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Daily Newsletter, Tuesday, 03/12/2002

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The Option Investor Newsletter                 Tuesday 03-12-2002
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)
************************************************************      
      03-12-2002           High     Low     Volume Advance/Decline
DJIA    10632.35 + 21.11 10639.68 10510.91 1.31 bln   1544/1597
NASDAQ   1897.12 - 32.37  1899.01  1879.42 1.71 bln   1480/2059
S&P 100   591.09 -  0.64   591.73   584.84   Totals   3024/3656
S&P 500  1165.58 -  2.68  1168.26  1154.34             
RUS 2000  498.90 -  1.85   500.75   495.03
DJ TRANS 2994.81 - 22.25  3017.59  2967.14
VIX        21.95 -  0.42    23.14    21.31
VXN        43.03 +  0.98    44.48    42.71
TRIN        1.13 
PUT/CALL    0.65
************************************************************ 

Dip and Chips?

The markets traded in negative territory for most of the day led
by the Nasdaq and the chip sector. Lucent, no stranger to profit
warnings, blessed us again with another pessimistic view of its
business. The warning tanked chips, networkers and computer stocks,
which led to a bad day for the Nasdaq. Microsoft also contributed 
to the red ink but not with a warning.



 



 



 

The rosy picture that Lucent painted in February dimmed in 
reality to black and white today. Lucent said it now expected
sales to increase from zero to 10% for the quarter instead of
10% to 15% as previously expected. They said capital spending
by the telecom sector was still very bleak and spending cutbacks
were still prevalent. The largest customers were still reducing
and delaying spending in an effort to conserve cash. Lucent has
run out of divisions and business units they can sell to raise
money and announced after the close that it will try to raise
cash by selling $1.5 billion of convertible debt. The stock had
rallied well off the lows by the close but dipped again in after
hours when the convertible announcement was made.

The gloom and doom from Lucent tanked the networking sector and
caused investors to take profits in stocks like JNPR, CSCO and
EXTR as well as CIEN, GLW and NT. 

Not enough gloom? Nokia added to the dip by warning that sales
would be lower than expected and prompted analysts to question
their ability to hit earnings estimates for the quarter and for
the year. Nokia said weak sales in China and Europe were to blame
for its -10% sales shortfall for this quarter. They said network
sales were down -25%. Both of these numbers were greater than 
previous projections. Nokia said they still expected earnings to 
come in around the prior estimates despite the slowing
sales but nobody cared as the stock dropped -1.41 to $22.09.

Need more telecom to worry about? Worldcom shares dropped to a low 
of $7.29 in early trading after it disclosed that it was the target
of a SEC inquiry regarding accounting procedures and loans to
officers. Oops! The SEC wants to understand the details behind
the multimillion dollar loans to CEO Bernie Ebbers and others.
Ebbers has said the company made him the loans to cover margin
calls when the stock fell. The company gave him the loans to
prevent a fire sale of his assets according to Bernie.

Surely that is enough bearish telecom news BUT there is more.
Global Crossing has come under fire as being another Enron by
the House Energy and Commerce Committee. Congressional investigators
asked GLBXQ to turn over documents regarding their accounting
practices and earnings statements. They are specifically looking
for info on capacity swaps, stock sales by executives and Arthur
Andersons role as auditor. They are investigating further allegations
about omission of material disclosures necessary to determining 
the companies true health as well as material misrepresentations
with regard to revenue recognition. This has been rumored for
some time but as it heats up investors will become more cautious
about other companies accounting problems.

The companies that have already posted their "improved" 10Ks
with the SEC have been seeing relieved investors move back into
their stock to some extent. IBM was the big winner with a +3.26
gain on Tuesday. GE firmed to hold over $41 after disclosing
additional accounting info but did not see a rush back into the
stock. 

Microsoft was the biggest loser on the Dow after Goldman Sachs
said it expected the software giant to reduce estimates below 
the current views. The analyst said the slump in PC demand would
impact software sales. Microsoft also said it was willing to
divulge some previously secret software code to ease concerns
by the European Union. The Union is concerned Microsoft is
writing code to prevent compatibility with rivals. Would MSFT
do that? No way! (smile) MSFT dropped -1.62 and traded under $62
for most of the day. Life at the top must be rough with all the
things hitting MSFT every day. Remember the $1 billion SUNW suit
last week? Still Bill Gates found time to sell seven million 
shares of stock for around $434 million. Guess he needed some
pocket change for the quarter. Bill, just give SUNW about 15
million ($1 bil) of your 450 million shares left and tell them to 
go away. Make them a partner and they will gripe much less. Better 
yet, your personal market cap is bigger than SUNW's $30 billion. 
Just buy them, become Chairman and CEO of a competing company. That
would give Ballmer something to worry about and jeopardize the 
rest of his hair. (just poking fun here, no malice intended)

With telecoms ordering fewer switches, routers and other components
the need for chips to power those components will slow. At least
that is what investors feared as they took profits in the chip
sector. That sector had risen +20% since Feb-28th on the hopes
that with the recession over the economic recovery was in full 
swing. While the chips may have dipped today as a result of the
continuing telecom disaster it was just profit taking which 
pulled back only to support from last week. Considering the big
gains companies like KLAC and CCMP had made beginning on March
1st even a drop of -$8 as seen in CCMP today only brought it back
to last Wednesday's levels. That level is still well above the
prior week. That will be little comfort to investors in chip stocks 
it still needs to be taken in context to the recent tech rally.

