Option Investor
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Daily Newsletter, Monday, 02/25/2002

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The Option Investor Newsletter                   Monday 02-25-2002
Copyright 2001, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
      02-25-2002          High     Low     Volume Advance/Decline
DJIA    10145.71 +177.56 10172.62  9966.36 1.30 bln   1931/1182
NASDAQ   1969.88 + 45.34  1776.61  1730.92 1.70 bln   1934/1658
S&P 100   563.78 +  9.74   565.83   554.04   Totals   3865/2840
S&P 500  1109.43 + 19.59  1112.71  1089.84             
RUS 2000  468.19 +  3.12   468.20   464.56
DJ TRANS 2777.39 + 51.74  2782.50  2727.01
VIX        23.28 -  1.61    24.69    22.75
VXN        44.07 -  4.50    48.08    44.07
TRIN        0.59 
PUT/CALL    0.75
*******************************************************************

POOF - Instant Bull Market
By Buzz Lynn
buzz@OptionInvestor.com

Thank Qualcomm (QCOM), General Motors (GM), and the January resale 
home numbers for today's equity gains.  Investor action seems like 
that of horses wearing blinders.  Then they can't see the barn, 
the hay, the pasture, and the other horses.  Thus they remain 
focused on what lies straight ahead of them as distractions are 
eliminated.  So too with horses, err, I mean investors.  

I still believe we are in a primary bear market and that there are 
many fundamental reasons why the equity markets should not be 
rising.  However - and this is important - my job is not to force 
the market to comply with my will.  As a trader, my job is to play 
the market I'm given, either up or down, and trade in the 
direction it leads.  Strap on my halter with blinders and lead me 
there.  If QCOM, GM , and housing numbers are the only things in 
my field of view, then so be it.

The point is to avoid the temptation to jump on perma-bull 
bandwagon and think that, "This rally is different".  It isn't and 
there is nothing to distinguish it from the multiple bullish 
headfakes we've seen over the last two years.  It is not the 
beginning of a primary bull market until we take out old highs.  
Don't get me wrong, there will be bullish moves within the bear 
market.  But it does not change the nature of the bear.

That said, let's find out about the news that triggered the 
dominos today.  

Through the blinders: First, GM upped their earnings forecast to 
reflect better than expected sales in Q1 and forecasts for all of 
2002.  The outlook is now at $1.20 (up form earlier estimates of 
$1.00) in Q1, and $3.50 (up from $3.00) for the full year.

Reality:  As reported in the Wall Street Journal this morning, 
"The Big Three auto makers (GM, F, DCX) each face potential labor 
conflict over the next year over plans for big cuts in North 
American production capacity.  The three co's are facing tough 
competition from Asian and European co's that are running at close 
to full capacity in and are looking to expand in North America."  
That according to a briefing.com summary.

Second (through the blinders), QCOM's targets for Q2 shipments of 
phone chips are coming in at the high end of 13-14 mln estimates, 
and CDMA 200 chip shipments are expected to exceed original 
estimates by 1 mln units.  After the close and during the 
conference call, QCOM said that it does not see excess inventory 
of phones or chips in the channel.

Reality:  Surprisingly, not much different, at least for CDMA, 
which is the wireless information protocol of Verizon and Sprint 
PCS and NTT DoMoCo.  Gilder Technology reports that sales of CDMA 
phones and equipment continue to grow at a significantly faster 
pace worldwide than older protocols GSM (commonly used in Europe 
and Cingular in the U.S.) and TDMA (predominantly used in the U.S. 
by AWE).  The good news probably really is good news for the CDMA 
end of wireless telecommunications.

Third, housing numbers knocked a homer over the center field 
bleachers of tallest stadium we could imagine.  Yep, existing home 
transactions came in at their highest level EVER, reaching 6.04 
mln units in January.  That's 16% above the December figures, and 
a big surprise over the estimates of 5.25 mln.  That puts year 
over year gains in the price of an existing home at about 10%.  
Those holding over the last few years or buying now have seen 
tremendous gains thanks to cheap loan rates that make it possible 
for so many (and their banks) to buy.

