Option Investor

Daily Newsletter, Tuesday, 03/26/2002

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The Option Investor Newsletter                 Tuesday 03-26-2002
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)
      03-26-2002           High     Low     Volume Advance/Decline
DJIA    10353.36 + 71.69 10432.86 10276.76 1.19 bln   1953/1205
NASDAQ   1824.17 + 11.68  1843,96  1807.47 1.46 bln   1999/1566
S&P 100   575,17 +  3.50   580.14   571.67   Totals   3952/2771
S&P 500  1138.49 +  6.62  1147.00  1131.61             
RUS 2000  501.66 +  5.27   501.74   496.39
DJ TRANS 2875.37 + 58.14  2878.05  2814.92
VIX        19.79 -  0.73    20.38    19.38
VXN        37.68 -  1.50    39.57    37.64
TRIN        1.10 
PUT/CALL    0.66

When is a rally not a rally?

When a +71 point gain follows a -354 point loss! This is what 
we saw on Tuesday when the Dow rallied back from a serious 
oversold drop of -354 points from the 10635 close on March 19th.
The four-day drop culminated with a -146 point dive on Monday
and set the stage for today's gains. The positive headline
economic numbers prompted some short covering but volume buyers 
were still absent despite the news. 




Economic reports prompting the minor short covering included
Consumer Confidence and Durable Goods. With consumers thinking 
the recession is over the headline numbers soared +15 points. The 
expectations index rose to 109.3 with 25% of the respondents
believing that conditions will continue to improve. This is the
strongest number since 1993. The present conditions index at
110.2 is up significantly since the 84.9 low in October but far
from the 144.5 number just last August. Unfortunately the internal
components declined. The numbers of consumers planning to buy a home,
auto or major appliance fell. The consumer held up the economy
during the recession but that spending appears to be slowing.

This decreased spending was also shown in the Durable Goods Orders.
The headline number showed a larger than expected increase but the
main contributors were aircraft and aircraft parts as well as 
defense orders. These orders will not continue and do not represent
a rebound in the business economy. Semiconductor orders fell -8.9%
and computers fell -3.1%. When the aircraft and defense orders are
subtracted from the index the real durable goods orders fell last
month. While the levels are still over the Q4 recession levels they
are still not healthy.

You can see from those two reports that the real health of the
economy may be improving over the long term but the rate of 
improvement is very much in question. This should make most 
investors look at the minor market gains today with skepticism.
The bounce was mostly short covering on the headline numbers and 
very little real investor buying. 

Another reason for the gains came from a set of mixed comments
from three Fed members. Two of them said the Fed was in no rush
to raise interest rates while one, Blinder, said rates should go
up soon. In balance the market paid more attention to the positive
comments than the comments by Blinder. Homebuilders jumped for
some good gains on the assumption that mortgage rates could remain
low for longer than previously expected. The Fed funds futures fell
to only a 60% chance of a 25 basis point hike in June instead of the
more than 80% chance last week. The big winner by far was NVR which
gained a whopping +$22 to $322.25. Sorry guys, it is not optionable!

There was still the normal run of story stocks impacting specific
sectors with major moves. Network Associates (NYSE:NET) said the
SEC had launched an investigation into the way the company booked
revenue in 2000. The company said the inquiry was probably based
on the resignation of the CEO, CFO and President in Dec-2000. Each
resigned just as NET announced a change in accounting practices 
and a revenue shortfall of $120 million for that quarter. This
announcement put the MCAF acquisition on hold after NET shares
fell -2.77 or -11%. 

EDS fell over -$4 after Sanford Bernstein lowered its rating on
worries that EDS would miss earnings on April-22nd. The analyst
said new business from current clients would not be enough to
offset the lack of new customers in the 1Q. Merrill Lynch called
the drop a "beautiful buying opportunity" and said they believed
the company would hit its earnings target. IBM failed to hold
the opening bounce and closed -$3 off the days high. IBM gets
a substantial portion of its revenue from services contracts
as well and any concern about EDS would be a concern for IBM.
Rumors are starting to fly that IBM may be challenged and could
miss estimates. They have been meeting estimates by cutting costs
and buying back shares for over a year and that tactic only lasts
so long. Remember, HWP may also have a shortfall in services income 
for the quarter.

Waste Management (NYSE:WMI) was all over the map today as the
SEC filed suit against the former WMI management for cooking the
books and inflating profits. The company was quick to point out
that this was against the "old" Waste Management and not relative
to current conditions. The stock ended the day down only a penny.
Unfortunately ROOM fell slightly more than a penny, -8.59 to be
exact, after Travelocity said it was buying Site59 for $43
million in cash. The acquisition is directly aimed at EXPE and
ROOM and capturing market share from these companies. 

CIEN said it was cutting 650 jobs (22% of its workforce) and said
it would take a $360 million charge. They will also take a charge 
of as much as $225 million for excess inventory in an effort to
return to profitability. Let's see, if you write off $225 million
in inventory and then sell it for $50 million at fire sale prices,
can you claim that $50 million as "profits"? Carrying this to the
logical extreme why not write off everything in one quarter and
then claim profits against a zero book value from then on? Don't
laugh, it is not that far from reality.

Show me the money. This is what real buyers will be saying before
they commit capital to this market. With the first quarter earnings
cycle only two weeks away the uncertainty about results is keeping
the volume very low. The markets are trending down despite the 
economic headlines. In Greenspan's speech tonight he mentioned the
quality of corporate earnings several times. With the Enron, Global
Crossing, Network Associates and Waste Management accusations still
flying regulators are questioning new accounting rules. Some of these
rule would seriously cripple "earnings" for many tech stocks. A PE
of 50 could become a PE of 200 overnight if the rules were changed.
This accounting cloud will depress the markets for sometime.

Speaking of clouds there is a huge thunderstorm brewing in the deep
south. DEEP South. Argentina is quickly self-destructing. This has
been underway for some time but it is quickly getting worse. The
currency is barely suitable for wallpaper and unemployment is well
over 20%. The government is in chaos and has no plan. One analyst
today said the current civil unrest is likely to turn into serious
trouble soon. Because this has been coming for many months most of
the impact to the U.S. markets has already been seen, factored and
forgotten. However the severity of the current crisis appears 
destined to impact all the surrounding countries even more than 
previously anticipated and that could ripple all the way back to 
Wall Street. Several multinational companies have already warned 
that the economic weakness in South America would impact their 2002 
earnings and more will follow. I don't think the Argentina crisis 
is over for us. Just an opinion.

Many traders are not convinced the market bottom is behind us. The
short interest on the Nasdaq rose to 4.01 billion shares in the
report released today. Considering the very light volume the last
week or two the majority have not decided to cover just yet. Still
there is a very strange divergence occurring in the market place.
The VIX hit another new 52-week low intraday despite the -146 point
Dow drop on Monday. Not a good sign. However the internals are 
showing some positive indications. The new highs continue to beat 
new lows despite the down trending markets. The NYSE highs beat lows 
113/79 and the Nasdaq was even stronger at 131/42. Advancers also 
beat decliners 5:3. 

On Sunday I warned about buying the Nasdaq under my entry point of
1875 and suggested shorting it under 1825. It closed today at 1824, 
right at the support level I mentioned. I suggested staying out of
the S&P until it traded over 1155 and to short it under 1140. It 
closed today at 1138. Confused? The market internals are positive
but the markets are still trending down along with the VIX. You 
should be confused. It is clear there is considerable confusion
among investors, retail and institutional alike. Not enough confusion
however to put volatility back into the market. Complacency reigns!

