Option Investor

Daily Newsletter, Thursday, 05/30/2002

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The Option Investor Newsletter                Thursday 05-30-2002
Copyright 2001, All rights reserved.                       1 of 3
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MARKET WRAP  (view in courier font for table alignment)
        05-30-2002        High      Low     Volume Advance/Decline
DJIA     9910.70 – 11.30  9943.50  9802.20 1236 mln   1493/1681
NASDAQ   1631.92 +  7.53  1637.65  1607.30 1360 mln   1664/1767
S&P 100   528.88 –  1.16   531.56   523.31   totals   3157/3448
S&P 500  1064.66 -  3.00  1069.50  1054.26
RUS 2000  487.83 +  0.23   489.57   482.60
DJ TRANS 2717.96 -  6.96  2725.51  2697.96
VIX        23.14 -  0.54    24.51    22.77
VIXN       46.57 -  1.00    47.66    45.04
Put/Call Ratio      0.80

Sidelined traders
by Leigh Stevens

Given the lack of any strong countervailing bullish news that 
might impact the Market directly, the unsettling tensions coming 
from the Indian subcontinent helped keep potential buyers on the 
sidelines this morning. Given this situation, there was more 
impetus to get out then get in, so the orders that were coming in 
for the first half of the day were predominately on the sell 

The second half of the session saw some bullish influences 
affecting Software and the PC sector that brought in some tech 
buying along with the same in healthcare, biotech and healthcare 
sectors, along with technical buying as indices held prior lows. 
The afternoon lift brought the Nasdaq Composite, Nasdaq 100 and 
the Russell 2000 indexes into slightly plus territory.  The Dow 
Industrials (INDU) S&P 500 (SPX), and S&P 100 (OEX) indices got 
back to nearly unchanged, closing just fractionally lower.  

Tomorrow is another story as far as potential for market-moving 
news - we'll see important releases on Productivity, Factory 
Orders, and Consumer Sentiment as noted on our Event Calendar. 

The market woke up today with news that Pakistan forces continued 
to be shifted to Pakistan's eastern border with India. Besides 
the dire prospect of conventional war that has the risk of going 
nuclear, it's bad news for the U.S. in that some of those troops 
were helping American forces search for al-Qaida and Taliban 
forces near and along the Afgan border. 

Pakistan and India have now over a million troops in the Muslim 
dominated Kashmiri region, mostly under Indian control, but hotly 
disputed for decades.  Muslim extremists seem to want to get the 
two big guys fighting, so they can advance more of their agenda: 
uniting the Muslim world and their "oppressed" breathen, 
weakening the moderate secular government of President Musharef,
 and taking the pressure off the same al-Qaida and Taliban forces 
that the U.S. has had on the run and on the defensive. 

The Pentagon was said to be preparing plans for mass evacuations 
of U.S. government personnel as well as U.S. nationals in general 
- numbers of 60+ thousand people were being discussed. Secretary 
of Defense, Donald Rumsfield is planning now to go the area next 
week. Bush says that the ball is Pakistan's court to stop the 
infiltration of terrorists across into Indian controlled 

The Department of Labor reported that jobless claims fell in the 
week ended last week.  Seasonally adjusted new unemployment 
claims fell to 410,000, a decrease of 12,000 from the previous 
week's revised 422,000. The 4-week average fell to 418,500 from 
the prior week's 421,500.

The dollar fell against the Euro, Pound and the Yen. The Euro 
went to a 15-month high to 93.78 (+0.3%) and the dollar fell to a 
new 6-month low against the yen which closed at 123.3 yen to the 
dollar, with the buck off 0.8% against the Japanese currency. 
Keeping some of this in perspective, the yen was at one time 
going for 100 to the dollar and the Euro began its life trading 
at $1.15 - it has some ways to go to get back to "par"; i.e., 1 
dollar equaling 1 euro, which is where I think it can and should 
wind up. 

The weaker dollar helps many of the American multinationals, as 
U.S. goods and services become cheaper relative to our other 
major trading partners. A strong dollar is always a mixed 
blessing. Good if you want to tour Europe, not so great if you 
live there and want to buy American. 

Many economists, being practitioners of the "dismal science", 
feel that a weak dollar could hamper the U.S. economic recovery. 
Their thinking is that a steep drop in the dollar risks a 
sustained, non-inflationary economic recovery, as Americans start 
paying more for foreign imports, pushing up prices and U.S. 

In this view, the dollar is already overvalued. However, this 
viewpoint is debatable.  It's like PE ratios - what level is over 
or undervalued? It's often a pretty subjective thing. Also, a 
cheaper dollar makes U.S. equities cheaper and foreign investing 
has been a significant influence in the past. It still is true 
that the U.S. is having a significantly stronger economic rebound 
than anywhere in the world.  Bottom line, I would not necessarily 
take the recent months weakening trend in the dollar as another 
bearish Market influence without question.   

Gold eased a bit, with the nearby futures at 326.20, -.15 the 
ounce. Bonds rose as there was a flight to the relative safety of 
U.S. Treasuries.    

As noted, there was little bullish news other than the improving 
jobless claims numbers. Consequently, traders focused such things 
as the sale of Miller brewing and more talk of the SEC's long-
standing probe relating to whether Microsoft manipulated its 
earning's picture by inappropriate accounting measures. 

Dow stock Philip Morris was up over a percent after the company 
announced the sale of its Miller brewing unit to South African 
Breweries PLC, a $5.6 billion deal creating the world's second 
largest beer maker. Microsoft (MSFT) was up 1.6 percent as 
investors reacted positively to a Wall Street Journal story that 
MSFT and the SEC are in negotiations to resolve allegations about 
fuzzy accounting that would give the impression of steady profit 
and earnings growth. 

The Journal indicated that any violations were minor. The SEC has 
launched several investigations in recent days against energy 
firms for inflating their earnings through accounting tricks such 
as sham "round-trip" trades. The oil index ($OIX.X) fell 1.6%. 
Salomon Smith Barney downgraded several energy companies, noting 
continued scrutiny by the debt ratings agencies, mounting legal 
and regulatory risks and concerns over heightened challenges for 
their business models. El Paso Energy (EP) fell another 8 percent 
as investors sold EP following its restructuring announcement 

Soundiew Technology, in an influential analyst report, said that 
there will be a "clear uptick" in the enterprise application 
software sector, Q2 forecasts are "realistic" and a repeat of the 
disappointing Q1 quarter was unlikely. Their report went to say 
positive things above PeopleSoft (PSFT - +9%), and Oracle (ORCL - 
unchanged). Besides these companies in the Software Index ($GSO.X 
+2.5%), the day also saw good gains in Veritas Software (VRTS - 
+10%) and Siebel Systems (SEBL - +6%).  

Not to discount the dangers on the political front, but the focus 
should probably remain "on the economy, stupid". (Let's assume
that Pakistan and India will find an overriding interest in
self-preservation and avoiding another costly war.) However,
there are obviously still a couple of major things bothering
current or potential U.S. equities investors: 

One, is the still lackluster pace of business spending. 
Businesses spent so much on the last technology buying spree, 
that they are taking a very cautious stance on opening up the 
corporate pocketbooks again, until they see their earnings coming 
on stronger than they are; sort of don't fire until you see the 
"whites of their eyes!" 

Two, there is still this basic view by professional and 
individual investors that stocks are still fully if not over
-valued. I've stuck my neck out and said that the market is
probably bottoming and that we're in a price area where further
downside risk may be limited. However, that said it still takes 
BUYING to get em back up. I haven't seen that investors are 
finding any compelling reasons for sustained buying. And for 
index options players this factor, by necessity, keeps the 
trading focus short-term.  The weak sector, as we've seen over 
and over, is tech.  