Reality:  I have no clue how long this can go on, and right now 
seems like a great time to buy since prices are steadily rising on 
heavy volume (a market condition we'd love to see).  For I am one 
of those people in the process of now buying an existing home.  
Yet every bone in my macro-economic, Fundamentals Guy body is 
screaming all the way to the lender that it is not a good idea to 
borrow a huge amount of money against tangible assets in a 
deflationary environment.  My family disagrees as do apparently 6 
mln other families across the nation.  Whether I kick myself or 
congratulate myself in five years is anyone's guess now.

Any sector get clocked today?  Yep, drug stocks.  Don't know if 
it's the complete answer, but Goldman (GS - more on them in a 
minute) issued cautious statements on the sector early this 
morning citing new FDA initiatives that would make it much more 
expensive to perform clinical trials, which could also lead to 
greater manufacturing and marketing scrutiny.  Read that, "More 
regulation".

Notice how I haven't commented a peep about market-specific 
scuttlebutt?  Contrary to popular belief, it doesn't mean much.  
For what really counts is found in the charts and the internals.

For those keeping score, NYSE volume was roughly 1.3 bln shares 
today - respectable, but not even close to a dead-ringer for a 
bull market despite that the Dow tacked on 177 points to close at 
10,145.  That is a significant amount over the psychological 
10,000 barrier.  

The NASDAQ turned in respectable, but not anywhere near heavy 
volume on its 45-point gain to 1769.  It eked out roughly 1.7 bln 
shares.

Both A/D lines were positive for the bulls, but nothing we haven't 
seen on many other days.

So, the charts?  All have a nice bullish bias in most cases.

Dow industrial chart INDU (weekly/daily/60):


 


Let's deal with oscillators first.  Weekly/daily have made bullish 
moves and are now pointing north presumably on their way to 
overbought.  Notice on the daily chart that the bottoms have been 
rising, never making their way to oversold.  While it may look 
strong, it really represents a house of cards since sellers have 
yet to be exhausted before eager bulls step in to reverse the 
process.  Bears are patient and will happily outlast bulls run 
amuck.  Even so, we can see the potential for trading support at 
10,050.  More to the point, we can also see on the weekly/daily 
chart the overhead resistance at 10,300.  Note too that daily 
chart while breaking through its 200-dma (gray line) has reached 
its 62% retracement off the September lows, which could act as 
another point of resistance.  We'll focus on the current level 
after amateur hour and go from there.  Volume is simply too light 
to name bulls the hands down winner in this never-ending battle.

NASDAQ chart COMPX (weekly/daily/60):


 


NASDAQ bulls (if there are any left or newly born) can only cross 
their little hooves that current stochastic action is prelude to a 
nice move up for a while.  Trouble is that 1780 is the first point 
of resistance with weekly resistance at just over 1800, and the 
NAZ is almost there.  If the daily descending range of candles is 
any indicator though, reaching those levels may make just another 
good short opportunity.  The 60-min chart stochastic certainly 
suggests that for a trading opportunity, we are nowhere near a 
call entry with the stochastics overbought and just now flashing 
"tired" signs.  However, I would be a call buyer if the 60 min 
stochastic chart cycles down to oversold with intentions of 
turning up while the candles find support at a higher low than 
1700, say 1750 or 1730.  Only then with a small test of risk 
capital.  Calls on the NASDAQ?  What am I thinking?  Well, the 
charts are there to suggest that that may be the next best course 
of action.  Too early now.

S&P 500 SPX (weekly/daily/60):



 


SPX however is showing some signs of strength.  Weekly and daily 
stochastics are working hard to turn upward.  The 60 min chart is 
already there and has filled the gap from last week.  I would thus 
look for support to come in as SPX approaches 1100.  The immediate 
trading danger is that now the 60-min stochastics have topped out, 
thus we could see some pullback to support.  Yet, since the 
weekly/daily have just begun their upward turn, puts have come un-
safe.  The next obvious play will likely come on the call side, 
but only after SPX backs off to oversold on the 60/30 charts, then 
reverses from there.

VIX?  23.28 and falling - bull biased, but nothing that suggests 
bears will soon find the honey pot either.  This one is 
inconclusive.

