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Daily Newsletter, Tuesday, 04/30/2002

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The Option Investor Newsletter                 Tuesday 04-30-2002
Copyright 2001, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      04-30-2002           High     Low     Volume Advance/Decline
DJIA     9946.22 +126.35 10006.28  9818.90 1.54 bln   2214/ 942
NASDAQ   1688.23 + 31.30  1697.03  1652.93 1.86 bln   2248/1312
S&P 100   532.40 +  5.56   536.02   525.93   Totals   4462/2254
S&P 500  1076.92 + 11.47  1082.51  1063.52             
RUS 2000  510.67 + 10.13   510.68   500.09
DJ TRANS 2704.72 +  9.88  2718.55  2683.84
VIX        23.78 -  2.33    26.64    23.49
VXN        42.86 -  2.26    45.59    42.70
TRIN        0.74 
PUT/CALL    0.80
************************************************************
One Day Does Not Make A Rally

I know it, you know it, and analysts know it. Then what is all
the excitement about? The talking heads did their best to add
fuel to the fire but resistance held and selling still returned 
at days end. The bounce was almost a sure thing after the TRIN,
an evidence of oversold conditions, closed at 2.40 on Monday. 
The VIX also hit a high of 26.64, a level not seen since Feb-22nd 
as sellers fled the market on Monday. The key? Minor capitulation
on Monday with all the major indexes closing on key support
levels 9800/1650/1065. Fund managers then went shopping for 
bargains on the last day of the month to dress up portfolios.



 



 



 



 

Historically this is a bullish week as tax refunds peak and
mutual funds see an inflow of retail cash. The markets being
severely oversold were a bonus factor in powering the strong 
bounce. Sure there were other factors but they were mostly 
fluff. Analysts without a clue were pointing to the Consumer
Confidence numbers out today as evidence that the economy is
still improving. Kings-X! There may be a recovery underway but
it is far from enthusiastic. 

The Consumer Confidence numbers were basically inline with
estimates but fell to 108.8 from 110.7 in March. Expectations
were flat and current conditions are slipping. The labor market
is beginning to weigh more heavily on consumers and a continued
barrage of "business conditions still weak news" is producing
a more cautious outlook. The unemployment numbers are still 
rising with more layoffs announced every day. So, why would 
this confidence number be market positive? Add the seventh 
weekly drop in Retail Sales in the last ten weeks and you have
growing evidence the consumer is weakening. 

The Chicago PMI numbers showed a deterioration of the strong
numbers from last month with the index dropping to 54.7 from 
55.7. The Prices Paid component increased by four points and
the New Orders rate slowed from 62.6 to 59. While any number 
over 50 indicates economic growth the March momentum is clearly
slowing. 

The big news today was the resignation of Bernie Ebbers from
Worldcom as the CEO, President and Director. The board was
becoming increasingly concerned over the drop in stock price
and increased SEC scrutiny of the financial dealings between
the company and Ebbers. The former basketball coach built
Worldcom from a struggling long distance company into a
communications giant but leveraged the company into more
then $30 billion in debt along the way. The company announced
they had paid off more than $700 million of that debt in the
past year but analysts were not impressed. There is an increasing
worry that WCOM will be forced into bankruptcy, the stock erased
and new stock issued to the debt holders in lieu of payment. 
Bernie will not go hungry despite having to pay back the loan.
He has huge assets that can be converted to fully liquidate it
and rumor has it he was buying the stock at this level to average
down. WCOM traded 295 million shares today and came close to the
346 million share record held by Enron when their bankruptcy rumors
were heating up. WCOM finished at $2.48 with a six-cent gain.

Another stock under pressure is Tyco but on their conference
call today they said they will have no liquidity issues for
at least nine months. The company said it has enough cash to 
cover the refinancing of $3.5 billion in debt coming due next
February. That is good news for investors who have watched
-$82 billion in market cap erased from TYC since the accounting
questions began. The stock jumped +1.45 to $18.45 on the news.

IBM is at it again. They announced another effort to buy 
investor confidence as the stock threatened to break the 83.34 
low from April-11th and hit levels not seen since Dec-2000.
They raised the dividend by a penny and, this is the important
part, announced another buyback of up to $3.5 billion of their
stock. If you have been reading my comments long you know that
IBM is the poster child for attempting to manage earnings by
repurchasing shares to increase earnings per share. The key
here is that analysts never know exactly how many shares are
outstanding at any given time. This allows them to reduce shares
when earnings are in jeopardy and still appear to hit their 
numbers. Follow the math. With 1.7 billion shares currently 
outstanding their trailing twelve month earnings are $4.06 per 
share. Reduce the outstanding shares by 42,168,675 ($3.5 billion
divided by $83 a share) and your 1.657 billion then outstanding 
shares converts those same earnings into $4.16 per share. Nice 
trick and if you have the cash you can buy back those shares as 
needed to manage the results. Investors were not impressed and 
after an early retail bounce to over $85 the stock lost ground 
and closed down -.13 cents.

After the close the judge threw out the Hewlett suit and cleared
the way for the HWP/CPQ merger to begin. Both stocks were up in
after hours. Hewlett said he had not decided whether to appeal it
and if he did it would be a really tough fight. The Supreme
Court only reverses about one in 22 cases that are appealed and
it would be especially tough since the lower court found no
evidence of wrong doing. In short, look for a merged company
very soon. This is good news according to Michael Dell who said
he expects to gain market share while the two giants struggle
to overcome the scale and complexity of the merger. I guess the
odds of my Dell/CPQ merger idea are pretty much toast based on
the ruling today! (grin) Did I mention that 15,000 workers will
now be laid off in the HWP/CPQ merger? 

The rest of the week could be interesting. With almost every 
trader in the market last week on the short side there is 
plenty of negative investor sentiment. The little bounce today
did not convince them and as you can see by looking at a chart
of the Dow or S&P, both rolled over exactly at strong resistance
(10000/1080) as shorts loaded up again. Should we get another
strong bump at the bell on Wednesday those shorts could be
flushed out quickly. If any bounce at the bell fails immediately
then we will probably be looking at another retest of the Monday
lows before the week is out. I would suggest that more than 
usual nobody attempt to pick a direction this week. The oversold
conditions have eased considerably but while the market internals
were decent they were not outstanding. The advances beat decliners
substantially on 3:1 up:down volume but there is still no 
conviction. While it would appear I am leaning to the downside
there is still a considerable short interest among investors and
those shorts are probably nervous tonight. If something triggers
a bounce then they could decide to take substantial profits and
cover those positions. The bottom line, despite the rebound today
there has not been a trend change, just a pause. We need to wait
patiently for the market equalization process to complete and the
next direction decided. Keep those seatbelts buckled!

Enter Very Passively, Exit Aggressively!

Jim Brown
Editor


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

UP, BUT HOLD THE CONVICTION
by Leigh Stevens

TRADING ACTIVITY - 
As I said today on the Market Monitor, we are seeing an oversold 
technical rally without much conviction. Not to say that it can't 
get higher however. Oversold rallies are rallies nevertheless, 
they just don't have the underpinnings of bullish conviction.  

