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Daily Newsletter, Tuesday, 04/02/2002

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The Option Investor Newsletter                 Tuesday 04-02-2002
Copyright 2001, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
      04-02-2002           High     Low     Volume Advance/Decline
DJIA    10313.71 - 48.99 10352.46 10264.86 1.17 bln   1506/1651
NASDAQ   1804.40 - 58.22  1839.37  1804.40 1.52 bln   1366/2147
S&P 100   571.48 -  5.28   576.68   570.67   Totals   2872/3798
S&P 500  1136.76 -  9.78  1146.54  1135.71             
RUS 2000  500.49 -  4.01   504.50   500.49
DJ TRANS 2790.19 - 77.39  2867.00  2790.19
VIX        20.81 +  0.76    21.21    20.51
VXN        39.15 +  2.70    39.54    38.24
TRIN        1.75 
PUT/CALL    0.85
******************************************************************
Tech Wreck Revisited

Just when you thought the Nasdaq was out of danger downgrades
and warnings push it even lower. The Nasdaq bounce on Monday
had analysts breathing easier again but tech hopes were dashed
as big caps took a beating on Tuesday. The culprits included
PeopleSoft and Goldman Sachs. Now that the quarter has ended
the warning season is in full bloom. 



 



 



 


PeopleSoft soured the markets after the close on Monday with a
warning that revenues would be -20% below plan and that current
forecasts included market penetration that had not yet occurred.
Investors did not like the promise of earnings on products that
were not yet accepted by users and felt competition could slow
that acceptance. Heavy insider selling also helped to sour 
investors mood. PSFT dropped -12.21 to $25.17. 

A pair of influential Goldman Sachs analysts said the economy 
was moving in the right direction but much slower than needed 
for techs to hit current earnings estimates. They cut estimates 
for MSFT, IBM, SEBL, EMC and SUNW. Laura Conigliaro said based
on their market checks IBM had a tough quarter and could miss prior
estimates. The same was true with EMC. She felt the company saw
gains late in the quarter but probably could not overcome a slow
start. Adding to the negative tech bias was earnings misses by
CMRC, IWOV and VITR each of which had bad news for investors.

The bottom line for the markets was a tech wreck of bubble 
proportions. With the PSFT and MSFT problems the software
sector never had a chance. The comments about slow hardware
sales took out the chip sector, hardware sector, storage sector
and the services sector by default. The Nasdaq opened down and
traded lower as the day progressed. With Dow components MSFT, INTC
and IBM all suffering it was surprising the Dow was only down -48
at the close. 

If tech problems were not enough the retail sector was hit by
two high profile warnings as well. Best Buy, which posted a huge
increase in earnings of +84% and beating the street by two cents, 
warned that future results would be less than expected. BBY got
pounded for a -4.47 loss. Competitor Circuit City met estimates
but warned it would post a loss going forward. One analyst said
that problems at CC could last up to three years as it struggles
to remodel its stores, compete with BBY and ward off new challenges
by Wal-Mart. Investors already knew CC was in trouble so the news
had no negative impact on the stock.

At least there were no new accounting problems. April fools!
Qwest announced that it would restate Q4 earnings due to pressure 
from the SEC. The SEC was also going to fine them for misstatements
in their Q4-2000 earnings but Qwest said it was undeserved. 
However, the embattled communications giant said it would take
a charge of -$20 to -$30 BILLION for write offs related to previous
acquisitions in order to conform to current rules. They will also
take a multi billion charge related to a Dutch subsidiary. I wonder,
does this mean my phone bill is going up or can I charge it off too?
Also, ADLAC may now be under SEC scrutiny according to an article
in the WSJ which claims their questionable debt may be more in 
the $400 million range instead of the recently reported $209 million.
Gemstar also dropped -37% after a CIBC analyst found evidence of
"aggressive accounting" in the firms 10K. It appears they booked
millions in revenue they had not received and much of it hinged
on winning a suit in progress. Just another day in the world of 
the SEC! I wonder if the SEC is behind the improved employment 
numbers recently due to their increased work load? Just kidding.

Even Saddam Hussein is helping trash the U.S. markets. He called
for an OPEC oil embargo, ala 1973 when oil prices quadrupled, in 
order to punish the U.S. for supporting Israel. Oil futures soared
to $28.10 intraday and a contract high since Oct-1999. That crippled
airlines and the entire transportation sector took another hit with 
the transports dropping -77 to 2790. Transports are now down nearly 
-10% from their March highs. 

Many analysts are concerned that the rising oil prices, now up 
nearly +50% since January, will cripple the economic recovery and 
push us back into recession if something does not happen quickly. 

Warnings, downgrades, accounting problems, what is next? More of
the same unfortunately. According to estimates from four major 
analysts this morning, including Merrill and Goldman, tech spending
may only increase +1% to +2% for the rest of the year. Several 
analysts expect it to be flat to down. Compare this to the earnings
estimates for tech companies as a whole compiled by First Call and
the danger is clear. According to First Call earnings for the 1Q
are expected to be down -25% from last year. No problem, we can
probably agree with that. However earnings for the following quarters
are expected to be up substantially. 2Q +38%, 3Q +132% and 4Q +72%.
Based on the current "visibility" by tech companies do you really
expect 3Q earnings to increase by +132%? I doubt it even considering
the pitiful 2001-3Q numbers. Very few tech companies are even affirming
current "flat line" numbers much less projecting strong growth.

At the risk of appearing too bearish I am just pointing out that
expectations are likely to go lower as real earnings guidance 
becomes known over the next several weeks. If positive guidance 
is given then we will all be ecstatic. However we need to be 
prepared for more negatives than positives since all indications
of business buying are still flat. The last two days have seen
some tax selling and some window undressing but it has not been
that bad, yet. Minor volatility has returned as some investors are
beginning to wonder if they were possibly too optimistic. Others
are still bargain hunting on small cap stocks. Despite the negative
markets today the number of new highs compared to new lows was still
very positive. On the NYSE there were 150 new highs compared to 53
new lows. On the Nasdaq the ratios were 125:51, not bad for a tech
wreck. The TRIN is easing into buy territory as well as the put/call
ratio, which tells us the markets are becoming oversold and are due
for a bounce soon. Unfortunately, it may be just a bounce before the
next leg down.