The Nasdaq, which had been previously been lagging the Dow, gained
over +200 points since February or nearly +10%. The -32 point drop
on Tuesday was negligible in context. The majority of the selling
was broad based and represented only minor drops in most stocks.
Will the drop continue? It has produced a ton of mixed opinions
among analysts. Leigh Stevens, our new market strategist, expressed
concern in one of the intraday updates today that the markets could
move sideways to down for the next week or so. He bases his opinion
on his equity only "call/put" ratio. (not put/call) You can see his
rationale at this link.

http://members.OptionInvestor.com/intraday/031202_3.asp
 
For me the picture is not that clear. The Dow is performing beyond
anybody's expectations. The 10632 close was the highest close since
June-6th 2001. It is clearly wedging higher and it appears a breakout
over that 10600 resistance is in progress. The Nasdaq is doing the
same dance just below 1900 as the Dow was doing at 10600 except for
the two day gap up which it has now given back. Where the Dow looks
ready to break resistance and run to 11,000 the Nasdaq has 
many more roadblocks in front of it. It has serious resistance at
1950, 2000 and finally 2075. The run to daylight may take it a lot
longer than the recovering blue chips. Complicating this picture is
the S&P which has formed a triple top at strong resistance of 1175.
Still it is also edging up closer to that resistance every day. 

The bullish case is built on "the recovery is coming and whether it
takes 3mo, 6mo, 9mo or a year, everyone will be prosperous again.
New GDP estimates are back in the +4% growth range for the 4th 
quarter already. What recession? That is dead and gone, let's roll.
The bears are building a great case for a double dip and that dip
expectation may just coincide with the annual April/May selling
season. Their premise is that earnings expectations have escalated
so quickly to almost bubble like proportions that companies have
no chance of hitting the raised bar. They agree that things are
better than the October lows but not yet back to the +4% growth
rate. They claim that even if that growth rate is achieved it will
not be in tech stocks since most tech is still suffering from the
post bubble depression. What is a tech stock worth in the "new
economy"? That is a "post recession economy" not an Internet economy
as the phrase used to refer.

According to the bears we are building a new bubble based on false
expectations and that bubble will end badly. Not a crash but possibly
another dip as expectations meet reality just before the summer
doldrums appear. 

As traders we are faced with the perpetual quandary. The market may
go up, or it may go down. Nobody knows. On Sunday I suggested that as
traders we needed to be long the market above 10450 on the Dow, 1865
on the Nasdaq and 1145 for the S&P. Trading below these levels represents
a breakdown of the current bullish trend and suggest an exit point for 
long positions. While nobody can guarantee the market will go up or down 
we can take steps to profit from rallies and protect those profits from
sell offs. If you stay long above those levels and a breakout occurs
then you are along for the ride. Should the markets continue upward
a wise investor would raise those exit points to protect himself.
We are all wise investors, right?

Sell Too Soon!

Jim Brown
Editor@OptionInvestor.com


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

Sideways Battle

It's official: the bulls can't hold a rally while the bears can't 
kill one.

If it weren't for selling resistance & buying support these days 
in tight range fashion we'd have little to work with right now. I 
got lucky on some QQQ Mar 38 puts and SMH 47.5 puts last Friday 
that worked out real well today. I'm sure the flip side of holding 
something into a gap-against session is right around the corner 
for me as well. Meanwhile, we're mindful of a very bearish VIX and 
penchant for dip buyers to rally keeping things in limbo right 
now.

(Weekly/Daily Charts: SOX)


 

The sexy SOX... aka silicon chips are the favored ground of 
momentum players right now. Mere suggestion of an economic 
recovery flushes hot money in ala 1999. The way these longer term 
chart signals look right now though, a pullback to support or 
something like that is more likely soon. Keep in mind that this 
sector has rolled between 500 and 600 levels for months now, and 
that pattern has not been broken yet.

(Weekly/Daily Charts: RTH)

 

Retail has gone parabolic since last fall, reminiscent of 
technology in the midst of our previous bubble. Look at those 
nosebleed trendlines! Price action is hugging the channel as well, 
bumping up against resistance but oscillators still point straight 
up in bullish fashion.

(Weekly/Daily Charts: BIX)


 

S&P banking index is climbing a wall steeper than K-2 here as 
well, which of course cannot last forever but can continue for 
awhile. Oscillators reversed course and now point straight up once 
more to indicate the ramp isn't finished being built just yet.

Conclusion
The VIX hovering below its 22 level tells us complacency rules the 
roost. Such a state of bullish nirvana does not have to end this 
week or even this month, but price action holding current levels 
and ascending considerably higher and holding those lofty measures 
for months on end does not have history on its side. Short-term 
traders can play either direction and sometimes both in a given 
day. Longer-term traders might consider shorting every move to 
resistance and using put options with plenty of time value 
remaining to take advantage of dirt-cheap Vega values that will 
appreciate considerably if/when the VIX cycles back to benign 
levels on lower market prices than what we see tonight.

Best Trading Wishes,
Austin P


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

Cyclical Divergence
By Eric Utley

With the exception of Big Blue (NYSE:IBM), Tuesday's Dow
performers were of the cyclical and consumer type.  The sector
scorecard revealed a similar tape.  Tuesday's moving groups
included Retail (RLX.X), Energy (OSX.X and OIX.X), Finance
(BKX.X and BIX.X), Papers (FPP.X), and Health Care (DRG.X and
HMO.X).

