Option Investor

Daily Newsletter, Tuesday, 04/16/2002

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The Option Investor Newsletter                 Tuesday 04-16-2002
Copyright 2001, All rights reserved.                       1 of 3
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MARKET WRAP  (view in courier font for table alignment)
      04-16-2002           High     Low     Volume Advance/Decline
DJIA    10301.32 +207.65 10308.17 10100.11 1.35 bln   2234/ 939
NASDAQ   1816.79 + 63.01  1816.91  1779.29 1.57 bln   2555/1042
S&P 100   561.29 + 13.57   562.20   547.72   Totals   4789/1981
S&P 500  1128.37 + 25.82  1129.40  1102.55             
RUS 2000  522.95 + 10.21   522.96   512.74
DJ TRANS 2881.40 + 78.75  2883.69  2803.04
VIX        20.30 -  2.08    21.72    19.92
VXN        39.44 -  2.43    40.75    39.05
TRIN        0.39 
PUT/CALL    0.64

Where Is The Volume?

Surprise earnings announcements from Novellus and Texas 
Instruments powered the chip sector to a +5% gain on strong
short covering. The battered telecom sector was also powered
by positive news from Sprint. Again, strong short covering
was the key to the strong gains. Traders got caught by surprise
and the short covering spread to other sectors as well but
the $64K question is still, "where was the volume?" The NYSE
managed only 1.35 billion and the Nasdaq only 1.57 billion.
Awfully meager for a strong day in the markets. Are we lacking
conviction here?



The glowing conference call from Texas Instruments set the 
stage for further recovery hopes. The CFO said it was a good
beginning to the year and forecast a +10% rise in revenue in
the 2Q. The company had just beaten the street by a penny but
you would have thought it was a dollar. Adding to the chip 
euphoria was Novellus where CEO Richard Hill forecast six cents
for the next quarter when analysts were predicting only a penny.
Suddenly chip bears were running for cover and the short covering
was turning into a rout.

If the chip surprise was not enough the telecom sector, tech 
lepers for the last year, was surprised by Sprint which beat
the street and added subscribers. It affirmed its growth targets
of three million new customers. Suddenly telecoms were targets
of short covering themselves and that covering spread into the
networking and fiber optics makers. Even Lucent, Corning and 
Nortel posted strong gains. 

GM helped power the Dow with a profit of $228 million for the
first quarter due to strong sales in North America. GM surprised
analysts by beating estimates by fifteen cents and raising 
guidance for the full year to $5.00 from $3.50. Also helping 
the Dow was a move by Citigroup to raise its dividend to $.18
cents. C jumped +2.19 on the news. JNJ also beat analysts 
estimates and reported double-digit percentage gains in profits
and sales. JNJ gained +1.10. Only two Dow components lost ground,
CAT -1.34 and EK -.03 cents.

The chip news continued after the bell with INTC, VTSS and MOT.
Intel met estimates with revenue coming in at the high end of
the projected range. Intel said the product mix was improving and
gross margins were at 53%. That is an incredible number considering
revenue was near $7 billion. Intel raised guidance only slightly
for the 2Q to a range of $6.4 to $7.0 billion. CFO Andy Bryant
said there were still no signs of a broad economic recovery but
we could see some uplift in the second half of 2002. Still the
company is executing well and broadening their product offerings.
The best news was that server chips were strong and overall units
shipped set a new record. The stock closed at $29.45 but rallied
back to resistance at $31 in after hours.

VTSS announced earnings inline with estimates and guided flat
to slightly higher for the next quarter. The CEO said they would
continue to remain cautious about system demand for the rest of
2002. Motorola beat the street with a smaller than expected loss
but on sales that fell -20%. The best news after the bell for
chips came from RFMD which posted results that showed a +85%
gain in revenue in a down market. They said they "DEFINITELY"
see signs that the handset business is picking up and DEFINITE
strength in the wireless networking business. They are forecasting
a strong second half. This should help produce more short covering
in the telecom, wireless and chip sectors.

Economic reports showed a mixed picture again with housing starts
falling -7.8%. According to analysts this was due to warmer than
expected winter weather which allowed an earlier than usual start
of spring construction. When taken in context with the gains in
prior months it should not be a problem. February starts were
revised upward and are on pace with the record set in 1998. The
CPI also came in lighter than expected at only a +0.3% increase
and should set the stage for a hands off Fed. That Fed policy
should be telegraphed tomorrow as Greenspan speaks on monetary
policy again. In his last several appearances he has claimed a
recovery in progress and tomorrow is not expected to be any change.

Industrial Production soared +0.7% in March as production ramped
up without an increase in the work force. This is normal in the
type of recession we have seen. The inventory rebuild cycle is
done with existing workers and only after an increase in long term
orders is seen are new workers added. This was the strongest gain
since May-2000. The manufacturing sector will now hold its breath
over the summer in hopes that the inventory buildup will not die
with no follow on orders.

This earnings cycle has produced its share of surprises which
have cheered the bulls and worried the bears. Of the 75 S&P
companies that have already announced 42 have beaten estimates
and only 12 missed their targets. The quality of earnings has
certainly been better than expected on the surface but still
cautious on guidance. The positive surprises have produced some
market internals which would have you believe a new bull market 
was in process. The advance/decline ratio on Tuesday was 2.5:1
and significantly better than recent history. But, the critical
piece still missing is volume. The short covering caused a severe
imbalance in up/dn volume which is a potential trouble signal. On 
Tuesday there was only 197 million shares of down volume on the
Nasdaq out of 1.57 billion total shares. On the NYSE only 185
million shares were down volume. 

This order imbalance knocked the VIX back to 20 and close to where
it was just before the April market slide began. The TRIN is even
worse at only .38. These numbers are very bad but as we know from
experience they can get worse. More importantly to me was the
rebound exactly back to resistance or slightly below. There were 
very few breakouts and many stocks rolled over again when they 
reached last weeks highs. 




One analyst after the bell was relating the historically high
PE for the S&P at 45 on a trailing basis. This is actually higher
than this time last year and you know what happened then. While
traders were caught off guard with better than expected results
they are still not seeing the guidance necessary to hit that PE
of 45. Something is going to have to change. Either the earnings
will have to improve significantly for the next two quarters, and
we are not seeing that in the guidance, or the PE will have to 
fall. (stock prices drop to push PE ratios lower) 

Giants IBM and MSFT will announce earnings this week and
IBM has already warned so expect no help there. MSFT is not
showing any signs of investor confidence either. As investors
we need to maintain our calm. Do not get caught up in the hoopla
associated with these paper profits. Many of them have been
generated artificially as we know. We just need to focus on the
market and wait for our entry points. 

Those entry points for me continue to be 10350/1800/1130. The 
short covering on the Nasdaq popped it back over 1800 to 1816
but the S&P closed right under 1130 at 1128. Remember, when 
the three indexes diverge you should weight them for confirmation
based on the number of stocks in each. This means the order of
ranking should be S&P, Nasdaq and then Dow. With the Nasdaq 
breaking over the entry point without confirmation by the S&P
I would be cautious and wait patiently. There will be plenty of 
time to board the train once we are sure it is going in our 
direction. In English, this means wait for the S&P to break 1130 
before going long. Should the S&P fall below 1130 again that 
would be my signal to go flat again. 