The market started on a quiet note, without any earnings 
bombshells, or other bombshells for that matter like in the West 
Bank.  From the get go, tech honeys continued their minor rally 
begun yesterday afternoon with the likes of Cisco, Microsoft, and 
some other big cap techs. The S&P lagged behind as the market 
waited for the Consumer Sentiment report for April and this gave 
a boost after a short period of digesting the numbers.  

The Consumer confidence report suggested that on one hand, 
attitudes about the U.S. economy indicated less confidence about 
current conditions; the overall index was reported at 108.8, down 
from 110.7. However, and what the market seized on, the consumer 
"expectations" index showed only a slight drop with the reading 
dropping to 110.0 from 110.2, hardly a blip. 

The traders take on consumer confidence is that it is holding up 
quite well, and shows confidence in the economic future ahead.  
This attitude generated a little more confidence in the market -- 
traders were ready to be convinced.  Shorts were eager to put 
some money in the bank and others went bargain hunting especially 
in the cyclical stocks like Forest Products (FPP.X), the Biotech 
sector (BTK.X) and Software (GSO.X), all groups that had either 
been week, but now seemed cheap (software & biotech) or had 
corrected from recent highs (Cyclicals).  

Tech stocks and sectors, with the exception of the hot hot hot 
healthcare sector (HMO.X) -- smoking!, dominated the action and 
the Nasdaq Composite closed up nearly 2%.  

For tomorrow, the feel good factor still being generated by the 
easing of restrictions on Arafat and some movement on the church 
siege in Bethlehem makes a dire situation only look bad.  Also, a 
bit of a feel good may result from the H-P battle being resolved 
in favor of management. These things are just one less 
distracting headline and that tone down the drumbeat of bearish 
influences.    


TRADING OUTLOOK AND STRATEGY -

It looks like this rally can go a bit further, with indexes 
possibly reaching the top end of their uptrend channels, as I'll 
review below with the charts.  Moreover, the COMP, Nas 100 and 
QQQ after a strong initial surge, consolidated in what may be  
about 1/2 way in the move. The formation in fact has the 
appearance of a bullish "flag"; i.e., an initial strong move (the 
'flagpole'), followed by a narrow-range consolidation, with the 
highs and lows tracing out what looks like a "flag". 

IF there is a breakout above the top of the rectangular flag, 
this outcome to this pattern has a good predictive ability for 
another upswing.  Meanwhile, the short-term hourly stochastic is 
showing downward momentum as price moved sideways.  A sideways 
move is another way to "throw off" an overbought situation. 
Tomorrow will tell the story. 

Unless, weakness sets in right away tomorrow, expect a period of 
backing and filling, then another move higher.  Pivotal levels or 
breakout points are defined.  A move above a pivot point sets up 
a "minimum" objective for another upswing equal to the one today. 
If further weakness comes in, I figure it's back toward the low 
of the downtrend channels.      

The lead is being provided by the tech sector, Nasdaq. COMP, NDX 
and QQQ -- the appearance of an hourly flag pattern allows a 
measure for a "minimum" upside objectives in the Nas indexes, 
assuming there is an upside penetration of the top of the flag, 
which becomes the "breakout" or pivotal point. 

The subsequent 3 "swing objectives" are contained in the comments 
below the daily and hourly charts. A minimum objective is a 
minimum only, but these targets correspond with price resistance 
at the top end of the intraday price channels and the place to 
jump in again on the short side.  If the rally fails by dropping 
under they near support levels suggested, exit any long calls if 
you do not want to risk again to the entry levels I suggested.

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


 

S&P 500 (SPX) has a minimum upside objective to the 1100 area, 
(1101) provided 1082 is exceeded -- 1082, being the high end of 
the minor consolidation showing on the hourly chart. 1100 also 
shows up as resistance implied by the prior lows -- at the dashed 
red level line. 

Sell rallies to the 1105 area on up to 1110, if reached - 1105 is 
resistance at the top of the hourly downtrend channel and 1110 is 
the pivotal area on the daily chart, at the 21-day moving 
average.   

Near support looks like 1074, then 1070.  The lower end of the 
channel in the 1060 may be another buy point, if hourly 
oscillators get oversold again at the same time.  I suspect that 
pullbacks will hold ABOVE the lows for a time however -- later, 
after this rally runs further possibly, I anticipate new lows.

S&P 100 (OEX) Daily/Hourly Charts: 


 

S&P 100 (OEX.X) minimum objective is to 546, IF 536, at the top 
of the consolidation/flag, is exceeded to the upside. 554.9, 
resistance implied by the 21-day moving average is not expected 
to be penetrated -- rallies that approach this area would offer a 
good opportunity to buy puts and short futures.  

Near support is estimated for 530 -- a retreat through this area 
suggests a re-test of the lows in the 525 area.    

Dow Industrials ($INDU & $DJX.X) Daily/Hourly Charts: 


  

DJX: 101.50 becomes a "minimum" upside target assuming enough 
buying power to take DJX through 100 in the near term. The Dow 
Jones pattern looks the weakest. A move through 101.7, while not 
expected here, is bullish for some further upside however.  

If the Index falls back below 98.5-99, further rally potential is 
not looking good.  98 is the low end of the downtrend channel.  

Nasdaq Composite ($COMPX) Daily/Hourly Charts:


 

In the Nasdaq Composite ($COMPX), 1730 looks like a "minimum" 
upside, assuming a near-term advance through 1694. 

Immediate overhead resistance, and the breakout or pivot point, 
is 1700.  The 1724 area, at a prior key low, is a next 
resistance. 1750, or 1754 at the 21-day moving average, if 
reached, should represent significant selling opportunities. 

On the downside, 1670 ought to hold up as support unless this 
rally is going to fall apart. A break of this area, could be the 
trigger point to exit calls, depending on the how skeptical your 
view today's rally is.    

Nasdaq 100 ($NDX.X) Daily/Hourly Charts: 


 

In the Nasdaq 100, 1335 is an upside objective if there is a 
decisive upside penetration of 1290. This would also mean a 
pivotal move through the 21-day moving average at 1350. 

Near support is 1260.  Take this has a pivot point -- exit long 
plays and take the short side on a break of 1260. This level 
should hold if there is going to be a second upswing here.  Next 
significant lower chart support is not apparent before the 1225 
area. 
 

Nasdaq 100 Trust Stock (QQQ) Daily/Hourly Charts: 


 

In QQQ, a possible upside minimum objective is to 33.2, assuming 
an advance thru 32.1.  I would take a move to the 33 area as a 
good selling opportunity.  35 should be pretty major resistance 
and a time to trade dollars for puts again -- only a break out 
above 33.6, at the 21-day moving average, would signal upside 
potential of this extent however. 

Near support is 31.5, then 31 -- this area should hold if the 
rally today has got some steam in it. If not, the Q's are looking 
like a retest of the lows in the 30.50 area is in their future.    