Bottom line, buy the S&P and Dow indices and representative 
stocks around these recent lows, sell the Nasdaq indexes around
recent highs. The strategy is that called for the likely
continuation of a trading range. Any expectations, my own
included, for a breakout of this range, are starting to look
like they will not be realized this summer. The S&P 500 (SPX) 
would need a weekly close above 1140 and the Nasdaq Composite 
above 1700, to suggest otherwise. Support continues to look like 
it will come in the 1050 area in S&P and 1600 in Nasdaq.  Like to 
trade? - there are opportunities within this range.           


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


The sideways to lower move is moving the daily stochastic 
indicator down toward an oversold reading, but its not there yet.  
Price wise, SPX rebounded today from the low end of its recent 
trading range, as can be best seen on the hourly chart. The 
pattern of a double bottom, in this case at 1054, was the same as 
seen back in February, although then the double bottom formed at 
a higher level, at 1075. The 1075 level, once support, will 
likely offer some resistance on a rebound back to it. Above 1075, 
focus would be at the prior 1097 (up) swing high. 

Use of the 21-day moving average acts as a "pivot" point, with 
trade under this level suggesting a bearish near term trend and 
trade above it indicating upside potential as long as prices can 
hold above it. The percentage trading envelope lines reflect a 
tendency for extremes in the indexes trading range to be 
contained within these percentage envelopes (relative to the 21-
day average). So, for example, if 1054 (also, 1048.9) was 
pierced, 1031 comes in as a possible "worst case" downside 

The Dow 1/100 index ($DJX.X) - Daily/Hourly charts:


As with the S&P, a double bottom low may have formed in the Dow 
at 98 in DJX or Dow 9800.  Moreover, today's low formed in the 
area of the 3% lower envelope line that typically contains the 
Dow's trading range.  The prior low at 110.6, then the prior high 
at 102.2, are potential resistance areas. 

I favor the long side in the Dow sector, as the low end of a 
likely 98-103 trading range has been seen once again.  However, 
if 98 gives way, 97 is a next possible downside objective, 
suggesting an exit/stop point at 96.8 for calls. 

The Nasdaq Composite ($COMPX) - Daily/Hourly charts:


Today's low in the Composite at 1607, occurred a bit above the 
prior 1600 low.  This makes an approximate double bottom low 
nevertheless. Time will tell.  Key near-resistance looks like 
Near resistance is 1600, then 1560.  

Notice that there is not yet an oversold reading on the 14-day 
stochastic - not so on the 10-day setting, which is another popular 
length and measures a 2-week time frame. 

The ever popular QQQ tracking stock of the Nasdaq 100 has made a
similar double bottom just under 30 (29.9 versus the 5/10 low at 
29.5). The Q's continue to look like a buy on dips to and under 
30 and a sell in 32-33 zone.  That chart is in my Index Trader 
wrap up tonight.    

Leigh Stevens


by Leigh Stevens

Worrying the market these days is something not seen so clearly 
since the Cuban missile crisis -- of course then they were tons 
of nukes pointed at our cities and neighborhoods and monster ones 
at that.  But the current saber rattling in the Indian 
subcontinent nevertheless fits the terror/terrorist worries 
prevalent since 9/11. 

The India/Pakistan terror blues might be the alternative title, 
even though in strictly economic terms, Argentina is more 
important to us as a trading partner. In a geo-political sense, 
unleashing the nuclear genie is pretty worrisome and gruesome. 
This is really letting the genie out of the bottle, if Pakistan 
uses nuclear weapons to create equality of arms - India and her 
army vastly outnumbering the Pakistani's.   

As I said in the Option Investor wrap tonight, the market really 
still has these same two worries - how soon will business 
spending improve and the related question of how soon will 
earnings get into a decent upward trend - stocks being seen as 
OVER priced relative to current earnings.

Back from a short 2-day market break, barely looking at the 
market except to go on line at the end of the day.  A true break, 
but not the one I was looking for as the market broke again in 
another drift lower on LOW volume.

I suggested at the beginning of the week that accumulation of 
index calls was warranted at least in the SPX & OEX, as the 
pivotal 21-day moving average looked like it was holding.  
Suggested a stop under SPX 1070 and/or to price average again on 
a retest of recent lows at 1054. 1054 was good, not sure about 
carrying calls under SPX 1070! We need a good rally to make that 
work out. Oversold readings were still not registering in the 
daily stochastics, so my original caution to not buy before that 
happens was on the mark given a worsening of the situation in 

One thing if I was long QQQ stock - I can hold the stock, with 
some confidence of an eventual sustained rally.  But where I have 
time premiums to worry about - well, this recent action has made 
me less confident of a summer rally. There may not be much more 
downside risk, but the market can go more sideways than up for 
some time to come unless peace breaks out all over and we see 
continued strong economic reports.  Time will tell.  

Just one example - June 1190 SPX calls went from a 17.50 opening 
on Monday to 9.20 today. Even buying more at 7 today around SPX 
1054, means 3 more points to break even on the two.  A losing 
proposition  unless there is a substantial rebound in the next 
couple of weeks.     

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

See my Option Investor wrap up.  

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


Buy zone for accumulation of OEX calls was suggested in 536-441 
area, risking to 529.50. A second buy point was the 522 
area in a re-test of those prior lows.  WRONG! on the first, 
right (sort of) on the second point for today.  We'll see what 
tomorrow brings, but next time I want to position trade this 
market, I'll lay down until the feeling passes.  

536 now looks like it will be the opposite of the earlier 
expected support and act as near resistance on a further rally.  
If 522 gives way, we may be looking at the 517-518 lows of early 
in the month as next possible support. Below there, if we retreat 
to my lower envelope band again, we're looking at maybe 510.    

Dow Industrials 1/100 Index ($DJX.X) Daily/Hourly charts: 

Nasdaq Composite Index ($COMPX) Daily/Hourly charts:

See my Option Investor wrap up on both -   

I would note that Nasdaq/tech continues to look like the indexes 
that I prefer trading from the put side on rallies.  Buy calls on 
OEX, sell rallies on Nasdaq seems to be the only way to play this 
split market. 

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


Suggested stop on long QQQ positions at 30.5, made Sunday and not 
adjusted would have resulted in what looks like an unnecessary 
exit today as the bottom was hit at 29.9. Accumulating calls if 
29.5 was re-tested, was the right general idea, but of course TOO 
"ideal" in a way as there were way too many buyers willing to 
take a long/call trade at this exact level with far to few 
sellers willing to put them at that price. 

Looks like we've seen a short-term low so would trade it that 
direction the next 1-2 sessions. Sell in the 32-33 zone both to 
take any long profits and to play the short/put side.  

You'll note that there is no more upside hourly price channel  
outlined on my charts, as there was continued bottoming action 
and a trading range, but the emerging trading range WITHIN an 
uptrend was not something that was maintained.    

Leigh Stevens
Chief Market Strategist 

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One Day Chance
By Eric Utley

Well, so much for the post Memorial Day rally.  Or maybe
Thursday's little late day ramp job was the beginning of the
rally.  It seems a little late, though.  The Nasdaq-100 (NDX.X)
has about 2 percent, or about 25 points to go for a positive
finish for this week, which is certainly possible with month's

Those wily fund managers like to play games at the end of the
month in an attempt to try to boost short term performance,
and in turn appeasing investors who've taken it on the chin
once again this year.  With the light holiday volume it would
be pretty easy to push around tech stocks tomorrow, so that's
something to keep in mind going into the session.

Elsewhere, there was a trend in the sector scorecard that I'd
like to touch upon.  There was a concentrated amount of selling
in some of the more economically senstive sectors today, which
didn't show up in the closing figures for the broader market
averages.  What I saw was weakness in the Airlines, Cyclicals,
and Paper stocks that was disconcerting for those who are
believers in the second-half recovery thesis.

Without the participation from the aformentioned groups,
Thursday's late day rally seems to me nothing more than another
short covering rally with a bit of month-end buying thrown in.
That's not to say it won't continue into tomorrow's session,
because I think it will.  But looking out into next week,
things don't look so well for the bulls.