The Dow and S&P hit my near term bearish targets on Monday of 
Dow 10100 and S&P 1100. This created an oversold climax and set 
the stage for the short covering we saw today on positive earnings
announcements. That oversold condition is now diminished and it
will take an even larger surprise to continue the rally. Intel
will influence the major averages at the open on Wednesday with
the $2 after hours gain as well as the positive results from MOT,
RFMD and VTSS. However, with 35% of the S&P announcing this week 
the focus will turn quickly to the next set of announcements. IBM
will be tomorrow and has already indicated they will miss estimates
but the details are still unknown. Microsoft will be on Thursday
and could be the next big market mover. Above all be patient!
We are only two days into the April-15th to May-15th high risk 
period and we have seen a 238 point range on the Dow and a 76
point range on the Nasdaq. Need I say more?

Enter Very Passively, Exit Aggressively!

Jim Brown


Holy Cow!
by Leigh Stevens

In the words of the great Phil Rizutto, know to all Yankees fans 
everywhere -- and, he must have been a "bull" -- Holy Cow, what a 
hit!  And they were hitting them out of the ball park.  Just goes 
to show that if you call for a big rally, eventually you will get 
one. No, I tend to be early sometimes -- only mistake I made was 
jumping the gun on suggesting purchase BEFORE prices got fully to 
my lower envelope bands.  If everyone realizes how simple it is, 
they will replace me with an auto update of the Index charts with 
the bands set to reflect average current volatility. Simple yes? 

No, the tricky part is that sometimes the indexes just follow the 
envelope lines up, or down, for a while, sometimes for quite a 
while.  You have to use this method or indicator with other 
things, but it sure not only tells you that the market is 
overbought or oversold, but a WHAT LEVEL.  This is the true value 
of the simple envelopes -- forget about Bollinger (Boli) bands 
(apologies to John who was a long-time drinking buddy -- he 
drinks me under the table). The other thing that protects my job, 
is that most traders never believe how simple it really is -- 
that is to trade the intermediate swings -- short-term trading is 
HARD. Everyone tries to make it == timing the market -- 
complicated, by following too many things. And, listening to the 
talking media heads and following endless fundamentals, etc. My 
book tries to make it simple (see www.essentialtechnicalanalysis.com) but it's still a 300+ page 
book and requires some attention.  


It became apparent in the final hour that the market was not 
going to pull back as the shorts were on the run and the mighty 
mo(mentum) was strong. The bond market took a hit and bears have 
been reminded that there are some bullish possibilities on the 
horizon with tech, with earnings, etc. 

I said on the Monitor that I don't want to get hung up in a 
bullish or bearish label. There are just trading swings, or as 
Dow said, minor, intermediate and major trends. Intel's report, 
widely talked about, was positive after the close, but there are 
other earnings reports to get through. The indices are now 
overbought on the hourly charts, so I look for a correction in 
the morning or tomorrow in the afternoon, if the morning 
continues strong. How to play it?

Nimble short-term players could play puts on the mo faltering in 
the resistance areas I will go through.  I would not like to do 
any more call buying however until the hourly oscillators again 
come down, either on a 14 or 21-hour setting (length setting).

The tone and market internals on the next correction should tell 
the story on whether we are beginning an intermediate-term 
upswing. The important thing in terms of trading strategy in this 
market is that there will be two-sided trading swings. If we are 
in a SPX 1100-1170 trading range, not surprising to rally when we 
got down near the low end of the range (and got pretty oversold). 
There could be even better volume, but we have seen some good 
advance-decline figures, a steady pick up in new highs over the 
past week and decent upside volume relative to downside. 

As I have been highlighting, if it was going to happen, the 
Semiconductors would be the sector that would lead the market 
higher. I wanted to just say "BUY" after the 4/15 close, but this 
market does breed caution.  Once the SOX blasted through the down 
trendline at 581, it was off to the races.  

Semiconductor Sector Index ($SOX.X) Daily chart:

Today on the Market Monitor I noted that the Indexes were 
starting to poke above technical resistances at the upper 
boundaries of the downtrend channels in QQQ, OEX and SPX, at 35, 
560, and 1123-1125 respectively. If the market remains strong 
into the close, I would back off from taking out Index puts for 

Dow (DJX) Daily/Hourly charts: 


The Dow is still a bit under its up trendline resistance in terms 
of the top of the hourly downtrend channel, which intersects in 
the 10,330 area. This rally has also put the short-term 
oscillators into overbought territory. In terms of levels: first 
resistance comes in to play at the 10,330 area extending up to 
10,350. The hourly chart has traced out a bull flag pattern, 
which, now yields a target to around 10,400, so this may be a 
area to then play the short side and buy puts. 


It is unlikely that we will just be up, up and away. For nimble 
short-term traders, I would look to buy puts in 10,350-10,400 
area, if reached, looking for a pullback that tested support 
around 10,220. On a decline back into this area I would turn 
buyer again. Watch also for the level reached when the hourly 
stochastic, set to "21" gets oversold again -- whatever price 
level that is, it should be an area to look to play the long side 

S&P 500 (SPX) Daily/Hourly charts: 


A key area to watch is the 21-day moving average on the daily 
chart -- red center line -- which is at 1134 currently.  A close 
over this level, with a subsequent ability to hold this area on a 
pullback, would be a sign that this Index is going higher.   


Basis the hourly chart, key near-term resistance is at 1130, at 
the dashed level (blue) line. Given the overbought reading on the 
hourly slow stochastic indicator, we may see deflection in this 
area.  If so, this is the area to play puts again with downside 
potential at that point to around 1120-1125. I would turn an 
Index call buyer in this area, especially if accompanied by a 
retreat in the hourly stochastic to oversold again.   

S&P 100 (OEX) daily/hourly charts: 

With the daily chart, we see the possible double bottom that has 
developed -- I say possible, because this in not "proven", so to 
speak this soon in a rally, as the Index could still reverse back 
to the area of the recent low. However, this kind of pattern, 
such as seen above, is a potent "signal" for a probable bottom, 
especially when coupled with a retreat to the lower envelope 

A key level is 570, at the 21-day moving average.  A close over 
570 is needed to turn the daily chart picture bullish. Even this 
would not necessarily be a bullish conclusive if there was a 
subsequent retreat back below this area, within 1-2 days.  These 
are key technical factors and influences that I'm watching.   


In terms of the OEX hourly chart, now that there has been a 
mildly bullish breakout above the downtrend channel, key overhead 
hourly resistance appears as 565.  This may be the area to look 
to play OEX puts again, as, given the overbought oscillator 
reading, I doubt that we will see the index get through this area 
easily.  Key support on a pullback comes in at 555, where I would 
be a buyer, if reached.  If already in May OEX calls, stay put 
(pun intended), if holding from below 555. 