Most investors feel the markets will go up as the recovery continues.
They are just divided on when that recovery will occur. Most analysts
are now pointing to 2003 instead of 3Q/4Q this year. The complacency
comes from indifference. Despite the increase in the Nasdaq short
interest it appears that most investors are content to just sit on
the sidelines and wait. Their volatility is zero. Others are content
to simply nibble on every dip and slowly add to their portfolios, 
confident in a future recovery. Their volatility is minimal. This
picture is vastly different from the February bounce when optimism
abounded. Reality is slowly sinking in and investors are beginning 
to realize the rebound may be lethargic instead of robust. The lack
of buyers is simply due to a lack of interest. Historically a sell off
occurs between April-15th and May-15th more often than not. Recently
52-week lows on the VIX produced a -10% to -20% drop in the S&P over
the next 45 days. A low VIX prior to the spring sell off? Hmmmmm.

Last three 52-week VIX lows:

8/28/00 18.13 S&P = 1523 dropped by -218 (14%) to 1305 in 45 days
7/16/99 17.70 S&P = 1418 dropped by -151 (11%) to 1267 in 23 days
7/17/98 16.78 S&P = 1188 dropped by -249 (21%) to 939 in 43 days

(7/2/2001 low was omitted due to 9/11 distortion but 13% drop had
occurred prior to attack)

The first key point here is that extreme complacency is followed by
prolonged selling. The second key point is that we only know these
were 52-week lows by looking backwards in history. The current VIX
at 19.75 is still above these historical numbers and still dropping.
This means we have not hit the bottom on the VIX yet. It could be
next week or it could be next month, we don't know. This is exactly
what large institutional investors are waiting for. They pay millions
for long term technical analysis in order to time their entries into
the markets. That technical analysis is suggesting that a better
entry point lays ahead. Therefore they are content to sit and wait.
It is interesting to note that the VIX low may be occurring significantly
earlier this year than in the last four years due to the recession
impact and positive investor expectations. Does that mean it could
drop below established norms? Could be.

Armed with the above knowledge what should an informed investor
be doing? Protecting long positions and waiting patiently for the
coming entry point. Until then should a rally break out we need
to wait for confirmation before boarding the train. That confirmation
would be a break above 10500/1875/1155, none of which is likely
to happen tomorrow! Remember my comments on Sunday about buying the
close on Thursday. I would only buy it if there is a post 3:PM
rally underway. The light volume today after the -354 point four 
day drop is worrisome. The Thursday close strategy should only be 
undertaken by nimble traders. Historically bullish post Easter
trading can evaporate instantly should earnings warnings prevail.

Enter VERY Passively, Exit Aggressively!

Jim Brown


What's New?

"Nothing that I have to say" would be my regrettable answer. Yet 
another day where no trend or follow through is evident, and 
traders need to take life one session at a time.

(Weekly/Daily Charts: XAL)


Looking at the three top performing sectors on Tuesday brings us 
to a trio of the usual suspects lately, and airlines are leading 
the pack. All those funds who tossed our airline stocks last 
September in fire sale fashion must be wailing & gnashing their 
teeth right now. I can see throwing ELAN and similar "nothing" 
companies away at times when they disappoint but Southwest 
Airlines and others? Not a good investment move, but the masses 
always sell low and buy high. I did nothing with the airlines 
myself but if I had to make a choice back then, selling would not 
have been an option.

Today may be a different story. XAL is one red-hot sector coming 
off artificial lows but nothing flies to the moon. Well, poor 
analogy there but you know what I mean. Price action recently 
failed at channel resistance, is trading below trendline in daily 
chart and weekly oscillators warn of serious correction ahead. If 
that lower channel line (red) gives way, time to short the 
dickens out of this one. Weekly oscillators down near oversold 
extreme and turning higher will be my cue to go long when it 
inevitably happens!

(Weekly/Daily Charts: DTX)


Look familiar? #3 performer today is of course Dow Jones 
Transports, of which the airlines are it’s best component. Mirror 
charts, and I’ll personally play DTX puts if/when this trendline 
of support gives way ahead. When both long-term chart signals 
turn bullish again from oversold extreme, call plays will have my 
attention then.

(Weekly/Daily Charts: SOX)


Hot money SOX is usually our most dynamic sector on any given 
day. Who in their right mind even pays attention to all the inane 
upgrades & downgrades both ways EACH WEEK for years now? Plenty 
of momentum players due, which is why it’s such a volatile 
sector. Nothing on this chart compels me to go long right now, 
either. Stochastic values are bearish, it might be forming a 
bearish triangle (muddy pattern) and has struggled for 2.5 weeks 
worth of red candles now. Again, I’ll play calls when both of 
these chart’s stochastic values align in oversold extreme and 
turn higher from there, but not before.

This week is controlled by big money pushing the markets around 
to trap little money and are doing a fine job of it so far. It’s 
easier to lose money than make it under current market conditions 
so please trade smaller than usual or wait until next week. Those 
who venture forth these next two days might just experience  
intra-session adventures indeed!

Best Trading Wishes,
Austin P

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On Edge
By Eric Utley

The bulls appear a bit skittish.  Monday's meltdown definitely
snuffed a lot of optimism.  But that good mood was found again
this morning following the release of March's consumer sentiment
number.  The index shot up to 110.2, well above the market's
expectations.  It was the highest reading since last August's

The upside surprise resulted in a sharp, big rally in stocks
early Tuesday, but something gave way later in the day.  Stocks
were unable to continue higher after the early buying spree,
which some suggested was a combination of short covering and
heavy futures buying.  The necessary demand to carry stocks
higher never materialized Tuesday afternoon.  Instead, the bids
disappeared and stocks headed lower.  The Nasdaq-100 (NDX.X)
slipped into negative territory before a last minute effort by
the bulls lifted the tech-heavy index back into positive
territory into the close.

The daily sector winner and loser were about as bifurcated as
sectors get.  The recent run in the Gold and Silver Index
(XAU.X) necessitated a pullback in Tuesday's session, leaving
the XAU 2.78 percent higher.  Meanwhile, the broader transport
sector came roaring back, led by the 3.57 percent pop in the
Airline Index (XAL.X).  The energy, telecom, and drug segments
of the market were especially weak.  While financials, cyclicals,
and technology led to the upside.

The fear gauges of the market continued to tick lower, epitomized
by the new yearly low in the CBOE Market Volatility Index (VIX.X).
In my view, the longer the VIX trades below 20, the greater the
downside risks grow.  The put/call figures confirm the lack of
fear in the marketplace as calls continue to swamp puts.

The short-term ARMS reading is ticking towards an extreme,
which reinforced the short-term oversold way of the market
going into Tuesday's session.  Coupled with the four consecutive
down days in the Dow, Tuesday's consumer number may have been
merely an excuse to cover shorts and blow-off some upside

Finally, the Nasdaq-100 Bullish Percent ($BPNDX) shed five
more percent Tuesday to a reading of 59 percent.  That move
reinforces our bearish stance on technology shares and won't
be shifted until we see some improvement in the indicator.


Market Averages


52-week High: 11350
52-week Low :  8062
Current     : 10353

Moving Averages:

 10-dma: 10488
 50-dma: 10090
200-dma:  9988

S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     : 1138

Moving Averages:

 10-dma: 1153
 50-dma: 1127
200-dma: 1143

Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low : 1089
Current     : 1440

Moving Averages:

 10-dma: 1475
 50-dma: 1485
200-dma: 1541

Airline ($XAL)

The XAL rebounded in Tuesday's session after a big down day
Monday.  The XAL finished 3.57 percent higher for Tuesday.
Fears over pricing strategies were squelched when Delta
Air Lines (NYSE:DAL) announced lowered fares for certain

Leaders included Southwest (NYSE:LUV), Delta, Continental
(NYSE:CAL), Alaska Air (NYSE:ALK), and United (NYSE:UAL).