Meanwhile, technology shares headed south.  The warning from
Lucent (NYSE:LU) was obviously not discounted into its share
price noting the market's reaction.  Neither was the short
fall on the part of Nokia (NYSE:NOK), who said its sales would
fall short of previous estimates.  The guidance renewed the
weakness in any stock tied to the telecom business.  Tuesday's
worst performing sector was the Optical (FOP.X) space, followed
by the broader Networking (NWX.X) group.

Yet the Nasdaq-100 Bullish Percent ($BPNDX), heavy with
telecom-tied stocks, didn't give up any stocks.  The unchanged
status of the $BPNDX in light of the 2.14 percent drop in the
Nasdaq-100 (NDX.X) was, in part, due to the extended nature of
many stocks in that group.  After the recent run-ups, the
NDX stocks have some distance to the downside before giving
new buy signals.  In other words, there remains a lot of
downside risk in technology over the short-term.

Away from technology, we saw some downside risk removed after
the sideways trading in the Dow Jones Industrial Average
($INDU) and S&P 500 (SPX.X).  The ARMS Index, which we put
into focus last week, has moved out of extreme, short-term
overbought status and back into its normal range.  The shortest
measure in the 5-day ARMS moved back above 0.90, in doing so,
relieving some of the downside risk that accompanies an
overbought market.

Speaking of an overbought market, the NYSE Composite Bullish
Percent ($BPNYA) is 0.16 percent away from a three year high.
A move in the $BPNYA above 62.00 percent would put that
indicator into Bull Confirmed mode, brining the five averages
we follow in synch.  Remember, an overbought market can always
grow more so.  If we do see the $BPNYA go into Bull Confirmed
mode this week, then I would expect another round of short
covering, perhaps even some real buying, to carry stocks
higher.

Then there's the bond market, which is unable to rally.  Yes,
yields finished lower in Tuesday's session.  But not without
a fight.  The short-end of the curve in the 13-Week (IRX.X)
finished at 1.800 percent, noticeably higher.  Further selling
in Treasuries combined with a Bull Confirmed reading in the
$BPNYA would have stocks, in general, higher this week.
Unfortunately, "in general" excludes stocks related to the
telecom industry.

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

Market Averages


DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     : 10632

Moving Averages:
(Simple)

 10-dma: 10454
 50-dma: 10016
200-dma: 10017



S&P 500 ($SPX)

52-week High: 1383
52-week Low :  945
Current     : 1166

Moving Averages:
(Simple)

 10-dma: 1147
 50-dma: 1128
200-dma: 1149



Nasdaq-100 ($NDX)

52-week High: 2771
52-week Low : 1089
Current     : 1520

Moving Averages:
(Simple)

 10-dma: 1482
 50-dma: 1519
200-dma: 1563



Gold and Silver ($XAU)

The $XAU was the best performing sector in Tuesday's session,
rising by 2.33 percent for the day.  Its performance slightly
surpassed the 1.99 percent pop in the Oil Service Index (OSX.X).

Leaders in the group included Apex Silver Mining (NYSE:SIL),
Harmony Gold (NASDAQ:HGMCY), Gold Fields (NASDAQ:GOLD), and
Newmont Mining (NYSE:NEM).

52-week High: 70
52-week Low : 46
Current     : 64 

Moving Averages:
(Simple)

 10-dma: 64
 50-dma: 62
200-dma: 57


Fiber Optic ($FOP)

The $XAU was the worst performing sector Tuesday with its
6.14 percent drop.  Lucent's (NYSE:LU) warning pressured the
group.

The worst performing stocks in the group included Corvis
(NASDAQ:CORV), Avanex (NASDAQ:AVNX), New Focus (NASDAQ:NUFO),
Lucent, JDS Uniphase (NASDAQ:JDSU), Corning (NYSE:GLW), and
MRV Communications (NASDAQ:MRVC).

52-week High: 139
52-week Low :  81
Current     :  99

Moving Averages:
(Simple)

 10-dma:  95
 50-dma: 105
200-dma: N/A

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

Market Volatility

The VIX imploded from its opening print above 23.  The index
fell throughout the session as the Dow rebounded.  A decline
below 21 could position the VIX for a slide down to the 20
level.

The VXN traded higher in light of the 2.14 percent drop in
the Nasdaq-100 (NDX.X).  It still, however, remains very
near its all-time low.

CBOE Market Volatility Index (VIX) - 21.31 -1.06
Nasdaq-100 Volatility Index  (VXN) - 42.97 +0.92

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.65        725,154       468,022
Equity Only    0.54        626,863       338,398
OEX            1.04         25,316        26,467
QQQ            3.11         31,368        97,684
 
-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          62      + 0     Bull Alert
NASDAQ-100    69      + 0     Bull Confirmed
DOW           77      + 0     Bull Confirmed
S&P 500       76      + 0     Bull Confirmed
S&P 100       79      + 1     Bull Confirmed

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

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

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

 5-Day Arms Index  0.92
10-Day Arms Index  0.96
21-Day Arms Index  1.10
55-Day Arms Index  1.23

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      1544           1597
NASDAQ    1480           2059

        New Highs      New Lows
NYSE      127             14
NASDAQ    114             23

        Volume (in millions)
NYSE     1,313
NASDAQ   1,714

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

Commitments Of Traders Report: 03/05/02

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

Commercial interests added a significant number of short
positions for a marked increase in the group's net short
position.  The group added more than 13,000 shorts while
reducing longs by more than 5,000 contracts.  Not by surprise,
small traders went the opposite direction in a big way.  The
group reached its most bullish position in the last year.