If you have been following me you know my targets to go short were
1825 on the Nasdaq and 1140 on the S&P. Each of those levels were
broken on Tuesday. I would continue to remain short below and flat
above those levels. As you can see from the Nasdaq bounce on Monday
we can trade above those levels again any day but I would refrain 
from going long until they are confirmed. My long entry points
remain 10500/1875/1155 respectively. If the markets are going to 
rally there will be plenty of time to board the train if those
numbers are hit. Until then,

Enter Passively, Exit Aggressively!

Jim Brown
Editor


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

Counting Change

Who said that a penny saved is a penny earned.  WRONG!!
Blindsided by the techs today, any bullish bias (mine included!) 
based on yesterday's minor upside chart breakout and apparent 
start of an upside reversal in the NAS 100 (NDX), was squashed on 
renewed techitis today. This renewed phobia and avoidance of tech 
got rolling when PeopleSoft (PSFT) shaved a penny off guidance on 
its next earnings and lost 3+ Billion of market value. Yes 
Virginia, the Market has NO mercy and takes NO prisoners.  

We cannot overlook the uncertainties associated with the Middle 
East. The market cares about this not from humanitarian reasons, 
which traders tend to leave to the Pope and others, but about the 
potential for oil to become hostage to reining in the Dogs of War. 
A huge spike in oil prices would be bad news indeed for the 
fragile economic recovery.  And Europe has $4 dollar a gallon gas 
already and they are lagging the US economy.  Ditto Japan.   

Microsoft (MSFT) weakness, with its earnings estimates cut by 
Goldman Sachs, and a big portion of the capitalization-weighted 
asdaq Composite (COMP) and the Nasdaq 100 (NDX) weighed heavily on 
the push to the downside -- the stock was off 3.08 or 5.1% on the 
day. I thought MSFT was going to regain its up trendline, but the 
chart tells the story. We'll see if it holds at only a 62% 
retracement, but we should take action in Microsoft as a key 
factor in the ability for NDX & the QQQ's to get a rally going. 



 

   
MORE ON SEASONAL FACTORS:
I mentioned yesterday the tendency for April to tend to be a 
period when stocks gain.  I did not mention the particulars, so 
here they are:  

Dec: avg. gain of 1.8% in 39 of last 51 years
Jan: avg. gain of 1.6% in 34 years
Nov: avg. gain of 1.5% in 33 years
Apr: avg. gain of 1.4% in 36 years 

While your stocks and option plays are not a season, there's a 
reason to mind the tendency for money to get put to work in stocks 
around tax time.   

TRADING NOTE:
I suggested a buy of QQQ at 26.50 or better, recognizing that a 
lower opening would mean a fill under that limit price.  Sure 
enough, fills at the opening were right around 36.00. Which also 
prompted a question from a subscriber about the "or better" 
designation: 

"Maybe it's just me, but I don't understand what you mean by "buy 
at 36.50 or better." Do you mean 36.50 or above? Right now (just 
before opening) it looks like the QQQ will go lower than 36.50. 
What am I missing?"

Maybe the question is what was I missing, but that's after this 
bit on "OB" - 

"Or better" always means at that price or better -- on a buy 
order, a better price would be LOWER than the intended purchase 
price or limit order. I sometimes use this designation when I 
think that there could be a lower opening and a fill may be at a 
lower price than the buy price suggested.  (Think of the reverse 
on a HIGHER opening and a short recommendation.) 

An exception, probably not to your advantage, would be limit order 
just under a recent close, but the next morning the stock gets 
clobbered; e.g., PeopleSoft (PSFT) this morning. You may now no 
longer want to own the stock at that point. 

"Or better" is implied on a limit order as a price that improves 
on a limit price is to your advantage and is an allowed practice.  
Sometimes "OB" is specified on an order put in before the opening, 
to leave no doubt that you recognize that an opening may put 
prices under or well under the suggested specific (limit) price. 
Remember a specific price on an buy order is a limit order -- no 
more than that price, but better the price of course. 

STRATEGY:
I still have a bullish bias, as I assess the rally potential as 
being better than further downside potential AT SOME POINT. I am 
not sure now how close we are to that turning point. Meanwhile I 
have a toe in the water with a (long) QQQ position at 36, but with 
a close by stop at 34.5.  

If stopped out of this position, would like to see ALL my 
indicators line up on the buy side before any substantial 
commitment to the long side. What is not in gear yet is my 1. 
advance-decline "oscillator" reading (see the Index Trader wrap – 
at bottom) and 2. the "sentiment" measures, as reflected in the 
amount of call to put volume -- so far, there has not been the 
heavy put buying associated with intermediate bottoms, even though 
I measure it several different ways.  

And, the VIX continues to show a nil expectation of prices getting 
volatile in either direction, which has been a good predictor of a 
top.  However, I am not sure what this low VIX means, as the 
market is not overbought and a low VIX, when it has signaled a 
top, has also been associated with an "overbought" market.  


MAJOR INDEXES: VIEWPOINT and TRADING STRATEGY:
Another light trading day but selling predominated.  There is an 
old market saying to never short a dull market, meaning low 
volume, like this one. However, it is also the case that the S&P 
500 is near the top end of its downtrend channel and SPX has been 
unable to break out above it.  So, the next move may be toward the 
low end of the channel and toward 1125, and a 50% retracement. If 
short, stay short or in puts unless there is a breakout above 
1150.  Cover in the 1120-1125 zone, as the market will be quite 
oversold by then. A possible bullish pattern is seen in the hourly 
chart, but only if the Index rallies from here.   