QQQ Daily/hourly charts: 


QQQ playbook - 
The most bullish aspect of the daily chart is the upside price 
gap, often marking the start of a good-sized move, and the 
ability of the Q's to penetrate its 21-day moving average.  The 
most bearish aspect is the inability to close ABOVE it.  I 
suspect QQQ will retreat back toward the gap area in the near-
term, next 1-2 days. I would be seller around 36 and a buyer in 
the 34 area if you want to do a scalping type play.  If you want 
to get positioned for what may be a larger move toward 38-39 in 
the coming 2-3 weeks, than play the long side only. 

Long/Call Positions:
Long QQQ at 34.30 
Stop: 32.50.  
Objective: 38.00  

My bullish general market indicators: 

First and foremost is my option sentiment Call to Put indicator 
which dipped again into bullish territory.  This tends to lead or 
occur ahead of decent rallies.  


NOTE: WHERE YOU CAN SEE THIS INDICATOR - (only) on this site.  I 
keep these numbers up to date by hand, as no one else calculates 
the figures quite this way, as I take out the index daily volume 
figures and divide calls by puts, rather than the reverse put to 
call ratio. 

The 10-day average of TRIN for the NYSE and for the Nasdaq has 
reached a bullish level that precedes, sometimes by a week or 
more, substantial rallies:


For the Nasdaq, there have been some indications that a good 
rally was coming -- last but not least:


Leigh Stevens
Chief Market Strategist 



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Bulls Back In Control?
By Eric Utley

Tuesday's rally was broad and deep.  Only one sector on my list
finished lower for the day.  That was the Gold and Silver Sector
Index (XAU.X) -- a defensive sector that we'd expect to finish
lower on strength in stocks.

Technology was particularly strong.  Pops of 5, 6, even 10 percent
were seen in the tech and telecom segments of the market.  TI's
(NYSE:TXN) and Novellus' (NASDAQ:NVLS) reports after the bell
Monday inspired a massive short covering rally in the Semiconductor
Index (SOX.X).  When the buying was done, the SOX.X finished 5.58
percent higher.  Whoa, Nelly!

The most constructive thing that I observed Tuesday was the
gain in the Nasdaq-100 Bullish Percent ($BPNDX).  The indicator
added 5 stocks, or 5 percent, for the day, which placed it only
two stocks away from a reversal back into bull confirmed.  That's
what I'm looking for over the coming days when deciding whether
or not to get bullish on tech stocks.  The next step would be a
shift into a bullish market, which would have me increasing my
long exposure in tech.

The short-term ARMS Index numbers I've been harping on worked
off a lot of the oversold condition that has been in place for
several days.  Follow-through tomorrow would put this indicator
well away from its previous extreme levels.

The only major cause for concern that I found with Tuesday's
rally was the implosion of fear once again.  The CBOE Market
Volatility Index (VIX.X) dropped 9.29 percent for the day.  It
was almost as if the last four weeks of pain in the S&P 100
(OEX.X) was forgotten in just one day.  That kind of unbridled
enthusiasm for stocks is not the type of sentiment on which
bottoms are formed.  Yes, I'm willing to trade to the upside,
but I'm more inclined to take quicker profits given the dearth
of fear.


Market Averages


52-week High: 11350
52-week Low :  8062
Current     : 10301

Moving Averages:

 10-dma: 10231
 50-dma: 10220
200-dma:  9949

S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     : 1128

Moving Averages:

 10-dma: 1119
 50-dma: 1127
200-dma: 1135

Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low : 1089
Current     : 1414

Moving Averages:

 10-dma: 1371
 50-dma: 1439
200-dma: 1513

Telecom ($XTC)

The XTC was the best performing sector in Tuesday's session.  It
gained 10.23 percent for the day.  WHOA!  Better-than-expected
earnings news induced a massive short covering rally in the
group.  But before you get too excited about the move in telecom,
take note of the index's 52-week low and high in relation to its
current quote.

Sector leaders included Nextel (NASDAQ:NXTL), WorldCom
and Qwest (NYSE:Q)

52-week High: 1028
52-week Low :  534
Current     :  603

Moving Averages:

 10-dma: 792
 50-dma: 636
200-dma: 579

Gold and Silver ($XAU)

Tuesday's worst performing sector was the XAU.  Its 0.99 percent
loss was minor, but enough for the dog of the day.  Strength in
stocks caused a rotation out of the defensive XAU.

Leading to the downside included shares of Agnico Eagle Mines
(NYSE:AEM), Meridian Gold (NYSE:MDG), Apex Silver Mining Limited
(NYSE:SIL), and Placer Dome (NYSE:PDG).

52-week High: 73
52-week Low : 49
Current     : 69

Moving Averages:

 10-dma: 69
 50-dma: 66
200-dma: 58


Market Volatility

Not by surprise, the massive rally in stocks resulted in an
implosion of implied volatility.  The VIX dropped nearly 10
percent Tuesday.  While the strength in stocks was welcome,
the lack of skepticism made the rally suspect.

Fear in the Nasdaq-100 (NDX.X) has imploded in the last
three days.  The VXN dropped back below 40 Tuesday, losing
nearly 6 percent for the day.

CBOE Market Volatility Index (VIX) - 20.30 -2.08
Nasdaq-100 Volatility Index  (VXN) - 39.47 -2.40


          Put/Call Ratio  Call Volume   Put Volume
Total          0.64        706,620       448,855
Equity Only    0.51        579,042       295,390
OEX            0.98         36,646        35,732
QQQ            0.61         50,074        30,644

Bullish Percent Data

           Current   Change   Status
NYSE          66      + 0     Bull Confirmed
NASDAQ-100    40      + 5     Bull Correction
DOW           63      + 0     Bear Alert
S&P 500       71      + 1     Bull Confirmed
S&P 100       68      + 0     Bear Alert

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  1.42
10-Day Arms Index  1.47
21-Day Arms Index  1.30
55-Day Arms Index  1.24

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      2234            939
NASDAQ    2555           1042

        New Highs      New Lows
NYSE      240             12
NASDAQ    277             38

        Volume (in millions)
NYSE     1,356
NASDAQ   1,574


Commitments Of Traders Report: 04/09/02

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' net bearish position dropped by about 2,500
contracts during the most recent reporting period.  But the
group remained decidedly bearish.  Even more disconcerting
for the bulls was the revelation that the spread between
commercials and small traders remained near a one-year high.
Small traders grew slightly less bullish, but not by a lot.
The group only reduced its net bullish position by about
3,000 contracts.

Commercials   Long      Short      Net     % Of OI 
03/26/02      317,671   410,186   (92,515)  (12.7%)
04/02/02      313,294   406,337   (93,403)  (13.0%)
04/09/02      320,101   411,075   (90,974)  (12.4%)

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
03/26/02      148,111     40,409  107,702     57.1%
04/02/02      149,449     43,139  106,310     55.2%
04/09/02      151,237     47,678  103,559     52.1%

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

Nasdaq commercials grew slightly more bearish last week.  The
group added about 600 contracts to their net bearish position.
Small traders went the other direction by adding to their net
bullish position.  The position gained about 600 contracts.