Commercials   Long      Short      Net     % Of OI 
02/19/02      355,905   416,664   (60,759)   (7.9%)
02/26/02      366,258   432,258   (66,000)   (8.3%)
03/05/02      361,254   445,989   (84,735)  (10.5%)

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
02/19/02      130,856     63,311   67,545     34.8%
02/26/02      139,183     62,087   77,096     38.3%
03/05/02      161,711     60,941  100,770     45.3%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 100,770 - 3/05/02
 
NASDAQ-100

Nasdaq commercial remained relatively inactive in the most
recent reporting period.  The group's net short position grew
by a modest amount.  Meanwhile, small traders continued their
back and forth ways, now holding a net long position.

Commercials   Long      Short      Net     % of OI 
02/19/02       33,871     35,690    (1,819)  (2.6%)
02/26/02       33,589     34,091      (502)  (0.7%)
03/05/02       33,549     35,419    (1,870)  (2.7%)

Most bearish reading of the year: (15,521) -  3/13/01
Most bullish reading of the year:   7,774  - 12/21/01

Small Traders  Long     Short      Net     % of OI
02/19/02        9,966     8,073     1,893     10.5%
02/26/02        9,517    11,416    (1,899)    (9.1%)
03/05/02       11,961    11,214       747      3.2% 

Most bearish reading of the year:  (9,877) - 12/21/01
Most bullish reading of the year:   8,460  -  3/13/01

DOW JONES INDUSTRIAL

Dow commercials reduced their net long position in the most
recent reporting period by adding more shorts than longs.
The group added 4,444 shorts and 3,714 longs.  Small traders
meanwhile weren't as convinced with their actions.  We see only
a slight increase in the group's net bearish position.

Commercials   Long      Short      Net     % of OI
02/19/02       29,606    17,953   11,653     24.5%
02/26/02       33,322    21,110   12,212     22.4%
03/05/02       37,036    25,554   11,482     18.3% 

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
02/19/02        4,654    10,431    (5,777)   (38.3%)
02/26/02        6,333    12,547    (6,214)   (32.9%)
03/05/02        6,589    13,057    (6,468)   (32.9%) 

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

Index Trader Swing-Trade Game Plan: Tuesday 3/12/2002 
Still Flopping Along

News & Notes: 
------------
The past several sessions have offered nothing more than quick 
intraday hits for very nimble traders watching the screens like a 
hawk. I'd love to say tomorrow will be different, but no evidence 
I see points to such.

Featured Markets: 
----------------

[60/30-Min Chart: OEX]  


 

Both S&Ps and the Dow (not shown) are all resting on support and 
poised to bounce higher from Wednesday's open. However, the proper 
entry arrived at the session lows Tuesday and is toppy right now. 
New call plays on a break above the green line may pop & fail 
quickly. Enter on a break thru the green line or pullback to it 
from a gap-higher open and hold stops just below the red line of 
support. Looks like entry at 591 and stop below 587 would be 
close.

[60/30-Min Chart: SPX]  


 

Same for the SPX. Long above 1166 and stop below 1160 is the range 
to play this one.

[60-Min Chart: QQQ]  


 

But as the Nez Perce indians named their Appaloosa breed of horse, 
the QQQ is of a different color. The opening gap in NDX did not 
get filled on Tuesday, a sign of bearish warning. We do see a bull 
flag formation from the session and intraday stochastic values are 
just turning bullish, so calls above 38.00 and a stop below 37.25 
should work here. I closed my QQQ 38 puts and SMH 47.5 puts based 
on the technical evidence shown above, so it'd better rally or 
I'll have seller's remorse tomorrow!

Summation: 
----------
Looks like a continuation off support into Wednesday, but watch 
for failure near resistance again. At least one of the remaining 
three sessions this week should be a big day, and tomorrow could 
be it.


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: 38 (QQQ-CL)            Mar Calls: 106 (DJV-CB)  
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop: Break Below                 Stop: Break Below 
                                

Mar Puts: 37 (QQQ-OK)             Mar Puts: 105 (DJV-OA) 
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break above 

----------

OEX                               SPX
Mar Calls: 600 (OEY-CT)           Mar Calls: 1175 (SPT-CO)
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop: Break Below                 Stop: Break Below 


Mar Puts: 590 (OEB-OR)            Mar Puts: 1150 (SPT-OJ)
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break Above 


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


Index Trader Sector-Trade Game Plan: Tuesday 03/12/2002 
--------------------------------------------
On hold


News & Notes: 
------------
Indexes are churning around right now, and could see a pop in 
price action tomorrow. This is a day trader's market right now so 
we will merely track the plays currently open and place further 
plans on hold for now.


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


Summation: 
----------
No new entries listed for tonight.


