, initiating new positions
on a bounce from either the $72 level, or even the level of our
stop at $71.  Just make sure that buying volume confirms bullish
conviction before playing.

MMM $108.65 -1.89 (-2.58) The concerns over asbestos litigation
and the impact on corporate profits took a back seat in today's
session as there were bigger fish to fry.  MMM pulled back on
sympathy with the Dow, which the stock is a component of.  For
the day, the Dow ended lower by about 2.5% while MMM finished
lower by 1.7%.  We like the relative strength in MMM and the
fact that it bounced from its support level at $108 and change,
which is actually a key retracement level.  We're raising our
stop to $108.  If the stock closes below that level, then it's
very likely that it's heading measurably lower over the short
term and we don't want to have that risk.  Where you place your
own stop should depend on you risk tolerance and entry point.
It's been rumored that President Bush is going to address the
asbestos concerns in his speech tonight.  If he does, MMM
could get a pop off of the news in tomorrow's session.  But the
fact remains that we need the Dow to trade higher for this play
to be a success.  Watch the Dow closely and only enter new call
plays when market conditions permit.

MRVL $42.51 -2.18 (-2.45) MRVL traced a new relative high in
yesterday's session.  In other words, the stock remained one of
the strongest in the tech sector.  Hopefully its advance past
$45 offered exit points for readers because the stock fell
under a bear attack in today's session.  The company's
headquarters in Bermuda and operations in Israel and Singapore
made the stock a target of the bears who are pounding stocks
with any ties to bad accounting.  The rumors were just that
and nothing has been substantiated.  Nevertheless, readers with
open positions might consider the risks that are associated
with accounting concerns whether they're real or not.  In the
short-term, MRVL could fall under additional pressure if the
bears decide to press or if institutional investors grow
nervous.  Let price action in MRVL be your guide.  If the
accounting fears pass in the next few days, we'll look for MRVL
to base around current levels.  In the meantime, gauge market
sentiment through monitoring the Nasdaq and the Semiconductor
Index (SOX.X).


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

RATL – Rational Software $24.15 +0.25 (+0.23 this week)

Rational Software is a provider of integrated solutions that
automate the software development process.  The company's
integrated solutions include unified tools, software engineering
best practices, and services that allow customers to successfully
and efficiently develop and deploy software.  RATL serves
customers in 3 principal categories that it refers to as
business applications, infrastructure, ad embedded systems and
devices.  Business applications customers include those that
are leveraging the power of the Internet to build
business-to-business (B2B) or business-to-consumer (B2C)
software.  Infrastructure clients are building the physical and
software infrastructure for the Internet and include
communications as well as operating system and "middleware"
software vendors.  Embedded systems and devices customers are
building devices with embedded software that provide connectivity
to the Internet and other specialized networks.

There have been plenty of areas of weakness throughout the market
so far this week, but the Software index (GSO.X) hasn't been one
of them.  While it has pulled back a bit from where it started
the week, it is still holding above the 200-dma ($185.56) and the
more important support found at $180.  Shares of RATL have held
up well this week too, following the gap up that occurred last
Thursday.  What is notable is that the stock has refused to fill
that gap, despite the weakness found in the broader Technology
sector.  Perhaps it has something to do with the company's
bullish forecast with their earnings report a couple weeks ago,
or maybe it has to do with the series of analyst upgrades that
surrounded their report.  Whatever the cause, RATL is a pocket
of relative strength and if the GSO once again rebounds, RATL
could be a notable beneficiary of the sector strength.  The PnF
chart really shows the strength, as RATL continues to give one
buy signal after another, without a single sell signal since
hitting the September lows.  And we got another buy when the
stock cleared $24 last week, creating another ascending
triple-top breakout.  Consider initiating new positions on a
dip and bounce from the $24 level, although dropping to fill the
gap at $23 before bouncing would make for an even better entry.
Momentum traders will want to wait for RATL to break out over
$25 before playing.  Since RATL shouldn't dip below the bottom
of the gap if this bullish move is for real, we can place a
tight stop at $22.