S&P 500 (Q-charts symbol: SPX) daily & hourly:


 
 

NOTE: The LENGTHS (number of closes looked at) of the hourly and 
daily chart stochastic oscillators above are LONGER than you are 
used to seeing, at 21-bars and 14, respectively. A longer length 
gives fewer buy and sell crossover "signals", but also tends to 
result in fewer "whipsaws".  

This prompted a question from an OIN Subscriber: 

"Can you comment on the difference in the stochastics settings 
that you use and those that Austin uses, ie, 5,3,3."

3's are "normal" or standard slow stochastic settings relating to 
a 3-day moving average, that is applied to the fast stochastic 
value to arrive at the "slow" stochastic value.   The key number 
is the first one -- this is LENGTH or number of "bars" or periods 
used. Stochastics measures current prices relative to the highest 
high or lowest low of X number of periods; e.g., hours or days.  X 
is the length variable. 
 
If applied to a daily chart, 5 looks at 5 days only and is for 
short-term trading.  Using 14 as your length setting means that 
the formula looks at 14 days worth of data and measures the 
current price relative to the high for more than two weeks.  This 
means that a 14 setting will tend to move up or down more slowly.  
There are fewer oversold or overbought readings this way and fewer 
shifts in momentum direction.  Use of 5 or 14 or whatever number 
depends on your trading timeframe.  My orientation is to look for 
fewer trades in the hopes of capturing some larger price swings.    
 
NASDAQ 100 (NDX) and QQQ:

The Nasdaq 100 (NDX) and the Q's appeared to break out yesterday, 
per the charts below. The downtrend channels were penetrated to 
the upside, but it didn't last due to Techitis that set in today.  

When subsequent market action does not confirm the technical 
picture, I assume that I did not read everything right and that a 
warning sign was there, but I did not "see" it.  RIGHT! This was 
apparent in the QQQ hourly chart action, as prices reversed from 
the previously broken up trendline -- what I call the "kiss of 
death" trendline as it so often is the drop dead reversal point.  



 



 

TRADES:
Buying the QQQ opening resulted in a fill at 36.00 on a 36.50 
order.  Since stop suggested was 1.5, a stop at 34.50 is 
warranted. 

TRADE PLAYS & GUIDELINES: 

Trade: Buy QQQ at 36.50 or better - FILLED at 36.00, 4/2
Objective: 42; Original suggested STOP: 35
Change in stop, if any: 34.50, based on fill at 36.00

OPEN LONG TRADES: NONE 

OPEN SHORT TRADES: NONE


NOTE: Risk to Reward guidelines:  Determining an objective is 
important, even if it is a moving target, as this is the reward 
potential.   Determining reward potential is critical to 
establishing whether a stop that makes “sense” (e.g., a sell stop 
that was placed under a key support level) would, if triggered, 
result in a dollar loss that is in proportion to profit 
potential; e.g., 1/3 of it.  (On occasion, when the purchase 
price of call or put is equal to 1/3 or less of the estimated 
reward potential, there may not be a specific exit suggestion, as 
the cost of the option is equal to the amount that is being 
risked.)   


KEY LONG-TERM MARKET INDICATORS: 
Will be updated & reposted tomorrow (Wed.) - these change slowing 
and need not be included everyday.  For a view of them, go to the 
Index Trader wrap commentary of 4/1/02. 


Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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

Tech Wreck
By Eric Utley

Our cautious, or bearish, stance on tech stocks was justified
in Tuesday's session.  Since the reversal in the Nasdaq-100
Bullish Percent ($BPNDX), we've been urging readers to take
defensive measures in technology.  We hope that the aggressive
readers took action in the recent weeks to benefit from
Tuesday's decline in tech shares.

The sector scorecard finished with a decided trend of weakness
in tech shares.  The Software Sector Index (GSO.X) carried the
day with its 6.56 percent decline.  Other notable moves in the
tech space included the 4.97 percent drop in the Optical Sector
Index (FOP.X), the 3.71 percent drop in the Semiconductor
Sector Index (SOX.X), and the 3.66 percent decline in the
Internet Sector Index (INX.X).

The day's best performing stocks were confined to the energy
space.  All four of the energy-related sectors that I track
finished well into positive territory, led by the 1.70 percent
pop in the Natural Gas Sector Index (XNG.X).

In the fear department, both major measures finished higher in
Tuesday's session.  The CBOE Market Volatility Index (VIX.X)
broke above what I consider its short-term descending trend.
That move leads me to believe that fear is on the rise, and
that the bears may be gaining some conviction.

Elsewhere, Treasuries rallied across the curve on what appeared
to be a mix of short covering and defensive positioning.  The
benchmark 10-Year Yield (TNX.X) finished at 5.348%, lower by
1.47 percent.

These are the indicators to trade off of in the coming days.
Further strength in bonds could take capital away from stocks.
And heightened fear levels will have the bulls running for the
door.

Finally, the most recent COT data is updated in this column.
We see a further divergence in the market that matters, the
S&P 500 (SPX.X), between commercial interests and small traders.
The commercials are decidedly bearish while the small traders
adopted their most bullish position in more than a year.  Watch
out bulls!

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

Market Averages


DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     : 10314

Moving Averages:
(Simple)

 10-dma: 10419
 50-dma: 10133
200-dma:  9974



S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     : 1137

Moving Averages:
(Simple)

 10-dma: 1149
 50-dma: 1128
200-dma: 1141



Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low : 1089
Current     : 1410

Moving Averages:
(Simple)

 10-dma: 1461
 50-dma: 1477
200-dma: 1534



Natural Gas ($XNG)

Spot prices (NG02K) rallied for the second straight day Tuesday,
sending equities sharply higher.  The XNG earned the day's best
performing sector spot with its 1.70 percent gain.

