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Daily Newsletter, Tuesday, 06/04/2002

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The Option Investor Newsletter                 Tuesday 06-04-2002
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)
************************************************************ 
      06-04-2002           High     Low     Volume Advance/Decline
DJIA     9687.84 - 22.00  9739.41  9592.79 1.48 bln   1407/1768
NASDAQ   1578.12 + 15.60  1587.79  1548.31 1.61 bln   1575/1877
S&P 100   516.03 +  1.29   518.94   510.65   Totals   2982/3545
S&P 500  1040.69 +  0.01  1046.06  1030.52             
RUS 2000  473.76 -  0.63   475.11   467.11
DJ TRANS 2663.50 - 26.30  2691.43  2638.42
VIX        26.94 +  1.24    27.93    25.94
VXN        49.66 +  2.01    50.12    47.91
TRIN        1.32 
PUT/CALL     .87
*************************************************************  

A Pause to Refresh

War worries, tax evasion, front running, layoffs, profit warnings
and even an attack by Greenspan could not make a big dent in the
indexes today. Does this mean the worst is over? Has the retail
investor suddenly had enough and decided that the bad news is
already priced into the market? While that may be too bullish 
an assessment there were many positive points to be derived from
today's market action.



 



 

We started the day with an overhang from the FLEX warning after
the company said they would miss estimates for at least two 
quarters. They said they would miss estimates by as much as 
-50%. Since Flextronics makes equipment for companies like 
Cisco the warning had a deeper meaning than just one company's
problem. If the manufacturers, FLEX, PLXS, SANM, JBL and SLR are
suffering from lack of orders then the companies that use them 
are suffering also. The networking sector (NWX.X) hit a new low
on the news. Still the Nasdaq held up very well under the 
pressure.

HPQ held its first analyst meeting and Fiorina reiterated the 
plan to cut 15,000 employees and targeted a $3 billion savings
through 2004. Fiorina said she would cut costs as well by 
consolidating contracts for outsourcing their manufacturing. 
Yet, another hit for FLEX and the sector mentioned above. She
said they would save as much as $800 million in the move. While
the HPQ CEO said there was no signs of a recovery in IT spending
this quarter she was confident that a backlog of pent-up demand
was building. Once managers could see profits improving they 
would not hesitate to place those orders, she said.

Bristol Meyers got the call they wish they could have ignored
today. Twenty-nine states sued BMY over delaying generic competitors
for its Taxol cancer drug. BMY had reserved $125 million for 
the upcoming litigation expense but some analysts estimate the
problem could run into billions. The revenue on Taxol was $1.5 
billion and depending on tactics employed to delay they could
be found liable for treble damages. This is even more troubling
for them since they are under suit for the same thing on BusPar.
This pattern of tactics will be especially damming if proven.

Layoffs are continuing in corporate America. IBM cut another -1500
jobs and announced a sale of its disk drive business to Hitachi
for $2 billion. IBM will take a charge of up to $2.5 billion for
the sale and the restructuring of the workforce. IBM said after
the bell that the workforce reduction effort was complete. IBM
gained +1.20 on a down day and was up slightly after the close.

Corning said it began cutting jobs as announced in April. They 
will eliminate -1500 jobs this week and -4000 jobs before the
plan is complete. They said this would enable them to return to
profitability by 2003. They said they will provide further details
in July.

Knight Trading got hammered for the second day in a row but for
a different reason. Yesterday's trading glitch loss was almost
completely eliminated by Monday's close but the stock opened 
back down at $4.00 today after the SEC announced they were 
under investigation for front running. The accusation said 
employees processing orders would place orders for their own
account before entering large customer orders that would likely
move the stock price. Once the price jumped the employees would
close the trade pocketing the difference. With NITE handling 11%
of the market volume this could have amounted to significant
gains. Oops!

The Tyco CEO was formerly arraigned today on a dozen felony 
counts of evading sales taxes on $13 million of purchased art.
$100 million a year in compensation and you can't afford the 
sales tax? While many people can relate to bending the rules
on a personal basis they do not want those rules bent corporately.
This called into question not only the accounting practices but
the business practices of Tyco under Kozlowski. Ironically, had
he only shipped the art to his New Hampshire home for a few months
as he stated on the exemption forms and then transferred it back 
to his $18 million New York residence he might have avoided the 
tax legally. That was an expensive decision by a high income CEO.