And at the risk of sounding like a broken record, I didn't
like the action in the CBOE Market Volatility Index (VIX.X)
Thursday.  The S&P 100 (OEX.X) finished off of its lows, but
still fractionally lower.  Yet the VIX couldn't manage to
trade higher, revealing ever more complacency in the market.
The mere sight of the rebound in the OEX was enough for the
VIX to roll over from its earlier rally attempt.  Tying this
observation in with our sector observations, I think that there's
a lot of risk to the OEX names minus tech components.

The one potentially bullish metric in tonight's sentiment is the
short term ARMS Index reading.  The 5-day moving average is
creeping back into extreme oversold readings, perhaps signaling
a short term relief rally around the corner.


Market Averages


52-week High: 11350
52-week Low :  8062
Current     :  9912

Moving Averages:

 10-dma: 10127
 50-dma: 10167
200-dma:  9890

S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     : 1065

Moving Averages:

 10-dma: 1085
 50-dma: 1103
200-dma: 1116

Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low : 1089
Current     : 1128

Moving Averages:

 10-dma: 1269
 50-dma: 1325
200-dma: 1445

Software ($GSO)

Here's an unfamiliar sector to the best peforming spot.  But the
GSO earned it Thursday with its 2.50 percent rally on bullish
comments from Wall Street.

Leaders to the upside included Veritas (NASDAQ:VRTS), Rational
Software (NASDAQ:RATL), PeopleSoft (NASDAQ:PSFTA), and Siebel
Systems (NASDAQ:SEBL).

52-week High: 241
52-week Low : 112
Current     : 123

Moving Averages:

 10-dma: 126
 50-dma: 139
200-dma: 159

Gold and Silver ($XAU)

The profit takers did just that in the XAU, which earned the
day's worst performing sector spot with its 2.44 percent give

Leading to the downside included Gold Fields (NYSE:GFI),
Harmony Gold (NASDAQ:HGMCY), Anglogold (NYSE:AU), and
Barrick (NYSE:ABX).

52-week High: 89
52-week Low : 49
Current     : 84

Moving Averages:

 10-dma: 84
 50-dma: 75
200-dma: 62


Market Volatility

I though we might finally witness the VIX trade higher in
conjunction with stocks Thursday, but it didn't happen.  The
fear gauge imploded on the late day rebound.

The VXN did have some stick to it, closing higher on the
rebound in the NDX.  From this little observation, I'd be
more inclined to be bullish on tech stocks for a trade than
the NYSE names.

CBOE Market Volatility Index (VIX) - 22.96 -0.07
Nasdaq-100 Volatility Index  (VXN) - 46.62 +0.91


          Put/Call Ratio  Call Volume   Put Volume
Total          0.82        300,464       245,610
Equity Only    0.59        257,679       152,740
OEX            1.00         12,617        12,627
QQQ            0.27         17,345         4,689


Bullish Percent Data

           Current   Change   Status
NYSE          63      + 0     Bull Confirmed
NASDAQ-100    40      - 1     Bull Correction
DOW           67      + 0     Bear Correction
S&P 500       64      + 0     Bull Confirmed
S&P 100       66      + 0     Bear Correction

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  1.47
10-Day Arms Index  1.22
21-Day Arms Index  1.27
55-Day Arms Index  1.31

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      1494           1697
NASDAQ    1676           1757

        New Highs      New Lows
NYSE      77             60
NASDAQ    95            133

        Volume (in millions)
NYSE     1,237
NASDAQ   1,574


Commitments Of Traders Report: 05/21/02

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 added more longs than shorts last week, resulting
in an decrease in the group's net bearish position.  Small traders
did just the opposite for a net increase in their bullish
positions.  Small traders are less than 2,000 contracts away from
their most bullish reading of the year.

Commercials   Long      Short      Net     % Of OI 
05/07/02      348,019   422,801   (74,782)   (9.7%)
05/14/02      343,941   424,893   (80,952)  (12.1%)
05/21/02      354,039   429,803   (75,764)   (9.7%)

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

Small Traders Long      Short      Net     % of OI
05/07/02      154,664     59,583   95,081     44.4%
05/14/02      163,035     58,587  104,448     49.8%
05/21/02      164,964     58,950  106,014     47.3%

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 bullish last week with
a gain of 1,000 contracts to their net bullish position.  Small
traders on the other hand grew more bearish by adding to their
existing chunk of shorts.

Commercials   Long      Short      Net     % of OI 
05/07/02       38,338     39,152     (814)   (1.1%)
05/14/02       40,858     35,761     5,097   (5.5%)
05/21/02       51,448     45,375     6,073   (6.3%)

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
05/07/02       13,229    13,161        68      0.3%
05/14/02       11,920    17,479    (5,559)     8.2% 
05/21/02       12,567    19,899    (7,332)    22.6%

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


Dow commercials grew less bullish last week by reducing their
long position and adding to their short position.  Small
traders remained flat in their actions.  

Commercials   Long      Short      Net     % of OI
05/07/02       19,967    14,045    5,922     17.4%
05/14/02       21,080    14,725    6,355     14.4% 
05/21/02       20,173    15,317    4,856     13.7%

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
05/07/02        5,124     9,831    (4,707)   (31.5%)
05/14/02        4,930    10,899    (5,969)   (25.2%) 
05/21/02        3,661     9,585    (5,924)   (44.7%)

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

We continue to see oversold rebounds in various tech sectors from 
time to time (e.g., today's Software index rally; $GSO.X), 
without it being particularly noteworthy. However, worth noting 
is the Semiconductor index's ($SOX.X) strong rebound from an area 
near its prior low.  The SOX is of course a strong bellwether for 
tech stocks and the Nasdaq. Also, Healthcare ($HMO.X) has 
rebounded this week strongly right from where I suggested that it 
needed to, at its up trendline. 



DOWN ON THE DAY on Thursday - 



Semiconductor Sector Index ($SOX.X)

The Semiconductor sector, after making a double bottom in the 
same approximate area, rebounded strongly today. This was 
accompanied by an RSI reading that was well above its prior low, 
which is a related sign that SOX may made a significant bottom 

One option play on this sector is to buy SOX index calls, 
although they have a tendency to get pricey as soon a rally 
develops so limit orders and picking an area to buy them on a 
pullback is important, Individual stocks that look favorable, 
like they will likely trade in line or as well as the SOX on a 
rebound, include MU, NSM, and TXN.   


Airline Index ($XAL.X)

Still in a downtrend, well under its 50 and 200-day moving 

Sector would not break out above its major down trendline before 
89. Support has developed in the last month in the 77.00 - 79.00 
area. Sector looks like it may be bottoming, but is not yet in a 
position to rally much - little buying interest in the group has 
shown up as evidenced by the pattern of lower relative lows after 
the early-May rebound.  LAST UPDATE: 5/30

Amex Composite Index ($XAX.X)
The small cap stocks so predominating in the Amex, as a group, 
appear to be correcting from their strong up trend, perhaps in a 
sideways consolidation.  Recent rally attempts have not carried 
to above the 962 area, at a "line" of resistance that is putting 
a cap on rallies. A close under 955 would cause a break of the up 
trendline dating from Feb. and suggest that the strong trend was 
reversing. LAST UPDATE: 5/30  

Bank Index ($BKX.X)

The bank index has made at least a temporary double top in the 
916 area - closing penetration of this prior top, and subsequent 
support developing in this area, would suggest a new up leg.  

BKK fell under its up trendline this week and its 50-day moving 
average.  It would need to close back above 889 to reverse this 
bearish near-term picture.  Significant support lies in low 860 
area - no major trend change is signaled without a move to under 
this area. LAST UPDATE: 5/30

Biotechnology Index ($BTK.X)

Biotech has been in pronounced downtrend, which appears to have 
reversed at the early-May lows in the 380 area. Continued rally 
from this point suggests that index can work higher as long as we 
continue to see a pattern of higher (up) swing highs and higher 
(down) swing lows. 