Sector leaders included Dynergy (NYSE:DYN), El Paso (NYSE:EP),
EOG Resources (NYSE:EOG), Questar (NYSE:STR), and Apache
(NYSE:APA).

52-week High: 264
52-week Low : 157
Current     : 200

Moving Averages:
(Simple)

 10-dma: 195
 50-dma: 178
200-dma: 192


Software ($GSO)

The GSO was the worst performing sector in Tuesday's session,
knocked down by a one-two punch from Peoplesoft (NASDAQ:PSFT)
and Microsoft (NASDAQ:MSFT).  The GSO finished a painful 6.56
percent lower.

Leading to the downside included shares of Peoplesoft, Rational
(NASDAQ:RATL), Broadvision (NASDAQ:BVSN), and E Piphany
(NASDAQ:EPNY).

52-week High: 246
52-week Low : 112
Current     : 155

Moving Averages:
(Simple)

 10-dma: 164
 50-dma: 171
200-dma: 174

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

Market Volatility

The VIX spiked higher in Monday's session and continue higher
during Tuesday's session.  I consider the last two days of
strength a reversal of the short-term descending trend.  I'm
looking for a trade past 23.50 to break the intermediate-term
trend.

In the VXN, I'm looking for a spike above 40 to break the
short-term descending trend.  Such a move would signal a rise
in fear on the part of NDX options market participants.

CBOE Market Volatility Index (VIX) - 20.68 +0.63
Nasdaq-100 Volatility Index  (VXN) - 39.32 +2.87

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.73        373,543       274,168
Equity Only    0.60        328,832       197,819
OEX            1.58          8,859        13,993
QQQ            2.01         26,978        54,106
 
-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          64      + 0     Bull Confirmed
NASDAQ-100    54      - 1     Bull Correction
DOW           77      + 3     Bull Confirmed
S&P 500       74      + 0     Bull Confirmed
S&P 100       76      + 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  1.34
10-Day Arms Index  1.19
21-Day Arms Index  1.08
55-Day Arms Index  1.22

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      1506           1651
NASDAQ    1366           2147

        New Highs      New Lows
NYSE      150             54
NASDAQ    125             51

        Volume (in millions)
NYSE     1,174
NASDAQ   1,525

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

Commitments Of Traders Report: 03/26/02

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

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

S&P 500

Commercial traders grew more bearish during the most recent
reporting period by dropping a number of long positions while
maintaining their number of shorts.  Meanwhile, small traders
reached their most bullish net position in more than a year.

Commercials   Long      Short      Net     % Of OI 
03/12/02      396,050   483,606   (87,556)   (9.9%)
03/19/02      322,938   410,494   (87,556)  (11.9%)
03/26/02      317,671   410,186   (92,515)  (12.7%)

Most bearish reading of the year: (111,956) -   3/6/01
Most bullish reading of the year: ( 36,481) - 10/16/01

Small Traders Long      Short      Net     % of OI
03/12/02      179,825     75,025  104,800     42.6%
03/19/02      145,262     43,066  102,196     54.3%
03/26/02      148,111     40,409  107,702     57.1%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 107,702 - 3/26/02
 
NASDAQ-100

Commercials didn't do much in the last week.  The group's
net bearish position dropped by only 300 contracts.  Small
traders added a small number of longs.

Commercials   Long      Short      Net     % of OI 
03/12/02       37,415     42,942    (5,527)   (6.9%)
03/19/02       24,792     33,699    (8,907)  (15.2%)
03/26/02       25,275     33,880    (8,605)  (14.5%)

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
03/12/02       14,571    13,045     1,526      5.5%
03/19/02       11,637     5,527     6,110     35.6%
03/26/02       12,760     6,264     6,496     34.1% 

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

DOW JONES INDUSTRIAL

Commercial traders shed a significant number of long positions,
while dropping a small number of short positions.  The result
was a drop in the group's net bullish position.  Small traders
added longs and dropped shorts for a drop in the group's net
bearish position.

Commercials   Long      Short      Net     % of OI
03/12/02       35,080    23,204   11,876     20.4%
03/19/02       20,858    13,283    7,575     22.2%
03/26/02       17,973    12,539    5,434     17.8% 

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
03/12/02        6,400    13,070    (6,670)   (34.3%)
03/19/02        4,651    10,367    (5,716)   (38.1%)
03/26/02        5,818     9,308    (3,490)   (23.1%) 

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 GAME PLANS
***********************

Sector News and Views

Continuing to perform well and resuming their strong uptrend are 
the natural resource stocks:  The natural Gas (XNG) Index was   up 
3.34 or 1.7%; the Goldman Sachs Precious Metal Index (GPX) at +4.4 
was +1.08% and the Oil Index (OIX) was up 3 or +.9%

I continue to watch the XAU as it nears resistance, which I think 
is implied by prices reaching the 62% retracement level and chart 
resistance suggested by the previously broken weekly chart up 
trendline. I'll repeat the suggestion of buying the May 65 (XAUQM 
- close at 1.05) or the May 60 puts (XAUQL - close at .40) on a 
further rally that takes XAU into the 75 to 80 area (close today: 
71.50). See chart:



 
 
NEW TRADE PLAY AND GUIDELINE: 

Sector: XAU (PHLX Gold & Silver Index)
Trade Entry:  BUY May 65 and May 60 puts, if XAU trades above 75)
Objective: XAU to 61
Stop: XAU close above 80
Time frame: 4-6 weeks.

RETAIL HOLDING TRACKING STOCK - RTH

Will leave this as a recommendation, even though stock continued 
lower today (close: 96.95) and chance of a fill lessens. 

OPEN TRADE SUGGESTION:

Sector: RTH (AMEX: Retail sector trust stock)
Trade Entry:  SELL (SHORT) at 99.00 or better  
Objective: 90
Stop: 102 
Time frame: 3-6 weeks.