India and Pakistan are still facing an imminent war. Contrary 
to rumors during the day about various statements and peace
agreements they are still facing each other with guns drawn.
The Pakistan leader would not make an unconditional statement
about not using his nuclear weapons in case of war. After
saying something like "you don't have them if you don't plan
on using them" the markets sold off again on his comments. A
small country carrying a big stick and begging for recognition
among major powers. Just my impression. 

AOL please return Holly's calls. Lehman analyst Holly Becker 
downgraded AOL today after lowering her outlook for the company.
She said online advertising slump may last longer than expected
and that risk remains for timing a potential turnaround. AOL
fell -.89 to close at $17.20.

Greenspaned again. His appearance before an International 
Meeting of Central Bankers prompted a discussion of the U.S.
economy. His statements sent the markets into a spiral once 
again when he said the giant first quarter bounce in GDP was
a one shot affair from a rebuilding of depleted inventory. 
He said the economy was in a soft spot now after the rapid
growth of the 1Q but that the economy was growing, just growing
slowly. Investors wanted to hear bullish comments, not qualified
boiler plate about a slower than expected expansion. I will
bet he is really fun at parties!
  
Pessimism and skepticism is rampant. Phillip Ruffat, SVP at
Mizuho Securities said, "It's like the perfect storm for stocks.
You have fraud, deceit in accounting, high valuations and
the visibility of a brick." He left out war and broker scams
but pretty much hit the nail on the head. What is wrong with 
this picture? The markets finished flat to up. Surprise! Yes,
the Dow lost -22 points but it finished +86 points off the low.
The Dow tested support at 9600 dating back to January and that 
support held. The Nasdaq also held 1550 and rallied to close 
with a gain despite a severe warning from FLEX. Numerous 
market analysts, when queried about a bottom, have said when
bad news no longer has any impact and volume increases. Sounds
almost like today. The bears tried to take it down but like
that coiled spring it refused to stay and in the case of the 
Nasdaq even rallied. 

While I am not claiming the beginning of the next bull market
I did issue a signal to go long on the Market Monitor at 1:06
with the Dow at 9606. With strong support at 9600 and strong
economic news the market may simply have run out of stock to
sell. This may only be a temporary situation but the oversold
conditions are strong. The VIX hit 27.94 intraday. The VXN
hit 50.12 which correlates with the May-7th low and the Jan-30th
and Feb-8th Dow lows in the 9600 range. Nothing is ever certain
but the stars are lining up for a rally tonight. One day or 
multiple days are unknown. Keep those stops tight and don't
let the bears bite!

Enter Very Passively, Exit Aggressively!

Jim Brown
Editor


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

VOLLEY VOLATILITY
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 

If you are confusing volleyball and the market (or, ping-pong?), 
there was a big jump in S&P volatility recently as measured by 
the CBOE Volatility Index or VIX ($VIX.X) 

In recent months on the one occasion when VIX got this high, it 
led to the best rally of the year to date - at that February 
juncture VIX closed above 27. When VIX then subsequently turned 
DOWN (on a daily closing basis) a substantial rally followed. 
High volatility seems to signal climatic type selling.  

The VIX today climbed well above 27 on an intraday basis, 
reaching a peak of 27.9. 


 

This jump in VIX is the type of volatility event that makes me 
alert to the possibility of a tradable bottom and a rally of more 
than 1-2 days. 

By the way, the best historical VIX tendency I found in recent 
years, relative to its signaling a sizable trend change, was a 
tendency for intermediate to major bottoms to occur when the VIX 
21-day moving average rose above 35, then turned down. The OEX 
and SPX were a buy after the 21-day average turned lower from 
such a peak. Of course, volatility may not get that high again.  
I find only loose correlations to VIX as a consistent indicator 
that "signals" market tops or bottoms.  

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


 


The daily chart lower envelope line, as discussed before, gives 
one idea of a possible downside target area (in blue - 1027 area) 
- this line was nearly reached today and is a "normal" volatility 
or range for SPX relative to its 21-day moving average.  

The "minimum" downside objective implied by the Head & Shoulders 
top pattern was fulfilled yesterday so I no longer have this 
pattern outlined on the hourly chart.

I think that the S&P is at or near a significant bottom and would 
accumulate long index calls on dips, especially if SPX dropped 
back to or dipped a bit under 1030 again. However, if 1025 was 
penetrated this would be my exit point. We're still of course 
vulnerable to outside events causing further panic selling.   