52-week High: 153
52-week Low :  59
Current     : 104 

Moving Averages:

 10-dma: 106
 50-dma:  97
200-dma: 103

Gold and Silver ($XAU)

The XAU pulled back in Tuesday's session after hitting a
new 52-week high Monday.  The XAU finished 2.78 percent
lower in Tuesday's session.

Leading to the downside included Gold Fields (NASDAQ:GOLD),
Harmony Gold (NASDAQ:HGMCY), Placer Dome (NYSE:PDG), and
Anglogold (NYSE:AU).

52-week High: 70
52-week Low : 46
Current     : 68

Moving Averages:

 10-dma: 65
 50-dma: 64
200-dma: 57


Market Volatility

The VIX traced yet another new yearly low in Tuesday's session
at the 19.38 mark.  Tuesday's close was the third below 20 in the
last four days.

The VXN spiked higher in Monday's session following the steep
drop in the Nasdaq-100 (NDX.X).  It rolled over at the 10-dma in
Tuesday's session.

CBOE Market Volatility Index (VIX) - 19.75 -0.73
Nasdaq-100 Volatility Index  (VXN) - 37.68 -1.50


          Put/Call Ratio  Call Volume   Put Volume
Total          0.66        398,033       268,367
Equity Only    0.59        345,232       205,205
OEX            0.79         11,245         8,840
QQQ            0.26         34,435         9,066

Bullish Percent Data

           Current   Change   Status
NYSE          64      + 0     Bull Confirmed
NASDAQ-100    59      - 5     Bull Correction
DOW           77      + 0     Bull Confirmed
S&P 500       74      - 1     Bull Confirmed
S&P 100       76      + 0     Bull Confirmed

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

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


 5-Day Arms Index  1.25
10-Day Arms Index  1.20
21-Day Arms Index  1.06
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 


Market Internals

        Advancers     Decliners
NYSE      1953           1205
NASDAQ    1999           1566

        New Highs      New Lows
NYSE      163             44
NASDAQ    152             24

        Volume (in millions)
NYSE     1,199
NASDAQ   1,470


Commitments Of Traders Report: 03/19/02

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

S&P Commercials maintained their relatively higher net bearish
position in the prior week by dropping a significant number of
longs and a small number of shorts.  The group's % of OI,
however, increased by a larger amount.  Small traders maintained
their yearly high net bullish position.

Commercials   Long      Short      Net     % Of OI 
03/05/02      361,254   445,989   (84,735)  (10.5%)
03/12/02      396,050   483,606   (87,556)   (9.9%)
03/19/02      322,938   410,494   (87,556)  (11.9%)

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
03/05/02      161,711     60,941  100,770     45.3%
03/12/02      179,825     75,025  104,800     42.6%
03/19/02      145,262     43,066  102,196     54.3%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 104,800 - 3/05/02

NDX commercials dropped a big chunk of their long position,
resulting in a drastic climb in the group's net bearish
stance.  Small traders went the opposite direction by shedding
a larger number of short contracts, establishing a firm net
bullish position.

Commercials   Long      Short      Net     % of OI 
03/05/02       33,549     35,419    (1,870)   (2.7%)
03/12/02       37,415     42,942    (5,527)   (6.9%)
03/19/02       24,792     33,699    (8,907)  (15.2%)

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

Small Traders  Long     Short      Net     % of OI
03/05/02       11,961    11,214       747      3.2% 
03/12/02       14,571    13,045     1,526      5.5%
03/19/02       11,637     5,527     6,110     35.6%

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


Dow commercials shed a significant number of both long and
short positions.  The result of their actions was a drastic
drop in the group's net bullish position.  Small traders
reduced their total position, too, resulting in a modest
drop in the group's net bearish position.

Commercials   Long      Short      Net     % of OI
03/05/02       37,036    25,554   11,482     18.3% 
03/12/02       35,080    23,204   11,876     20.4%
03/19/02       20,858    13,283    7,575     22.2%

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

Small Traders  Long      Short     Net     % of OI
03/05/02        6,589    13,057    (6,468)   (32.9%) 
03/12/02        6,400    13,070    (6,670)   (34.3%)
03/19/02        4,651    10,367    (5,716)   (38.1%)

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 Swing-Trade Game Plan: Tuesday 03/26/2002 
Up & Down Again

News & Notes: 
Would you believe we had yet another volatile day chopping up & 
down? Of course you would... what else do we endure more sessions 
than not?

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


OEX burst thru this channel as shorts covered in panic today, 
only to drop back inside by the bell. 30-min chart shows Bullish 
Reversal “Morning Star” candle pattern and stochastic values 
rounding up from oversold extreme. In this channel if it breaks 
above 575 look for 580 to be reached in a hurry. Otherwise, 567 
area is next.

[60/30-Min Chart: SPX] 


We’ve redrawn the channel lines in this chart for a varied 
perspective. I’m not sure which measure is valid, the old channel 
or this one. So we’ll use both! Aggressive traders could go long 
the break above resistance right at 1139 and look for 1150 to 
1160 area next. Passive traders might wait for 1142 instead. 
Failure near channel resistance line (blue) or higher open and
drop thru this close is a short to play. Look for the point of 
today’s wedge as resistance as well.

[60/30-Min Chart: QQQ] 


Qs look overbought and weak... which gives us bearish tint for 
all the indexes on Wednesday. But price action here is midway 
within its channel and flat coil to end Tuesday’s session was 
entered on the upswing, a bullish implication. 

Mixed picture tonight. Volume is thin, investors are out of the 
market and big traders are pushing the pile around at will. Only 
fit for adept intraday traders with advanced risk management 
skills and trading vehicles. Nothing but day trades until next 
Tuesday or so in my opinion.

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. 

Index Trader Sector-Trade Game Plan: Tuesday 03/26/2002 
Flopped & Chopped

News & Notes: 
Indexes opened flat, soared to session highs on wild, short-
covering squeeze, sold off and rallied back a bit to recover half 
of Monday's loss. And there you have it... another volatile day.

Featured Plays: 

Open shorts improved late in the session or merely tread water, 
one of the two. No changes to note of interest 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

New Play Targets:

Open Long Plays:

Open Short Plays:
XLB **          XLP **          
Short: 23.75    Short: 26.00    
Stop:  24.50    Stop:  26.75    

XLV **          XLY **          
Short: 29.00    Short: 29.90    
Stop:  30.25    Stop:  31.00    

IYD             IYK             
Short: 45.25    Short: 45.90    
Stop:  47.00    Stop:  47.00    

IYR             IYE
Short: 84.75    Short:  49.70
Stop:  86.00    Stop:   52.00

Short:  97.00
Stop:   99.00

DIA **[DJX]     IYM
Short: 105.90   Short: 42.00 
Stop:  103.50   Stop:  41.00

03/25 Listings
QQQ **          SMH **          BBH **         
Short: 36.60    Short: 46.25    Short: 126.25  
Stop:  36.50    Stop:  46.50    Stop:  124.00

OIH **          MKH **          RTH **         
Short: 65.50    Short: 58.50    Short: 100.00  
Stop:  69.00    Stop:  58.50    Stop:  101.00 

TTH **          FFF **          IWD         
Short: 38.50    Short: 82.25    Short: 57.50 
Stop:  41.00    Stop:  83.25    Stop:  58.80

IWM             IWS             IYC         
Short: 99.75    Short: 82.75    Short: 57.00 
Stop: 100.75    Stop:  84.00    Stop:  59.50

IWW             IYY             IVE         
Short: 73.70    Short: 53.00    Short: 55.50 
Stop:  77.00    Stop:  56.00    Stop:  58.00

XLE              IYM            XNG (options only)
Short: 28.40     Short: 41.50   Short: 193.25
Stop:  31.00     Stop:  42.50   Stop:  203.00

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Contact Support
The Option Investor Newsletter                  Tuesday 03-26-2002
Copyright 2001, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


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.