OPEN LONG TRADES: NONE


OPEN SHORT TRADES:
(previously suggested)

Sector: XLB at 23.75
Stop: 24.50


 

Sector: XLP at 26.00
Stop: LOWER to 26.25, from 26.75


 

Sector: IYD at 45.25
Stop: LOWER to 46.60, from 47.00


 

Sector: IYR at 84.75
Stop: 86.00 (4/2 HIGH @ 85.70)

Sector: IYE at 49.70
Stop: 52.00 (4/2 HIGH @ 51.59)

RISK to REWARD guidelines:  
Determining an objective is important, even if it is a moving 
target, as this is the reward potential.   Determining reward 
potential is critical to establishing whether a stop that makes 
“sense” (e.g., a sell stop that was placed under a key support 
level) would, if triggered, result in a dollar loss that is in 
proportion to profit potential; e.g., 1/3 of it.  (On occasion, 
when the purchase price of call or put is equal to 1/3 or less of 
the estimated reward potential, there may not be a specific exit 
suggestion, as the cost of the option is equal to the amount that 
is being risked.)   


Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                  Tuesday 04-02-2002
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:
*****

None


PUTS:
*****

MIL $44.30 +0.04 (+0.07) The bulls at the $43 level continued to
defend MIL in the last two sessions.  The stock's failure to
move lower in light of today's broad weakness was perhaps a sign
that short-term selling has dried up.  Couple the stock's
fractional gain with its penetration of the 10-dma and we're
growing nervous to the upside.  Look to cut losses short in
tomorrow's session on any weakness.


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

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

CALLS              Mon    Tue

COF      63.99   -0.30   0.39  Keeping an eye on that $65 level
EOG      42.33    0.82   0.94  Breaking higher with energy sectors
KLAC     65.66    2.07  -2.86  Still finding buyers in technology
CAH      71.47    0.80  -0.36  Stepping higher, slowly but surely
LH       95.50    0.17  -0.52  Consolidating recent rally at $95
THC      68.25    0.25   0.89  New all time higher after numbers
UNH      77.02   -0.29   1.13  Another all-time high, very strong
HLIT     10.62    0.05  -0.66  Sector weakness pressured lower
SLAB     34.86    0.21  -0.65  Gaining strength, inside day Tuesday
VARI     37.94    1.30  -1.02  Big breakout, followed by retracing


PUTS

ISSX     21.81   -1.07  -0.09  Sector hurts, lower lows ahead...
MIL      44.30    0.05   0.04  Dropped, not performing enough
TMPW     33.89    0.79  -1.29  Entry point and roll at its 50-dma
GNSS     24.80    0.33  -1.53  Entry point Monday, rolled Tuesday
IBM     101.01   -1.37  -1.85  Trading very heavily, time to warn?
CVG      28.55   -0.73  -0.35  Breakdown on volume, follow-through
CTX      49.13   -1.59  -1.27  Weakest link in the housing sector
CDWC     47.99   -0.58  -1.83  New, weak hardware business
VRSN     25.25   -0.08  -1.75  New, software breakdown brings bears


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

CAH $71.47 -0.36 (+0.47) CAH continued marching higher in
yesterday's session, advancing just short of the $72 level.
The stock gave a little back in today's session on extremely
light trading activity.  Judging by its early price action
since initiating coverage, CAH looks like it's going to march
higher in a stair step fashion; punching higher, then pulling
back to set a relative higher low.  That means readers should
focus on taking entries on weakness rather than buying into
strength above relative highs.  While entering on a breakout
may prove profitable, the risks in doing so are greater than
waiting for a pullback to support to remove some of the
downside risk.  We'd like to see a light volume retreat down
into the $70 area for an ideal entry point.  More aggressive
types might look for rebound from the $70.50 mark.  An
extended pullback could see CAH fall all the way back down to
the $69 level where its 200-dma currently resides.  We'd look
to get aggressive with bullish positions on a rebound above
the 200-dma.  To the upside, we'd expect some resistance
between the $72 and $73 levels, but beyond that it's pretty
clear of congestion until the $76 mark. 

COF $63.99 +0.39 (+0.10) The broader financial measures traded
very well in Tuesday's session relative to the broader market.
The brokers were slightly lower, but the banks traded in positive
territory for most of the day.  That strength allowed COF to
continue higher, challenging the $65 level.  We saw a trade up
to exactly $65 in yesterday's session, then a trade up to $64.99
in today's session.  Obviously the $65 level is a significant
level either for the shorts or for longs taking profits.  We
should expect additional trouble with the $65 level in the
coming days unless the financials breakout in a big way.
Depending on your specific entry point, you could use another
move up to the $65 level as a potential exit point for booking
short term gains.  Those still on the sidelines looking for an
entry point should continue to wait for a pullback into support.
That could start with a rebound from the 10-dma just below the
$63 level.  If you're looking for a deeper pullback, wathc for
sector weakness to pressure COF back down to the $61.25 area,
which would offer entries with tight stops just below.

THC $68.25 +0.89 (+1.60) THC pulled a quick one on us and
reported earnings before the bell this morning.  The company
reported a 41 percent increase in earnings over the same
period one year ago.  The company said that higher admissions
and higher revenues per patient boosted its bottom line.  The
company went on to paint a rosy picture for the year ahead.
On that guidance, the stock punched to a new all-time high.
Normally we don't hold plays over earnings because of the
tendency for a post earnings sell off.  But the HMO group
continues to trade incredibly strong based on the quality
earnings from the companies within the group.  We're choosing
to hold THC over its earnings, but playing it with a tight
stop.  We're raising our stop up to $67 to protect against
a post earnings drop.  Traders with open positions can look
for exit points on a move up to the $70 level.  Track the
HMO Index (HMO.X) closely for better insights into entry
and exit points into this play.