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


 


I said yesterday that I thought that the OEX could get to the 
508-510 area before it would bounce off support implied by the 
lower (daily chart) envelope band or the low end of the weekly 
downtrend channel. Take a look. Looks good so far - stay tuned! 

I also said last night that I expected a rally attempt to set up
by today and that if so suggested covering shorts and exiting 
puts and would turn buyer for a trade, risking to 505.  Can't say
much more than this tonight. Buy dips.

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


 


My implied Head & Shoulders downside objective was to 27.5, but 
now doubt that we will go lower than today. In fact, on today's 
Market Monitor, I suggested covering short positions in the 29.0 
area. Moreover, I later suggested going long/buying calls on the 
first rebound and got filled at 29.25.  Then came the yo-yo wild 
swings, so there was more than one opportunity to buy dips. My 
exiting stop on long positions is suggested for 28.5. 

For those looking to cover shorts/exit puts - suggest getting out 
with QQQ at 29.30 or lower - I would not be surprised to see the 
Q's at 29 again, as this market is very nervous and prone to 
sharp price swings. That's what high volatility is all about! 

In case the Q's take off to the upside - and I don't see what 
would spark a sustained run up yet, especially ahead of an Intel 
mid-Quarter earning progress report on Thursday (after the close) 
- nevertheless, suggest having a protective buy stop set at 30.3 
for tomorrow (Wed.). 

I remain more concerned about protecting against a sharp further 
sharp decline - it will likely take some positive "spark" to get 
em up, but any spooky rumor seems enough to take em down. 

Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com


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

Fear On The Street: It's Up To The 200-dma
By Eric Utley

The CBOE Market Volatility Index (VIX.X) is rising, which means
fear is doing the same.  That trend is even more evident in the
Nasdaq-100 Volatility Index (VXN.X).  Both fear measures finished
higher Tuesday, despite a rebound in the Nasdaq-100 (NDX.X).  The
close higher in the VXN.X may reveal that there's staying power
to the short covering rally that we witnessed in the NDX names
near the close of the day's trading.

The ebb and flow of market psychology is amazing, especially
near key turning points no matter the time frame.  The spike
higher in the VIX Tuesday and close above its 200-dma reveals
to me that we're close to a short-term turning point for the
S&P 100 (OEX.X) names.  I think we're even closer in the Nasdaq
100 (NDX.X) issues due to the relatively increased oversold
nature of that index.

The spike further into extreme readings in the ARMS Index
(INDEX:TRIN) helps to reinforce that view.  The very short
term 5-day reading closed at 1.71, while the 10-day moved
within striking distance of extreme oversold readings.  The
last time we had both the 5 and 10-day ARMS readings in
extreme oversold the market staged a pretty good two day
rally.  The 1.50 level is something to watch for in the 10-day
number tomorrow.

The difference between the S&P and NDX names is even more
compelling in recent developments in bullish percent data.
The S&P 500 Bullish Percent ($BPSPX) reversed into bear
confirmed Tuesday at 54 percent.  While the Nasdaq-100 Bullish
Percent ($BPNDX) fell lower to finish at 26 percent, but in
bull correction mode.  Using this indicator alone, the plan of
attack is relatively simple.  Look for weak S&P names near
resistance because that market holds more downside risk and is
in bear confirmed mode.  And look for strong NDX names near
support for bullish plays, because the downside risk in that
group is quite a bit lower than any other market.  The bears
know that, and will be more inclined to cover their tech
shorts.  All the tech bulls need is a catalyst.  Maybe that
will come from Intel?

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

Market Averages

DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     :  9688

Moving Averages:
(Simple)

 10-dma:  9972
 50-dma: 10125
200-dma:  9882



S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     : 1041

Moving Averages:
(Simple)

 10-dma: 1070
 50-dma: 1097
200-dma: 1114



Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low : 1089
Current     : 1178

Moving Averages:
(Simple)

 10-dma: 1230
 50-dma: 1308
200-dma: 1438



Semiconductor ($SOX)

The SOX was the best performing sector on the day with its 3.43
percent rally.  The gain was fed by short covering ahead of
Intel's (NASDAQ:INTC) mid quarter update.

Sector leaders included Broadcom (NASDAQ:BRCM), NVIDIA
(NASDAQ:NVDA), Linear Technology (NASDAQ:LLTC), and Xilinx
(NASDAQ:XLNX).