ROOM $60.00 -8.59 (-9.00) ROOM's CFO expressed concerns at an
investor meeting today about Travelocity's intentions to
establish its own hotel merchant product, potentially severing
ties with ROOM.  Despite the CFO's reassurance that Travelocity
was locked into its contract until 2005, investors didn't take
the news kindly and punished ROOM for it.  The stock blew past
our stop on its way to breaking its short term trend.  If you
weren't stopped out during today's sell-off, look for any signs
of a bounce early tomorrow to take losses.

CEPH $64.34 -1.29 (-3.66) CEPH announced today that it had
increased the number of authorized shares to take advantage of
such things as stock splits, acquisitions, and issuance.
Investors didn't like the idea for the potential of the latter
two.  In addition to the news, the broader Biotech Sector (BTK.X)
traded relatively weak during the day.  The stock did settle
around its 200-dma.  That level could attract buyers tomorrow
and result in a bounce that can be used as an exit point.

EXPE $65.12 -1.81 (-3.25) Travelocity announced this morning
that it was acquiring Site59.  The acquisition is expected to
give Travelocity an in to the travel business, possibly
competing with the likes of Expedia.  The news weighed on
shares of Expedia throughout today's session as the stock
slipped down to its 10-dma.  Volume picked up during the
decline.  Given the potential for increased competition, we're
dropping coverage on EXPE ahead of potential downside.  Look
for an early bounce tomorrow morning to cut losses.

GENZ $48.79 -0.46 (-3.01) The bulls built up quite a head of
steam last week as they propelled GENZ right up to the 200-dma
as the Biotech sector (BTK.X) flirted with a breakout over the
$540 level.  Alas, it wasn't to be, as the BTK pulled back
sharply the first two days of this week, pressuring shares of
GENZ below our $49 stop on Tuesday.  Despite the late-day bounce
off the lows, we're dropping the play tonight as it looks like
the bulls are taking a breather.

TXN $33.52 +1.47 (+0.36) Our TXN play was a long-shot play,
where we were looking to profit from a rebound in the
Semiconductor sector that would propel some of the stronger
names higher.  Well, that rebound never really materialized, as
the SOX broke down yesterday.  Even with today's rebound, it
wasn't enough to get the bulls out of their defensive mode and
TXN, while higher on the day appears to be finding resistance
near the $34 level, which looked like support last week.  While
our stop is still intact, we're removing the play from the call
list tonight due to the deteriorating technical picture, both
for the stock and the sector.




Please view this in COURIER 10 font for alignment

CALLS              Mon    Tue

BAC      69.12   -0.50   0.97  One of the strongest bank stocks
IDPH     67.99   -2.05   0.84  Gaining relative strength vs. BTK
CEPH     64.34   -2.37  -1.29  Dropped, biotech under pressure
GENZ     48.49   -2.55  -0.46  Dropped, rolled at the 200-dma
COF      62.75   -2.83   2.21  Hanging tough in volatile market
EOG      40.16   -0.24  -0.58  Pulling back after break, entry?
EXPE     65.12   -1.44  -1.81  Dropped, not performing as expected
TXN      33.52   -1.11   1.47  Dropped, slipping lower with SOX.X
KLAC     65.13   -0.88   0.75  Could go either way in coming days
CAH      69.27   -1.34  -0.68  Bouncing between $68 and $70 levels
ROOM     60.00   -0.41  -8.59  Dropped, negative developments
LH       93.61   -0.66   2.36  New, breakout to new highs and more
THC      65.53    0.51   0.33  New, new all-time higher, leading


ISSX     25.89   -0.69  -2.13  Positive developments for the bears
MIL      44.51   -0.97   0.62  Battle between bulls and bears
GDW      62.52   -0.75   0.80  Consolidating recent leg lower
TMPW     32.99   -0.01   0.80  Inability to break above resistance
FLIR     44.64   -3.44   3.39  Back and forth trading, no trend
EMLX     29.80   -1.79   0.04  Intraday highs are lower and lower
GNSS     25.00   -1.12  -1.81  New, poor performing chip play
IBM     102.90   -2.04  -0.66  New, service sales under pressure

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CAH $69.27 +0.56 (-0.68) CAH pulled back in yesterday's session
along with the broader market.  In the recent past, we've seen
the health care stocks get a boost when the broader market sells
off, but didn't see that develop in yesterday's session.
After trading slightly lower early in today's session, CAH
rebounded and held onto its gains despite the rollover in
the broader market.  That was more like it!  We like to see
relative strength in this stock during weakness in the
broader market.  However, yesterday's move placed CAH well
below its 200-dma for the first time in six sessions.  The
stock's rebound today took it back above the 200-dma on an
intraday basis, but CAH had some trouble advancing above the
200-dma near the late part of today's session.  The 200-dma
currently sits just above the $69 level and could serve as
short-term resistance.  That being said, the 200-dma could
also be used as an action point for those traders looking for
new entry points.  An advance above today's intraday high at
the $69.45 mark would confirm a break above the 200-dma.
From there, we'll look for a move above the $71 mark.
Otherwise, look for entries on intraday pullbacks above the
$68 level.

IDPH $67.99 +0.84 (-1.21) IDPH managed to trade well in today's
session despite the weakness all day long in the broader
biotech sector.  The AMEX Biotechnology Sector Index (BTK.X)
finished lower for the third consecutive session, but it did
manage to settle off of its day lows.  From a technical
standpoint, the BTK.X traded slightly below but managed to
close above its 50-dma.  That technical bounce could reveal
a reversal in the short-term descending trend.  For IDPH's
part, it was encouraging to see the stock finish strongly
higher despite the weakness in its sector peers.  The stock
fell back down around the $67 level but managed to inspire
buying interest once again near that level.  The stock's
reluctance to breakdown bodes well for its bullish prospects
going forward, but no matter its strength, IDPH needs the
BTK.X to participate if it's going to breakout above its
near-term resistance.  Additionally, the stock traced an
inside day in today's session, a pattern indicative of
either a pause in trend or a reversal of recent trend.  If
IDPH is going to breakout above its short-term resistance,
it could start the move with an advance past the $68.85 level,
which was Monday's high.  Make sure to confirm buying interest
in the BTK.X if using the inside day technique, or use
further intraday dips to the $67 support level as entry

COF $62.75 +2.21 (-0.62) COF reiterated its financial
guidance yesterday.  The company said that it expected to
spend more than $1.1 billion in marketing this year, and
that it expected to grow its earnings by 20% over last
year's numbers.  The news of increased marketing expenses
may have added additional pressure to the stock in
yesterday's session, but more likely was the broad weakness
pressuring shares lower.  The stock did however rebound in
a big way during today's trading, along with the bounce in
the broader financial measures including the Bank Sector
Index (BKX.X) and the Securities Broker/Dealer Index (XBD.X).
With the recent trading range that appears to have been
established in the last week, traders might look to intraday
weakness near support for entry opportunities instead of
trying to chase the stock higher.  Bounces just above the
$60 level have been followed with rallies up to the recent
relative highs, which is a pattern that could repeat in the
coming days.  The better entries might come on such bounces
near support.  The stock could breakout if the broader
financial measures continue advancing.  Look for that sector
sponsorship before attempting to enter plays on a breakout
above resistance at $64.