Recent Index trading suggestions; from Index Trader -

Yesterday's "out on a limb" trade suggestion was to take some put 
profits around levels specified below.  Also, purchasing Index 
Calls also suggested Sunday & Monday as short-term trade 
suggestion for a countertrend trade. Below price areas also 
suggested for call purchases, coupled with upside momentum buy 
signals intraday (hourly stochastics), as occurred today: 

Purchase SPX (S&P 500) calls in 1060-1063 area. 
OEX (S&P 100) in 525-527 area
Buy DJX in 98 area

Sunday 4/28: identified COMP support in 1645 area
Nasdaq 100 ($NDX.X) - buy in 1233-1230 zone
QQQ: Sunday 4/28: Buy QQQ on dips under 31   


Long/Call Positions:

Date: 
Bought XXX Calls at 
Stop: 
Trade Objective: 
Comments: 

Short/Put Positions: 

Date: 
Bought XXX Puts at   
Stop or risk parameters: 
Trade Objective: 
Comments:


Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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

Renewed Confidence?
By Eric Utley

The market felt like it wanted to rally even before the release
of consumer confidence.  Maybe the buyers were ready to do just
that: Buy!  Of course the end of the month may have played a
role in Tuesday's rally.  Those crazy fund managers like to do
crazy things at the end of the month to try to make their
portfolios look better than they actually are.

In fact, a lot of late last week's and yesterday's weakness
may have been attributable to end of the month selling of
major positions by the funds.  That selling appeared to have
run its course this morning.  I was watching Qwest Communications
(NYSE:Q) all day out of curiosity more than anything.  It
traded below $4.50 this morning on what appeared to be further
heavy liquidation.  Then that selling stopped and the stock
rebounded for about $1 before settling in for the day.
Multiple the action in Q a couple of hundred times, and maybe
the consumer confidence number really didn't have anything to
do with the rally.

Despite the strong confidence number, however, Treasuries
finished slightly higher.  The benchmark 10-year yield (TNX.X)
finished at 5.091%.  You'd think that bond traders would be a
bit more nervous if the consumer confidence number actually
meant anything to the economy, wouldn't you?

The most interesting, in my opinion, and maybe even the most
telling indicator of this market is the CBOE Market Volatility
Index (VIX.X).  Once again, the VIX (read: fear) imploded
during Tuesday's rally.  The VIX dropped by nearly 9 percent
on the 1.05 percent pop in the S&P 100 (OEX.X).  The lack of
skepticism in the face of rallies shows the crowd's willingness
to buy into the attempt.  That's not the stuff that bottoms
are built on.  Complacency remains a problem, which is why
any rally from here should not hold.  Sure, we could see the
market move higher for a week or so with as oversold as stocks
have become.  But it will be a trading rally and nothing more
until we see a wall of worry built.

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

Market Averages


DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     :  9946

Moving Averages:
(Simple)

 10-dma: 10065
 50-dma: 10273
200-dma:  9929



S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     : 1077

Moving Averages:
(Simple)

 10-dma: 1099
 50-dma: 1127
200-dma: 1129



Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low : 1089
Current     : 1277

Moving Averages:
(Simple)

 10-dma: 1324
 50-dma: 1412
200-dma: 1491



Biotech ($OSX)

The BTK was the day's best performing sector with its 3.98
percent pop.  But the index is hovering just above its yearly
lows, which tells me that Tuesday's strength was primarily a
product of short covering.

The best performing shares in the group included Millennium
Pharmaceuticals (NASDAQ:MLNM), OSI Pharmaceuticals (NASDAQ:OSIP),
Protein Design Labs (NASDAQ:PDLI), ImClone (NASDAQ:IMCL),
Gilead Sciences (NASDAQ:GILD), and Enzon (NASDAQ:ENZN).

52-week High: 676
52-week Low : 411
Current     : 436

Moving Averages:
(Simple)

 10-dma: 457
 50-dma: 488
200-dma: 519


Gold and Silver ($XAU)

The XAU measurably fell for the second consecutive session on
what appeared to be sector rotation.  Spot prices fell back
after running up past the $310 per ounce level.  The XAU was
Tuesday's worst performing sector with its 3.78 percent plunge.

Leading to the downside included shares of Harmony Gold
(NASDAQ:HGMCY), Placer Dome (NYSE:PDG), American Eagle Mines
(NYSE:AEM), Gold Fields (NASDAQ:GOLD), and Newmont Mining
(NYSE:NEM).

52-week High: 74
52-week Low : 78
Current     : 49

Moving Averages:
(Simple)

 10-dma: 74
 50-dma: 68
200-dma: 59

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

Market Volatility

Pretty amazing!  The VIX traded right up to its simple 200-dma
yesterday and again today before plunging back to earth.  While
I find the rally in the VIX promising as it relates to finding
a bottom in stocks, I can't get past the fact that each time
stocks even hint at a run complacency returns to the VIX in a
big way.  Selling rallies will continue working so long as we
observe the lack of stick in the VIX.

The VXN is showing a little bit more fear, which may mean that
we're closer to a bottom in tech related shares than the S&P
100 types of stocks.

CBOE Market Volatility Index (VIX) - 23.78 -2.33
Nasdaq-100 Volatility Index  (VXN) - 42.88 -2.24

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.80        578,779       462,089
Equity Only    0.69        500,810       319,460
OEX            0.88         16,195        14,254
QQQ            1.57         36,828        57,916
 
-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          63      + 0     Bull Confirmed
NASDAQ-100    28      + 0     Bear Confirmed
DOW           53      + 0     Bear Alert
S&P 500       62      - 1     Bear Alert
S&P 100       57      + 1     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  1.48
10-Day Arms Index  1.41
21-Day Arms Index  1.45
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 
points.

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

Market Internals

        Advancers     Decliners
NYSE      2214            942
NASDAQ    2248           1312

        New Highs      New Lows
NYSE      161             69
NASDAQ    195            108

        Volume (in millions)
NYSE     1,312
NASDAQ   1,959

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

Commitments Of Traders Report: 04/16/02

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

The spread between S&P commercials and small traders narrowed
during the most recent reporting period.  Commercials added a
few more longs than shorts, resulting in a small reduction in the
group's net bearish position.  Meanwhile, small traders added
quite a few short positions, coming off of the group's yearly
high in bullishness.

Commercials   Long      Short      Net     % Of OI 
04/02/02      313,294   406,337   (93,403)  (13.0%)
04/09/02      320,101   411,075   (90,974)  (12.4%)
04/16/02      322,578   411,245   (88,667)  (12.1%)

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
04/02/02      149,449     43,139  106,310     55.2%
04/09/02      151,237     47,678  103,559     52.1%
04/16/02      150,529     50,424  100,105     49.8%

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

Nasdaq commercials grew less bearish during the most recent
reporting period.  The group added a number of long positions,
while maintaining last week's short position.  Net, however, the
group is still bearish.  Small traders went in the opposite
direction by adding more shorts than longs, for a decrease in
the group's net bullish position.

Commercials   Long      Short      Net     % of OI 
04/02/02       26,211     31,840    (5,629)   (9.7%)
04/09/02       28,985     35,221    (6,236)   (9.7%)
04/16/02       32,024     35,723    (3,699)   (5.5%)

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
04/02/02       10,615     7,769     2,846     15.5%
04/09/02       11,640     8,353     3,287     16.4%
04/16/02       12,458    10,572     1,878      8.2% 

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

DOW JONES INDUSTRIAL

Dow commercials grew less bullish during the most recent reporting
period by reducing their number of longs and increasing their
number of shorts.  The group's net bullish position dropped by
about 1,100 contracts.  Small traders added slightly more longs
than shorts for a reduction in the group's net bearish position.