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 symbol has listed options as well 


New Play Targets (Short):
------------------------
None


Open Long Plays:
---------------
XLE             
Long: 26.75     
Stop: 28.50     
           
BDH             
Long: 12.75     
Stop: 14.50 [hit]    
                

Open Short Plays
----------------
XLB **          XLP **          
Short: 23.75    Short: 26.00    
Stop:  25.00    Stop:  28.00    

XLV **          XLY **          
Short: 29.00    Short: 29.90    
Stop:  31.00    Stop:  32.00    

IYD             IYK             
Short: 45.25    Short: 45.90    
Stop:  48.00    Stop:  48.00    

IYR             UTH **          
Short: 84.75    Short: 93.25    
Stop:  88.00    Stop:  98.00    

RTH **          PPH **          
Short: 98.00    Short: 98.75    
Stop: 102.00    Stop: 102.25    

DIA **[DJX]     IYM
Short: 105.90   Short: 42.00 
Stop:  110.00   Stop:  44.50

OIH **
Short: 66.50
Stop:  68.00 [hit]
Result: -1.50

IYE
Short:  49.70
Stop:   52.00

IJJ
Short:  97.00
Stop:  101.00


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The Option Investor Newsletter                  Tuesday 03-12-2002
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:
*****

CREE $16.25 -1.60 (-2.55) CREE lowered its financial guidance
after the bell Tuesday.  The company cited product delays and
weak demand for its light emitting products.  CREE said that
it now expected to breakeven for its current quarter.  The
warning signs were made clear ahead of Tuesday evening's
announcement as CREE traded sharply lower yesterday and again
in today's session.  It appears that someone knew of the warning
ahead of time and acted on that information.  The stock was
substantially lower in the after hours.  If you weren't stopped
out in today's nearly 9% drop, look to cut losses early tomorrow.

DYN $29.44 -1.01 (-0.96) While shares of DYN have not cratered
this week, neither have they really shown any concrete signs of
life, just drifting lower on a day-by-day basis.  While it was
encouraging to see the 10-dma hold up as support on Tuesday,
the real source of our concern is the fact that the daily
Stochastics are now clearly rolling down, exiting overbought
territory.  News that California is suing four energy companies,
including DYN is likely weighing heavily on the stock as well.
DYN will likely be dominated by weakness over the near-term, and
since there appear to be better plays out there, we'll move the
stock to the drop list tonight.

FLIR $53.50 -1.19 (-2.75) Relative strength is fading, and fading
fast.  The bulls appear to have abandoned shares of FLIR over the
past week, and the stock is being consistently pressured lower.
A burst of selling hit the stock towards the end of the day, and
if not for a sharp rebound into the close, FLIR would have closed
well below our $53 stop.  Rather than wait and hope for the stock
to move higher from here, we're going to take our leave of the
play due to its deteriorating technicals and declining relative
strength.  Use a rebound on Wednesday to close any open positions,
not to open new ones.

VRTS $43.33 -0.83 (-1.08) Despite a solid rebound from the $42.50
level this afternoon, it looks like the rally that took VRTS
through its 200-dma last week is fading.  With heavy selling in
the Technology arena and VRTS' daily Stochastics rolling down out
of overbought territory, we're going to remove the stock from our
playlist before things get really ugly.  The past 3 days have
seen a series of lower highs and lower lows, and until that is an
early sign that the bears are regaining control in the stock.
We'll revisit the stock once support begins to build again.


PUTS:
*****

None


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

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

CALLS              Mon    Tue

TDW      42.16    0.69   0.67  OSX.X continues to carry TDW higher 
UTX      75.00    0.37  -0.69  Waiting for the Dow to breakout
HON      40.17    0.26   0.06  Pinned at the $40 level, release
BA       50.28    1.48  -0.60  One step forward, one step back
ETN      83.33    1.00  -1.14  Upgrade Monday, give back Tuesday
ACS      52.18    0.46  -0.52  Consolidating recent gains
FLIR     53.50   -1.56  -1.19  Dropped, rolling over 
CREE     16.25   -0.95  -1.60  Dropped, warning and weakness
BAC      68.00   -0.08   0.25  Very, very strong bank stock
CHIR     46.86    0.01  -0.64  Biotechs ready to breakout
DYN      29.44    0.05  -1.01  Dropped, slipping back lower
DCN      21.77    0.51   0.47  Rolling higher, under accumulation
SYMC     41.73   -0.15  -0.07  Holding up very well versus GSO.X
IDPH     66.38   -1.33   0.22  New, gaining momentum higher


PUTS

ENZN     43.12    0.17   0.07  Consolidating ahead of next move
ABT      55.19   -0.26   0.52  Bounced, entry rollover at $56.25
CTX      61.32    0.86   0.99  Minimal risk on bearish plays
EMLX     31.65   -2.80  -0.36  New, ready to breakdown at 200-dma
NVDA     54.59   -0.68  -3.02  New, expensive chip headed lower


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

TDW $42.16 +0.67 (+1.36) The Oil Service Sector Index (OSX.X)
kicked off the week on a bullish note with its back-to-back
rallies in the last two days.  The sector finished back above
the ever critical 100 level in Tuesday's session, finishing
just off of its recently traced relative high at 101.55.  TDW,
as it does, tracked the action in the OSX.X closely in the
last two days.  After Tuesday's finish, the stock is poised to
retest its relative high at $42.79.  The last two days of
trading should reinforce the necessity for monitoring the
sector when gaming entries and exits into TDW plays.  The
stock has established a short-term ascending support line,
which currently resides around the $41 level.  Light volume,
intraday pullbacks to the $41 level can be used to gain entry
points into plays, provided the OSX.X confirms such a
strategy.  Momentum based entries can be pursued on a strong
breakout in the OSX.X.  Look out tomorrow for the market's
reaction to Tuesday night's release of the weekly supply
data.  The American Petroleum Institute (API) is expected
to show that crude supplies fell by 1.25 million barrels in
the week ended March 8.