BAC $69.12 +0.97 (+0.47) Like the Energizer Bunny, BAC keeps
going and going.  Each brief dip seems to be met with eager
buyers near the $68 level, as they jockey to be in position for
the eventual breakout over the $69.50 resistance level.  An it
looks like that could be coming along sooner, rather than later.
See how the daily Stochastics appears to be starting a
short-cycle bullish reversal and is heading back towards
overbought?  The near-term overbought condition of last week
has been relieved, giving the bulls room to run.  The price
action in the Banks index (BIX.X) is confirming that bullish
intent, once again holding above the $670-675 support area.  As
long as the BIX can maintain altitude, we can continue to use
the dips in shares of BAC to initiate new positions in
anticipation of the pending breakout.  

EOG $39.30 -0.58 (-0.86) The waiting game continues.  Despite
a solid breakout over the $38 level two weeks ago, EOG bulls are
having a hard time maintaining their conviction.  With the price
of Natural Gas once again calming down and the XNG index
consolidating above its own breakout near the $190 level, it
should come as no surprise that shares of EOG are settling in
around the $39 level.  We're still leaning bullish on this stock,
but proper entries will be important to managing risk.  Look to
enter on a rebound from the $38.50-39.00 level, keeping a tight
stop on the play at $38.50, just below the ascending 20-dma
($38.57).  This is the top of the gap up on March 7th and if EOG
falls into this gap, the bullish move will be in serious
jeopardy.  Barring that sort of negative development, use
intraday bounces from support to initiate new positions ahead
of a renewed run at the $41.50 resistance level.

KLAC $65.13 +0.75 (-0.13) Those high-flying chip stocks got their
tail-feathers singed over the past couple days, as the
Semiconductor index (SOX.X) broke below the critical $580 support
level.  But dip-buyers came to the rescue, giving the SOX a
morning bounce off the lows and then another bounce in the
afternoon from the $580 level.  That helped our KLAC to bounce
from support, just as we were expecting.  The chip equipment
manufacturers should lead any true rebound in the Semiconductor
industry, and KLAC has been performing well in recent months.
Due to end-of-quarter window dressing, we could even see a nice
ramp into the weekend if the SOX can get moving in a northbound
direction.  KLAC gave us a great entry this morning, as it
rebounded from the long-term ascending trendline near $63.25,
which also happens to be the site of near-term support from last
week.  Continue to target intraday dips to support for
initiating new positions and keep stops set at $62.75.


THC - Tenet Healthcare $65.53 +0.33 (+0.94 this week)

Tenet Healthcare Corporation (Tenet) is the second largest
investor-owned healthcare services company in the United States.
As of May 31, 2001, Tenet's subsidiaries and affiliates owned or
operated 111 general hospitals with 27,277 licensed beds and
related healthcare facilities serving urban and rural
communities in 17 states, and held investments in other
healthcare companies. 

The consistency and quality of earnings offered by health
care providers continues attracting bullish attention.  That
much can be observed by the fact that the HMO Index (HMO.X)
trades near its all-time high.  One of the strongest stocks
in the broader group, THC is poised to breakout to an all
time high itself.  The stock has been trending higher since
early 2000 and that trend does not appear to be near an end.
The stock pulled back, along with its group, in late
February, which culminated with a trade down to and rebound
from the 200-dma in early March.  Since that time, THC has
been trending higher and is threatening to breakout from its
three month consolidation range.  The consolidation began in
early January when THC traded up above the $66 level.  It
retested that level in early February, followed by the
pullback down to the 200-dma.  The third test of that
resistance may prove to be the charm that carries the stock
well above resistance and into the low $70s over the short
term.  Momentum traders who favor trading breakouts above
resistance in strong stocks can look for a volume-backed
move above the $67 level in conjunction with strength in the
HMO.X.  The sector can move counter to the broader market
due to its defensive nature, so give more credence to the
sector itself.  Those who prefer waiting for a pullback can
look for a light volume retreat down into the $63 to $64
support zone, reinforced by the 10-dma at the $64 level.  Our
stop is initially in place at the $62 level.

BUY CALL APR-60 THC-DL OI=1370 at $5.90 SL=3.75 
BUY CALL APR-65*THC-DM OI=3866 at $1.85 SL=1.00 
BUY CALL MAY-65 THC-EM OI=3776 at $2.85 SL=1.50 
BUY CALL MAY-70 THC-EN OI=1479 at $0.90 SL=0.25 

Average Daily Volume = 2.06 mln

LH - Laboratory Corp. of America $93.61 +2.36 (+1.70 this week)

Laboratory Corporation of America Holdings (LabCorp) is the #2
clinical laboratory service in the world, behind Quest
Diagnostics.  LH performs 2000 types of tests for more than
100,000 clients, including health care providers, pharmaceutical
firms, physicians, government agencies and employers.  With 25
major laboratories and some 1200 service sites nationwide, the
company emphasizes specialty and niche testing such as allergy
tests, HIV tests, blood analyses, and substance abuse

Never mind the persistent weakness that the broad markets have
been seeing in recent weeks, there are still some notably strong
stocks that are breaking out to new highs.  Add in the fact that
this one is in the relatively stable Health Care industry, and
things start sounding better.  We've played LH on numerous
occasions over the past 18 months and if there is one thing
we've learned, it is that the stock loves to breakout.  Well,
true to form, shares of the #2 clinical laboratory service
company broke through recent congestion on Tuesday to post a new
all-time closing high of $93.61.  This move really got moving a
couple weeks ago, when LH pushed through the $89 level to create
a triple-top buy signal on the PnF chart.  The current vertical
count points to the stock eventually rising to $118, but we won't
hold our breath on that one.  Near-term, the buying volume is on
the rise and daily Stochastics are still vacillating near the
overbought zone.  A good old-fashioned momentum run.  Use
intraday pullbacks near the $90-91 level to initiate new
positions or else wait for another breakout (this time over $94)
on strong volume before playing.  We are initially placing our
stop at $89.50.

BUY CALL APR-90 LH-DR OI=396 at $4.80 SL=3.00
BUY CALL APR-95*LH-DS OI=405 at $1.70 SL=0.75
BUY CALL MAY-90 LH-ER OI=180 at $6.00 SL=4.00
BUY CALL MAY-95 LH-ES OI=116 at $3.10 SL=1.50

Average Daily Volume = 593 K

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MIL $44.51 +0.62 (-0.35) MIL broke from last week's consolidation
in yesterday's trading with its decline below the $44 level.  The
trading following that breakdown has been volatile, taking MIL
back up to the $45 level.  We've seen some serious intraday
volatility uncharacteristic of this stock, possibly revealing
a battle between the bulls and bears at current levels.  The
intraday rollovers from the $45 level have proved to be solid
entry points into new put plays, so traders can continue to
look for such moves and target the rollover.  Tight stops just
above the $45 level can be used to manage risk.  Its no
surprise that we've seen the volatility in the last two days
because of the significance of the $44 support level.  That
level is a quadruple bottom on the point and figure chart and
will be broken with a decline below the $43 level.  MIL was
0.29 away from the $43 level in yesterday's session.  Momentum
traders who favor entering on weakness can wait for a trade
below the $43 level before entering new put plays.  Look for
volume to increase on any breakdown below $43 and confirm such
a decline with a move below $42.