Commercials   Long      Short      Net     % of OI
04/02/02       18,717    12,549    6,168     19.7%
04/09/02       19,393    13,445    5,948     16.7%
04/16/02       19,080    14,267    4,813     14.4% 

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
04/02/02        5,192     9,007    (3,815)   (26.9%)
04/09/02        5,459     9,340    (3,881)   (26.2%)
04/16/02        5,644     9,448    (3,804)   (25.2%) 

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

THE SECTOR BEAT - 4/30
by Leigh Stevens


SECTOR ACTIVITY/OUTLOOK:
Bargain hunting was the order of the day today, especially in the 
cyclical stocks like Forest Products (FPP.X), the Biotech sector 
(BTK.X) and Software (GSO.X), all groups that had either been 
weak, but now seemed cheap (software & biotech) or had corrected 
from recent highs (Cyclicals).  

Tech stocks and sectors, with the exception of the hot hot hot 
healthcare sector (HMO.X) -- smoking! - dominated today. 


SECTOR TRADING IDEAS:

Biotechnology Index ($BTK.X) -- Regarding my focus last night on 
the technical position and chart of BTK, thanks to a Subscriber 
request, seemed pretty timely today, based on biotechs being the 
strongest performing group today -- + 16 points or 4 percent. 

I'll just leave up what I said yesterday on the bullish side: 
"recent lows were made in the same area over the past couple of 
years" and offered good potential support for that reason.

BTK rebounded strongly from yesterdays low at the highlighted 
"line" of support around 420.  



 

Stock up today in the BTK Index:


  

Stocks favored in the Biotech group, assessed as having better 
than average upside potential within this sector: MLNM; PDLI; 
IMCL; GENZ; IDPH; ADRX -- see names above.   

Healthcare Payors Index ($HMO.X) -- 
Stocks favored in this group and the optimum levels to buy the 
stocks or call options, after pullbacks -- of course these stocks 
have very strong upside momentum so corrections may occur from 
higher levels:

Oxford Health (OHP) at $43 (4/30 close: 46.16).
Wellpoint (WLP) at current levels & pullbacks to 70 (4/18: 75.08)
United Health Group (UNH) on dips to 80 area (close: 87.8)
Humana (HUM) - in $14 area (close: 16.3)
Mid Atlantic Medical (MME) - in 30 area (close: 36.43)
Tenet Healthcare -- in $66 area (close: 73.37)
Aetna (AET) - in $40 area (close: 47.6)
PacifiCare Health Systems (PHSY)in 23.5-24.70 area (close: 30.26)
 
Oil Services Index ($OSX.X) -- The OSX stocks continued to 
undergo minor corrections today -- I will update tomorrow if I  
have some suggested plays and levels at which support can be 
anticipated, based on a further pullback.  

Gold and Silver Index ($XAU.X)- The correction that began in 
these  stocks continued today. I continue to monitor individual 
stocks in this group as possible buys on pullbacks in key 
individual stocks with the XAU.



SECTOR WATCH - contu.

>> DRG, the Pharmaceutical sector index ($DRG.X), (4/22 comment). 
Rebounding from low end of a probable trading range and oversold.  
Moreover, investor attention may focus on DRB due to strength in 
other healthcare areas.
  
DRG sector may be playable by the purchase of the May 60 Merck 
(MRK EL) calls, a prominent stock in this sector, especially on a 
pullback in the stock.

UPDATE: No suggestion yet on Merck   



LONG/CALL TRADES, PREVIOUSLY RECOMMENDED:

>> Internet Sector index ($INX.X) - 4/17 Sector Trader 
suggestion: OPTION play: JNPR (Juniper Networks) May 15 Calls 
(JUX EC).JNPR objective is to $18, based on the stock having 
potential to retrace half of the Dec - Feb. downswing.

The May 12.5's (JUX EV) Calls were later recommended. 

UPDATE: Suggest staying with any calls bought on this trade play 
idea. Monitoring to see if rally develops after stock reached, 
and held, low end of its 7 month trading range, at 9.5-10.00. 


>> Telecom ($XTC.X) index - 4/15 suggestion:
OPTION play: Sector stock, Level 3 Communications (LVLT)-
1)June 5 Call (HGY FA) suggested at .60 and under
2)LVLT outright purchase, with stock under $5, also suggested. 
Objective on LVLT stock is to 5.5/6 based on upside potential 
based on the stock continuing to advance within its current 
uptrend channel.

UPDATE: LVLT broke its support up trendline at 4.2.  
EXIT any stock or long calls with value worth selling.  


>> Semiconductor Index ($SOX.X) - 

WATCH: Continue to watch any further rebound this week as a point 
to suggest put plays in SOX-member stocks like Micron (MU), KLA 
Tencor (KLAC), Teradyne (TER), Applied Materials (AMAT) or Intel 
(INTC).


>> Cyclical sector ($CYC.X) - 4/15 suggestion:
1.) iShares Cyclical Trust (IYC)  - 4/16 open: 56.95
Objective: new high above 63.00
2.) OPTION play: CYC Sector stock, - Alcoa (AA) 
May 40 calls (AA EH) - 4/16 open: .60  

UPDATE: CYC broke technical support and AA fell briefly below the 
low end of its trading range at $33.30, but has gotten up off 
these lows, rebounding to $34. Support at triple bottom low area 
around 33 may contain any further decline. HOLD   


>> Airline sector ($XAL.X) - 4/15 Sector Trader suggestion:
OPTION PLAY: XAL sector stock Southwest Airlines (LUV) 
Sept. 20 (LUV ID) call suggested at 1.25 or less.  
OBJECTIVE: $22 based on a rebound back toward the high end of the 
current uptrend channel.

LUV has been holding technical support, but just. Retreat in the 
stock to BELOW 17.25, on a closing basis, would cause me to exit. 


>> Utilities Index - Holders trust shares (AMEX: UTH) 
Long at 95.25 
Stop: 91.00



OPEN SHORTS/PUT PLAYS:

>> RTH (AMEX: Retail sector trust stock)
SHORT at 99.00 
LOWER stop to 100 



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.)   


Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                  Tuesday 04-30-2002
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:
*****

SLB $54.75 -1.15 (-2.06) Wouldn't you know it?  SLB closed right
on our coverage stop today forcing us to drop coverage on the
play.  The stock pulled back for the second straight day on
weakness in the Oil Service Sector Index (OSX.X).  The two day
pullback at this point seems pretty mild, so we may see a bounce
in the coming sessions.  Nevertheless, we're honoring our stop
and electing to drop coverage this evening.  Use any short term
bounce tomorrow to exit open plays and cut losses.


PUTS:
*****

EBAY $53.10 +2.26 (+3.40) It was fun while it lasted, but after
one last attempt to push EBAY decisively below support, the bears
gave in and covered EBAY with much of the rest of the Technology
sector on Tuesday.  Concerns that short-covering was just around
the corner had us tightening our stop to $52 last night and it
was decisively taken out early in the day, never to be revisited,
even with the afternoon market weakness.  We're dropping coverage
of EBAY tonight, and all positions should now be closed.  Look to
close any remaining positions tomorrow on any price weakness.