One note before we sign off tonight -- some of the put plays 
including CHKP, GNSS, GS, and VRTS are dangerously close to 
stopping out.  We're keeping them tonight, but the major index 
charts on a risk/reward basis look more to favor the bulls right 
now than the bears.  While there may be some backing and filling 
tomorrow morning that could lop some pennies from the price of 
equities, be vigilant in honoring your put stops.  Bigger moves up 
tomorrow after the open suggest there will be no turning back for 
a few days (except for traders who can play both directions in the 
same day).  On the other hand, if the market sputter tomorrow 
right at levels of resistance, then you might consider put entries 
there.  Pivotal points.  Exit losing puts on strength or make put 
entries on weakness.  Whether you choose to ignore amateur hour or 
not is each trader's individual decision.  I tend to ignore the 
first half hour and see where we are from 10:00 to 10:05.  I'll 
make a decision then.  But we all remain free to choose.

See you at the bell!


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

They Wanna Buy 'Em Up
Austin Passamonte

In an ever-widening trading range, markets bounced off support and 
now seek resistance above. I for one sure wish today's low-volume 
rally was the start of a trend that'd last for months on end, but 
let's not get any hopes up. Short-term plays in direction of 
prevailing strength is the only attempt I trust right now, and 
modest capital risked at that!

(Weekly/Daily Charts: BIX)


 

S&P Bank Index is posting a "short-cycle" in the oscillator trip 
from overbought to oversold zones. This is either a sign of strong 
uptrend that won't break or sideways action. My guess is the 
latter, but right now there is no reason to be short any charts 
that look like this and not expect to endure upside heat.

(Weekly/Daily Charts: CYC)


 

Same for MS Cyclical Index, which also broke out today. Traders 
enamored with their former tech darlings continue to complain that 
those tired symbols aren't moving while old economy remains the 
place to be, overall. Few will actually switch from tech to other 
symbols while the action is hot, but they'll do so right towards 
the end. Basic herd behavior known as human emotion at work. That 
said, this one's a bit toppy right now albeit still with room to 
run.

(Weekly/Daily Charts: RLX)


 

Our last chart was a tossup between Dow Transports and Retail 
index. Let's look at the stores, which should have enjoyed a 
bigger boost considering Wendy went shopping today. Another 
squirrely set of chart signals I'd avoid. However, they are mostly 
bullish and strong components with better charts remain playable 
to the upside. If the index breaks and closes above 75% 
retracement (958) from historical highs in March 2000 I'd be very 
impressed indeed!

Conclusion
My nightly scan of all tradable indexes and sectors show many more 
W/D timeframe charts in bullish setups than not. Plenty of readers 
tell me they remain stubbornly bearish and expect the markets to 
collapse any day now. That might indeed happen, but I'll 
personally trust the charts in front of me and buy dips on the big 
indexes unless/until they turn bearish again. We remain firmly 
ensconced within a bear market not looking to break any time soon, 
but shorts can still be crushed in the rally attempts that happen 
within.

Trade Smaller And Hold For Less Time,
austinp@OptionInvestor.com


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**************
Traders Corner
**************

Interesting Observations
By Mark Phillips
mphillips@OptionInvestor.com

Like many of you, I've been following Buzz's series on Qcharts
with great interest.  You never know when someone is going to
point out a valuable aspect of one of your tools that you had
previously been unaware of.  While Buzz didn't point out the
tool I'm going to talk about this afternoon, he did get me
digging into Qcharts, looking for valuable insights from which
we can all benefit.

In poking around in some of the canned workspaces that Qcharts
provides, I found a workspace (actually a whole set of them)
that are filed under the Breadthalizer heading.  While the name
is certainly cute, I was thinking there might be some good
tools for assessing the health of the market on an intraday
basis.  While I normally stick with equity-specific trades for
my own trading, I occasionally dabble in OEX and QQQ trades.  I
thought to myself, "wouldn't it be nice to have another tool to
measure the health of a given market move with something other
than comparing advancers to decliners?"  And I think I may have
found a useful tool.

I need to preface this discussion by saying that I really
haven't tested what I'm going to talk about.  Think of our
discussion as a mutual process of discovery.  Ready?

The indicator that captured my attention was a measure of
Advancing Volume vs. Declining Volume, which subtracts the latter
from the former.  The Qcharts symbols are ADVDECV.NY for the NYSE
and ADVDECV.NQ for the NASDAQ.  While many traders just use
Advancing Issues - Declining Issues, my thinking was that a
measure that incorporates volume will give a better measure of
the force behind a given market move.  Traders looking for a
longer-term reading of overbought and oversold conditions in the
broad markets sometimes use the TRIN or Arms Index, but I've
never been able to consistently apply that indicator.