Next key technical resistance area is 449-450, area of several 
prior lows and the intersection of daily down trendline. Close 
above 449-450 would indicate that the trend has reversed higher. 
Further resistance then comes in at the top of its downtrend 
channel at 475. 

Suggested buy of Biotech Holdr's (BBH) at 101.50 on 5/24 open; 
recommended initial stop/exit point at 92.5; initial objective: 
113; longer-term objective: 127, back to area of mid-March highs. 

Computer Technology Index  ($XCI.X)
STOCKS: to be listed 

Remains in a downtrend; May rally recently reversed at 50-day 
moving average and from an overbought reading on the daily 
oscillators; e.g., 4-day RSI.  Key resistance is at 672, then 
682. Close over these levels would turn the trend up. 

Early-May lows in the 580 area now looks like major support as 
current levels are well above this area. LAST UPDATE: 5/23
Computer Boxmaker Index ($BMX.X) 

Boxmakers sector, an unglamorous term for PC manufacturers, had a 
mid-May rally right to its down trendline at it's 50-day moving 
average, where BMX reversed - this was also area of its 50-day 
moving average.  

Current downtrend reverses with a close above 96. Break of near 
support at 91, on a closing basis, suggests a possible further 
retreat to major support in the 83-85 area. LAST UPDATE: 5/23 

Cyclical Index; Morgan Stanley; ($CYC.X)

The cyclical index has been locked in a 595-552 trading range 
since early- March, with current levels close to the high end of 
this range. Interestingly, the recent advance did not hit an 
overbought extreme on the daily oscillators, so the sideways 
trade could be setting up for an eventual breakout when/if the 
economy really gets going.  

A breakout above 395 on a closing basis, with subsequent ability 
to hold this level on pullbacks, would suggest that another up 
leg was developing in CYC. A close below 564, at its up 
trendline, would reverse the trend down. LAST UPDATE: 5/23

Defense Index; Amex ($DFI.X)

The Defense sector, a very strong performer in the January to May 
timeframe, formed a May top after repeated failures to get 
through resistance in the 680 area - retreat from the top area 
was accompanied by the a downside break of the Jan-May up 
trendline. The last rally to this area occurred on less relative 
strength, forming a classic price/RSI divergence.  

Resistance at the previously broken up trendline is at 673 
currently, not far under the major 680 resistance.  Am watching 
to see if the 50-day moving average acts as support beyond today. 
Downside possibilities for a pullback in DFI may lie either in 
the 615 or 595 areas, representing the 38% and 50% retracements, 
respectively. LAST UPDATE: 5/23 

Disk Drive Index ($DDX.X)

The disk drive index remains in a downtrend. However, after a 
drop to the 82 area in early-May, which completed a 62% 
retracement of the September '01 - February '02 advance, DDX 
rebounded some. If the index can hold above its prior low at 82, 
the index could be a position to rally.  

The last rally reversed at its 200-day moving average. A close 
above 88, current resistance implied by its down trendline, would 
suggest some further rally potential at least back up to re-test 
its 200 and 50-day moving averages. LAST UPDATE: 5/26 

Fiber Optics Index ($FOP.X)

The Fiber Optic group has been in a downtrend since peaking in 
the 139 area in early-December. FOP's recent low was made at 65 
in early-May and the index is again near that area.  A break of 
this level would suggest another downswing, but I don't have 
enough price history to focus on what might be a possible further 
downside objective.  

On the upside, a close over 71.00 would put FOP above its down 
trendline, basis the daily chart. Sector is again approaching an 
oversold reading on the daily oscillators. LAST UPDATE: 5/26

Financial Index; NYSE ($NF.X)
STOCKS: This index is composed of all the financial stocks on the 
NYSE; e.g., banks, insurance, etc. 

Forest & Paper Products Sector Index ($FPP.X)

Gold & Silver Sector Index ($XAU.X)

XAU continues to accelerate to the upside, but may find near 
resistance at the top end of its steep uptrend channel at around 
90. My longer-term objective is 100 however. Near support looks 
like 80, with major support at 70.  
If you want to buy into this sector it is high risk, although 
gold bullion has a possible per ounce target to $340-345, maybe 
350. The question is how much of the potential further price rise 
in gold is priced into the XAU stocks already. LAST UPDATE: 5/23

Health Providers Index; Morgan Stanley ($RXH.X)

Healthcare Index; Morgan Stanley ($HMO.X)


Healthcare ($HMO.X) has rebounded strongly right from where I 
suggested that it needed to, at its up trendline. LAST UPDATE: 

** Previously suggested basket of 3 HMO stocks/calls -

PacifiCare Health Systems (PHSY) at 23.5-24.7. Stop/exit: 23.3

Wellpoint Health Networks (WLP) - Entry at 72.00, then at 70. 
Stop/exit point: 65 Additional buy suggested at 66. 

Humana (HUM) - Entry suggested at 15.60 & 15.00-15.15. Stop/exit 
point: 13.2 

High Tech Index; Morgan Stanley ($MSH.X)

Internet Index; CBOE ($INX.X)

Natural Gas Index  ($XNG)

Networking Index ($NWX.X)

Oil Index; CBOE ($OIX.X)

Oil Service Sector Index ($OSX.X)

Pharmaceutical Index ($DRG.X)

Retail Index; S&P - CBOE ($RLX.X)

Russell 2000 Index ($RUT.X)

Securities Broker Dealer Index ($XBD.X)

Semiconductor Sector Index ($SOX.X)


Software Index; Goldman Sachs ($GSO.X)

Telecoms Index; No. American ($XTC.X)

Transportation Average; Dow Jones ($TRAN)

Utility Sector Index ($UTY.X)

Wireless Telecom Sector Index  ($YLS.X)

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

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The Option Investor Newsletter                 Thursday 05-30-2002
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.


RYL $107.50 -3.00 (-6.60) Despite the positive housing data
earlier this week, the shares of the home building stocks haven't
been able to gain any traction.  After failing to push through
the $115 level earlier in the week, shares of RYL have been
heading south again and sold off with a vengeance on Thursday,
ending well below our stop.  Even the late day rebound wasn't
enough to get the stock back above the $108 level and with the
$DJUSHB trading sharply lower as well, it should come as no
surprise that we're dropping coverage of RYL tonight.  Since our
stop was violated today, all positions should now be closed.  If
you are holding open positions, use any strength tomorrow to exit
at a more favorable level.

CYMI $42.61 -0.51 (-1.99) CYMI took a turn for the worse in the
last two days on continued weakness in the broader technology
sector, and specifically in the semiconductor sector.  The
stock broke below its relative low and our stop in today's
session before staging a big late day recovery rally.  But with
the stop broken and the chart looking weak, we're dropping the
play this evening.  Look for a follow-through of today's
rally to exit plays.




Please view this in COURIER 10 font for alignment

CALLS              Tue    Wed    Thu

TEVA     67.10   -0.50   0.15   0.65  Still very strong, breakout?
ERTS     64.30   -0.89  -0.46   1.84  Ready to break above $66!!!
NOVN     26.01    0.38   0.58   0.69  Retesting relative highs
RYL     107.50   -1.90  -1.70  -3.00  Dropped, housing rolls over
SNPS     50.99   -1.23  -0.87   0.39  Bouncing above the 200-dma
ADBE     36.53   -1.00  -0.82   0.68  Finding support above $36
CI      105.93    0.19   0.05   0.88  Advanced past the $106 mark
CYMI     42.61    1.33  -0.81  -0.51  Dropped, broke below lows
GILD     36.81    0.90  -2.60   1.46  Volatile trading, entry pt.
PDLI     12.06    0.30  -0.49   0.20  Coiling tighter and tighter
THC      74.20    1.45   0.95   1.22  Strong stock, strong sector
DGX      87.00    0.44   0.33   1.28  New, rebound from pullback
INTU     44.48   -0.74   1.44   1.56  New, relative tech strength