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

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

CALLS              Mon    Tue

SLB      54.75   -0.91  -1.15  Dropped, weakening oil sector
DGX      91.89   -1.05   1.89  New high, working very well!!
SII      70.05   -0.64  -0.61  Still strong, ready to bounce
THC      74.48   -2.78   1.67  Entry point on weakness
SRCL     67.53    0.09   0.98  New, health care bottom play
FISV     44.46   -0.44   1.62  New, strong getting even stronger 

PUTS

MU       23.70    0.45  -2.75  Working lower, breaking down big
EBAY     53.10   -1.14   2.26  Dropped, rebounded too much  
ADI      36.96   -0.49   1.21  Short covering rally with sector
PLCM     20.62   -0.08   1.69  Entry point after short covering
CVC      23.50   -1.23   1.03  Traced new low before recovery
LRCX     25.66   -0.19   0.63  Strength in SOX pulls stock higher
SEBL     24.19    1.09   0.51  Rolled over from the 10-dma at 25
VRTS     28.34    2.03   0.09  Losing steam, rolled and bad close
FLIR     39.88   -1.18  -2.41  New, diverging from defense space
GS       78.75   -0.40   0.25  New, stalling, ready to rollover 


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

SII $70.05 -0.61 (-1.24) The Oil Service Index (OSX.X) has
pulled back in the last two days, and SII has tracked its
sector's movement nearly exactly.  The stock has pulled back
in the last two sessions on weak volume, which leads us to
believe that the weakness is nothing more than routine profit
taking after the recent move higher.  Investors appear to be
waiting for the next catalyst to take this one higher, which
may come in the forms of renewed violence in the Middle East,
or renewed optimism over the recovering U.S. economy.  Either
way, the sellers appear non-committed, and the buyers on
hold.  Traders looking for short term entries on this recent
pullback can look for a trade down to the 10-dma at $69.14,
where a rebound would offer favorable entries.  The $69 level
should also be supported by the quintuple top that was at
that level before SII's recent breakout.  The platform should
inspire buyers, either shorts covering or bulls, to step in
and pro up the stock from the $69 level.  Confirm direction in
the OSX.X before entering on weakness.

DGX $91.89 +1.89 (+0.84) Those Health Care stocks just keep on
rising.  With the HMO index tacking on another 2.75% gain on
Tuesday for yet another new high, it seemed that everything even
remotely tied to health care was on the rise.  Shares of DGX were
primed for another solid advance after a bit of profit taking on
Monday and sure enough they did.  Intraday the stock actually
topped the $92 level before settling just below that to post yet
another all-time closing high.  Our DGX play is just a matter of
buying the dips, so long as the bullish uptrend remains intact.
Those that took advantage of the brief dip to $89 this morning got
a great entry and it looks like DGX wants to run higher still.
The recent double-top breakout bears this out, with the vertical
count growing today to $109.  Look to initiate new positions on an
intraday bounce from support at either $90 or $89.  Raise stops
tonight to $88.  Of course a breakout through the $92 level is
tradable by the momentum types, so long as the breakout is
supported by continued strong volume.

THC $73.37 +1.67 (-1.11) After giving us a bit of a scare on
Monday by trading down to exactly $71 (the level of our stop),
shares of THC rebounded smartly in the afternoon session and
continued that pattern today.  By the closing bell, THC was well
off those lows and appears to be firming above the $72.75 support
level.  But here's the rub.  The ascending trendline that has
been supporting the stock since early March was broken in
yesterday's decline.  And despite a valiant attempt today, THC
couldn't get back to the upper side of that trendline (now
at $74), which is likely to act as resistance over the near-term.
So we're left to look for other measures of support, such as the
20-dma ($71.18) or the 10-dma ($72.95) as possible points to
enter on future dips and bounces.  The $71 level still looks like
solid support, so we'll leave our stop intact there until we see
THC push back above the $74.50 level.  In the meantime, use the
intraday dips as opportunities to add to new positions.  Those
that want to trade the breakout will need to see THC clear $74.75
before playing.


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

SRCL - Stericycle $67.53 +0.98 (+1.33 this week)

Stericycle, Inc. is a regulated medical waste management company
in North America, serving approximately 269,000 customers
throughout the United States, Canada, Puerto Rico and Mexico.
Stericycle's services and operations are comprised of collection,
transportation, treatment, disposal and recycling, together with
related training and education programs, consulting services and
product sales.

The broader health care sector continues to impress.  With the
exception of anything drug-related, the health care group has
been one of the best performing segments of the market this
year.  That includes the major health care providers evidenced by
the run up in the Health Maintenance Organization Index (HMO.X);
it includes the health care insurers; major operators of
hospitals have been performing very well; manufacturers of
medical devices and laboratory equipment have been trading
exceptionally well.  We're turning to a company near the very
end of the health care market in Stericycle.  The firm
provides disposal of medical waste services, and even its
business has been booming.  The stock has been trending higher
for three years now, and that trend appears no where near
ending.  The breakout during today's session should lead to the
next leg higher for this stock, which could take it well above
the $70 level in the short term.  This play should also
benefit from further weakness in the broader market as the
buyers find places to park money with relative safety and
consistence in performance.  Traders looking for new entry
points can take plays from current levels on further strength
in tomorrow's session.  Confirm any rally attempt with a move
past today's high at the $68.50 level.  Dip buyers who would
rather wait for a pullback can do so by watching for a retreat
down into the $64.50 to $65 level on relatively lighter
volume.  Our stop is initially in place at $64.

BUY CALL MAY-65*URL-EM OI= 15 at $4.10 SL=2.50
BUY CALL MAY-70 URL-EN OI=102 at $1.40 SL=0.25
BUY CALL JUN-65 URL-FM OI=  0 at $6.10 SL=4.75
BUY CALL JUN-70 URL-FN OI=  1 at $3.20 SL=2.00

Average Daily Volume = 286 K



FISV - Fiserv $44.46 +1.62 (+1.18 this week)

Fiserv, Inc. is a technology resource for information management
systems used by the financial industry. Fiserv provides
information management technology and related services to banks,
broker-dealers, credit unions, financial planners and investment
advisers, insurance companies, leasing companies, mortgage
lenders and savings institutions.

Some companies continue to perform financially during this
economic downturn.  Their shares are garnering a premium
valuation.  Fiserv reported revenues of $560 million during
its first quarter, which marked a 21 percent increase over
the same period one year ago.  The stock has certainly
reflected the company's strong financial performance this
year as FISV remains one of the stronger stocks on the
Nasdaq market.  The stock's relative strength remains very
strong versus most market measures, which makes it one of
the better candidates for a breakout to new highs once the
broader market stabilizes.  Traders looking for a quick
breakout can use an advance above the $45 level to enter
new call plays into strength.  Just make sure that the
market is support such a momentum based strategy before
pulling the trigger.  Those who'd rather enter on a dip can
wait for a pullback on market related weakness down into
the $43 level which is supported by the 10-dma.  Our stop
is in place at $42.25.