52-week High: 697
52-week Low : 344
Current     : 467

Moving Averages:
(Simple)

 10-dma: 481
 50-dma: 537
200-dma: 526


Defense ($DFX)

Here's a new one, the DFX was the worst performing sector on my
watch list Tuesday with its 1.73 percent drop.

Leading the way to the downside included Alliant Tech
Systems (NYSE:ATK), L 3 Communications (NYSE:LLL), Titan
(NYSE:TTN), and FLIR Systems (NASDAQ:FLIR).

52-week High: 210
52-week Low : 155
Current     : 193

Moving Averages:
(Simple)

 10-dma: 199
 50-dma: 199
200-dma: N/A

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

Market Volatility

The VIX finally broke and closed above its 200-dma.  That level
is now below at 26.19.  The rally is finally showing some real
signs of fear, which could eventually lead to a washout event,
and from there a rally of duration.

The VXN is testing its 200-dma.  A breakout here would confirm
what we see in the S&P names.  I like the way that the VXN
closed higher Tuesday along with the NDX.

CBOE Market Volatility Index (VIX) - 26.97 +1.27
Nasdaq-100 Volatility Index  (VXN) - 48.76 +1.11

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.73        365,435       266,163
Equity Only    0.55        306,482       169,056
OEX            1.01         15,482        15,750
QQQ            0.40         27,820        11,267

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

Bullish Percent Data

           Current   Change   Status
NYSE          58      - 2     Bull Confirmed
NASDAQ-100    26      - 4     Bull Correction
DOW           53      - 3     Bear Correction
S&P 500       54      - 4     Bear Confirmed
S&P 100       53      - 2     Bear Confirmed

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

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

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

 5-Day Arms Index  1.71
10-Day Arms Index  1.47
21-Day Arms Index  1.33
55-Day Arms Index  1.33

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      1416           1784
NASDAQ    1580           1865

        New Highs      New Lows
NYSE       69             89
NASDAQ     52            205

        Volume (in millions)
NYSE     1,481
NASDAQ   1,880

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

Commitments Of Traders Report: 05/28/02

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

Commercials grew more bearish last week by adding about 5,000
contracts to their net bearish position.  They did so by adding
more shorts than longs.  Listen up!  Small traders reached their
most bullish position in over a year by adding a big number of
long positions to total more than 114,000 net long contracts.  The
spread here between commercials and small traders has widen
considerably over the last two weeks!

Commercials   Long      Short      Net     % Of OI 
05/14/02      343,941   424,893   (80,952)  (12.1%)
05/21/02      354,039   429,803   (75,764)   (9.7%)
05/28/02      362,607   442,845   (80,238)   (9.9%)

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

Small Traders Long      Short      Net     % of OI
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      172,313     57,803  114,510     49.8%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 114,510 - 3/26/02
 
NASDAQ-100

Nasdaq commercials grew less bullish last week by reducing their
longs more than their shorts.  Small traders went in the opposite
direction by growing less bearish, reducing their net position by
about 3,000 contracts. 

Commercials   Long      Short      Net     % of OI 
05/14/02       40,858     35,761     5,097   (5.5%)
05/21/02       51,448     45,375     6,073   (6.3%)
05/28/02       49,669     44,900     4,769   (5.0%)

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
05/14/02       11,920    17,479    (5,559)     8.2% 
05/21/02       12,567    19,899    (7,332)    22.6%
05/28/02       12,562    16,969    (4,407)    14.9%

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 were flat on a week over week basis.  Their net
position lost less than 100 contracts.  Small traders grew less
bearish, though, by adding a number of long positions.

Commercials   Long      Short      Net     % of OI
05/14/02       21,080    14,725    6,355     14.4% 
05/21/02       20,173    15,317    4,856     13.7%
05/28/02       20,289    15,513    4,776     13.3%

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
05/14/02        4,930    10,899    (5,969)   (25.2%) 
05/21/02        3,661     9,585    (5,924)   (44.7%)
05/28/02        5,709     9,180    (3,471)   (23.3%)

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 - 6/4
by Leigh Stevens

SECTOR NEWS/TRADING  -

The big story was software ($GSO.X) and semiconductors ($SOX.X) - 
in very similar action to the Nasdaq Composite, both indexes held 
their prior lows from early-May setting up potential double 
bottoms. More on these two key tech sectors in the Highlights 
section below. 
 