Commercials   Long      Short      Net     % of OI 
03/26/02       25,275     33,880    (8,605)  (14.5%)
04/02/02       26,211     31,840    (5,629)   (9.7%)
04/09/02       28,985     35,221    (6,236)   (9.7%)

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

Small Traders  Long     Short      Net     % of OI
03/26/02       12,760     6,264     6,496     34.1% 
04/02/02       10,615     7,769     2,846     15.5%
04/09/02       11,640     8,353     3,287     16.4%

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


Dow commercials reduced their net bullish position by a small
amount during the most recent reporting period.  They did it
through adding more short than long positions.  Meanwhile,
small traders remained relatively flat.

Commercials   Long      Short      Net     % of OI
03/26/02       17,973    12,539    5,434     17.8% 
04/02/02       18,717    12,549    6,168     19.7%
04/09/02       19,393    13,445    5,948     16.7%

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
03/26/02        5,818     9,308    (3,490)   (23.1%) 
04/02/02        5,192     9,007    (3,815)   (26.9%)
04/09/02        5,459     9,340    (3,881)   (26.2%)

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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by Leigh Stevens


Semiconductors - 

What can I say -- a monster rally in the Semiconductor index 
($SOX.X)! I alerted on this one for a couple of days, but took a 
cautious stance, unless SOX broke out above the down trendline at 
581, which is did with a vengeance. 


Besides saying that a decisive upside penetration of 581 would be 
a breakout above the down trendline dating from the early-March 
high, I also got myself tongue tied in numbers -- misstating my 
intention to look at buying the SOX May 570 or May 580 calls 
yesterday -- correction and apologies as those levels got 
completely screwed up in my column & came out as May "750" & 
"760" calls. No -- not THAT far out of the money! Apologies for 
anyone trying to translate this. 

Stay with the cyclicals, such as Alcoa, etc.   

Cyclical Index ($CYC.X) daily chart: 


Stay with the Telecom play - 

The Telecom ($XTC.X)Index took off today.  

I suggested Level 3 Communications (LVLT), as a way to 
play this sector.  LVLT broke out above its multimonth 
downtrend line and is rebounding from the area of its 50-day 
moving average.  


Upside potential in LVLT looks like 5.5 - 6 over the coming few 
weeks.  Purchase of the stock was suggested or buying June 5 
Calls. It was billed as a higher risk trade to attempt to profit 
from an upswing in the sector of which it is part.

Momentum play - 

Stay with the Airline Index ($XAL.X) "proxy" or representative 
airline stock. Southwest Airlines Sept. 20 calls were suggested, 
with projected upside potential in the stock to back up to the 
top end of its price channel to $22 more near-term, and perhaps 
to the $24 area over time.  


RTH (AMEX: Retail sector trust stock)
SHORT at 99.00 
Objective: 90; Stop: 102 

XAU (PHLX Gold & Silver Index)
Bought May 65 puts at 1.80  
Stop: Risk to no value on the option
	Also recommended May 60 Puts
Objective: XAU to 60.50, where it has support

Sector: XLB (Basic Industrial Sector SPDR) at 23.75
CHANGE: close out position and cancel stop at 24.50

Sector: XLP (Consumer Staples SPDR) at 26.00
CHANGE: close out position and cancel stop at 26.25

Sector: IYD (US Chemical Index iShares) at 45.25
CHANGE: close out position and cancel stop at  46.60

Sector: IYE (US Energy Index iShares) at 49.70
Stop: Lower to 50.00, from 52.00 
Objective: 46.50 


UTH - Utilities Holders trust (AMEX) 
Long at 95.25 
Stop: 91.00
Objective: 105

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



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Contact Support
The Option Investor Newsletter                  Tuesday 04-16-2002
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.




ENZN $42.28 +3.01 (+5.59) The shorts that have been leaning
on ENZN down its 10-dma capitulated today when the stock
broke above with the support of the BTK.  ENZN finished more
than 7% higher, far out pacing the gains in the BTK.  But
volume remained very low, which revealed that the buying was
most likely short covering.  Nevertheless, the stock closed
below our recent lowered stop at the $42 mark, and we're
dropping coverage.  Look for a pullback early tomorrow to cut

GNSS $23.91 +1.41 (+1.91) We've had a nice ride (albeit a rather
slow one) from GNSS on the way down to the most recent low, but
it is time to get off for now.  Short-covering (especially in
the Chip sector) gave the stock another sharp rise of more than
6% on Tuesday.  It actually looked like our $23.50 stop might
hold this morning, but with the afternoon follow-through, we have
no choice but to honor our stop and exit the play tonight.

GS $84.59 +2.99 (+1.59) Despite a nice drop shortly after
beginning our bearish coverage of GS, we are forced to close the
play on a sour note.  The pattern of consolidation that we had
been watching was resolved in favor of the bulls, forcing us out
at our $84.10 stop.  Short-covering throughout the broad market
on Tuesday lifted even the ailing Brokerage stocks and GS managed
to go along for the ride, with a 3.67% advance.  If you neglected
to exit on the stop violation today, use any weakness to close
out open plays, as Tuesday's move has a bullish feel to it.


Please view this in COURIER 10 font for alignment

CALLS              Mon    Tue

AZO      72.01    0.74   1.10  Ready to rock, watch the breakout
KKD      39.42   -0.01  -1.21  Rotation out of food stocks, entry
TKTX     40.75   -1.92   1.31  Basing above the 50-dma, breakout
RYL     101.80   -0.95  -1.25  Pullback on housing news, entry pt.
PNRA     68.96   -0.87   1.23  New, highflier with short covering
GENZ     44.18    1.22   0.86  New, biotech rebound leading higher


TMPW     29.10   -0.18   1.03  Lagging the INX.X, under performed
GNSS     23.91    0.50   1.41  Dropped, broke above the 10-dma
SGP      29.85    0.59   0.64  Bouncing, look for rollover at $30
WPI      24.67   -0.03   0.55  Basing before next leg lower
ENZN     42.28   -0.42   3.01  Dropped, shorts cover biotech
GS       84.59   -1.40   2.99  Dropped, broad market strength
OVER     24.05    0.40   0.18  Trading poorly versus Internets
JDEC     12.26   -1.70  -0.42  New, didn't bounce during buying
MU       30.11   -0.36   1.41  New, ready to roll at resistance
IGT      55.85    1.45  -2.50  New, bearish developments in sector
MXIM     56.79    0.72   2.12  New, betting on rollover at top


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KKD $39.42 -1.20 (-1.21) The report of insider sales last week
failed to materialize into stock price weakness early this week
as KKD continued higher in yesterday's session.  The stock did
however pullback in today's session, while the broader market
rallied sharply.  The pullback today was most likely a function
of sector rotation.  The buyers turned their collective focus
to more aggressive stocks, such as technology and finance, and
shunned the food and restaurant stocks like KKD.  The pullback
may have offered an ideal entry point into this play though,
as the stock's 50-dma just below at the $39.18 level could
produce a bounce in the coming days.  Dip buyers can look early
tomorrow near the 50-dma for entry points.  Just make sure to
wait for a bounce before entering on weakness.