BUY CALL MAY-40*FQV-EH OI=264 at $4.90 SL=3.00
BUY CALL MAY-45 FQV-EI OI=281 at $1.10 SL=0.50
BUY CALL JUN-40 FQV-FH OI=201 at $5.50 SL=2.75
BUY CALL JUN-45 FQV-FI OI=762 at $2.00 SL=1.25

Average Daily Volume = 1.51 mln



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

CVC $23.50 +1.03 (-0.20) News of the YES network suing CVC on
the issue of a Sports-TV monopoly sent shares of the company
plunging to fresh all-time lows on Monday and the slid continued
on Tuesday all the way to the $21.80 level.  The combined effect
of market-wide short covering on Tuesday, along with news that
subscriber losses from the YES Network controversy would likely
be only around 15K, rather than the previous estimate of 30K were
enough to give the stock a bit of a lift, with CVC ending the day
with a more than 4.5% gain.  Despite the sharp rebound, the stock
is still in a pronounced bearish trend and we are just looking at
a fresh opportunity to enter the play.  Look for price to roll
over near the $24 resistance level, (or even as high as $25)
before opening new positions.  We're leaving our stop in place
at $25.25.  Keep in mind that the fuse on our CVC play is rather
short, with the company scheduled to report earnings Thursday
morning before the opening bell.

PLCM $20.62 +1.69 (+1.61) Short covering was the name of the game
on Tuesday.  We knew it was bound to occur sometime soon, and PLCM
went with the flow, tacking on nearly 9% to close just a bit below
our $21 stop.  Volume ran right at the ADV, so it was clearly a
solid move.  The future of our play will be determined by the
direction of the NASDAQ tomorrow.  A rollover in PLCM from the
vicinity of $21 will make for another attractive entry into the
play as the bears reassert their influence.  Intraday resistance
comes in near the $21.15 level, and that is awfully close to the
declining 10-dma at $21.19.  Enter on the rollover if it occurs,
but stay true to your stop.  If the bulls manage to power through
the $21 level on a closing basis, then we'll want to stand aside,
as it will likely indicate further upside to come.

SEBL $24.19 +0.51 (+1.60) While short-covering seemed to be the
dominant theme on Tuesday, the Software sector (GSO.X) was
certainly not a standout leader.  Sure the GSO managed to finish
higher by more than 2.5%, but appeared to roll over right at the
$133 resistance level.  After the early rise, shares of SEBL
showed even more weakness than the rest of the sector, falling
nearly a dollar from their intraday high.  Isn't it interesting
that the high of the day corresponded almost exactly to Friday's
intraday high?  The descending trendline at $25.75, also the level
of our stop, is still looming overhead as a formidable obstacle
for the bulls.  Given the late-day weakness, it appears unlikely
that level will be crested unless the whole sector really goes on
a bullish tear.  Continue to use failed rallies (like the one
this afternoon at $25) to initiate new positions in anticipation
of the stock heading back to test its lows just above $22.

VRTS $28.34 +0.09 (+2.12) Beginning its rebound a bit earlier
than the rest of the Technology market, VRTS bottomed near the
$26 level on Monday and finished right at the high of the day.
The buying (actually short-covering) spree continued on Tuesday
morning before running out of steam near the $29.50 level before
commencing to roll lower for the remainder of the afternoon.
Traders that have been watching that descending trendline got a
choice entry as VRTS kissed the line and then rolled over like
an obedient puppy.  When the short-covering had run its course
in VRTS and the Software sector (GSO.X), gravity took effect like
it always does in weak stocks.  Another pop up to the $29.50 level
would make for a solid entry, but we need to beware of a changing
tide in the Technology market.  If the NASDAQ can continue to
move northward, the GSO will likely go along.  And where the GSO
leads, VRTS will likely follow.  So keep those stops in place at
$30.50, exiting open plays on a close above that level.

MU $23.70 -2.75 (-2.30) Hynix Semiconductor's board shot down
MU's proposal to buy the company, which sent shares of the
would be acquirer reeling in today's session.  The board said
that there were too many problems with the memorandum of
understanding, and that it had overestimated the value of
Micron's stock to be used to pay for the estimated $3.4 billion
deal.  For Micron, the deal was expected to make it the world's
largest producer of computer memory products.  Investors
obviously didn't like the revelation of the deal falling
through as they dumped the stock today despite the modest
strength in the broader chip space.  From here, we can expect
some more volatility as the deal continues to develop.  Having
said that, traders might want to lock in gains to protect
against any last ditch effort by MU to save the deal.
However, if the negative sentiment persists, we don't expect
major support to show up until the $20 level.  We're lowering
stops to $26.90. 

ADI $36.96 +1.21 (+0.72) ADI rebounded in today's session on
strength in the Philadelphia Semiconductor Sector Index (SOX.X).
The SOX.X traded higher on what appeared to be mostly short
covering and possibly a little bit of end of th month
buying by portfolio managers.  That macro buying spilled over
into ADI, and rebounded the stock for a modest gain after
yesterday's slip towards the $35 level.  Over the next two days,
we expect ADI to encounter resistance near its recent relative
highs at the $38.50 mark.  A rollover from there is likely
especially if the SOX.X does the same.  Traders looking for
new entry points into put plays can start by watching for such
a rollover in the SOX.X, then confirming that move over to ADI.
The descending 10-dma overhead near $39.50 should help to
serve as a risk management tool, as well as pressuring the
stock back down.  To the downside, we'll be watching for a
breakdown below the $35 mark now that some of the stock's short
term oversold nature has been removed.

LRCX $25.66 +0.63 (+0.44) LRCX followed the Semiconductor
Sector (SOX.X) lower in yesterday's session to trace a new
relative low in the recently established descending trend.
The stock gapped higher this morning, and continued higher
to blow off some of the short oversold way of the stock.  We
should get another get entry point on a rollover from the
upper end of the channel in the next few days if the SOX.X
continues higher either tomorrow, or Thursday.  Traders
looking for that rollover can start looking for divergence
from the sector or price weakness just below the $27 level,
which is where LRCX had trouble clearing late last week.
Those sellers are most likely still around and waiting for
LRCX to trade back up to that level.  The 10-dma just below
the $27 level should help to contain any further rally on
short covering.


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

FLIR –$39.88 -2.41 (-3.69 this week)

FLIR is engaged in the design, manufacture and marketing of
thermal imaging and stabilized camera systems for a wide variety
of commercial, industrial and government applications.  The
company's products are divided into two categories, which
include the thermography products and imaging products.  In the
Thermography division, FLIR manufactures products that are sold
to commercial, industrial, research and machine vision customers.
For industrial customers, FLIR has developed thermography
systems that feature accurate temperature measurement, storage
and analysis.  The Imaging division caters to military, law
enforcement, surveillance and security customers.