BUY CALL FEB-22 RAQ-BR OI=1274 at $2.60 SL=1.25
BUY CALL FEB-25*RAQ-BE OI=1266 at $1.25 SL=0.50
BUY CALL MAR-22 RAQ-CR OI=  23 at $3.50 SL=1.75
BUY CALL MAR-25 RAQ-CE OI= 137 at $2.20 SL=1.00
BUY CALL MAR-30 RAQ-EF OI= 676 at $0.70 SL=0.25

Average Daily Volume = 3.70 mln



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

ADRX $59.09 +1.26 (-1.98) The breakdown below $60 finally came
to be realized.  There was news Monday that spurred the break.
Andrx and AstraZeneca (NYSE:AZN) have been in court over the
former's marketing exclusivity of its heartburn drug Prilosec.
Andrx is trying to get its generic version on the market.  The
ruling of the case was delayed until some time this spring,
while it was supposed to be settled by the end of this month.
The delay knocked down ADRX and cause that technical break we
had been looking for.  The stock rebounded in today's session
on what may have been short covering.  No matter the reason,
we would've liked to seen ADRX follow through following the
breakdown, especially considering the fact that the BTK.X was
lower by 2.18% today.  Traders with open positions should have
tight stops in place to either manage gains or protect against
loss.  We'll watch closely for further weakness in tomorrow's
session.  As for new entries, look for rollovers at the $60
level, which has now become resistance.  Our stop is down at
$63.

CIMA $26.70 -0.03 (-1.15) Breaking below the $27 support level
on continuing Biotech (BTK.X) weakness on Monday, CIMA continued
its month-long bearish trend unabated.  But warning signals went
off on Tuesday, as the BTK completed its breakdown under the
critical $510 level, and CIMA only gave up a paltry 3 cents.
Are the bears getting tired here?  While we can't say for sure,
it wouldn't be a great surprise to see a bounce before the stock
stages its next leg to the downside.  Entries off that bounce
would likely come with a rollover from the vicinity of failed
support at $28, or possibly as high as $29.  Any further up than
that, and we'll have to consider the possibility that the
downtrend is in danger of being broken.  We're keeping our stop
in place at $30.

GNSS $58.01 -2.24 (+1.84) Sure enough the bounce in shares of
GNSS is losing steam, failing once again to hold above the $60
level, which is becoming stronger as a resistance level.  As
the Semiconductor index (SOX.X) lost its upward momentum this
morning, so did GNSS, rolling over sharply right from the open.
But there is some cause for concern in our bearish stance, as
GNSS seems to be building support near the $56 level, as the
bulls struggle to push this 2001 darling back into an uptrend.
But the recent trading range gives us some important points to
key off of.  Another rollover from the $60 level looks good for
new positions, as does a drop under the $56 support level.  Keep
in mind that major support exists near $52.50, the 38%
retracement of the September-January rally.  A volume-backed
decline below this level will confirm our bearish bias and can
also be used for initiating new bearish positions, as it would
open the door for a retest of the $50 level and more than likely
the 50% retracement at $47.  Keep stops in place at $61.

IVGN $54.81 -0.17 (-3.00) Will she, or won't she?  IVGN is
getting closer and closer to breaking below major support, and
the breakdown in the Biotech index (BTK.X) certainly isn't
helping the bulls.  The BTK completed its breakdown today by
moving below the $510 level, and continued its slide, falling
within spitting distance of the 62% retracement ($592.50) of
the September-December rally.  This could be a pivotal point for
our IVGN play; if the BTK breaks the 62% level, it will likely
usher in a new wave of selling in IVGN, with the $52 level being
the next level of support.  And that breakdown could be underway
now, with IVGN edging below the $55 level at the close today.
Those that used the rollover near $60 last week are sitting
pretty now, and should have cinched up their stops to at least
the breakeven level.  Use any failed rally that tops out below
the $59 level (the current level of our stop) to initiate new
positions, or for the momentum traders out there, consider entry
on a drop below Tuesday's lows near $54.50 on continued strong
volume.