TKTX $40.75 +1.31 (-0.71) TKTX pulled back in yesterday's
session on declining volume.  But the stock rebounded in
today's session on the strength in the broader market and the
Biotechnology Sector Index (BTK.X).  The BTK.X finished 1.04%
higher in today's session, behind the performance of the
broader market.  Nevertheless, the strength in the BTK.X helped
push TKTX higher in today's session.  The stock did trace an
inside day during Tuesday's trading, which should help traders
find a good entry point in the coming days.  Momentum and
breakout traders can look for an advance on heavy volume past
the $41.60 level in tomorrow's session.  Those with open
positions might consider tightening stops up to the $39.34 level
to protect against downside risk.

AZO $72.01 +1.10 (+1.84) The market gives, and the market takes
away.  In the case of our AZO play, the market seems to be in a
giving mood.  The stock took advantage of the bullish action on
Tuesday to vault (well, actually crawl) through the $72
resistance level for the first time since late December.  Volume
was still a bit tepid, coming in at about 80% of the ADV, but a
breakout is a breakout and we'll take it.  With the print of $72,
the PnF chart has a fresh ascending triple-top breakout (bullish
price target of $86) and next up is the $75 resistance level.
Use intraday dips back to the $70.50-71.00 area as attractive
entry points into the play or else enter on strength as AZO
pushes higher.  We're ratcheting our stop up to $69.80 tonight.

RYL $99.60 -1.25 (-2.20) The Home Construction sector ($DJUSHB)
was one of only 2 sectors to finish Tuesday's clearly bullish
session in the red.  Driving the weakness was the weaker than
expected Housing Starts number this morning, along with an even
sharper drop in the number of new Building Permits.  That started
the group off on a negative note, from which they never really
recovered.  It was encouraging to see the bulls chart forward
around 2:30pm ET, driving RYL off of its lows to close very near
the high of the day, but it was still a loss.  But once again,
the stock held above support, making the $97-98 level look better
as a support level for new entries on renewed bounces.  Note that
the day's lows came right at the 10-dma ($97.81), which has been
providing support for the stock for the past 3 weeks.  We are
raising our stop to $96.50 tonight.  Even though RYL has been
strong relative to the DJUSHB lately, look out for significant
weakness in the index, as it would most likely have the effect
of dragging our play down with it.


PNRA - Panera Bread Company $68.96 +1.23 (+0.36 this week)

Panera Bread Company, through its wholly owned subsidiary Panera,
LLC, operates bakery-cafes under the names Panera Bread and Saint
Louis Bread Company. As of December 29, 2001, the Company had 100
Company-operated bakery-cafes (including two specialty bakery-
cafes), ten bakery-cafes operated as a joint venture through a
90%-owned indirect subsidiary (for a total of 110 Company-owned
bakery-cafes) and 259 franchise-operated bakery-cafes (including
one specialty bakery-cafe).

Momentum players are finding plenty of trades away from the
technology sector.  Restaurant stocks have seen a lot of action
this year.  PNRA is one of the stronger in the group.  The
stock continues to defy the shorts, who've been trying to knock
this one down for about 20 points now.  Indeed, short interest
continues to climb.  The most recent figures show that 1.57
million shares have been sold short, which amounts to about 13%
of the stock's float.  That's a pretty big number for a stock
trading near its all time high, and creates a potentially
explosive situation for further price appreciation.  Price
action has been coiling in recent sessions, culmination with an
inside day during today's trading.  The shorts appear to be
getting nervous as the intraday highs are being set at higher
and higher levels.  Traders looking to get in ahead of a breakout
can do so tomorrow by entering on intraday weakness.  Those
who would rather wait for a breakout can watch for an advance
above the $69 level.  Confirm the initial rally attempt with
a move past the $70 level, which scare the shorts into covering
further.  Our stop is initially in place at the $66 level. 

BUY CALL MAY-65 UPA-EM OI=217 at $6.20 SL=4.75 
BUY CALL MAY-70*UPA-EN OI=361 at $3.00 SL=1.50 
BUY CALL AUG-70 UPA-HN OI= 64 at $6.70 SL=5.00 
BUY CALL AUG-75 UPA-HO OI=  8 at $4.30 SL=2.00 

Average Daily Volume = 410 K

GENZ – Genzyme General $44.18 +0.86 (+2.08 this week)

Genzyme General, a division of Genzyme Corporation, is focused
on developing innovative products and services to solve major
unmet medical needs.  GENZ has nearly 600 products and services
on the  market and a strong pipeline of therapeutic products for
the treatment of rare genetic diseases.  The Diagnostics
business unit develops, markets and distributes in vitro
diagnostic products and genetic testing services. With a solid,
profitable revenue base, this research is intended to maintain
the company’s high rate of earnings growth.

It has been a nip and tuck battle in the Biotechnology sector
(BTK.X) over the past several days, but it is beginning to look
like the bulls are gaining some headway.  After once again
finding support at the $450 level, the BTK has rebounded somewhat
and actually managed to clear the first hurdle, resistance near
$478 on Tuesday.  There's still a lot of work to do before we can
call it a true recovery, but enough work has been done so that we
can begin nibbling on some of the stronger names in the sector.
Following the path of the BTK, shares of GENZ fell to post a
double bottom at the $39 level and since then have moved up
nicely.  But there is a big obstacle waiting just overhead at
$44.50.  This is the site of the bottom of the big gap down from
late March, and also the site of the declining 20-dma ($44.44).
With the daily Stochastics already into overbought territory, we
need to be careful of a rollover at resistance, but a break
through that level could be powerful due to the likelihood of
some significant short covering.  Aggressive traders can consider
buying dips in advance of the breakout, looking for a bounce from
the $42-43 area.  The safer play will be to target new positions
on a volume-backed breakout over the $44.75 level.  As a
confirmation, look for the BTK to move up towards its next level
of resistance near $495.  We are initiating the play with a
rather tight stop, set at $41.50.

BUY CALL MAY-45*GZQ-EI OI=1109 at $2.30 SL=1.25
BUY CALL MAY-50 GZQ-EJ OI= 228 at $0.65 SL=0.25
BUY CALL JUL-45 GZQ-GI OI=1168 at $4.10 SL=2.50
BUY CALL JUL-50 GZQ-GJ OI=3223 at $2.05 SL=1.00

Average Daily Volume = 4.97 mln



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OVER $24.05 +0.18 (+0.58) OVER traded poorly in today's
session.  The stock finished only 18 cents higher on a day
when the Nasdaq gained 63 points, and the Internet Sector
Index (INX.X) finished 3.34% higher.  The under performance
on the part of OVER was encouraging to witness as hopefully it
portends further downside once the broader market rolls over.
The stock is finding intraday support near the $23 level,
which is the site to look for the next big breakdown.  Traders
should watch for weakness to return to the tech sector, and
look for OVER to breakdown below the $23 mark on heavier
trading activity.  To the downside, the next support level is
at the psychologically significant $20 level.  Traders taking
entries near current levels can manage upside risk with a
tight stop between the $25 and $25.50 levels.  Our coverage
stop remains at $25.50.