HB       60.50   -0.54  -0.48   1.10  Rally to resistance, entry
GS       75.08   -1.29  -0.75  -1.07  Ready to breakdown at $74
PLAB     22.72   -0.25  -0.75  -0.24  Another relative low
COHU     23.75    0.30  -0.65   0.10  Relief rally sets up entry
WHR      71.10   -1.26  -0.80  -0.75  Blue chip stocks breaking
VRTS     22.99   -1.48  -1.14   2.06  Oversold bounce to entry
WMB      14.00   -0.31  -1.64  -1.47  New, headed to single digits 
DUK      31.78   -0.11  -1.08  -1.73  New, wrong sector for bulls

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ADBE $36.53 +0.68 (-1.14) Soundview lit a fire under the
Software sector on Thursday with their call this morning, stating
that they believe earnings visibility is improving and that
estimates for the group appear to be achievable.  That was enough
to life ADBE from its recent malaise, where the stock has been
hugging the $36 support level.  Recall that this level has been
providing support for the past several months, so it was
encouraging to see the bulls continuing to support it.  While the
gain was rather small at only 1.9%, it was good to see buying
volume solidly above the ADV.  Once again, it looks like the $36
level provided a solid entry point into the stock, but we need to
see the confirmation of continued buying interest in the Software
sector (GSO.X) before we can be sure.  The problem we see is the
fact that ADBE fell back at the close, showing that there is
significant overhead resistance still in place.  So while intraday
dips near $36 are indeed buyable, more conservative traders will
want to see ADBE push through near-term resistance at $38.25
before taking a position.  Keep stops set at $35.

ERTS $64.30 +1.84 (+0.49) Eager bulls can almost taste the pending
breakout in shares of ERTS, as the stock is once again pressing
against the $65 resistance level.  After falling back to the $62
level earlier this week due to the persistent weakness in the
Software sector (GSO.X), shares of the video game software company
shook off their malaise and staged a strong rebound on Thursday.
Traders that took advantage of the rebound from support are in
good shape tonight, but those waiting for the breakout are
wondering whether there is enough momentum to get through
resistance.  Price action will unfold as it sees fit and it is
our job to act accordingly.  Use a repeated rebound from the $62
level to initiate new positions or else wait for a solid breakout
over $65 resistance.  Keep stops set at $61.

PDLI $12.06 +0.20 (+0.01) As the Technology market continues to
try to find bottom, the Biotechs (BTK.X) are still looking
positive due to their ability to maintain their fledgling uptrend
from the early May lows.  Whether the BTK can lead the rest of
the NASDAQ out of its slump remains to be seen, but for now we
are clearly seeing some relative strength.  Shares of PDLI got
hit by a bit of selling yesterday (likely due to sector weakness),
but once again stabilized on Thursday.  Despite holding up fairly
well this week, the stock hasn't been able to advance and will
need to see stronger bullish action in the BTK if the bulls have
any hope of a strong move higher.  Intraday dips near the $11.50
level still provide attractive entry points, with the first
confirmation of bullish action coming with a push through the
$13.75 resistance level.  Use the action of the BTK to gauge
the strength in PDLI.  If the BTK can't clear the $435 resistance
level, then PDLI will likely have a hard time clearing its own

SNPS $50.99 +0.39 (-1.71) The past two days have been rough on
investors in the Semiconductor sector (SOX.X) as the index has
flirted with a major breakdown under the $475 level.  But traders
that focus on the strong stocks in the sector are finding solid
entry points.  SNPS has held up very well in the past month and
both of the last two days bounced strongly from the $49.50 level,
which is the site of our stop.  Aggressive traders could have
taken those bounces as entries into the play, but what we really
want to see is whether the stock has the ability to move through
near-term resistance at $51.50.  That would be a positive sign,
but the real test will come at $52.  This is the site of the
stock's 5-month descending trendline and if the bulls can clear
it on a closing basis, it could set the stage for more follow
through to the $54 resistance level.  Clearly we'll need to see
the SOX stage a significant rebound for SNPS to challenge this
heavy resistance.  Continue to target new entries on successful
bounces from support, keeping stops set at $49.50.  More
conservative traders will want to see a rally through $54 before
entering the play.

THC $74.20 +1.22 (+3.62) Are Health Care stocks staging a rebound?
It certainly looks that way and it was quite encouraging to see
the Health Care Payor's index (HMO.X) briefly trade above $625
on Thursday.  Not only did that represent a push through
near-term resistance ($620), but it also created a fresh
triple-top breakout on the PnF chart, putting the sector back in
its bullish trend.  Shares of THC had been consolidating in
sideways fashion for most of the past month and then finally got
moving upwards on Wednesday, closing right at the $73 resistance
level.  With Thursday's solid move in the sector, THC faulted
higher, moving to within a dollar of its all-time highs before
settling back a bit at the close.  Relative strength appears to
be back with the HMO index and THC is going along for the ride.
We can use intraday dips back to the $72-73 area for initiating
new positions or else wait for a breakout over the $75.50 level.
Given the strength of recent support, we are raising our stop to
$70.50 tonight.

TEVA $67.10 +0.65 (+0.30) TEVA rebounded in today's session on
the late day recovery in the broader market.  Our feeling is that
this stock will lead any rally to the upside from here, but
getting that rally is going to be the difficult part.  TEVA has
built up some impressive relative strength in the last month
or so, and that strength will carry to the stock up to new
relative highs if the broader market and its sector, the AMEX
Biotechnology Sector Index (BTK.X), get moving to the upside.
In terms of new entry points, we favor taking advantage of
intraday dips as entry points on short term weakness.  That way,
we can set tighter stops just below short term support and
protect against any failure by the broader market of moving
higher.  To the upside, we'd like to see the stock trade above
the $69 level on the next leg higher, which would confirm that
the stock's bullish trend is still alive by tracing another
relative high.

NOVN $26.01 +0.69 (+1.64) Just as we discussed late last week
when NOVN traded up above the $26 level, the stock came within a
few ticks of that relative high today on the retest.  Today's
rally marked the eighth straight session that NOVN finished
higher for the day, which is a remarkable accomplishment in this
market environment.  But just because the stock is very strong and
very bullish doesn't mean we should lose our heads.  It's growing
more overbought by the day over the short term, which is why
traders who've been riding the trend higher over the last two
weeks need to raise up protective stops to hedge off any extended
pullback over the short term.  Or, those who were targeting the
retest of the relative high might start looking to take profits
on further upside in tomorrow's session.  In terms of new entry
points, we'd like to see a pullback in this stock back down to
the $24 level, supported by the rising 10-dma where we can
better manage risk.

CI $105.93 +0.88 (+1.12) CI traded within a few pennies of the
breakout level that we've been targeting at the $106 level during
yesterday's session.  The stock's rally attempt Wednesday was
a peek into Thursday's session when the stock finally broke out
above that key resistance level.  We should see some more upside
from here as the sector is moving in the right direction for this
play to be a success.  The pullback following the breakout created
another entry point on weakness, which traders can start looking
for bounces from the $104 to $105 level ahead of further upside.
The rising 10-dma just above the $104 level should help to provide
support during any further pullbacks from here.  To the upside,
with the $106 level broken, look for a retest of relative highs
in the coming sessions up around the $110 level.  Monitor the
HMO Index (HMO.X) for sector confirmation, and confirm further
upside in the stock with a breakout above today's high at the
$106.95 level.

GILD $36.81 +1.46 (-0.24) It's been a wild two days for GILD.
Talk surfaced late yesterday afternoon that its AIDS drug
was causing kidney failure in some of the patients using the
drug.  The stock responded by trading as low as $33.50 before
rebounding.  Then Wall Street came to the stock's defense today
saying that the fears over the drug were unfounded.  Merrill
Lynch came to the stock's defense by reiterating its buy rating
on shares, which helped to inspire a solid rebound today, and
of course the broader market strength helped.  The result of
today's trading was a wide inside day being completed.  From
here, where the stock trades is up to the direction of the
biotech sector, and the broader market.  We'll look for a break
from the inside day as an entry point in the coming session on
further strength in the NASDAQ and BTK.  If the stock continues
pulling back, look for a low risk entry near today's low just
above the $35 level.