UTX $75.00 -0.69 (-0.32) UTX is trading in an increasingly
tighter trading range, similar to the price action in the
Dow Jones Industrial Average ($INDU).  Both the INDU and its
component UTX refuse to breakdown as was evidenced in Tuesday's
session.  Although UTX finished fractionally lower, its decline
came on relatively light volume and could be considered as a
continuation of last week's profit taking.  What we're watching
in this play and, in fact, for the rest of the INDU is the
wedge that has formed just beneath the 10,700 level in the
blue chip index.  A breakout from that wedge could have the
INDU trading up to the 11,000 mark in the short-term, which
would obviously be a welcomed development for bulls in UTX.
That move could be used as an action point for entering new
plays in UTX.  Simply look for the INDU to breakout above
10,700 and enter UTX calls at current levels.  If UTX and
the INDU spend a little more time trading sideways before
attempting a breakout, look to enter on intraday weakness near
support at the $74 level.

HON $40.17 +0.06 (+0.32) Have you seen how HON has traded
around the $40 level in the last four sessions?  The stock
has gyrated within about a $1 range in the last four days,
unable to move above or below the $40 for any measurable
distance.  The March 40 strike has about 4,300 open interest
which is not the peak open interest in front month contracts.
The 35 strike holds the most at about 8,000.  Nevertheless,
it's possible that the 40 strike is pinning HON ahead of
this week's expiration.  Keep that in mind when looking for
entry points into new positions.  Given its tightening
trading, however, a solid advance above the $40 magnet may
result in a sharp move higher on short covering.  The
necessary catalyst to break HON free from the $40 level will
most likely come in the form of a rally in the Dow Jones
Industrial Average ($INDU).  Look for the Dow to breakout
above the 10,700 level which should in turn allow HON to
break free from its $40 level.

ETN $83.33 -1.14 (-0.14) Prudential Securities raised its
investment rating on Eaton Monday morning to a buy rating
from a lukewarm hold rating.  The firm cited improvements
in the company's fundamentals.  Prudential said that "the
company should enjoy improving fundamentals in all businesses
except its smallest, Truck, as the company exits 2002," which
inspired the buyers in Monday's session, who carried the stock
$1 higher.  It did, however, give back all of that gain during
Tuesday's pullback.  The pullback felt routine in nature and
may have been attributable to the wish-wash session across
the broader market.  The thing we need to see happen is a
firming in the S&P 500 (SPX.X) and a subsequent advance.
Such a development should allow ETN to break from its recent
trading range.  We're still looking for a short term breakout
above the $85 level if market conditions permit.  We are
also taking note of the stock's close near its 10-dma in
today's session.  A good stop point, in the event of further
downside, would come at Tuesday's intraday low at $82.75 for
tight risk management.

CHIR $46.86 -0.64 (-0.63) The Amex Biotechnology Sector Index
(BTK.X) hasn't made much upside progress in the last two
days.  That much has kept a lid on CHIR, which continues to
essentially trade sideways.  We'd like to see a breakout in the
BTK.X above the short-term resistance at 515, followed by a
confirmation move above the 520 level.  Such a development
should allow CHIR to breakout from its recent consolidation.
Several of the recently beaten up stocks in the sector showed
signs of strength in Tuesday's session, which may have hinted
that the shorts in this sector are growing fearful of upside
risk.  That bodes well for the stronger stocks in the stock,
which includes CHIR.  The stock continues to catch bids at its
200-dma, which currently resides underneath at the $46.42
level.  Traders can look to intraday dips to that level for
entry points.  Otherwise, wait for the above detailed scenario
to unfold in the BTK.X and look for CHIR to take out some of
its short-term resistance between $47 and $48.

SYMC $41.73 -0.07 (-0.22) SYMC is holding up very well relative
to its sector and the broader market, as measured by the
Nasdaq Composite (COMPX).  The COMPX lost 1.67% in today's
session, while SYMC finished only fractionally lower.  Moreover,
the Software Sector Index (GSO.X) finished 2.12% lower in
today's session.  SYMC definitely gained some relative strength
in today's session.  The company is slated to present at the
Lehman Brothers Global Software Conference tomorrow at 2:15
p.m. EST.  The presentation could produce market moving guidance
so traders need to be on alert tomorrow afternoon going into
the conference.  If the company's presentation produces positive
news, then traders can look for a breakout on heavy volume
above the $43 level.  Ideally we'd like to see the GSO.X
confirm any breakout attempt.  But good news may trump sector
weakness if it persists.  In the event of a pullback, look for
SYMC to retreat to the $40 level, reinforced by the 10-dma
below at $39.76.

DCN $21.77 +0.47 (+0.98) DCN continued to march higher early
this week after our weekend addition to the call play list.
The stock trades on impressive volume and acts as if it's
still under heavy accumulation, which is obviously a big
positive for call traders.  The stock is trading at a six
month high and faces very little in the way of resistance
above its current levels.  In fact it's a straight shot to the
$26 level.  We don't expect the stock to trade directly up to
that level, but we are comfortable with its prospects over the
next two or three months.  We must, however, appreciate the
overbought nature of the stock.  Its daily oscillators have
been buried in overbought for quite a while, which increases
the downside risk in the play.  With that in mind, we'd
prefer entering new call plays on intraday pullbacks to
support.  One thing we ran across today is the ascending
support line on the 60 minute chart.  In addition, the stock's
50-PERIOD moving average on the 60-minute chart has served as
an excellent entry point for the past four weeks.  That line
currently rests at $20.60, where traders can look for future
dips as entry points.