SGP $29.85 +0.64 (+1.23) Bullish life has not yet returned to
the Pharmaceutical index (DRG.X) and less than stellar results
from LLY yesterday certainly didn't help.  With the broad markets
staging an impressive advance on Tuesday, it is no great surprise
that the DRG advanced somewhat, but given the outsized gains in
other sectors, it is clear that the DRG is lagging.  So the
current rebound looks like it could be setting us up for fresh
entries, when the upward momentum wanes.  But we're getting
awfully close to the end of our rope on SGP, as it is skating
dangerously close to our $30 stop following a solid 2% gain on
Tuesday.  Remember we're looking for a rollover below resistance
(preferably accompanied by sector weakness) to usher us into new
positions.  If SGP follows the pattern of the past 2 days and
moves up again on Wednesday, then we'll move it to the drop list
on a close above the $30 level.

TMPW $29.95 +1.03 (+0.85) After 5 days of losses, TMPW was due
for a bounce, and it would have been difficult to avoid that
development in such a strong market as we saw today.  Virtually
every sector finished with a gain, so we're willing to accept the
slight rise in price on Tuesday.  Nothing fundamental has changed,
and we'll take advantage of the current bounce when it runs out
of steam to initiate new positions on the rollover from
resistance.  Ideally the stock will move as high as the $31
resistance level (also the site of our stop) before rolling, but
we would be content with entries taken near the $30.00-30.25 area,
where TMPW appeared to be rolling over on Tuesday afternoon.
Recall that the PnF chart is looking very bearish, forecasting a
target of $18.  That gives us plenty of downside once the stock
rolls again, so we're more than willing to wait for the proper
setup before entering.  On the outside chance the bulls prevail,
make sure to keep those stops in place.

WPI $24.67 +0.55 (+0.52) Pushed along by the tide of the broader
market, shares of WPI have been trying valiantly to rise for more
than a week now, to no avail.  That $25 resistance level is
looking stronger by the day, as daily Stochastics continue to
rise in the absence of any meaningful increase in price.  If this
pattern continues for a couple more days, we'll have a high-odds
entry point in our hands, as the reversal from overbought
territory will likely be the hammer that finally pounds the stock
below the $24 level to test last week's intraday low at $23.  So
long as the Biotech index (BTK.X) remains trapped beneath the
$495 resistance level, this should remain a fertile ground for
the bears.  While acceptable entries can be had near the $25
level, we would really like to see a failed intraday pop up near
the $25.50-25.75 resistance level before opening new positions.
Our stop remains at $26, as a move through that level would
indicate that WPI is actually garnering some real buying interest.


JDEC - J.D. Edwards & Company $12.26 -0.42 (-2.12 this week)

J.D. Edwards is a provider of agile, collaborative solutions for
the connected economy. The Company delivers integrated,
collaborative software for supply chain management (planning and
execution) procurement and customer relationship management, in
addition to workforce management and other functional support.
Its enterprise software is designed to help organizations manage
and execute internal business functions, such as manufacturing,
finance, distribution/logistics and other core operational

The recent rebound in the tech sector may have erased the
painful memories of the weakness in the software group.  The
increased number of warnings in the group led to heavy selling
pressure.  But those warnings have been shunned in the last
two days.  Still, investors aren't buying every stock in the
group.  JDEC continued lower in today's session despite the
4% pop in the Software Sector Index (GSO.X).  The stock continued
falling on extremely heavy volume.  Today's volume topped the
average daily volume by two times, which is what we've observed
in recent days.  The stock also closed below its 200-dma for the
first time since early November.  That alone should lead to
further institutional selling starting as early as tomorrow
morning.  Trend traders can look for this stock's trend to
accelerate to the downside in the coming days.  New entries can
be taken on weakness below today's intraday low at the $11.82
mark.  Rollovers following short covering near today's high
at the $13.50 mark can also be used to gain new entries into
put plays.  To the downside, the first potential support level
rests below at the $10.50 mark.  Below there, though, there
isn't much in the way of help until the gap down around the $9
level.  We're targeting a move lower into the gap over the
next several weeks.  Our stop is initially in place at the
$13.50 level.

BUY PUT MAY-15 QJD-QC OI=119 at $3.30 SL=1.75
BUY PUT MAY-12*QJD-QV OI=174 at $1.35 SL=0.75

Average Daily Volume = 1.30 mln

MU - Micron $30.11 +1.41 (+1.05 this week)

Micron Technology, Inc. and its subsidiaries are principally
engaged in the design, development, manufacturing and marketing
of semiconductor memory products. The Company offers products
that include dynamic random access memory, synchronous dynamic
random access memory, double data rate dynamic access memory,
legacy dynamic random access memory products, static random 
access memory products and Flash products. 

Texas Instruments (TXN) delivered a seemingly positive
earnings report last night.  And Novellus Systems (NVLS) raised
guidance.  After the bell tonight, Intel (INTC) reported
in line numbers.  The bullish news in the broader semiconductor
group may have the bulls trying to run these stocks higher.
But if it's like the pattern we've seen time and again this
year, the rally in the chips should begin to lose steam, and
the stocks should rollover near key resistance levels.  One
of the recently weaker stocks in the group, MU could be
poised for such a rollover as early as tomorrow.  The stock
was trading slightly higher in the after hours session,
reaching above the $31 level.  We hope that MU trades that
high tomorrow, because we'd look to take entries into new
put plays on rollovers near the $31 level.  There's a lot of
short term congestion at that point, plus a gap lower marked
by the short term top at the $32 level.  We're looking to
take entries near $31 with a stop at the $32 level, betting
on a rollover from there.  To the downside, a pullback in
the semiconductors could bring MU back down to the $28
level, giving a nice quick $3 trade.  If the downtrend in
MU resumes however we could see the stock work down to the
$25 level over the next several weeks.

BUY PUT MAY-32 MU-QS OI= 591 at $3.80 SL=2.00
BUY PUT MAY-30*MU-QF OI=9906 at $2.35 SL=1.25

Average Daily Volume = 8.07 mln

IGT – International Game Tech. $55.85 -2.50 (-1.05 this week)

IGT is a manufacturer of computerized casino gaming products
and an operator of proprietary gaming systems.  The company
serves the casino gaming industry in the United States as well
as manufacturing gaming products in the United Kingdom and
through a third party manufacturer in Japan.  IGT provides
gaming products in every significant legalized gaming
jurisdiction in the world.