Looking at a daily chart of any of these breadth indicators gives
me a headache and doesn't appear to provide any meaningful
information (at least to me), but drilling down to the intraday
charts tells an interesting story indeed.  Let's start by looking
at the 10-minute chart of ADVDECV.NQ vs. the NASDAQ Composite
from last Thursday.  It was another session where the NASDAQ
Comp started weak, tried to recover and then sold off into the
close.  Before the day started, all the charts were pointing to
another downside move, so short-term traders should have been
viewing the day through bearish lenses.  But it never hurts to
have an independent indicator to confirm that your expectations
from the market are being met.  And if they aren't, maybe that
additional indicator will give you a clue early on that you are
on the wrong side of the trade.

So back to Thursday's action.  Dissecting the two charts below
should give you a feel for both what was happening on the surface
and what was brewing beneath the surface.  I've bracketed the
day's action with the vertical black lines.



 

See how the rally attempt during the lunch hour eventually
failed, with the bulls swamped by heavy selling in the
afternoon?  Well, look at the chart of the ADVDECV.NQ (bottom
chart), and you can see why.  Although the price was challenging
the highs of the day during the lunch hour, the Advance/Decline
line of volume couldn't even get close to zero.  I interpret
this as a sign of internal weakness, telling me to continue to
sell the rallies.  By the closing bell, the NASDAQ Comp had given
up 60 points and was resting precariously above the 1700 support
level.  The story told by volume is particularly interesting too,
as nearly 1 billion more shares were exchanged on the decline
side than on the advance side.  Very negative!

Alright, that makes for a nice case to prove your point, Mark.
What about the action in today's market?  Did your fancy new
indicator have anything to say about today's rally before it
picked up steam in the final two hours of the day?



 

You bet it did!  And in a big way, too!  First off, I have to
apologize for the spelling of "consolidation" in the top
graphic -- obviously I was in too big a hurry creating my charts,
and by the time I discovered the misspelling, it was too late to
go back and fix it.  But let's move on to what the charts were
telling us.  From 11:30-1:00, it wasn't clear from the price
action in the Composite whether the rally was going to have any
legs, and we had to wait until price action broke above 1752 on
the 13:20 bar before we had confirmation that the bulls were
trying for a breakout.  

But look at the message conveyed by the Advance Decline of the
Volume.  It broke above the morning consolidation before the
lunch hour even began, and while price action waffled, the
ADVDECV indicator continued to work northward.  That way, when
traders returned from lunch, the die was already cast.  By the
time the closing bell rang, the volume picture was nearly a
mirror image of last Thursday's action with nearly a billion
more shares trading on the advance side than on the decline side.
And if we had been watching this breadth indicator, we would have
had a clue early in the day that the dips were definitely buyable.

Two days do not make a new trading rule, and I am still very
early in my research into this one to see if it has any
consistent validity for short-term trades.  But what I see is
rather encouraging.  If nothing else, I think it is far more
useful than just the standard "Advancers are leading decliners
by a ratio of 20 to 12".

And last Tuesday gave a perfect slide from opening to closing
bells.  While traders might have been unable to decide whether
to sell the rallies or buy the dips, the ADVDEC indicator gave
an unequivocal bear vote.  The ratio started at the zero line
and decayed sharply throughout the day, without so much as a
bullish blip to confuse us.  I know it will sometimes be wrong,
and we definitely don't ever want to use it on its own, but right
now it looks to me like this little gem could be a powerful trade
filter to help keep us on the right side of the trade.

While I didn't have time to do the charts in this article, I've
also noticed that abrupt points of inflection (like we had late
on Friday) in the ADVDEC indicator seem to give an early warning
that the prevailing trend is about to change.  Take a look at
this indicator over the past month, and see whether you see any
value to it.  I would welcome any input on observations or
concerns you might have.  Afterall, education is the name of
the game!

Until next week...keep that equity curve on the rise!

Mark


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

IS Swing Trade Model: Monday 2/25/2002
Popping Higher

News & Notes:
------------
Indexes act like they want to mount the next bear-market rally, 
and that's fine by us! We'll play the upside on any pullback so 
long as weekly/daily chart stochastic values remain bullish. Put 
play entries MIGHT also work, but playing counter to prevailing 
chart signal trend is best left for nimble individuals only.