ACS $52.18 -0.52 (-0.06) It has been a rather quiet start to the
week for shares of ACS, as the stock consolidates near the upper
end of its recent trading range.  Despite some weakness in the
broader market, the stock continues to find buyers on each dip.
Intraday support is building near the $51.50 level, with stronger
support waiting near the $50.50 level.  For the time being,
resistance is holding the bulls back at the $53 level, but given
the stock's recent resilience, we expect to see that give way
soon.  Look to initiate new positions on a renewed bounce from
support or else wait for price to push through the $53 level
before taking a position.  We're raising our stop to $50 tonight,
as a drop back below that level would be a bad sign for the
bulls.

BA $50.28 -0.60 (+0.88) Higher lows and higher highs remain the
pattern of choice for BA, as the stock continues to work its way
up the chart.  After yesterday's run up to the $51 level, a bit
of weakness was to be expected and the weak opening for the broad
markets produced just that, dragging BA as low as $49.50 before
the afternoon bounce began.  It was encouraging to see both the
Defense index (DFI.X) and the Airline index (XAL.X) recover from
their lows, and that strength likely helped BA to reclaim the $50
level by the closing bell.  As long as the dips continue to be
bought, we can use those dips to initiate new positions as the
stock works towards the next significant level of resistance near
$52.  We're keeping our stop in place at $49, just below the 50%
retracement level, which looks like it is now providing solid
support.

BAC $68.00 +0.25 (+0.17) If you have any doubts about the strength
of the current broad market rally, all you have to do is look at
the recent action of the S&P Banks index (BIX.X).  Despite some
weakening of the broad market rally the BIX rebounded from
support again on Tuesday to post its highest closing price since
late 1999.  It is a widely known fact that sustainable rallies
need the Financials to participate and Banking stocks are clearly
doing their part.  Our BAC play certainly is no slacker, as the
stock rebounded from its lows today to close right on the $68
level, its best close since July of 1999.  That's right, a new
31-month closing high and it came on solid volume too!  There is
some intraday resistance at the $68.50 level and then the bulls
will be setting their sights on the $70 level.  Continue using
intraday dips to support in the $66-67 area to initiate new
positions.  Our stop remains at $65.


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

IDPH - IDEC Pharmaceuticals $66.38 +0.22 (-1.11 this week)

IDEC Pharmaceuticals Corporation is a biopharmaceutical company
engaged primarily in the research, development and
commercialization of targeted therapies for the treatment of
cancer and autoimmune and inflammatory diseases. The company's
first commercial product, Rituxan, and its most advanced product
candidate, ZEVALIN (ibritumomab tiuxetan), are for use or
intended for use in the treatment of certain B-cell non-Hodgkin's
lymphomas (B-cell NHLs). 

While negative news continues to filter out among several biotech
players, others continue to shine.  With the sector showing some
signs of strength, the leaders could be poised for another leg
higher.  Ever since receiving early approval for its cancer
drug, Zevalin, shares of IDEC Pharmaceuticals have been gaining
strength.  The company received FDA approval in late February
for its drug intended for non-Hodgkin's lymphoma.  Most analysts
hadn't been expecting approval for the drug until May or June.
The drug is expected to significantly impact IDEC's bottom
line for the better.  That news continues to help the stock
higher along with the strength in the Amex Biotechnology Sector
Index (BTK.X).  The BTK.X finished only 0.29% lower in today's
session, while the broader Nasdaq measures finished much lower.
That relative out performance has been a growing trend and
with a positive broader market, we'd expect the BTK.X to out
pace the averages to the upside.  That sector strength should
only add to IDPH's momentum.  The stock is coming off of a
short term pullback, which may have ended with its rebound from
the $65 area today.  The stock has slight congestion above
current levels, which would be cleared on a breakout above the
$70 level.  That move is still far off, so traders can look to
get in ahead of it in a positive BTK.X early tomorrow.  In the
BTK.X, look for an advance past 515 and confirm such a rally
attempt with a breakout above 520.  If, on the other hand, the
BTK.X continues lower, look for IDPH to pullback into the
$63 to $64 range, from which a bounce could be used as an
entry point.  Our stop is initially in place at $62.

BUY CALL APR-60 IHD-DL OI=1517 at $9.30 SL=7.50 
BUY CALL APR-65*IHD-DM OI=2989 at $5.80 SL=4.00 
BUY CALL APR-70 IHD-DN OI=4393 at $3.30 SL=2.00 
BUY CALL JUL-65 IHD-GM OI=2653 at $9.60 SL=7.75 
BUY CALL JUL-70 IHD-GN OI=2978 at $6.90 SL=5.00 

Average Daily Volume = 3.65 mln



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

ABT $55.19 +0.52 (+1.10) After last week's selling frenzy, it
has really been no surprise to see shares of ABT bouncing so far
this week.  Although the stock has managed to bounce from the $54
level, this just looks like a setup for a solid entry point when
the bulls run out of steam.  Solid resistance is looming overhead
at the $56 level and a rollover from that level would make for a
very nice entry point.  The company appears to be tilting at
windmills with its plans to retain Arthur Anderson as its
auditor, even though it appears the current trend in large
companies is to find new auditors that haven't been tainted by
the Enron debacle.  As long as the Pharmaceutical index (DRG.X)
continues to struggle beneath its 200-dma, rallies in stocks
like ABT are likely to be short lived.  We'll take advantage of
this situation, selling the rallies as they fail.  Keep stops
set at $56.75.