Have you noticed how some of the stocks that chalked up big gains
last year are starting to get hit with concerted selling this
year.  The entire Casinos index ($DJUSCA) has rallied almost 100%
from the September lows, but we're starting to see some weakness
and the possibility of a double-top near the $250 level.  So with
beginning signs of weakness, we need to look for a stock in the
sector that has recently been lagging the group, and IGT has been
doing that in a big way for the past 3 months.  While the DJUSCA
posted a higher high this week, IGT has been posting lower highs
for the past 6 weeks, and the weakness can be clearly seen on the
relative strength chart.  Relative to the DJUSCA, IGT broke to a
new 16-month low on Tuesday and it looks like things are only
going to get worse.  On its own price chart, IGT has been falling
sharply lately, and part of the catalyst may be pending changes
to state laws that have previously been more friendly to gaming
establishments.  Fears that those laws are about to change may be
inducing investor nervousness.  When that story broke, IGT fell
as low as the $56.25 level before rebounding to the descending
trendline near $60 (now at $58.50) and then it began rolling
again.  Tuesday's price weakness drove the stock below the $56
level for the first time since early November.  It looks like the
next stop for the stock will be the $53-54 support area, also the
site of the 50% retracement of the fall rally ($53.85).  If that
fails, we will be looking for a drop to $50, the site of the
bullish support line on the PnF chart.  Use intraday rallies to
the $57 or $58.50 resistance levels to initiate new positions, or
else enter on a volume-backed drop below the $55.50 level.  We
are initiating the play with our stop set at $58.75.  Keep in
mind that this will be a rather quick play, as IGT announces
earnings next Tuesday.

BUY PUT MAY-60 IGT-QL OI=419 at $5.30 SL=3.25
BUY PUT MAY-55*IGT-QK OI=372 at $2.50 SL=1.25
BUY PUT MAY-50 IGT-QJ OI=137 at $1.00 SL=0.50

Average Daily Volume = 1.14 mln

MXIM – Maxim Integrated Products $56.80 +2.13 (+2.85 this week)

MXIM designs, develops, manufactures and markets a broad range
of linear and mixed-signal integrated circuits, commonly
referred to as analog circuits.  The company also provides a
range of high-frequency design processes and capabilities that
can be used in custom design.  MXIM's objective is to develop
and market both proprietary and industry-standard analog
integrated circuits that meet the increasingly stringent
quality standards demanded by customers.

Following NVLS' blowout earnings last night, short-covering in
the Semiconductor sector (SOX.X) was the dominant theme on
Tuesday.  After a 2-day, 8% jump for the SOX, it is tough finding
bullish plays in the sector with manageable risk.  But finding
the weak stocks in the sector that are most likely to fall back
from the pack is a more palatable venture.  Shares of MXIM have
been caught in a slowly descending trend for more than 4 months
now after peaking out near the $62 level.  The more recent price
action has the stock confined under both its descending trendline
(currently $57) and historical resistance at $57.50-58.00.  Since
short-covering is the likely cause of the stock's rise today, we
want to take advantage of price weakness when that short-covering
comes to an end.  Look to enter new positions on price weakness
near the $57-58 level and then set a tight stop at $58.50, just
above resistance.  Earnings are 2 weeks away on April 30th, so
that should give us ample time to generate some profits. Use the
SOX as a guide for new entries, looking for weakness to
materialize near the $615 level.

BUY PUT MAY-60 XIQ-QL OI= 271 at $5.80 SL=4.00
BUY PUT MAY-55*XIQ-QK OI=3191 at $3.30 SL=1.75
BUY PUT MAY-50 XIQ-QJ OI=5567 at $1.75 SL=1.00

Average Daily Volume = 5.60 mln



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Note: Options involve risk. Risk disclosure: 



Please read our disclaimer at:


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

Contact Support
The Option Investor Newsletter                  Tuesday 04-16-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


OVER - Overture Services $24.05 +0.18 (+0.58 this week)

Overture Services, Inc. is engaged in the provision of pay-for
performance search services on the Internet. Overture operates
an online marketplace that introduces consumers and businesses
that search the Internet to advertisers that provide products,
services and information. Advertisers participating in the
Company's marketplace include retail merchants, wholesale and
service businesses and manufacturers.

Most Recent Update

OVER traded poorly in today's session.  The stock finished only
18 cents higher on a day when the Nasdaq gained 63 points, and
the Internet Sector Index (INX.X) finished 3.34% higher.  The
under performance on the part of OVER was encouraging to witness
as hopefully it portends further downside once the broader market
rolls over.  The stock is finding intraday support near the $23
level, which is the site to look for the next big breakdown.
Traders should watch for weakness to return to the tech sector,
and look for OVER to breakdown below the $23 mark on heavier
trading activity.  To the downside, the next support level is
at the psychologically significant $20 level.  Traders taking
entries near current levels can manage upside risk with a
tight stop between the $25 and $25.50 levels.  Our coverage
stop remains at $25.50.


OVER didn't participate in Tuesday's rally by as much as we
would have expected.  The stock's relative weakness may lead
to downside if the tech sector weakens.  Look for selling to
return to technology names.  Specifically, watch for weakness
to return to the Internet Sector (INX.X).  Early signs of
selling should lead to a rollover in OVER.  Look for a break
below the $23 mark.

BUY PUT MAY-25*GUO-QE OI=736 at $4.20 SL=2.25
BUY PUT MAY-22 GUO-QX OI=449 at $3.20 SL=1.75

Average Daily Volume = 1.25 mln


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Do You Have Trader Status, Part VI?
Buzz Lynn

A day late and perhaps a dollar short for those needing to make 
the April 15th deadline for tax filing.  No matter, we agreed 
last time that in light of the final installment topic dealing 
with living trusts, nobody was going to suffer this tax date from 
lack of info on this particular subject.  Heck, in my experience, 
it normally takes a few weeks to set this up anyway.  Besides, 
with the time a space constrains of the newsletter, we HAD to 
move this to another day where it could stand as a topic on its 

I've chimed in every now and then in the last five episodes of 
our "interview" with Jim Crimmons of TradersAccounting.com, and 
we've had a pretty good dialogue.  If you've missed them, you can 
review them at your leisure at the following links:


But today, Jim has the floor.  So I'll turn it over to him now.  

Me:  Jim, tell us about living trusts and why you consider it the 
greatest estate planning and tax-saving tool there is.
Jim:  A Tax Action Plan would not be complete without a few words 
about the biggest tax saving and estate planning tool there is 
for you and your family and other heirs.

Over the past two decades, the popularity of Living Trusts has 
skyrocketed.  No longer a tool for just the rich, Living Trusts 
are one of the most common estate planning tools in use today.  
This legal arrangement creates a separate entity called a 
revocable (changeable) trust.  Almost everyone can benefit from a 
Living Trust.  A revocable Living Trust is a comprehensive legal 
document that, among other things, ensures an orderly 
distribution of your assets upon your passing.  Unlike a will, a 
well-drafted Living Trust eliminates probate, thereby avoiding 
costly and time-consuming court proceedings.  In addition, your 
Living Trust protects privacy and eases the burden placed upon 
your loved ones at a time of extreme emotional stress.  It also 
removes any need for a probate court to designate a conservator 
in your behalf when you are unable to act for yourself, for 
whatever reason.