GDW $62.52 +0.80 (+0.05) GDW has traced a classic 'b'
long liquidation consolidation over the past six sessions.
Interestingly, volume has increased over that time period as
bulls try defending at current levels while the sellers
rotate supply.  The stock is likely to breakout of its
consolidation within the next three trading session.  The
probabilities of the pattern are in favor of a breakdown due
to the direction of recent trend.  Whether that breakdown is
realized will depend on the direction of the broader market as
well as the KBW Bank Sector Index (BKX.X).  The BKX.X has been
trading strong in recent sessions and a continuation of that
trend will most likely prevent a breakdown in GDW.  The short
term resistance that is forming between the $62.50 and $63
levels can be used as an entry point on intraday rollovers.
That resistance zone is reinforced by the rolling over 50-dma
at the $63.18 level.  Look for weakness to return to the BKX.X
and use entries near the resistance zone in order to manage
risk easier.

EMLX $29.80 +0.04 (-1.75) Despite valiant attempts by the bulls,
shares of EMLX can't get out of their own way.  After failing to
move through the declining 20-dma ($31.89) for the past 3 days,
the bulls seem to have lost their nerve again on Tuesday
afternoon, allowing the stock to once again fall below the $30
level, closing below the 200-dma again.  While we need to be
aware of significant support in the vicinity of the $26-27 area,
there's no doubt the stock is seeing some concerted selling
pressure.  We can continue to use failed rallies near the 20-dma
to initiate new positions, and this should make risk easy to
manage with a stop set at $33.  The picture portrayed on the PnF
chart tells us there is still some significant downside risk,
with a bearish target of $17.  Momentum traders will want to see
the $28.50 support level give way before initiating new positions
on a breakdown, keeping in mind that the true breakdown level
will be near $26.50, in the vicinity of the lows from a week ago.

FLIR $44.64 +3.39 (-0.05) Holy mirror images, Batman!  What
shares of FLIR gave us to the downside yesterday, it took back
today.  The really interesting thing is that the intraday candle
patterns from the two days are virtual mirror images of one
another.  With both days' action coming on pretty heavy volume,
we need to be on the lookout for more strength on Wednesday, as
the daily chart shows us a Tweezer Bottom candle pattern, which
is a fairly reliable bottom-reversal signal.  So keep those
stops in place at $46 and move to the sidelines if it is
violated.  But if the weakness that has been prevalent (both in
the stock and the DFI index) continues, we can use today's
rebound to give us an attractive entry into the play.  A rollover
in the vicinity of $45 would be good, but a pop and then decline
from the $46 area would be even better.  Keep an eye on the DFI
index for signs of renewed weakness before adding new positions.

ISSX $23.07 -2.13 (-2.82) Patient bears were rewarded again this
morning, as ISSX broke down below the $25 level.  We've been
leaning on the stock over the past week due to its poor relative
strength and a lack of positive catalysts in the Internet
Security arena.  The picture got a little uglier this morning
before the opening bell, as Robertson Stephens says its channel
checks indicate that the current quarter is tracking below plan
and they fear the company may miss its numbers.  That's all
investors needed to know to knock the stock as low as $21.75
before firming a bit through the afternoon to end with 'only' a
8.45% loss on the day.  Volume was understandably huge, coming
in well above triple the ADV.  There was a lot of technical
damage done on Tuesday, but shares of ISSX are still technically
hanging onto support near the $22 level.  It is important to
note that we got a fresh double-bottom breakdown on the PnF
chart on Tuesday, and that means we have a new bearish price
target: $11.  But we don't want to give back too much of our
gains after being in the right place, at the right time, so we
are ratcheting our stop down to the $25.50 level (just above
the top of today's gap).  Use failed intraday rallies below
that level to initiate new positions with an eye on the next
level of support near $19-20.

TMPW $33.78 +0.80 (+0.75) For all the wild movement in the broad
markets so far this week, the action in shares of TMPW has been
rather disappointing.  Ending virtually unchanged on Monday and
tacking on 80-cents on Tuesday is not the stuff winning
directional plays are made of.  But the stock is definitely
showing its weakness, as it pulled back from the $35 resistance
level to post another Doji day of indecision.  Until the market
decides which way to drive shares of TMPW, we can take action at
the extremes of the recent range.  Consider new entries either
on another failed rally near the $35-36 area, or else wait for
near-term support at $32.50 to give way.  Our stop remains at
$37.  Note that volume was downright anemic on Tuesday, further
evidence of the market's indecision on the stock.  Wait for the
conviction of volume to provide confirmation before playing.


IBM - IBM $102.90 -0.66 (-2.70 this week)

International Business Machines Corporation (IBM) uses advanced
information technology to provide customer solutions. The
Company operates using several segments that create value by
offering a variety of solutions, including, either singularly or
in some combination, technologies, systems, products, services,
software and financing. 

Electronic Data Systems has been the target of bearish analyst
actions in recent days.  Sanford Bernstein cut its investment
rating on shares of the information technology company.  Analysts
raised concerns over EDS' ability to realize its sales goals
for the current quarter, citing the continued weakness in
corporate spending.  If the analysts are correct about EDS'
weakness, then that brings into question IBM's current quarter.
The company relies heavily on its services division, which is
a bigger version of EDS.  Not to mention the fact that IBM
continues to trade poorly relative to the broader market and
the narrow-based technology segments of the market.  The stock
traded heavy all day during today's session and actually closed
lower, one of the few Dow Jones Industrial Average components
that finished in negative territory during today's session.  The
rebound in tech shares near the close of trading today couldn't
even inspire a bounce in IBM, which finished just off of its
intraday lows.  Traders could be fearing a warning from IBM in
the coming week as warnings season is underway for the first
quarter.  The stock certainly trades as if investors are
fearful of further deterioration in IBM's core businesses.
Traders looking to capitalize on that fear can look to take
entries into further weakness below the $102 level.  Below there,
the $100 level can often act as psychological support, so the
technical downside may be limited in the very short term barring
a major rollover in tech stocks or an actual warning from IBM.
Those who'd rather get bearish plays at higher prices can wait
for an intraday rally on relatively lighter volume up to the
$105 to $106 resistance level.  The 10-dma, which is declining
and converged with the 50-dma, may reinforce that resistance
zone and prevent IBM from rallying much above that level.  Our
stop is in place at the upper-end of that zone at $106.

BUY PUT APR-105*IBM-PA OI=20479 at $4.30 SL=2.00
BUY PUT APR-100 IBM-PT OI=36027 at $2.15 SL=1.00

Average Daily Volume = 7.84 mln

GNSS - Genesis Microchip $25.00 -1.81 (-2.93 this week)

Genesis Microchip designs, develops and markets integrated
circuits that receive and process digital video and graphic
images.  Its integrated circuits are typically located inside a
display device and process images for viewing on that display.
The company also supplies reference boards and designs that
incorporate its proprietary integrated circuits.  GNSS is
focused on developing and marketing image-processing solutions
and targets the flat-panel computer monitor and other potential
mass markets.