The strength in the Defense Industry index (DFI.X) has been truly
impressive since the terrorist attacks in September, and rightly
so.  With the government expanding its Defense spending, that is
likely to have a direct impact (positive, we might add) on the
companies likely to provide the products and services needed to
fight the war on terrorism.  Sure enough, the DFI index rocketed
to a fresh all-time high on Tuesday, propelled in part by news of
the Northrup Grumman Navy deal last night after the close.  So
with all this talk of the strength in the sector, you may be
wondering why this play is in the Put section.  Well, shares of
FLIR broke down in a big way on Tuesday (contrary to the overall
sector) and they did so on big volume too.  While there wasn't
any news that would have prompted the selloff, we've seen this
pattern before.  When a stock sells off for apparently no reason,
it may very well be hinting at some bad news waiting in the wings.
FLIR sold off below the $41-42 support area, then the 200-dma
($41.14), before finally finding some buying interest near the
$37 level on news that BofA was out defending the stock, saying
there was nothing fundamental to cause the drop in price.  The
stock responded by rebounding into the close, coming to rest just
under $40.  But the technical damage had been done, and in this
case, FLIR looks like it trades significantly lower over the near
term.  In fact, today's triple-bottom breakdown on the PnF chart
has us eyeing the $23 level.  That may seem a long ways off, but
if the $35 support level gives way on some sort of bad news, it
is entirely possible.  Wait for the short-covering to run its
course, likely in the $40-41 area and then initiate new positions
on the rollover from resistance.  We want to give the play some
room to work, so we are starting out with our stop set at $44.

BUY PUT MAY-40*FFQ-QH OI=154 at $2.65 SL=1.25
BUY PUT MAY-35 FFQ-QG OI=  0 at $0.90 SL=0.50

Average Daily Volume = 673 K


GS – Goldman Sachs Group $78.75 +0.25 (-0.40 this week)

The Goldman Sachs Group is a global investment banking and
securities firm that provides a wide range of services worldwide
to a substantial and diversified client base that includes
corporations, financial institutions, governments and high
net-worth individuals. The company provides investment banking,
which includes financial advisory and underwriting, and trading
and principal investments, which includes fixed income, currency
and commodities, equities and principal investments.  GS
recently completed the acquisition of Spear, Leeds & Kellog,
which is engaged in securities clearing, execution and market
making, both floor-based and off-floor.

As the investigation into the Brokerage industry heats up over
the weeks ahead, the selling pressure exerted on the stocks in
the Brokerage sector (XBD.X) is likely to increase.  It all got
started with the NY Attorney General taking a hard look at the
alleged unethical and possibly illegal actions of some of the
analysts at Merrill Lynch.  That got the ball rolling and last
week the XBD index finally broke down under the $480 support level
and the 200-dma at $474.  After the drubbing the sector took on
its most recent plunge a bit of short-covering is to be expected
and that is what we saw this morning.  But as soon as the
artificial buying (short-covering) had run its course, the XBD was
back on the decline, giving up most of its intraday gains by the
closing bell.  Shares of GS have been weak relative to the XBD
since last fall, and the stock has been in a declining trend for
the past 2 months.  Prompted by the sector weakness, GS broke
below the $78 support level last week and the $80 level is now
shaping up as solid resistance.  Retracement levels do a good job
of explaining the recent price action, as the low last week
occurred very near the 62% retracement ($76.25) of the fall rally
and the intraday highs this week are coming very near the 50%
retracement ($80.25).  The current vertical count from the PnF
chart puts the bearish price target at $70, so there is
definitely some room for the stock to fall.  Look to initiate
new positions on rollovers from the $80 level, or possibly on
an intraday push to the $81.50 level (recent support and now the
site of the declining 10-dma).  Alternatively, look to enter the
play on a breakdown below the $76 level.  We are initiating
coverage with a liberal stop at $83.

BUY PUT MAY-80*GS-QP OI=3062 at $3.40 SL=1.75
BUY PUT MAY-75 GS-QO OI=2145 at $1.35 SL=0.75

Average Daily Volume = 3.30 mln



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The Option Investor Newsletter                  Tuesday 04-30-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


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

ADI - Analog Devices $36.96 +1.21 (+0.72 this week)

Analog Devices, Inc. is engaged in the design, manufacture and
marketing of high-performance analog, mixed-signal and digital
signal processing integrated circuits (ICs) used in signal
processing applications. The Company produces a wide range of
products that meet the technology needs of a broad base of
customers and markets. Markets and applications for the
Company's products include communications, computers and
computer peripherals, consumer electronics, industrial,
instrumentation, military and space systems and automotive
electronics.

Most Recent Update 

ADI rebounded in today's session on strength in the Philadelphia
Semiconductor Sector Index (SOX.X).  The SOX.X traded higher on
what appeared to be mostly short covering and possibly a little
bit of end of th month buying by portfolio managers.  That macro
buying spilled over into ADI, and rebounded the stock for a
modest gain after yesterday's slip towards the $35 level.  Over
the next two days, we expect ADI to encounter resistance near
its recent relative highs at the $38.50 mark.  A rollover from
there is likely especially if the SOX.X does the same.  Traders
looking for new entry points into put plays can start by watching
for such a rollover in the SOX.X, then confirming that move over
to ADI. The descending 10-dma overhead near $39.50 should help to
serve as a risk management tool, as well as pressuring the stock
back down.  To the downside, we'll be watching for a breakdown
below the $35 mark now that some of the stock's short term
oversold nature has been removed.

Comments

The SOX under performed the Nasdaq by about 0.75 percent
during today's trading.  That relative weakness may portend
another rollover in the chips.  Using the SOX as your guide,
watch for a rollover in ADI from the $38.50 level on any
further upside from current levels driven by short covering.
Tight stops just above entries can lessen risk.
 
BUY PUT MAY-40*ADI-QG OI=1288 at $4.00 SL=3.25
BUY PUT MAY-35 ADO-QG OI=1574 at $1.15 SL=0.75

Average Daily Volume = 2.84 mln



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**************
TRADERS CORNER
**************

Gold Revisited
Buzz Lynn
buzz@OptionInvestor.com

For those of you that never had the opportunity to check out an 
article I penned (OK, digitized) in IndexSkybox in its heyday, 
take a stroll with me down Memory Lane.  It's paved with gold, and 
I've taken a keener interest in the stuff lately.  That interest 
has been further fueled by what seems to be other people's 
interest in it too.  "Gold" is a word that is beginning to roll 
off more than a few peoples' tongues.  It has not gone unnoticed 
by me either that when hearing such, it isn't met with derision 
and the former scoffs of tech investors.  Hmmm. . .is change in 
the air?

As I noted then, I never much cared for the stuff as a part of my 
portfolio in the past.  Maybe that’s because the soft, yellow 
metal hasn't done much for anyone's portfolio since its climax 
near $900 over 20 years ago.  But a few things have me thinking 
differently now, most of which can be traced to nothing more than 
contrarian thinking and the Great Humiliator.  

The contrarian part seems obvious.  After all, who in their right 
mind would buy gold in a deflationary environment?  But let me 
explain that Great Humiliator thing.  It is a term coined by money 
manger and Forbes columnist, Ken Fisher to describe the sole 
mission of the market - to humiliate and embarrass as many of us 
as possible at any given time.  With so many people convinced over 
the last 20 years that money invested in gold is dead money, and 
with inflation seemingly the farthest worry from anyone's mind, 
perhaps the greatest humiliation to the market would be for gold 
prices to take off.  

Call it the long version of "expect the unexpected".

But just maybe there are some rational reasons why gold might make 
an interesting trade, if not investment, right now.  Please 
understand that I am not recommending you drop everything in order 
to melt down your jewelry or hop the next flight to South Africa 
for a stash of Krugerrands (South African gold coins).  I bring it 
up precisely because nobody else does, and I offer this grain of 
salt because I sometimes arrive at the wrong conclusion even 
though the facts may be correct.  It's like a story that Abe 
Lincoln once told in court when correcting opposing council on a 
conclusion that had erroneously drawn.  