NTIQ $30.28 -1.22 (-0.19) Nimble day-traders have been having
fun with NTIQ over the past week, as the stock has made a couple
trips from the $32 level (current resistance) and the $28 level
(current support).  While each bounce in the past week has come
on increasing volume, it is interesting to note that Tuesday's
bounce off the lows came on weaker volume than the one we got
last Friday.  Could it be that the bears are weakening the
bullish resolve concerning the $28 support level?  The answer to
that will likely be forthcoming soon, but in the meantime, we
have a couple of nice action points to work with.  Target new
positions on a rollover from below the $32 resistance level, or
for momentum-types, wait for selling pressure to push NTIQ below
the $28 level.  Keep in mind that our stop is set at $32, and a
close above that level will bring our play to an abrupt end.

CCMP $61.01 -2.65 (-2.39) There hasn't been news out from CCMP
in the last two days.  But no matter, the stock is still
trading very weak.  Tuesday's sell-off to the tune of 4% was
a welcome development.  The stock broke below its recent
relative low traced late last week and closed today's session
at the low for the day.  The heavy selling could continue into
tomorrow's session.  Those who entered on the brief relief
rally in Monday's session might use weakness below the $60 level
in the coming days to exit positions or partial positions.  The
stocks remains tied to the Semiconductor Sector (SOX.X), which
ended lower today by 2.40%.  CCMP's out performance to the
downside was encouraging.  When gaming new entries or managing
existing plays, keep a close watch on the SOX.X for insight into
the sector's sentiment.  As the SOX.X goes, so too should CCMP.

MRCY $34.41 -0.18 (+0.91) CIBC World Markets initiated coverage
on shares of Mercury this morning with a strong buy rating.
The stock gapped slightly higher on the news this morning but
faded lower as the trading day wore on.  The analyst action
may have been the reason that MRCY didn't participate to the
downside with the rest of the technology sector.  MRCY only
finished fractionally lower for the day.  Nevertheless, the
stock remains stuck in a descending trend that has lead to the
formation of a descending wedge.  We're still looking for that
breakdown below the $33.25 level on heavy volume.  Such a
breakdown would be playable in a market that permits that type
of strategy.  In the meantime, entering bearish positions near
resistance might offer readers a more favorable entry point and
the ability to manage risk more carefully.  Two resistance
levels to monitor for rollovers are $35.25 and $36.  A tight
stop above the aforementioned levels would offer an easy risk
management solution.


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

AT - Alltel $54.62 -1.63 (-1.88 this week)

Alltel Corporation is a customer-focused information technology
company that provides wireline and wireless communications and
information services. The Company operates in two principal
areas, communications and information services. The Company's
communications operations consist of its wireless, wireline
(local and long-distance) and emerging businesses segments.

Telecom is bad for bulls, good for bears.  Worldcom
(NASDAQ:WCOM) drew attention to its accounting during Tuesday's
trading.  Western Wireless (NASDAQ:WWCA) has been knocked down
over concerns that rivals are encroaching upon its primary
market.  The two recent news events and consequent sell-offs
reinforce the difficulties faced by telecom companies: demand
is slacking and overcapacity remains.  AT could fall under
pressure in the near-term over those concerns.  The company
has exposure in the wireless segment of the market, which is
far from robust.  The stock broke down below intermediate
term support in today's trading on active volume.  We're
looking for the selling to continue into the next several
sessions.  Watch for weakness to continue in the North
American Telecom Sector (XTC.X) as well as the Wireless
Services Sector (YLS.X).  The two have been overwhelmingly
weak recently for obvious reasons.  Weakness in both could
serve as confirmation in any bearish plays entered around
current levels in AT.  Momentum traders looking for confirmation
can wait for a breakdown on heavy volume below the $54 level.
We'll target $50 for our first downside exit point.  Those
who prefer entering put plays near resistance can look for
rollovers near the $56 level.  Our coverage stop is initially
in place at $56.75.