How many times can you go to the same well before you are
considered greedy?  There are several plays that we have come
back to time after time over the past several months because of
the predictable trends they provide.  Despite the fact that it
fits into the volatile Semiconductor sector (SOX.X), shares of
GNSS continue to languish in a very predictable manner under
their 10-week descending trendline.  The stock cratered more
than 40% on February 28th after the company gave a disappointing
post-merger (with Sage) financial outlook.  Since striking a low
of $22.50 on the day of the announcement, GNSS gradually
recovered up hear the bottom of that big gap ($32.50) before
beginning to slide downwards again.  Late last week, the
declining price trend ran smack into that descending trendline
near $29 and the stock has been under increasing selling pressure
since then.  Tuesday's price weakness dropped the stock through
last week's intraday lows near $25.75 and it really looks like
the $22.50 support level is in jeopardy.  The recent
consolidation had been building a neutral triangle on the PnF
chart and that pattern recently broke in favor of the bears.
Use intraday rallies in the vicinity of the descending trendline
(now at $27) or $28 intraday resistance to initiate new
positions.  Because of the stock's volatile nature, we're
initiating the play with a wide stop, set at $29.25.

BUY PUT APR-25*QFE-PE OI=8383 at $2.30 SL=1.25
BUY PUT APR-22 QFE-PX OI= 717 at $1.20 SL=0.50

Average Daily Volume = 4.51 mln

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The Option Investor Newsletter                  Tuesday 03-26-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


CAH - Cardinal Health $69.27 +0.56 (-0.68 this week)

Cardinal Health, Inc. is a provider of products and services to
healthcare providers and manufacturers, helping them improve the
efficiency and quality of their healthcare services and products.
Cardinal Health has four reporting segments: Pharmaceutical
Distribution and Provider Services, Medical-Surgical Products
and Services, Pharmaceutical Technologies and Services, and
Automation and Information Services.

Most Recent Update 

CAH pulled back in yesterday's session along with the broader
market.  In the recent past, we've seen the health care stocks
get a boost when the broader market sells off, but didn't see
that develop in yesterday's session.  After trading slightly
lower early in today's session, CAH rebounded and held onto its
gains despite the rollover in the broader market.  That was more
like it!  We like to see relative strength in this stock during
weakness in the broader market.  However, yesterday's move placed
CAH well below its 200-dma for the first time in six sessions.
The stock's rebound today took it back above the 200-dma on an
intraday basis, but CAH had some trouble advancing above the
200-dma near the late part of today's session.  The 200-dma
currently sits just above the $69 level and could serve as
short-term resistance.  That being said, the 200-dma could
also be used as an action point for those traders looking for
new entry points.  An advance above today's intraday high at
the $69.45 mark would confirm a break above the 200-dma.
From there, we'll look for a move above the $71 mark.
Otherwise, look for entries on intraday pullbacks above the
$68 level.


CAH's pullback in yesterday's session removed some of the
downside risk in this play.  Today's rebound could be the
early move in a breakout above short-term resistance.  Look
for the stock to follow-through in tomorrow's session by
taking out today's high at $69.45.  From there, a move back
up to $70 is probable.  That should set-up the eventual
breakout above the $71 mark.

BUY CALL APR-65 CAH-DM OI= 290 at $5.20 SL=3.50 
BUY CALL APR-70*CAH-DN OI=1487 at $1.50 SL=1.00 
BUY CALL MAY-70 CAH-EN OI=  85 at $2.50 SL=1.50 
BUY CALL MAY-75 CAH-EO OI= 370 at $0.85 SL=0.25 

Average Daily Volume = 3.03 mln

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Trader's Corner

Do You Have Trader Status?
Buzz Lynn

That's almost an insulting question!  Of course I have 
trader status.  I'm a trader!  Err, well, maybe I qualify.  
OK, I lost $100,000 last year and quit trading after 
March, so maybe not.  But boy, how I wish I could claim 
the whole loss suffered in instead of using a measly $3,000 
per year over the next 34 years for what seems like eternity.

Anybody utter these words to themselves over the last two 
years?  We get plenty of reader e-mail from those who have.  
Invariably, they go on to ask if we know what is/how to get 
trader status that would allow deductions for substantial 
losses exceeding the $3,000 annual limit.  While we are not 
accountants (at least none of the folks I know at OIN are) 
and we don't even play them on TV, we know people who are.  
And following last week's Trader's Corner on Beating the Tax 
Man, there seems to be an unusual amount of interest in the 
subject - no surprise given that returns and taxes are due 
in just 21 days.  

So we figured, "what the hey".  Not only would this make a 
great article of immense benefit to fellow readers, it would 
also give us an excuse to seek out and ask the questions of 
an expert in the field.  Just as we would never entrust our 
hard-earned dollars to a brick maker for the purpose of buying 
fine jewelry, so too should we avoid trusting our accounting 
issues to Fundamentals Guy or any other analyst, market 
strategist, and trader on our staff.  While we know tidbits, 
we are in no way qualified to talk specifics on the subject of 
trader status and tax liability.  For those issues, we need an 
expert.  And that expert is Jim Crimmons of 

Here's the reader e-mail that got the ball rolling on this:


Would you please direct this question to the most appropriate 
individual at option investor?  I realize that you are not 
accountants but you all do the same thing with options. 

I have discussed for many years the tax strategies with my 
accountant and to date have always been an investor and not a 
trader and have not marked to market.  I make over 400 option 
transactions per year, create a lot of margin debt and had huge 
losses over the past two years that would have been better 
offsetting earned income rather than the current 3000 per year 
until offset by future capital gains. 

Would some please devote an article to trader Vs investor?  My 
accountant say that the rules are deliberately ambiguous so 
that most people will end up investors and not risk going into 
unchartered waters where they are subject to audits, penalties 
and interest for trying to write off home office expenses, and 
use mark to market today.  He says that one has to get 
permission from the IRS to go back from market status to investor 
status after making their first election so that in years where 
there are huge capital gains one would regret that they no longer 
can have long-term capital gains.  He says that having separate 
accounts at separate brokerage firms does not allow one to be a 
trader in one account and an investor in another account as there 
has been no ruling and that at an audit one would have to pay 
penalties and interest and then go to tax court to try to win 
your case without any ruling. 

Would someone at Option investor please comment on the tax 
options available to option investors/traders. 

Thank you"

Dear Reader - Your day is here!

Rather than try to answer our fellow reader's question with 
just a paragraph from one of us here, we posed the question to 
Jim Crimmons, founder of www.tradersaccounting.com.  What we got 
back was detailed enough to answer almost anyone's questions on 
the entire subject.  I'll let Jim do the talking from here.  

Me: What say you, Jim?


Executive Summary:  Tax planning is worthless unless it is 
put in place.  Probably the biggest reason people do not 
follow through is that the idea is either too complex, or 
forces them to change their lifestyle in a dramatic fashion.  
While the following suggestions may sound intimidating and 
complex initially, their operation is fairly simple and is 
designed not to make any major changes in your current 
lifestyle.  Remember the idea is to plan ahead to establish 
your Tax Efficient Trading Plan, which dove tails with your 
overall Trading Plan.

Treat it as a business:  Establish an LLC for your trading.  
Advantages.  Since you can treat the LLC as a pass-through 
entity, you will not be subject to double taxation as you 
could with a C corporation, but you can run your business 
deductions through it.  This account will be your active 
trading account and will provide you with liquidity and 
asset protection.  When there is sufficient trading activity, 
you can adopt the Mark to Market method of accounting, which 
allows you to ignore both the Wash Sale Rule, as well as the 
$3,000 cap on Capital Loss Deduction.  Because many of the 
expenses you are now paying out of your own pocket can be 
expensed out through your trading company, you will be 
lowering the amount of money you need to live on, and by this 
means lowering your personal income taxes.