What is Probate?  Probate is the name given to the process in the 
Court System through which ownership of a deceased person’s 
assets passes to their heirs.  Probate includes collection of 
assets, payment of creditors, and distribution to beneficiaries 
who may not be the ones you had in mind—which happens far too 

Probate is Voluntary!  If you die without a will, the state has 
one for you.  The estates of persons with wills as well as those 
without them must be probated.  Living trusts avoid probate 
altogether.  You can choose to avoid this unwarranted waste of 
money and time merely by choosing to use a living trust.

Probate is Costly.  Probate fees are typically based upon a 
percentage of your GROSS estate and can consume from 4% to 10% of 
the estate before any property is distributed.  Your heirs will 
need legal help to protect their interests.  As well, the 
attorney appointed will be paid from your estate.

Probate is Lengthy.  Probate can take anywhere from six months to 
two years or even more to complete.  Once it is started, it 
cannot be stopped.  Thus, for the entire period of probate 
distributions are determined by the probate court.  You and your 
heirs are out of control—needlessly!

Probate is Public.  Probate files are open to the public.  
Consequently, any individual can learn and broadcast what your 
specific assets are, and how much each of your beneficiaries will 
receive.  (That’s why we know so much about the estates of so 
many famous people. . .it’s posted at the county court house!)

How Does a Living Trust Help?  A Living Trust is a legal 
instrument.  Effectively you transfer property to the trustee of 
the trust (probably you) to hold and manage all of the property 
for the benefit of a beneficiary (you with your heirs or others 
as successor beneficiaries).  Instead of you owning the assets, 
the trust owns them.  For example, your home will be titled in 
the name of the trust rather than your name.  The assets are 
owned by the trust and can be distributed immediately upon your 
death or on a basis you determine in advance.  Your heirs will 
not be burdened with the time and expense of probate.

Who controls my property while I am alive?  You, as trustee, 
maintain complete control and enjoyment of the assets until you 
pass.  On your passing, your assets that were transferred into 
the Living Trust while you were alive avoid probate.  You will 
have instructed your successor trustee what to do with the assets 
upon your death.

Can I change or abolish the Trust while I am alive?  Remember, it 
is a revocable Living Trust, which means you can modify it or do 
away with it very easily.  We also recommend that it be looked at 
carefully at least once a year to make any changes necessary.  
Selecting a holiday or other anniversary to do so will help you 
remember to review your trust regularly and make the changes 

Who Needs a Living Trust?  Each state requires probate and each 
state sets its own requirements for probate, typically when the 
net estate exceeds a modest amount (say, $25,000, $40,000) or 
when there is real estate involved.  Almost anyone with an estate 
above the state thresholds can benefit from having a Living 
Trust.  Estates are subject to probate in the state of residence 
and in each state where there are real assets.

How flexible is a Living Trust?  Trusts can be structured for 
complicated family situations, such as re-married couples with 
children from previous marriages, and couples with children who 
are physically or mentally challenged who will need extra care 
after mom and dad pass on.  You can provide for lump sum 
disbursements or schedule distributions over time periods of your 
choosing.  Trusts can be drafted to last a very long time.

The Living Trust is also useful for individuals subject to estate 
taxes.  Through a Living Trust, both spouses are able to maximize 
their Unified Tax Credit to its fullest—virtually doubling the 
amount exempt from tax!  This credit as mandated by Congress, 
currently shelters up to $1,000,000 (Based on changes enacted by 
Congress in 2001, the sheltered amount will gradually increase 
until 2010 when the tax itself is repealed.  However, in the 
following year, 2011, the changes enacted in 2001 are repealed 
and the individual exemption reverts to $1,000,000.) from estate 
taxes.  With only a will in place a married couple will receive a 
single $1,000,000 exemption.  However, if a Living Trust with an 
“A-B Provision” is in place and one spouse dies, the Living Trust 
separates into two separate trusts (thus the A-B designation) 
with each of the two separate trusts receiving its own $1,000,000 
exemption, meaning a total of $2 million is sheltered from estate 

You say, "But, What About My Will?"  Perhaps the all-time 
greatest myth concerning estate planning is that a Last Will and 
Testament avoids probate.  If you have a will your estate must go 
through probate and if you do not have a will your estate must be 
probated. . .with one notable exception:  those who have a living 
trust will not be subject to probate!  We hope by now we have 
convinced you that probate is bad news (not to mention 

When an attorney urges their clients to invest in a will, many 
clients naturally assume that the Last Will and Testament the 
attorney is recommending will avoid the cost and headaches of 
probate.  However, few realize that attorneys are not required to 
tell their clients that a will is an automatic ticket (do not 
pass go) to Probate Court.  What the Attorney is not telling you 
is that the strategy he/she is using sets him up for fat and easy 
probate fees at your passing.  Even if you write your own will or 
buy a will or a will kit off the Internet the result will be the 
same.  You have purchased your estate and your loved ones 12 to 
24 months or more of frustration and delay in Probate Court; AND, 
you have sacrificed from 5 to 20 percent of their inheritances 
for court costs and attorney fees—not to mention the loss of one 
spouse’s exemption from estate tax!

Do You Need A Living Trust?  Before going any further, deciding 
whether you need a Living Trust involves asking yourself the 
following questions:

Do I want to avoid probate?
Do I wish to avoid conservatorship?
Do I wish to minimize court costs and hassles?
Do I need to make provisions for my minor, handicapped or disabled 
child or spouse or relative?
Do I plan to leave an inheritance to children from a prior 
Do my parents need a Living Trust?

If you answered yes to any of these questions a Living Trust will 
be a wise decision for you.

Living Trusts are easy to start-up and require little on-going 
maintenance.  They afford an extra measure of protection against 
loss of control, and ensure that your assets remain out of the 
public record even after your death.

How do I get started?  Discuss your need for a Living Trust with 
us when we have our Tax Action Planning session.  We can take 
care of the complete set up, guiding you through the rough spots.

One, more thing, Buzz. . .permit me one last shot of crass 
commercialism. . .

Me:  Sure, Jim.  Take your best shot!

Jim:  Recommendations can only be made when we have received your 
personalized information.  If you would like our recommendations 
for your trading business, please let us know and we will be more 
than happy to do so.  You can reach us on the Web at 
www.tradersaccounting.com.  Or we have toll free number:  800-
938-9513, which you can use to reach us during normal Pacific 
Time business hours.

Me:  I'll second that part about recommendations ONLY after 
you've had a discussion with a qualified tax advisor.  Besides, I 
am no expert in that field and this column should not be 
construed as advice.  

That said, this concludes our tax series and mock interview with 
tax expert Jim Crimmons on the subject of trader status and 
minimizing our tax burden as traders.  Jim, thanks for taking the 
time put this together for our readers and us.  We really 
appreciate it.

See you in tomorrow's Wrap!



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Rollover at resistance, or another short covering pop.  Here're ways to play each.

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More movement in recent days.  Several sectors are poised for breakouts Wednesday.

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