INTU - Intuit $44.48 +1.56 (+2.26 this week)

Intuit, Inc. is a provider of small business, tax preparation and
personal finance software products and Web-based services that
simplify complex financial tasks for consumers, small businesses
and accounting professionals. The Company's principal products
and services include Quicken, QuickBooks, Quicken TurboTax,
ProSeries, Lacerte and Quicken Loans. Intuit offers products and
services in five principal business divisions, which include Small
Business, Tax, Personal Finance, Quicken Loans and Global Business.

Relative strength is an amazing tool that helps investors spot
winners, and keeps them out of trouble.  We've found of all things
a technology stock displaying very impressive relative strength
that looks primed for a major breakout.  We're talking about INTU,
which staged a massive rally today with help from positive
comments from analysts on the broader software sector.  The shift
of sentiment in the group was all INTU needed to trade up to its
relative highs, threatening to breakout as early as tomorrow.
The four month base that was traced from January through April
should provide the necessary lifting power for the stock once it
decides to breakout from its consolidation.  Looking out over the
longer term using the weekly chart, we see that the stock has
formed a cup like base, which reinforces the short term
consolidation that is in play.  If the stock can clear its short
term resistance at the $45 level, there's only the $46 level that
stands in the way of clear blue sky upward trend towards the $50
level.  A breakout above the $45 level could be used as an entry
into strength above current levels, but only if the broader
technology sector is supporting such a strategy.  Look for
strength in the Nasdaq to confirm a breakout in INTU before
entering above $45.  If the stock decides to pullback before
breaking, then look for a retreat followed by a bounce from the
$42.50 area.  Our stop is initially in place at the $41 mark.

BUY CALL JUN-40 IQU-FH OI=1668 at $5.00 SL=3.75
BUY CALL JUN-45*IQU-FI OI=1691 at $1.60 SL=0.75
BUY CALL JUL-40 IQU-GH OI=3797 at $5.80 SL=4.00
BUY CALL JUL-45 IQU-GI OI=1880 at $2.70 SL=1.75

Average Daily Volume = 2.41 mln

DGX – Quest Diagnostics $87.00 +1.28 (+2.05 this week)

Quest Diagnostics was the result of a 1996 Corning spinoff,
and currently holds the title of the world's #1 clinical
laboratory.  DGX performs more than 100 million routine tests
annually, including cholesterol, HIV, pregnancy, alcohol, and
pap smear tests.  Operating laboratories throughout the US and
in Brazil, Mexico, and the UK, DGX also performs esoteric
testing (complex, low-volume tests) and clinical trials.  The
company serves doctors, hospitals, HMOs, and other labs as well
as corporations, government agencies, and prisons.

With Health Care-related stocks finding renewed buying interest,
even in the face of broad market weakness, it is time to revisit
this familiar area for a fresh bullish play.  The HMO index
managed to break out over near-term resistance at $620 on
Thursday, and that tells us the bulls are getting interested in
this relatively strong sector again.  While not a part of the HMO
index, shares of DGX are no stranger to the call play list.  The
stock has been marching steadily upward since last September and
had a strong bullish run into the last earnings report.  We knew
that the stock needed to consolidate those gains before we
featured it again, and after falling back to firm support at $85
it looks like it is ready to go.  While not quite down to the
level of the ascending trendline ($83.50), this was a strong
level of support in April and it was good to see it hold up
again earlier this week.  Moody's gave the bulls a shot in the
arm yesterday, upgrading the company's debt rating, showing
their confidence that the company whould be able to sustain its
positive operating trends.  Sure enough, the bulls came back in,
right on cue, bidding DGX higher by 1.5% on Thursday on volume
that was well above the daily average.  Dips near the $85 level
appear to be very buyable over the near term, and given that
strong support, we can set a fairly tight stop at $84.  On
the upside, DGX has some resistance near $89 to get through and
momentum traders will want to wait for that level to be cleared
on continued strong volume before venturing into new positions.

BUY CALL JUN-85*DGX-FQ OI=2544 at $4.00 SL=2.50
BUY CALL JUN-90 DGX-FR OI= 544 at $1.40 SL=0.75
BUY CALL JUL-85 DGX-GQ OI=  33 at $5.50 SL=3.50
BUY CALL JUL-90 DGX-GR OI= 127 at $2.85 SL=1.50
BUY CALL JUL-95 DGX-GS OI=  29 at $1.25 SL=0.50

Average Daily Volume = 851 K

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GS $75.08 -1.07 (-3.11) As the broad markets continued to plunge
lower over the past few days, the Broker/Dealer index (XBD.X)
certainly hasn't been a pillar of strength.  Hope of support
holding near the $465 level has now been dashed and if the bulls
can't hold the line near Thursday's lows in the $448 area, a test
of the early May lows near $432 seems assured.  GS has been our
vehicle of choice for playing this downward trend and the stock
hasn't been disappointing in the least.  After a brief pause near
the $76 support level (also the site of the 62% retracement of the
fall rally), the stock has headed southwards again, trading as
low as $74.25 before recovering in the afternoon on Thursday.
This level will be critical to the stock, as a break of $74 will
open the door to a drop to at least $72 and quite possibly the
September lows in the vicinity of $65-67.  Overhead resistance
is getting stronger in the $76-77 area and a failed rebound near
that level would make for a choice bearish entry point.  Failing
that, a breakdown below the $74 level can also be used for
initiating new positions, especially if the XBD index breaks
below its own support.  Lower stops to $78.

VRTS $22.99 +2.06 (-0.56) After falling 30% in just over a week,
VRTS was primed for an oversold bounce, and with the broad markets
attempting to rebound from important support levels, that bounce
occurred on Thursday.  Even the laggard Software index (GSO.X)
managed to stage a 2.5% rebound, helping shares of VRTS to post a
nearly 10% advance from Wednesday's close below the $21 level.
So is this a temporary end to the recent bearish trend or the
setup for a fresh bearish entry?  Only time will tell, but we're
leaning to the 'fresh entry' side of the argument due to the heavy
overhead resistance near $24.  This was a persistent level of
support prior to the sharp move lower last Friday.  Today's
rebound had the appearance of short-covering and if that's all
there is to it, then we can look to initiate fresh positions on a
rollover near the $24 level.  Watch for weakness to resume in the
GSO index to confirm fresh bearish entries and keep stops in place
at $24.25.

HB $60.50 +1.10 (+0.08) HB delivered the relief rally on
relatively lighter volume that we have been waiting for.  The
stock climbed higher by about $1 in today's session on the
recovery in the broader market.  But the stock's trading
volume for the day only totaled 126,000 shares, not the type
of volume that reversals of trends are built upon.  Instead,
we suspect that today's short covering rally will prove to be
yet another good entry point into this stock's one month
declining trend.  In addition to the weak trading activity,
we like the pause and failure to rally at the 10-dma, which
closed today at $60.46.  The stock's close right on that level
suggests that the buyers didn't have enough conviction to take
it any higher, and that once the broader market rolls over
again, so will HB.  Start looking for entries near current
levels early in tomorrow's session, or slightly higher around
the $60.75 level.  Tight stops can be set to protect against
any further upside short covering rally, while the downside
could be a quick trip down to the $58 level that we've been

PLAB $22.72 -0.24 (-1.24) PLAB continued along its path of
relatively lower lows during yesterday's session when it took
out the previous day's low at $23.25.  It went on to take out
the $23 short term support level that we saw established during
Tuesday's session.  From there, it continued lower today
keeping the trend alive and well.  The continued weakness in
the Semiconductor Sector Index (SOX.X) is certainly helping
our play along, as the SOX continues to lose relative strength
versus the broader technology sector.  The rebound near the
end of today's trading in the sector and the stock might
continue into tomorrow's session as we near the end of the
month.  Such a relief rally in PLAB would set up another
favorable entry point near the upper end of its aggressive
downward channel.  Look for a trade up to and a rollover from
the short term overhead congestion area between the $23.50
and $24 levels.  The declining 10-dma at the $25 level can
be used as an upside protective stop.