CTX $61.32 +0.99 (+1.85) Housing stocks are trying to stage a
comeback from last week's selling, but it doesn't look like there
is much conviction to the move.  After bouncing higher at the
open this morning, shares of CTX drifted slightly lower
throughout the day.  So even though the stock posted a gain of
almost $1, it all came on the opening bounce.  We're looking for
the stock to roll over at resistance again, and that will be the
trigger to initiate new bearish positions.  Resistance becomes
firm in the $62.00-62.50 area, and we'll want to wait for CTX to
fall back from that level before taking a position.  Keep in mind
that this play carries the additional risk of trying to pick a
top in a stock (and sector) that has performed well over the
past 6 months, but now appears to be topping out.  Keep stops
set at $62.50.

ENZN $43.12 +0.07 (+0.24) Trading in shares of ENZN has come to
a virtual stand still in the past few days, as the stock
continues to meander around the $43 level.  Tuesday marks the
third consecutive doji for ENZN, and that is a clear indication
of the indecision that is plaguing Biotech investors.  Further
evidence of this evidence can be seen in the Biotechnology index
(BTK.X), which has been stuck in a narrow consolidation range for
the past four days.  ENZN has been underperforming the BTK for
months now and should continue to do so.  The 20-dma ($45.08)
has consistently turned back the rallies, particularly in the
past 8 weeks.  Look for a failed rally near this level to provide
attractive entry points.  Of course, with the stock resting
precariously above the $40 long-term support level, a drop below
that level on strong volume would be a great entry for momentum
bears.  We're keeping our stop set at $45.50.


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

EMLX – Emulex Corporation $31.65 –0.36 (-3.16 this week)

A leading networking company, EMLX designs, builds and
distributes three types of connectivity products: network
access servers, printer servers, and high-speed fibre channel
products.  It's fibre channel products, which are based on
internally developed ASIC technology, are deployable across
a variety of network configurations and operating systems to
support increasing volumes of stored data.  EMLX sells its
products directly throughout the world to OEMs and end users,
as well as through system integrators and industrial
distributors.

We've had an eye out for weak stocks in the Technology arena
lately, as the current recovery has gone far enough that those
weaker stocks should start to shake out.  Sure enough, one of
them violated an important technical level today, and makes its
entrance onto the put list.  Shares of EMLX have been languishing
for the past 6 weeks, falling back from their double-top near
$48, despite the fact that the NASDAQ has been rallying.  In fact,
EMLX has been greatly underperforming other Storage related
stocks like QLGC since early February.  Coming back to the
technical failure, we've been watching the $32 level with great
interest due to the fact that it had been providing support.
Well, that support gave way on Tuesday, as the stock fell as low
as $30.43 before finding some buying support.  That was just shy
of giving us a fresh PnF sell signal, and when EMLX prints $30,
we'll have a fresh double-bottom breakdown, and the current column
of O's will give us a target of $23.  A failed rally near the
$34-35 area would make for a great entry, although we may have to
settle for an entry on a rollover near the $33 intraday resistance
level.  Traders looking for confirmation will want to wait for
the breakdown under the $30 level before playing.  We are
initiating the play with a wide stop, initially set at $36, the
highs from last Friday.

BUY PUT APR-32 UMQ-PZ OI=2217 at $4.80 SL=3.00
BUY PUT APR-30*UMQ-PF OI=1545 at $3.50 SL=1.75
BUY PUT APR-27 UMQ-PY OI= 409 at $2.65 SL=1.25

Average Daily Volume = 9.41 mln


NVDA – NVIDIA Corporation $54.59 -3.02 (-3.70 this week)

NVIDIA Corporation designs, develops and markets 3D graphics
processors, graphics processing units and related software that
set the standard for performance, quality and features for
every type of desktop personal computer user.  Used in a wide
variety of application including games, the Internet and
industrial design, the company's products were the first to
incorporate a 128-bit multi-texturing graphics architecture.
This design approach delivers to users a highly immersive,
interactive 3D experience with compelling visual quality and
stunning effects at real-time frame rates.  NVDA sells its
products to major PC manufacturers such as Compaq, Dell,
Gateway, Hewlett-Packard and IBM.

Semiconductor stocks have had quite a run recently on renewed
hopes of a robust recovery, but it looks like it may be time to
pay the piper.  After rocketing to a new 7-month high at $638
last week, the Semiconductor index (SOX.X) has not had a good
week so far, falling back to test the $595 support level on
Tuesday.  Shares of NVDA were one of the biggest winners in 2001,
but this year, the stock has been the victim of the bears,
posting a series of lower highs and lower lows.  It looks like
the latest lower high is now in place near $60, and with the drop
today below the $56 support level, it looks like the next
downward leg is well underway.  The last rally attempt failed
right at the bearish resistance line on the PnF chart and with
Tuesday's decline, we have a fresh PnF sell signal with a
tentative price target of $50, right where the stock found
support on the last downward cycle.  It is interesting to note
that Tuesday's intraday highs came right to the declining 20-dma
($56.32) before rolling over again.  A rebound to the $56 area
would make for a solid entry point as the stock rolls over again,
although it would be even better if we could get an intraday pop
near the $57.50-58.00 level before entry.  We are initiating
coverage with our stop set at $59.

BUY PUT APR-55*RVU-PK OI=3008 at $5.50 SL=3.50
BUY PUT APR-50 RVU-PJ OI=2809 at $3.50 SL=1.75

Average Daily Volume = 9.43 mln



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offers contingent option orders based on the price of the 
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