VARI $38.21 -1.02 (+0.27) VARI exploded in yesterday's session
above the $38 level, continuing all the way up to the $39.60
mark.  Hopefully readers were able to take advantage of that
intraday move for a quick day trade.  The stock pulled back in
today's session on the overwhelming weakness in the broader
technology sector thanks to a handful of warnings and bearish
analyst actions.  VARI did use its relative strength to
mitigate the pressure from the broader tech weakness, which is
a pattern that we'll watch for continuation in the coming days.
As long as VARI out performs to the upside and under performs
to the downside, then we're comfortable with the back and forth
action.  But it does require nimbleness on the part of traders
searching for entry points.  What we're talking about is looking
for entries into new bullish positions on weakness.  That could
mean a pullback in the coming days down into the support zone
between $36.50 to $37.  A rebound above that zone could serve as
a solid entry into new positions.  Look for stabilization in the
broader tech sector before buying the dip, though, as broad
market weakness could pressure this stock below support no
matter its level of relative strength.

HLIT $10.62 -0.66 (-0.98) HLIT pulled back in today's session,
but rebounded back above the $10.50 level near the close of
trading despite the ugly finish in the broader technology
sector.  The stock continues to display signs of relative
strength and should be the first out of the gates when the
tech sector rebounds.  Traders looking for entries on weakness
can start looking to take positions from current levels or
slightly lower in tomorrow morning's trading.  If the $10.50
support level continues holding, traders can look for signs
of stabilization in the broader tech measures and consider
entries off of $10.50.  Our coverage stop is still in place
at the $10 level, which can be used by those who take entries
from current levels or slightly lower.  Those looking for
confirmation can wait for strength in the Networking Index
(NWX.X) to carry HLIT back above the $11 level.

EOG $42.33 +0.94 (+1.77) Natural gas prices have been in rally
mode again and on Tuesday the June futures contract (NG02M) shot
to its highest level since last August.  The Natural Gas index
(XNG.X) followed suit, clearing recent resistance, but still
below the highs from last October.  No matter how you slice it,
this sector of the market continues to garner bullish enthusiasm
and you can also see that in shares of our EOG play which broke
out again on Tuesday, following Monday's test of the $41.40
resistance level.  Not only did the stock clear resistance on
solid volume, but with Stochastics pointing northward (and just
now entering overbought territory), it looks like there is more
room to run.  And the PnF chart is confirming the stock is in
breakout mode with its recent quad-top breakout at $40.  While
new positions taken on continued strength may still be viable,
we'd prefer to catch an intraday pullback near the $41 level.
We're raising our stop tonight to $40.

KLAC $65.66 -2.86 (-0.84) With the Semiconductor rally off the
morning lows on Monday, it looked like a breakout in shares of
KLAC was almost a done deal.  But that was before the market
opened on a negative note this morning and the Semiconductor
index (SOX.X) spent the day heading south.  By the time the
closing bell rang, Monday's gains had been erased, along with
a bit more.  But that doesn't mean the bullish trend is over.
We're just getting another chance to play.  Note that KLAC came
to rest just above its 2-month ascending trendline, which
currently rests at $65.  In order for our play to remain alive,
we need to see new life in the SOX to propel the index towards
the upper end of its recent range.  If that comes to pass, then
another rebound from the $65 level would make for a solid entry
into our play.  Note that our stop is currently set at $65, so
a close below that level will bring our play to an end.

LH $95.50 -0.52 (-0.36) Following last week's rocket ride in
shares of LH, this week has gotten off to a fairly quiet start
with the stock consolidating between $94-96.  This base-building
is exactly what we want to see if LH is going to take a serious
shot at the century mark.  Despite the 2 days of "doji
indecision" in LH, with the Health Care index (HMO.X) continuing
to inch higher, LH definitely has sector strength on its side.
Use dips near the $94 level to initiate new positions or else
wait for the stock to break back above the $96 level (recent
resistance) before opening new positions.  We're tightening our
stop tonight to $93.75

SLAB $34.86 -0.65 (-0.47) Semiconductor stocks got a nice boost
on Monday, helping the NASDAQ to come back from an early deficit
to close in positive territory.  But that strength had faded by
Tuesday, as the SOX index headed lower to the tune of 3.7%.
While it is tough to pick a short-term direction for the SOX
(as it is stuck between support near $570 and resistance near
$615), there are some stocks that are starting to gain relative
strength and our SLAB play is one of those.  As proof that we
need the sector to participate for any sustained bullish move,
SLAB got dragged back from the $36 resistance level twice in the
past 3 days.  So support near the $34 level is holding, but so
is resistance.  We need to see either a solid bounce from the
$33-34 support area or a breakout over $36.50 before initiating
new positions.  And don't forget to look for confirmation from
the SOX index before playing.

UNH $77.02 +1.13 (+0.60) Aside from Energy stocks, the Health
Care index (HMO.X) was the best performer on Tuesday, inching to
yet another all-time closing high of $515.  And with the strength
in the overall sector, it is no great surprise to see our UNH
play come back from its brief Monday dip near the $75 level to
post another all-time high on Tuesday, closing above $77.
Monday's dip was classic low-volume profit-taking and the buyers
came back with gusto on Tuesday proving the utility of using
relative strength in our favor.  So what's next for our play?
Ideally we'll get one more dip and bounce in the vicinity of
the $75 support level to allow entries, but if not, then we'll
want to target new entries as the stock rallies through
Tuesday's highs near $77.60.  We're raising our stop tonight
to the $74 level.