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


 

The indexes are overbought on an intraday basis and will not 
remain that way for long. Soon they will release, roll back down 
to oversold areas and should turn higher from there. We'll be 
watching new points of support via current channels and old 
bullish triangles to gauge near-term pivot points of support.

[60/30-Min Chart: SPX]


 

I expect the indexes to retest recent support at/near moving 
averages and Monday's points of congestion. If these coils are 
touched and hold (OEX 549, SPX 1100) while stochastic values reach 
oversold zones and reverse, it would signal high-odds call plays 
indeed!

[60/30-Min Chart: QQQ]


 

Ditto for the QQQ. If these indexes hold higher recent lows at 
support when stochastic values turn from oversold zones, go long 
in a hurry.

Summation:
---------
We have no predefined entry points for actual swing trades 
tonight, but a successful pullback on Tuesday could offer the new 
parameters we seek.


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
Mar Calls: 37 (QQQ-CK)            Mar Calls: 99 (DJV-CA)  
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop:                             Stop: 
                                

Mar Puts: 34 (QQQ-OH)             Mar Puts: 98 (DJV-OS) 
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break above 


=====


         OEX                         SPX
Mar Calls: 570 (OEB-CN)           Mar Calls: 1125 (SPT-CE)
Long: BREAK ABOVE none            Long: BREAK ABOVE none 
Stop:                             Stop: 


Mar Puts: 550 (OEB-OJ)            Mar Puts: 1075 (SPQ-OO)
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break Above 



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


IS Position Trade Model: Monday 2/25/2002
Upwards With Trepidation

News & Notes:
------------
Appears that indexes and some sectors insist on going higher. 
Option players should test the upside from here, but not for long 
periods of time to hold!


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


Summation:
---------
The trend is decidedly down while indexes appear poised to rally. 
We cannot in good faith suggest call option plays that will hold 
for several days or weeks for high-odds success against this 
trend. However, shorter-term call plays look like potential 
winners to us. 

Our suggestion is to follow Swing Trade entries as they emerge 
later this week or Sector Share listings of optionable symbols and 
use those parameters for buy & hold calls. Using 100% risk capital 
instead of stops and March or (at the furthest away) April call 
option contracts for any option play attempts.


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 means the model is idle at this time.


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


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


Sector Share Trade Model: Monday 2/25/2002
Rally Holds

News & Notes:
------------
From weekend summation: "We see the possibility of a developing 
rally soon, of distance and duration unknown. A few token long 
plays are listed tonight to track if they move higher from 
oversold extremes, but most indexes and sectors are still in the 
developmental stage for viable entries."

Indeed the rally continues. We've listed a slew of potential long 
plays to track and some of them are optionable. All have both 
weekly and daily charts in oversold extreme poised for bullish 
reversals soon.


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


 

The QQQ is just one of many examples. Stochastic values are buried 
in oversold extreme and poised to turn bullish. Daily chart 
candles formed a three-day "Morning Star" bullish reversal 
incorrectly labeled in this chart (sorry!). Bearish on Thursday, 
neutral on Friday and bullish on Monday suggests higher prices 
ahead. Many index and sector charts look this way tonight.

Summation:
---------
We will track long plays from here and expect the next rally 
attempt to ensue this week. How far up for how long remains to be 
seen, but W/D timeframe charts will guide us along the way!

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:
----------------
LONG:
QQQ             BDH             SWH
Long: 35.30     Long: 12.75     Long: 40.00
Stop: 33.50     Stop: 11.00     Stop: 37.50

WMH             IAH             MKH
Long: 45.60     Long: 32.75     Long: 57.60
Stop: 43.00     Stop: 31.00     Stop: 55.00

OEF             SPY             FFF
Long: 55.65     Long: 111.50    Long: 80.15
Stop: 54.00     Stop: 108.00    Stop: 77.00

IYZ             IYW             IYC
Long: 26.60     Long: 48.10     Long: 55.60
Stop: 25.00     Stop: 46.00     Stop: 53.00

IYG             IVE             IVW
Long: 87.00     Long: 53.10     Long: 48.10
Stop: 84.00     Stop: 51.00     Stop: 46.00