COHU $23.75 +0.10 (-0.25) COHU traded lower in yesterday’s session
on the continued weakness in the broader technology sector, along
the way taking out its short term support just above the $24 level
that was formed earlier in the week.  The stock's breakdown below
that support should reveal that the sellers are still overwhelming
any buying pressure, despite today's reversal from yet another new
relative low in the downward trend that has been in place in the
last two weeks.  Today's relief rally on relatively lighter volume
was most likely a short covering blip because of the rebound in
the broader technology sector.  We might see that buying continue
into tomorrow's session which would set up another solid entry
point into put plays upon a failed rally attempt above short
term resistance.  Watch for the sellers to return as early as the
$24 level.  If the stock advances through that congestion, watch
for a rollover from the $24.50 level with pressure coming in from
the declining 10-dma just above $25.

WHR $71.10 -0.75 (-2.71) The economically and consumer
sensitive stocks in the market are showing disconcerting
signs of weakness as witnessed in WHR so far this week.
The stock, along with other blue chip issues, broke down
earlier in the week and continued lower in yesterday and
today's session.  With the gap above to the $72.65 level
created by the move lower Wednesday morning, the bulls might
try to fill that void in the coming sessions if the broader
market tries to put together a rally.  Bears might take a look
at a rollover upon a filling of that gap for entry point.  On
the other hand, if the stock fails to fill its short term gap
and continues lower, the bears might look for an entry into
further weakness below current levels.  A breakdown below the
$70 level on relatively heavier volume and in a weak broad
market environment would offer a good entry point into weakness,
with confirmation coming on a decline below the 200-dma which
now sits below at the $68.85 level.


WMB – Williams Companies $14.00 -1.47 (-3.42 this week)

Williams is engaged in the transportation and sale of natural
gas and petroleum products and other energy related activities.
Through its subsidiaries, the company is engaged in price risk
management services; the purchase, sale and transportation and
transmission of energy and energy-related commodities;
transportation and storage of natural gas; exploration,
production and marketing of oil and gas.  Along with being
involved in seemingly every aspect of the energy production
and marketing business, WMB also is engaged in energy commodity
trading and marketing, and even participates in the
communications business.

Once the darlings of the energy markets, Utilities that moved
into the arena of energy trading (pioneered by Enron) have fallen
on hard times.  With the price of Natural Gas falling back to
earth and the power crisis averted, the speculative frenzy that
drove these stocks into the stratosphere has disappeared.  Now
many of these stocks are suffering under the same burden that is
plaguing many of the Telecom stocks, that of debt load.
Debt-ratings agencies like Moody's and Standard & Poor's have
taken notice and seem to be issuing a downgrade a day lately.
WMB was already in a prolonged downtrend before the latest round
of selling took place, with a series of lower highs and lower
lows beginning in early 2001.  The sharp selloff in late January
drove the stock down to the $14 level, it's lowest level since
late 1995, before there was a revival of bullish interest that
took the stock right up to its descending trendline near $24.
Showing the power of that trend, the stock headed lower again
falling back to the $15 level last week on renewed fears by
investors of debt-load issues and the growing spectre of SEC
probes into any company involved in energy trading and possible
"round-trip trades".  Last Monday's pronouncement from the company
that the company did not engage in round-trip trading gave the
stock a pop up to the $18 level, but bearish news from other
players like DYN and a downgrade from Prudential knocked the legs
out from under the bulls.  Completing the reversal, was Tuesday's
news that the company may issue more stock or sell additional
assets.  Then after the close on Tuesday, the company's credit
rating was cut by S&P.  The final straw came from fellow energy
trader El Paso, which cratered yesterday on news that it cut its
outlook, followed by a downgrade at Merrill Lynch.  You can see
the theme here -- the outlook for these energy traders is bleak
and getting worse.  On Thursday WMB broke down below the $14 level
on heavy volume, generating a fresh spread triple-bottom sell
signal on the PnF chart.  The current vertical count points to a
price target of $11.50, but firm support is not seen until the
$10 level.  We want to take advantage of this strong bearish
trend, preferably by selling into the next failed rally near the
$15 level.  A further breakdown below the $13.75 level is also
tradable, but we need to keep a sharp eye out for an oversold
bounce given the sharp 20% drop already this week.  Following
Thursday's breakdown, we feel comfortable setting a fairly tight
stop at $16.50.

BUY PUT JUN-15*WMB-RC OI=3996 at $1.70 SL=0.75
BUY PUT JUN-12 WMB-RV OI=6363 at $0.60 SL=0.25

Average Daily Volume = 3.52 mln

DUK - Duke Energy $31.78 -1.73 (-2.92 this week)

Duke Energy Corporation offers physical delivery and management
of both electricity and natural gas throughout the United States
and abroad. Duke Energy provides these and other services through
seven business segments: Franchised Electric, Natural Gas
Transmission, Field Services, North American Wholesale Energy
(NAWE), International Energy, Other Energy Services and Duke

The broader energy sector has become littered with disasters.
The most recent of which include Dynergy, El Paso, and Williams.
The negative sentiment is spreading to others in the group such
as DUK.  The company reported that it was hit with more
investor lawsuits today that claimed that the company misled
shareholders by issuing false and misleading statements about
its financial position and business conditions.  We're not sure
if this play is going to lead to another blow up like we
witnessed in El Paso, but the odds are good that the stock is
going to work lower over the short term.  The descending wedge
on the weekly chart is ready to be broken with a breakdown
below the $31 level.  Bears can look for a decline below that
level as early as tomorrow morning as an entry point if the
sentiment of negativity in the energy sector continues.  Watch
for intraday volume to increase on a move below that level.
If the stock does rebound before first breaking down, we'll
look for rollovers starting at the $33 level.  If it continues
above there, then we'll watch for a failed rally just below the
$34 level.  Our stop is initially in place at the $34.50

BUY PUT JUN-32*DUK-RZ OI=2591 at $1.75 SL=0.75
BUY PUT JUL-30 DUK-RF OI=6849 at $0.80 SL=0.25

Average Daily Volume = 4.16 mln

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The Option Investor Newsletter                 Thursday 05-30-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


TEVA - Teva Pharmaceuticals $67.10 +0.65 (+0.30 this week)

Teva Pharmaceutical Industries Ltd. is a fully integrated global
pharmaceutical company producing drugs in all major therapeutic
categories. In the area of proprietary drugs, Teva has focused
on products for central nervous system disorders, primarily the
development of Teva's first globally marketed branded drug,
Copaxone, a treatment for relapsing-remitting multiple sclerosis.
Teva also possesses significant manufacturing operations for
active pharmaceutical ingredients (API). Teva Pharmaceuticals USA,
Inc., Teva's principal United States subsidiary, is a generic
drug company in the United States.

Most Recent Update

TEVA rebounded in today's session on the late day recovery in the
broader market.  Our feeling is that this stock will lead any
rally to the upside from here, but getting that rally is going to
be the difficult part.  TEVA has built up some impressive relative
strength in the last month or so, and that strength will carry to
the stock up to new relative highs if the broader market and its
sector, the AMEX Biotechnology Sector Index (BTK.X), get moving to
the upside.  In terms of new entry points, we favor taking
advantage of intraday dips as entry points on short term weakness.
That way, we can set tighter stops just below short term support
and protect against any failure by the broader market of moving
higher.  To the upside, we'd like to see the stock trade above
the $69 level on the next leg higher, which would confirm that
the stock's bullish trend is still alive by tracing another
relative high.