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

None


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

IBM $101.01 -1.85 (-3.02) IBM failed to participate with the tech
rally in yesterday's session, which may have hinted towards
the weakness that we witnessed in today's session.  The stock
continued to sink lower on the technology warnings and bearish
analyst comments within the broader tech space.  The stock
traded below the $102 level in today's session and inched
towards the psychologically significant century mark.  We should
see a test of the $100 level in the coming days if tech
continues to weaken.  IBM could bounce from that level if the
buyers decide to defend.  With that possibility, traders who
took entries at higher prices might consider a short term exit
on a trade down to the $100 level.  On the other hand, if the
bearish momentum picks up in technology, then IBM could decline
below the $100 level very easily.  If we see a close below the
$100 level in the coming days, then there's a good chance that
IBM will retest its relative lows down around the $96 mark.  The
$96 level could serve as a good downside target for those who
have a higher risk tolerance a little more patience.

CVG $28.55 -0.35 (-1.09) CVG broke down in a big way in
yesterday's session on heavy volume.  The decline below the $29
level could have served as the action point that bears were
looking for.  We were especially encouraged by the spike in
volume as CVG traded 2.67 million shares during its breakdown.
The stock is poised to work lower and should continue to do so
on further market weakness.  Traders looking for new entry
points can use a break below the $28 level in conjunction with
broad market weakness.  Excess supply from the broader market
should take CVG down below the $28 level.  Any intraday strength
on short covering could take the stock back up to the $29.25 to
$29.50 area.  A rollover from there would serve as an excellent
entry for those who missed the breakdown below $29.  Stops can
be set up near the descending 10-dma, which is just above the
$30 level.  To the downside, we will target the $27 to $27.25
in the shorter term, while a trader with a longer time horizon
can look for a decline down to the $25 level over the next
several weeks.

CTX $49.13 -1.27 (-2.80) If a rolling stone gathers no moss,
than a falling stock must gather no bulls.  With the air coming
out of the over-inflated Housing sector, hot momentum stocks
like CTX are falling on hard times.  Investors are expecting
the record housing numbers to slow, partly due to the recent
high numbers and partly due to the expectations that interest
rates are set to rise in the near future.  It looks like the
smart money is leaving the sector early and judging by the
recent price action in shares of CTX it is leaving quickly.
Recall that our last update showed CTX resting precariously
on the $51.50 support level and we were looking for a drop
through the $51 level to usher us into new positions.  Those
that used that trigger are in the black tonight with CTX
resting below the $50 level for the first time since early
December.  With this week's print at $51, we have a fresh
double-bottom breakdown on the PnF chart, opening the way for
a serious run at the $40 bearish price target.  The next
serious chart support is sitting down in the $44-45 area,
although we could see a bounce from the 200-dma (currently
$46.50).  Use failed intraday rallies below the $51.50-52.00
level as entries for new positions, or else wait for CTX to
fall below the $48.50 level before playing.  We're lowering
our stop to $53 tonight.

GNSS $24.80 -1.53 (-1.20) Each successive rally attempt is coming
with less and less conviction, as shares of GNSS continue to drift
lower, getting closer and closer to new 52-week lows.  No longer
a favorite of momentum bulls, the stock has clearly been under
heavy distribution for several months now.  The past 2 weeks have
seen the stock unable to even hold above the 10-dma (currently
$26.68), a level that continues to provide attractive entry points
on failed rallies.  Critical support resides near $22.50, the
reaction low from late February.  After the beating this stock
has taken, eager bears need to weigh risk and reward carefully
before initiating new positions.  With our stop at $27, new
positions taken on a rally failure near the 10-dma provide an
attractive risk/reward dynamic.  Momentum traders will need to
bide their time, as the next high-odds entry for them will be
when GNSS drops below the $22.50 level.  Remember that GNSS
will be subject to the whims of the volatile Semiconductor
sector (SOX.X), so we'll want to confirm weakness in the SOX
before playing.

ISSX $21.81 -0.09 (-1.04) The woes of the Internet Security firms
just keeps getting worse by the day, with the likes of VRSN,
CHKP, RSAS and ISSX all seeing heavy selling this week.
Yesterday's earnings warning from RSAS got the ball rolling, but
the current unrest in the Middle East isn't helping shares of
CHKP, as it is an Israel-based company.  Whatever the catalyst du
jour, this group is under pressure and the bears are having fun.
Our ISSX play broke lower on Monday before finally finding some
support near the $21 level, which just happens to be the 62%
retracement of the September-January rally.  Based on the recent
double-bottom breakdown on the PnF chart, shares of ISSX have a
lot further to fall, with a bearish target of only $9.  Use
failed rallies in the $23.50-24.00 area to initiate new positions,
keeping stops in place at $24.25.  Traders waiting for a
breakdown will want to see the $20.50 level breached before
taking on new positions.

TMPW $33.89 -1.29 (-0.58) The noose is tightening on TMPW and it
appears the bears are going to win this battle.  While the $32.50
level seemed to provide solid support last week, there is no
arguing with the weakness of the recent price action.  Despite
a negligible price rise, daily Stochastics have moved almost
back to overbought territory and are starting to roll over.  And
the stock rolled over right at the declining 20-dma ($35.07) on
Tuesday, showing that level will likely continue to provide
formidable resistance just like it has since the middle of
January.  We're leaving our stop in place until TMPW breaks out
of its narrow range, but we can use the range to define our
action plan for initiating new positions.  A failed rally in
the $35-36 area or a breakdown below $32.50 will both make for
decent entry points.


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

CDWC - CDW Computers $47.99 -1.83 (-2.40 this week)

CDW Computer Centers, Inc. is a direct marketer of microcomputer
products, primarily to business, government, educational,
institutional and home office users in the United States. The
Company sells a broad range of multi-brand microcomputer products,
including hardware and peripherals, software, networking and
communication products and accessories through knowledgeable sales
account managers. 