BUY PUT FEB-55*AT-NK OI=144 at $1.55 SL=0.75
BUY PUT MAR-55 AT-OK OI= 10 at $2.60 SL=1.50

Average Daily Volume = 811 K

 
GS – Goldman Sachs Group $84.48 -3.37 (-2.82 this week)

The Goldman Sachs Group is a global investment banking and
securities firm that provides a wide range of services worldwide
to a substantial and diversified client base that includes
corporations, financial institutions, governments and high
net-worth individuals. The company provides investment banking,
which includes financial advisory and underwriting, and trading
and principal investments, which includes fixed income, currency
and commodities, equities and principal investments.  GS
recently completed the acquisition of Spear, Leeds & Kellog,
which is engaged in securities clearing, execution and market
making, both floor-based and off-floor.

So many breakdowns, so little time.  The latest sector to
receive that label is the Securities Broker Dealer index (XBD.X),
which got slammed for more than a 5% loss on Tuesday, falling to
its lowest level since early December.  For any sustainable
rally, this is one sector that NEEDS to participate and the
breakdown today is a strong sign that the overall markets are
in trouble.  With the XBD plunging below the $500 level, and GS
once again breaking below the 200-dma ($86.81) and the $85
support level, it is clear that supply is in control here.  The
PnF chart bears this out as well, with a descending triple
bottom breakdown with its print of $85 on Tuesday.  The sell
signal that began this downtrend gives us a bearish target of
$76, leaving plenty of room for profits.  GS has been working
lower for most of the past 3 weeks, and leaves behind it some
solid resistance at the $89 level.  Adding to the strength of
the bearish picture is the fact that today's breakdown in GS
came on strong volume, nearly double the ADV.  As long as the
XBD continues to deteriorate, we can use failed rallies below
this level to initiate new positions, with the ideal target for
a rollover near intraday resistance at $87.  Should the current
decline continue unabated, look to initiate new positions on a
drop below $83.  A good confirming indication for momentum bears
will be when the XBD violates its 200-dma at $479.  Our initial
stop is in place at $89.

BUY PUT FEB-85*GS-NQ OI=3483 at $3.50 SL=1.75
BUY PUT FEB-80 GS-NP OI=1399 at $1.55 SL=0.75

Average Daily Volume = 2.81 mln



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The Option Investor Newsletter                  Tuesday 01-29-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


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

CCMP - Cabot Microelectronics $61.01 -2.65 (-2.39 this week)

Cabot Microelectronics Corporation is a supplier of high
performance polishing slurries used in the manufacture of the
most advanced integrated circuit (IC) devices, within a
process called chemical mechanical planarization. The Company
supplies slurries to IC device manufacturers worldwide. Most
of the Company's CMP slurries are used to polish insulating
layers and the tungsten plugs that go through the insulating
layers and connect the multiple wiring layers of IC devices.

Most Recent Update

There hasn't been news out from CCMP in the last two days.  But
no matter, the stock is still trading very weak.  Tuesday's
sell-off to the tune of 4% was a welcome development.  The
stock broke below its recent relative low traced late last week
and closed today's session at the low for the day.  The heavy
selling could continue into tomorrow's session.  Those who
entered on the brief relief rally in Monday's session might use
weakness below the $60 level in the coming days to exit
positions or partial positions.  The stocks remains tied to the
Semiconductor Sector (SOX.X), which ended lower today by 2.40%.
CCMP's out performance to the downside was encouraging.  When
gaming new entries or managing existing plays, keep a close
watch on the SOX.X for insight into the sector's sentiment.  As
the SOX.X goes, so too should CCMP.