Learn to deduct expenses that you cannot fully do personally, 
like education, meetings, and trading expenses.  For example, 
Healthcare costs - Your company can pay Medical Insurance 

Medical Savings Account - If you are funding your own medical 
insurance, a Medical Savings Account for your family generally 
saves our clients a lot of money, as well as add to their 
retirement income.  If you are unfamiliar with MSA’s order our 
free special MSA report by e-mailing us at 
questions@tradersaccounting.com, enter the words MSA in the 
subject box.  [Shameless plug for Jim :-)]

Work With Your Tax Advisor Quarterly:  As the year progresses, 
because of the extremely volatile nature of trading, you need to 
evaluate your tax strategy needs.  You cannot wait until this 
time next year and enact any strategies for this year.  A 
pro-active tax advisor will work with you on a quarterly basis, 
to ascertain what you need to do to lower your taxes.

Traders Education:  Learning from others can often be the least 
costly.  As a former dean of Harvard put it:  “If you think 
education is expensive, try ignorance.”  Investment seminars and 
publications present important learning opportunities that are 
essential to mastering your trading skills.

Me: Sounds good so far, Jim, but why should we trade in a 
business entity?

Jim:  Some clients have traded as a business, and others have 
traded in their own name and are considered investors.  When we 
talk with the last group we are always asked, “Why should I trade 
in a business entity?”  It is important that you understand both 
the pros and cons of trading as a trader and as an investor.  
Trading as an “investor” limits you in several aspects, the 
first being taxes.

Taxes: Because the IRS treats an investor as a hobbyist, 
educational expenses and the related expenses of attending 
seminars such as travel and meals are not deductible.  If you are 
a trader like I am, you realize that from time to time you need 
to go to an educational workshop to hone your skills.  This 
generally is an on-going process, many of us go to at least one 
trade show or workshop each year, and the expenses can be pretty 
substantial.  The rub is we bump up against the 2% threshold the 
IRS imposes for expenses on our personal tax return.  What this 
means is that if our Adjusted Gross Income for the year is 
$100,000 the first $2,000 of expenses we have cannot be deducted.
Let’s look at two examples where our taxpayer has made money:

John is an investor trading in his own name without benefit of a 
business.  At the end of the year he finds he has made $40,000 
trading.  He and his spouse both work; together they have made 
an additional $100,000.  Their trading expenses look like this:

Telephone	$   480	Seminars	3,500*
Fees	1,200	Travel & Entertainment	650*
Cable	360	Home Office Expense	1,800*
DSL	240	Office Equipment	10,000*
Margin Interest	6,000	Sub-Total	$15,950
Sub-Total	$8,280	TOTAL	$24,230

Of this amount, how much could be deducted by John?  
He can claim only $8,280 in expenses.  He cannot claim the items 
above which are marked with an asterisk, since he is classified an 
investor, and the hobby rules indicate that he cannot deduct these 
items.  He and his spouse have approx. $140,000 in income for the 
year, so the first 2% of his expenses are not deductible.  This 
would mean that $2,800 in expenses could not be deducted, leaving 
John with $5,480 he could deduct, which at a 30% tax bracket would 
save him $1,644!  (Obviously for illustration this example is 
flawed in its simplicity.  Most taxpayers will have other 
deductions as well as adjustments to their gross earnings.)

Susan on the other hand has set up a business entity to trade 
in.  Within the business she has filed for the Mark to Market 
Accounting Method.  Assuming she is in the same exact situation 
that John is with the same total income and expenses, Susan 
would be able to deduct the additional $15,950.  According to 
section 162 of the IRS code, a business can deduct "all ordinary 
and necessary expenses."  Susan, also in the 30% tax bracket, is 
able to deduct the entire $24,230.  Susan saves $7,269 in taxes.

Lets see:  the difference between John and Susan is $5,625 more 
in Susan’s trading account at the end of the year—that’s quite 
a difference!

Ok, we have seen that Susan wins out when they both have made 
$40,000 in trading income, but what happens when they have a 
losing year.  Let’s remain consistent with our expenses, the 
same as before, but this year each has lost $40,000 with their 
Now John really gets stiffed because he has the same 
limitations on his expenses that he had in example one, but 
since he did not make money trading he cannot deduct his 
margin expense.  (You can only deduct margin interest to the 
extent that you have made money trading securities or options.)  

At this point he has $2,280 in deductible expenses.  Since 
he lost money trading, his AGI has dropped to $100,000, 
which means that the first $2,000 of expenses is not 
deductible.  He is now able to deduct only $280 in expenses 
this year, and $3,000 of his capital loss for a total of 
$3,280 of deductions.  

Assuming he remains at the 30% tax level he will save a 
whopping $984 in tax saving!  Oh yes, in addition to this 
he has a $37,000 loss carryover, which he can use at $3,000 
a year in subsequent years!

However, Susan is still able to save the complete 
$7,269 in taxes, (all ordinary and necessary expenses 
for the business).  Plus, since she is a trader who 
has taken Mark to Market, she can offset her regular 
income of $100,000 with her $40,000 loss, bringing her 
AGI to $60,000, so she saves another $12,000, for a 
total savings of $19,269 in taxes.

The difference this year?  $18,285 more for Susan’s 
Account.  So, no matter whether you make or lose money in 
the market, it makes sense to be trading as a business!
Lets summarize:

Example	John	DIFFERENCE	Susan
1.  $40K Gain
Tax Savings	$1,644	$5,625	$7,269
2.  $40K Loss
Tax Savings	$984	$18,285	$19,269

Me:  Wow!  That's quite a difference.  It really does seem 
to pay off if we establish a separate trading entity and 
run it like a business.

Jim:  In addition to the huge difference in the tax 
savings, when you trade as a business there are other 
issues that we should bring to your attention.

Wash Sales
When your entity is set up properly and you are trading 
at a level to validate using Mark to Market Accounting, 
you no longer have to worry about the Wash Sale Rules, 
which has been a boon to those active traders who trade 
the same stock over and over throughout the year.

[Note: Wash Sale rules can affect persons who trade the 
same stock repeatedly throughout the year.  An example of 
one of the rules should suffice to illustrate.  You buy 
Microsoft at $50, it goes to $45; you sell for a loss of 
$5.  If you buy Microsoft again within 30 days, you cannot 
claim the $5 loss; rather you must increase your basis.  In 
this situation if you buy Microsoft at $30, then your basis 
would be increased by the amount of the prior loss to $35.  
See "Beat the Tax Man" from March 19, 2002, Trader's Corner.]

Fringe Benefits
When you trade as a business, you have the ability to pay 
for health insurance, set up higher education plans, and 
provide for retirement plans, child care and other benefits 
for your employees.  Most traders have immediate family 
members as their only employees, so this can be a huge 
benefit, lowering your taxes by increasing the legitimate 
expenses of your trading business.
In my opinion there is absolutely no reason you would not 
want to trade as a business.  Whether you use Mark to 
Market accounting needs to be investigated thoroughly.  
Don’t wait another day, as you gain nothing doing so, and 
will probably penalize yourself by losing money each day 
you wait.

Me:  Thanks, Jim for that information that could save 
us traders countless thousands of dollars!

As we can see, Jim has a wealth of knowledge on the 
subject and has barely broken through the surface on 
the topic.  Many of you are probably wondering about 
"trader status", which is a topic worthy of a full column 
in and of itself.  So we don't have to wait a full week, 
I promise that subject will be first up in tomorrow's article.  
Until then, let us make a great day for ourselves!

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“7 Steps to Success – Trading Options Online”.  

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Bulls back in health care.  Bears leaning on brokers.

To Read The Rest of The OptionInvestor.com Market Watch Click Here


Monday's movement in the major averages shifted support and
resistance levels in several of the indexes, but the volatility
didn't induce any breakdowns or breakouts.

To Read The Rest of The OptionInvestor.com Market Posture Click Here


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