Intel has not participated with the recent rally in the chip
stocks.  That rally has primarily been lead by chip equipment
makers.  It's peculiar that the biggest chip maker trades closer
to its February lows than its relative highs.  Micron is another
PC-related stock that trades heavy.  It, too, trades closer to
its February lows and is danger of breaking down.  The big PC
maker in Dell trades as if the PC business has worsened since
the beginning of the year.  The combination of the poor price
action in the aforementioned PC names has us focusing on CDWC,
the retailer of hardware and software.  The company recently
warned and its shares act as if business is deteriorating.  A
test of the 200-dma seems likely in the short-term.  The 200-dma
currently resides below at the $46.85 level.  A test and
subsequent rebound from there is possible, while a full on
breakdown is just as likely.  Watch the 200-dma closely in the
coming days.  A breakdown below the 200-dma would be signaled by
a decline below the $46 level, where momentum bears can look to
hop on the downside move in this stock.  From there, the next
support is located at the $44 mark.  Entries on intraday strength
can be taken on rollovers near the $50 level.  The downward
slopping 10-dma at $50.38 should help to reinforce the $50
level as resistance.  Confirm weakness in the Hardware Index
(GHA.X) and Semiconductor Sector Index (SOX.X).  Our stop is
initially in place at the $51 mark.

BUY PUT APR-50*DWQ-PJ OI=1861 at $3.60 SL=2.00
BUY PUT APR-45 DWQ-PI OI= 541 at $1.25 SL=0.50

Average Daily Volume = 1.13 mln


VRSN – VeriSign, Inc. $25.25 –1.75 (-1.75 this week)

VeriSign is the leading provider of Internet trust services
and digital certificate solutions needed by Web sites,
enterprises and individuals in order to conduct secure
electronic commerce and communications over IP networks.  VRSN
has used its secure online infrastructure to issue over 100,000
of its Website digital certificates and over 3.5 million of its
digital certificates for individuals.  The company also offers
the VeriSign Onsite service, which allows an organization to
leverage the company's trusted service infrastructure to develop
and deploy customized digital certificate services for use by an
organization's employees, customers and business partners.  To
date, over 300 enterprises have subscribed to the OnSite service
and VRSN has strategic relationships with industry leaders
including Cisco, Microsoft ,RSA, Security Dynamics, and VISA.

It seems there is no end to the woes of Internet Security firms,
as all of the familiar names (ISSX, RSAS, VRSN and CHKP) have
been under heavy selling pressure for weeks, and in some cases
months.  The earnings warning from RSAS on Monday was met by
both a series of analyst downgrades and heavy selling from
investors, as it became clear that revenue estimates in the group
were going to be hard to meet.  That bearish development is
having its effect throughout the group and we're going to take
another bearish run at the stock in this sector that has the most
well-established downtrend.  VRSN has been in a consistent
downtrend since last May and the downtrend has steepened since
the relative highs posted in October of last year.  The
descending trendline connecting the highs for the past several
months is currently resting at $29, and it doesn't look like the
stock is going to challenge that level anytime soon.  The next
point of support is found at $25, and if it fails, we'll be
looking for a possible bounce from the $22 level where the stock
found a bid in February.  This is just a matter of playing an
existing trend to the downside, using failed rallies to establish
favorable risk/reward positions.  We want to use a rebound to the
$27-28 level as an opportunity to initiate new positions on the
rollover.  This allows us to set our stop at $29.25 (just above
the most recent gap down) to protect our position.  Momentum
traders can use a drop below $25 to establish new positions,
but will want to keep in mind that such an entry carries more
risk.

BUY PUT APR-30 QVR-PF OI=1276 at $5.20 SL=3.25
BUY PUT APR-25*QVR-PX OI=3874 at $1.60 SL=0.75
BUY PUT APR-22 QVR-PD OI=1533 at $0.75 SL=0.25

Average Daily Volume = 9.81 mln



************************Advertisement*************************
If you trade options online, then you need an online broker 
that:
offers true direct access to each option exchange
offers stop and stop loss online option orders
offers contingent option orders based on the price of the 
option or stock
offers online spread order entry for net debit or credit
offers fast option executions

PreferredTrade offers these online option trading features and 
more; call 1-888-889-9178 or click for more information.

http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN
**************************************************************


**********
DISCLAIMER
**********

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


**************************************************************
ADVERTISING INFORMATION

For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support

The Option Investor Newsletter                  Tuesday 04-02-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.




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

IBM - IBM $101.01 -1.85 (-3.02 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.

Most Recent Update 

IBM failed to participate with the tech rally in yesterday's
session, which may have hinted towards the weakness that we
witnessed in today's session.  The stock continued to sink lower
on the technology warnings and bearish analyst comments within
the broader tech space.  The stock traded below the $102 level
in today's session and inched towards the psychologically
significant century mark.  We should see a test of the $100
level in the coming days if tech continues to weaken.  IBM could
bounce from that level if the buyers decide to defend.  With that
possibility, traders who took entries at higher prices might
consider a short term exit on a trade down to the $100 level.  On
the other hand, if the bearish momentum picks up in technology,
then IBM could decline below the $100 level very easily.  If we
see a close below the $100 level in the coming days, then there's
a good chance that IBM will retest its relative lows down around
the $96 mark.  The $96 level could serve as a good downside target
for those who have a higher risk tolerance a little more patience.

Comments

IBM didn't even try to rally during yesterday's ramp in technology.
The bears remain firmly in control of this stock.  Look for more
downside into tomorrow's session to pressure IBM below the key $100
level.  The bulls might try to defend, but a breakdown below $100
should open the way for a decline down to relative lows.  Intraday
rollovers from the $102 level can be used as entry points.

BUY PUT APR-105*IBM-PA OI=20396 at $5.20 SL=3.75
BUY PUT APR-100 IBM-PT OI=37805 at $2.40 SL=1.75

Average Daily Volume = 7.84 mln



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MARKET WATCH
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Bearish tech bets replace triggered bullish plays.  Two bear 
candidates make their way onto the list tonight.


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**************
MARKET POSTURE
**************

Energy is on the rise.  Technology is going the other way.


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