Comments

The SOX.X rolled over at its 200-dma in Tuesday's session after
being up in the last four sessions.  The rollover and outside
day traced in the SOX.X could portend a reversal in trend and
short-term downside.  In the event of weakness in the SOX.X, we
want to be in CCMP.  The stock is one of the weaker in the
semiconductor sector and should continue to fall on weakness in
the SOX.X.

BUY PUT FEB-65 UKR-NM OI=413 at $6.50 SL=4.50
BUY PUT FEB-60*UKR-NL OI=549 at $3.50 SL=2.00

Average Daily Volume = 1.17 mln



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

A Personal Bet On Market Direction
Buzz Lynn
buzz@indexskybox.com

Let it be known here and now that I entered this trade yesterday 
with no knowledge of what would happen in today's equity markets.  
Call it dumb luck.  Truth is that there is some soundness to the 
logic.  But, while the play and the action are related, they are 
not joined at the hip.

OK, everyone knows what happened in the equity markets today.  
They got clocked, as in "clock cleaned".  I was not betting on a 
big drop in today's price.  In fact, you can read my Wrap last 
night and see that I was in the range-trading camp thinking no 
discernable direction likely until after the FOMC meeting.  

Surprise!  I was wrong - surprised not that I was wrong, that 
happens every day.  I was surprised by the markets steep drop.  
However, today's steep drop has nothing to do with the play I'm 
about to highlight.  

So what play did I enter?  I made a speculative personal bet on 
market direction in favor of the bears.  No surprise that it was 
to the downside given Fundamentals Guy's belief (belief finally 
confirmed by what I saw and still see) that we are in a primary 
bear market.

Follow my thinking here.  On second thought, forget that.  
Unemployment rising, companies missing earnings or guiding down, 
bankruptcies of large companies with more likely to come, 
accounting scandals that violate the public trust in their 
intended purpose.  That stuff is plain as day and doesn't require 
much thinking, just initial observation.  Connecting the dots 
though requires us to remember that this stuff does not all 
converge in a resumption of yesteryear's bull market.  Oh!  I 
guess by the economy's actions, we have to call this a bear 
market!

Yes, there are bright spots in the fundamentals picture too.  
Housing sales and starts, despite the government's adjustments and 
re-jiggering of previous month's numbers, have been robust, though 
that may be slowing.  11 interest rate cuts by the Fed have done 
much to stimulate consumer demand, and consumer confidence is 
coming back greater than anyone predicted.  The consumer has been 
savior of this economy despite fears of a 9/11 repeat, threat of 
further layoffs, and tepid government stimulus mostly thanks to 
belief in a 2002 recovery.  From my perspective the recovery is 
borne of blind hope and belief in the repetition of anybody in 
front of a microphone.  On what factual basis?  None that I can 
see.

As SUNW's CEO, Scott McNealy once said, "If they didn't see the 
cliff coming, how are they so sure we've hit bottom?"

Alright, on with the story of my buying puts yesterday.  Other 
than the backdrop above, I saw one huge, monstrous, waving, red 
flag that told me I will likely be right.  I also had seasonality 
patterns that tell me historically we are entering a slow market 
period.  But the red flag goes by the name of VIX.  However, 
trading just with this indicator makes a mockery of market timing, 
which is often more successfully used in daytrading.  Don't use 
the VIX as a sole indicator to a trade.  (That aspect is 
speculative, which I'll get to in a minute.)

It is a measure of fear in the OEX expressed as a composite 
volatility reading of ITM and OTM, front month and back month puts 
and calls - a total of eight contracts.  Don't worry about the 
formula.  It doesn't matter.  For masochists that have to know, 
check out Mark Phillips articles on said subject. 

http://members.OptionInvestor.com/options101/112101_1.asp

http://members.OptionInvestor.com/options101/112801_1.asp

Here's the premise.  Historically, whenever VIX falls into the 20-
22 level, it has signaled or nearly signaled a market top, making 
an excellent opportunity for buying puts.  