MDY             XLF             XLK
Long: 92.50     Long: 25.25     Long: 21.40
Stop: 89.00     Stop: 24.00     Stop: 20.00


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


Open Long Plays:
---------------
BHH
Long: 3.50
Stop: 3.00

IIH
Long: 4.75
Stop: 4.00

HHH
Long: 28.00
Stop: 26.00

IYV
Long: 11.40
Stop: 10.75

XLE
Long: 26.75
Stop: 25.00


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The Option Investor Newsletter                   Monday 02-25-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

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APA - call
Adjust from $48.50 up to $50

HON - call
Adjust from $32.70 up to $33.50

SII - call
Adjust from $54.50 up to $57

TDW - call
Adjust from $34.50 up to $35.40


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

None


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

QCOM $35.90 +3.15 (+3.15) Bullish comments from the CDMA company
this morning, combined with the blowout housing numbers to put
investors in a buying mood.  QCOM leaped higher at the open,
but promptly reversed just below the $36 level.  The stock
weakened into the middle of the day, but then the buyers took
control once again, driving the stock through the morning highs
to close at the high of the day and well above our $35.50 stop.
Sealing our play's fate was the fact that volume ran nearly
double the daily average, confirming there was conviction behind
the rebound.  Short covering strikes again, and all we can do is
honor our stop and move QCOM to the drop list tonight.


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

CCMP – Cabot Microelectronics $53.25 +3.59 (+3.59 this week)

Cabot Microelectronics is a supplier of high performance
polishing slurries used in the manufacture of advanced
integrated circuit (IC) devices, within a process called
chemical mechanical planarization (CMP).  CMP is a polishing
process used by IC device manufacturers to flatten many of the
multiple layers of material that are built upon silicon wafers
and necessary in the production of advanced ICs.  CMP enables
IC device manufacturers to produce smaller, faster and more
complex IC devices with fewer defects.

Most Recent Write-Up

No matter how you look at it, the Semiconductor sector (SOX.X)
is not healthy, and every day the number of casualties in the
sector continue to mount.  Companies at every stage of the
production process are being ravaged by the bears, even those
that have performed rather well over the past year.  CCMP is
involved in the chip manufacturing process through their CMP
polishing process, but if there are less chips being made, then
this company will see falling demand for its products as well.
After a stellar recovery off the September lows, CCMP actually
pushed as high as $87 in early January before the selling party
began.  Since then the stock has given back more than 75% of
its fall gains, and it looks like a retest of those September
lows is in the cards.  After breaking below the 62% retracement
level a week ago, the stock has continued to work lower and on
Thursday broke below the $55 support level for the first time in
4 months.  With the SOX threatening to break below the $500
support level, CCMP looks vulnerable to at least the $50 level
over the near term.  Even the late-day rally on Friday wasn't
enough to lift the stock, as it closed just off the lows of the
day.  The stock is oversold based on the daily Stochastics, and
we would prefer to get a short-term rally to sell into before
taking a position.  A failed rally near $55 looks attractive,
although we wouldn't rule out a pop as high as $56 before the
selling resumes.  Given the stock's oversold condition, we want
to give it a little room to move, so we are initiating the play
with our stop set at $57.50, just above Wednesday's intraday
highs.  Trading a breakdown below $52.50 will work too, but we
will want to see strong selling volume and renewed weakness in
the SOX before playing.

Comments

On a day where the broad market went on a turbo-driven rally, and
CCMP tacked on 6.75%, you'd think the stock would be exiting the
put list and heading for the drop heap.  But there is something
interesting about the stock's behavior.  Rather than powering
higher on strong volume, CCMP only saw about two-thirds of its
average volume on Monday and reversed right at the $57.50 level.
While this could be the early signs of a trend reversal, it also
has the earmarks of a stock that just happened to go along for
the ride with its sector, bouncing from deep within oversold
territory.  So while the stock is on the cusp of being dropped,
a failure of the rally tomorrow could make for an attractive
entry point.  Action triggers are crystal clear tonight.  New
entries if the fledgling rollover continues and stand clear of
the play (and exit any existing ones) if CCMP pushes through
our stop.

BUY PUT MAR-60 UKR-OL OI=306 at $5.30 SL=3.25
BUY PUT MAR-55*UKR-OK OI=225 at $2.75 SL=1.25

Average Daily Volume = 1.08 mln



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