Abe relay's (paraphrasing here), "Six-year-old Mikey runs from the 
barn into the home shouting, 'Mommy - Johnny has pants down and 
Mary has her dress up, and they are about to go to the bathroom in 
the hay!' to which Mom responds, 'Right facts, wrong conclusion.'"

I may be six-year-old Mikey in this set-up, but hear me out.

The first "fact" that strikes me is that the Fed has be shoveling 
piles of money into this economy to keep it afloat.  I don't know 
the exact figures, but the money supply has been growing at double 
digit rates (or something like that) in order to preserve a stock 
market and real estate bubble, which further preserves the notion 
that we are somehow "rich", and should continue to spend our way 
out of tough economic times.  Yet, due to worldwide production 
overcapacity, prices for goods and services have remained flat if 
not down.

In pure logical terms, when too much money is chasing too few 
goods, INFLATION is the natural result, not deflation.  We ought 
to be seeing a 1970's style price run-up in tangible goods right 
now, but we are not thanks largely to above-mentioned 
overcapacity.  

This also dovetails nicely into a not-so-clear observation that 
has yet to be observed by the dominant financial media.  Remember 
this from this article if nothing else: there is a fundamental 
shift under way from over valued, inflated FINANCIAL assets 
(stocks, bonds, notes, interest swaps, mutual funds, even passbook 
savings) to hard, TANGIBLE assets like real estate, commodities, 
natural resources, and yes, even gold.  The change is subtle and 
takes (usually) decades to complete.  Think 1980-1982 when you 
couldn't give financial assets away, yet gold traded to just shy 
of $900 per oz and real estate had just ended what might have then 
been its biggest boom ever, especially with rampant inflation.  
That was then, the opposite is true now pertaining to gold.

But back to inflation - what happens when that ends and our demand 
catches up with and begins to outstrip capacity?  Can anybody see 
commodity prices and bond rates rising then?  I can, right along 
with the price of finished goods and hard assets.  That alone 
could single-handedly save the real estate and automobile markets 
not to mention the metals, steel, lumber, and oil companies that 
make all the rest possible.  Commodities, including gold, could 
ultimately be the beneficiaries of the expanding Fed-liquidity 
policy.

The second "fact" is anecdotal and comes straight out of Forbes 
from the December 10, 2001 issue.  It's more a story about 
lightning striking the same place twice, and relay's the story of 
a guy named James Sinclair, who in 1977 predicted gold would peak 
at $900 per oz. from the then current $150.  It never got there, 
but did reach $887 on January 21st, 1980.  The next day, Sinclair 
unloaded his entire gold position personally netting $15 mln.  He 
then said gold would languish for the next 15 years, which it has 
(and then some).  Now he is bullish and says that his new bet on 
gold is the biggest in his life.

Should we listen to him?  I'm inclined to give him an ear and tell 
him, "Convince me".  I don't want to give the guy guru status, but 
I am certainly interesting in the thinking that led to his 
conclusions that led to his massive investment.

Here's the logic taken straight from the article.  First, he 
thinks the dollar is due for a fall (I agree), and that mining 
companies, which typically pre-sell metal to protect against price 
drops, have not hedged their bets this time.  That alone should 
cause a small rise in the price.  If that happens, look for gold 
speculators to cover their $36 bln in short positions at roughly 
$305.  That short squeeze would spark another run to $350 or 
perhaps $430 according to the article.

Interesting.  It so happens the prediction has come true so far 
since the Forbes article first appeared.  The big story and 
current buying has been in Japan since the Bank of Japan (Japanese 
Fed) stopped insuring savings and checking accounts.  To preserve 
the account, smart Japanese money has been converting cash into 
gold since that is, de facto, the only way to theoretically insure 
the account.  In fact, when gold hit $305 yesterday, it 
immediately shot up to $312.50.  While it backed off a bit (and 
charts suggest that it may do the same again - see below), my 
thinking is that any pullbacks to $300-$305 might make an 
excellent entry.  I'll wait until the stochastics back off a bit 
from overbought on the daily chart.

June 2002 Gold Contract chart - GC02M (weekly)


 

This chart shows all the way back to April of 1997, but with the 
June 2002 contract (GC02m) nearing exercise date, looking further 
out to say December 2002 (GC02z), June of 2003 (GC03m), or even 
December 2003 (GC02z) would give us more time to be right.  But 
the new trend over the past year is pretty clear - up with a 
series of higher lows and higher highs.  Nearer term, perhaps a 
bearish wedge, but the support line is clear at $300 or $285.

One other thing noted in the Forbes article: "It costs most 
companies $250 (including back office support) to extract an ounce 
of gold.  With gold trading below cost, it made no sense for 
mining companies to hedge against further price reductions [which 
would help explain why they no longer entered pre-sell contracts 
as noted above].  Recognizing that such hedges meant that a major 
force pulling gold down would soon disappear, he [Sinclair] 
reasoned that the bottom was near."  

Sure enough in February, 2000, word broke that large mining 
companies had stopped hedging.

Again, all this is not to say we should buy every ounce in sight.  
Just as Mikey did in Abe's story above, my conclusions could be 
entirely incorrect.  But the strategy seems to have some merit 
based on the facts, and might make an interesting trade with some 
speculative risk capital.  While we don't write about trading 
futures or commodities, gold mining companies might make 
interesting targets too if looking for a position trade or perhaps 
even an investment trade.  We could always look at the Gold and 
Silver index (XAU) in which to purchase options, but time decay 
and the bid/ask spreads are murder.  Personally, with gold stocks 
already up over 50% this year, my inclination is to stick to the 
actual metal, itself, in coin or form.  Like I wrote in the recent 
past, I'm not just talking about a flood.  I'm preparing an ark.

Just to be sure, I checked with Preferred Trade to see about 
trading commodities and futures, and was pleasantly surprised that 
though did not offer that service now, it is on their short "to-
do" list.  They may offer it as soon as July, 2002.  That date was 
recently moved out from April.  Stay tuned on that.

In the meantime, for those who are interested in futures trading 
and can stomach the risk, www.interactivebrokers.com offers 
trading accounts with as little as $2000 U.S.  You can sign up 
online but have to pass a test, which I know nothing about.  This 
is not an endorsement - only a place to start if this line of 
trading might interest you.  Short of that, you can actually buy 
gold coins for a 2%-4% premium over their intrinsic value.  Find a 
dealer by doing a typical search using any popular search engine.

There is currently nothing to suggest the Gold Bugs are wrong and 
I think the case for gold (or silver) becomes more compelling each 
day.  Yes, gold is out of the ordinary, but it just might make a 
great trade, hedge or investment and help us beat the Great 
Humiliator.  Maybe that is the correct conclusion given the facts.  
But that decision is up to each of us to determine on our own.  

Happy trades to you until we meet again!


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************
MARKET WATCH
************

One recently triggered play is replaced with two more ideas.  One 
bullish and one bearish.


To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/043002.asp


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

More movement this week in the major averages and sectors.  
Several sectors are poised to trigger alerts.


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