VIX chart vs. OEX (weekly)



 

However, it sometimes takes a while to be right, which 
automatically put me into back month contracts with enough time to 
be right when (not if) the trend reverses to bearish.  In other 
words, I didn't want the put contracts to expire as I patiently 
waited for a reversal.  

Still, the VIX can stay low for quite a while and really put the 
time decay squeeze on my June puts.  Whenever I enter a play like 
this, just like a straddle, I need time to be right with enough 
time value left over to sell if the move I expect never 
materializes.  Thus I like to retain about 60 days of remaining 
time until expiration.  Otherwise, time decay starts to take a 
larger bite of the premium while I wait.  June contracts give me 
until April to be right and still have 60 days of remaining life - 
a nice fit.  

Keep in mind, this is speculation at its purest because I am 
betting on market direction, as I believe it will be.  It just so 
happens that is what the market is showing me as of today too.  
Yes, I swerved right into good luck!  Still it is a speculative 
position and I am using speculative capital only that I can afford 
to lose, but obviously don't want to.

Here's another piece of the puzzle that had me interested in the 
downside.  It's simple so I won't show it graphically.  But given 
the dojis (or close to them) on the daily charts, with the VIX 
meanwhile sinking, tells me that optimism is building even though 
price levels are not.  Got that?  Rising optimism but no price 
correlation - no conviction, just mindless optimism lulling 
investors to complacency.  Despite a Fed meeting and a 
Presidential speech on the immediate time horizon, markets were 
not responding well given the anticipation.  The wakeup call was 
going to be harsh.  Little did I suspect today's downward action 
would shake the beds of institutions.

OK, so I have a plan - buy puts based on belief.  I have a reason 
for doing so - the VIX is at the low end of the range.  Candle 
action is weak.  Complacency is growing.  June contracts offer 
enough time to be right and enough time to sell if speculative 
objectives are not met.  But what strike, or better yet, what 
symbol to buy?

Using the VIX, one might figure the OEX to be the logical choice 
of vehicles.  I chose the QQQ instead.  Yes, it has exhibited 
relative strength to the OEX and the Dow over the past few weeks.  
But I thought unjustifiably so and assumed the buoyancy of NASDAQ 
stocks was borne of speculation.  In other words, the QQQ was a 
bigger bubble all filled up with technology and biotechnology 
stocks - certainly not the defensive stocks we see in the S&P and 
Dow.  I simply believed it had further to fall with a pop because 
it had room to rise in a bubble.

Great, June QQQ puts, but what strike?  Ummm. . .October lows?  
That would be roughly the $30 strike price.  Could it get that 
low?  I think so, but as a gradual move, not in one fell swoop.  
That's why I bought some time to be right.  Buying the JUN-30 put 
would also give me a huge gamma move though it was a long way OTM.  
Remember this is speculation.  Plus some bullish counter moves in 
the QQQ wouldn't be too painful on the purchased premiums either 
while I waited.  

The VXN, NASDAQ's equivalent of the VIX confirmed it by hitting 
new lows too.  Volatility had never been lower in the VXN's 
history than yesterday.  So once again I knew I was buying super-
cheap volatility and the option premiums would inflate 
substantially from a spike at current levels.

And now the play - TA DA! It sounds anti-climactic now, but I 
ponied up for 10 contracts at $0.95 per contract - $950.  If I 
lose it, "Oh well".  But the payoff is that an ATM put is 
currently worth about $3.60 (that's without inflated volatility 
premium).  So if QQQ hits $30 soon, my contracts should land me 
roughly a 3:1 profit.  Every point under $30 will bring in roughly 
another 100% return.  Speculative yes, but I like the odds 
(especially after today, but that won't last forever either).

There you have it.  Normally, I won't take a trade like this, but 
the VIX aligned with many other factors to convince me it was 
worth at least a speculative roll of the dice.  A VIX at or near 
20 is always worth a bearish roll of the dice in my book - not 
suitable for everybody, but it was for me.

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


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