With the end of the month approaching, some of May's best
performing stocks could be in for a little bit of upside.  Fund
managers like to play games at month's end.  So we're turning
to one potential game piece in TEVA.  The stock has had a very
strong month, and could be in for more end of month buying
tomorrow.  Watch for an advance above today's high at the $67.85
level, then look for a confirmation move up beyond the $69

BUY CALL JUN-65*TVQ-FM OI=1418 at $3.30 SL=1.75
BUY CALL JUN-70 TVQ-FN OI=1037 at $0.65 SL=0.25
BUY CALL JUL-65 TVQ-GM OI= 119 at $4.40 SL=2.00
BUY CALL JUL-70 TVQ-GN OI= 580 at $1.70 SL=0.75

Average Daily Volume = 910 K

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Carpe' Dementia!
Buzz Lynn

Seize the debt!  Time for Fundamentals Guy to dust off his cape.  
The truth of the matter is that I should have written this months 
ago, but didn't because I did not completely grasp the big picture 
of huge corporate debt loads, or at least never felt compelled to 
write about it until now fearing faithful readers would consider 
me just another sourpuss bear.

There has much in favor the bears over the past 24 months, which 
has had little airtime until recently.  Think back over the past 
few months to the top stories of big bearish days in the market.  
Think of Enron, WorldCom, Dynegy, El Paso Energy, and Williams 
Companies as the most recent examples.  Common element?  Debt, and 
lots of it, cloaked under the umbrella of "accounting issue".  

That is not to say that all companies with debt are in trouble 
with investors.  We need only look at the likes of Philip Morris, 
Kraft, Pepsi, and scads of others to see that some companies 
operate very profitably using debt.  

So what is the difference?  Aside form the obvious answer that 
some businesses are more profitable than others - for instance 
that oil companies generally make money and Internet companies 
don't - debt management and prudent borrowing is worth observing 
when picking the market's winners and losers.  

One such measurement that I watch is the debt to equity ratio, 
which is the total liabilities divided by shareholder equity.  A 
ratio of 0.0 would mean zero debt (MSFT) while a ratio of 2.5 
would mean 2.5 times as much debt as equity.  It indicates the 
proportion of debt and equity that a company is using to finance 
its assets.  

Here's the catch.  Sometimes only long-term, interest-bearing debt 
instead of total debt is used in the calculation.  That leaves 
plenty of accounting wiggle room to use revolving, short-term 
lines of credit, interest rate swaps, and zero-coupon debt 
instruments to be omitted from the ratio.  The ratio can be 
artificially low in the hands of an unethical CFO bent on hiding 
true debt loads.  The number can often be understated, which 
conceals a company's inability to repay its debts.

So what does that mean for a company that borrows heavily or 
carries a lot of debt.  Furthermore, as traders or even investors, 
why should we care?  For investors, that answer is obvious.  Who 
wants to own a company that won't be able to produce profits after 
servicing its debt?  Nobody I know - at least none that would 
intentionally buy a stock knowing it cannot earn money.  

But for the trader, that can often be a big clue as to the stocks 
long-term trend.  Carrying lots of debt could mean that a company 
would founder under its own weight in an economic downturn (No, 
get out!).  Knowing that and corroborating that with technical 
charts would likely keep us out of call LEAPS, selling naked puts, 
or writing covered calls.  No thanks.  We don't want to trade 
calls if the earnings prospects are bleak.  Hmmm. . .puts anyone?

The fact is that a high debt to equity ratio means that a company 
has been aggressive in using debt to finance its growth, which can 
lead to volatile earnings (if any at all) from the resulting 
interest expense.

And therein lies the problem with debt.  Companies that had a 
reliable and once growing stream of income no longer do.  Debt 
loads that used to be serviceable are no longer so as revenues 
have remained flat or fallen back from previously anticipated 
levels.  The problem isn't the debt itself, but rather that many 
business are being called into question on their ability to 
generate sufficient revenue to service the debt let alone earn a 

Surprise!  Profit margins matter again!  Long gone are the days of 
losing on every sale with the attempt to make it up on volume.  
Isn't that what many were implicitly touting as they put "market 
share" above profitability?  Without profit margin, there is no 
ability to repay debt!  Market share should be the least of a 
company's worries if there isn't sufficient margin after expense 
to service debt.

Ahh, now we see how the companies with high margins consistently 
make money (MSFT, ORCL).  Profit margin.  It's not a tough 
concept.  It would also explain why those two have a cash hoard 
exceeding $44 bln between the two of them with MSFT making up 
nearly $39 bln of that.  But furthermore, we can see that huge 
margins on a staple business like Philip Morris (love 'em or hate 
'em) allows MO to carry a hefty but manageable debt/equity ratio 
of 1.18 (for them) and still pay a 4% (and increasing) dividend.  
That's do-able with a consistent 18% profit margin.

Also, despite lingering, negative, accounting concerns and a 
debt/equity ratio of 1.84, even TYC has a decent operating margin 
of 13% and pays a small but consistent dividend, though who knows 
how long that will last if pricing pressures crop up in TYC's 
playing field.  The same can't be said for EK whose photographic 
film business is being gobbled by Agfa and Fuji, whose digital 
strategy hasn't paid off, and who suffers under a 1.13 debt/equity 
ratio with a 1.6% operating margin, and still pays a dividend that 
exceeds its income.  Think twice before buying EK for the 
dividend, which can't be sustained.  

But what about the revenue streams of DYN, WMB, WCOM, and others?  
With falling revenue streams, but debt service remaining at the 
same levels, profits get squeezed or eliminated.  What then 
happens to stock prices?  Since prices are a reflection of 
expected earnings, and earnings are falling, it makes sense that 
stock prices would too.  How low could they go?  Look at 
Globalstar, Global Crossing, Metromedia Fiber Network, 
360Networks, and Exodus for the answer - zero, or pennies at best.

All that begs the next question of, "If Greenspan is keeping 
borrowing rates so cheap, why don't companies just refinance to a 
lower interest rate to improve their earnings?"  The short answer 
is that they can't.

Why not?  Companies get loans from all sorts of lender - banks, 
finance companies like GE Capital, insurance companies, or bonds 
to name a few.  All of them want some sort of collateral in case 
the borrowing company cannot repay the loan.  The company must 
remain solvent if the lender is to get a return on and a return of 
capital.  Otherwise the lender will collect and dispose of 
collateral.  Most of the time, the lender requires that and 
accelerates the loan if certain conditions cease to be met - 
conditions like a minimum average stock price over a 30-day 
period, or certain debt/equity ratios.  That is why we often see a 
company CEO or CFO trying to prop up the stock price.  He/She 
isn't necessarily concerned with his/her incentive stock option 
package.  He/she is concerned with keeping the borrowing covenants 
intact so as not to have the company's credit downgraded or its 
loan called, the latter of which usually results in default.  
Lenders hate that and will not lend money if they perceive any 
real chance that could happen.  The chances are much greater in 
this economic environment. 

So rates are cheaper now, but can companies get those cheaper 
rates?  There's an old definition of a lender as someone that 
gives you an umbrella when the sun shines and takes it away when 
it starts to rain.  How true, but not without good reason.  So 
back to debt - rates may be cheaper, but shaky companies can't 
meet the requirements now to get the cheaper rates.  With a 
falling debt/equity ratio, a company ends up on credit watch, and 
thus no ability to get cheaper loans or refinance even if the 
cheaper rates are around.  That's the issue with WCOM along with 
the potential of that fear to materialize for other debt-laden 
companies too, including those named in the second paragraph 

Sad for investors but true.  As Steve Forbes, publisher of Forbes 
Magazine points out, "It's like reducing the price of gas to $0.35 
per gallon, but having none for sale at that price."

The takeaway?  Steer clear of the companies with heavy debt and 
flagging sales.  No matter how low the interest rates, they will 
be the next victims in this bear market, along with their 
shareholders who are "investing for the long term".

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Two more bearish ideas make their way on to the list tonight.  
Look for breakdowns ahead.

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


More movement in the last two days following the quiet trading 
earlier in the week.  Unfortunately it was below support.

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


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