The drug sector ($DRB.X) fell to its lowest level in 2 years, led  
by a 4% decline in Bristol-Myers (BMY) after attorney generals 
from some 25 states filed a lawsuit against the company alleging 
it improperly sought to delay generic competition for its anti-
cancer drug Taxol. Pfizer (PFE) bucked the downdraft with an 
advance (3+%) after reaffirming previous earnings goals for 2002-
2004.

HIGHER ON THE DAY ON Tuesday - 


 


DOWN ON THE DAY on Tuesday - 


 


SECTOR HIGHLIGHT OF THE DAY -

Software Index; Goldman Sachs ($GSO.X)
STOCKS: ERTS; INFA; INKT; INTU; ISSX; ITWO; IWOV; JDEC; MANU; 
MENT; MSFT; MUSE; NATI; NOVL; NTIQ; ORCL; PMTC; PRGN; PRSF; PSFT; 
RATL; RETK; REY; RHAT; RNWK; SEBL; SNPS; SY; SYMC; TIBX; VIGN; 
VRTS; WEBM; WIND; YHOO

The software sector, as a group, had a good-sized rebound after 
getting slammed on Monday on a bunch of downgrades or lowered 
estimates. Oracle (ORCL) rallied over 6% after closing down over 
7% on Monday. The institutional research firm, Sanford Bernstein 
had issued a report that indicated investors might want to 
"revisit" the stock - they saw the possibility of any negative 
pre-announcement was already priced into the current price of the 
stock, suggesting that the downside was limited.



 

The Software Index, on a technical basis, looks like it could 
have formed a double bottom low here.  Supporting the view of a 
possible future upside reversal is the bullish price/RSI 
divergence, as the RSI oscillator has held well above its prior 
low, whereas prices fell to its prior low.  Moreover, the two 
(dashed) declining trendlines have the appearance of a bullish 
falling wedge.  

The "falling wedge" pattern tends to be bullish due the indication 
that buying and selling interests are getting more and more in 
balance so to speak, which I describe as "compression". Like a 
spring, if/when there is a move above the upper trendline, a 
substantial rebound often follows. Selling is usually satisfied 
after the lengthily decline, whereas buyers find reasons to come 
back when the prospects for the group are perceived to have 
changed and/or the group is considered to be undervalued. 

Semiconductor Sector Index ($SOX.X)
STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; 
MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX

The Semiconductor Index ($SOX.X) price activity was again a major 
feature of today, as it was on Monday, although there was no 
"new" news to speak of. Buyers simply came in bargain hunting and 
covering short positions in the stocks, after follow through 
selling spilled over from Monday but then seemed to dry up.   

SOX's importance is more than another tech group as strength or 
weakness in chip making is seen as key for tech stocks in general 
due to chip use being part of so much technology and hardware.  



 

While there was a lower intraday low, there was a rebound that 
kept the close from equaling or exceeding the early-May closing 
low. As with the Software sector, we have a double bottom that 
has set up and may indicate the start of a more sustained 
turnaround.     

The 14-day stochastic has now fallen to an oversold area, which 
is a supportive positive for a rebound.  There may be some 
backing and filling and even a retest of today's low, but I see 
downside risk as limited based on today's market action - the SOX 
index appears to have found an area where buyers will support the 
stocks in this sector. The risk of another down leg seems less 
than it appeared yesterday.   


SECTOR REVIEW - ** No new updates today, 6/4 - reviews are being 
completed for Wed. **

Airline Index ($XAL.X)
STOCKS: ALK; AMR; AWA; CAL; DAL; FRNT; KLM; LUV; NWAC; U; UAL

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

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: 6/02

Amex Composite Index ($XAX.X)
The small cap stocks so predominating in the Amex, as a group, 
has been in a sideways consolidation.  Recent rally attempts have 
been finding resistance in the 964 area. 947-948 looks like a key 
near support, with a break under this level suggesting at least a 
temporary top. LAST UPDATE: 6/02  

Bank Index ($BKX.X)
STOCKS: BAC; BBT; BK; C; CMA; FBF; FITB; GDW; JPM; KEY; KRB; MEL; 
NCC; NTRS; ONE; PNC; SOTR; STI; STT; USB; WB; WFC; WM; ZION

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: 6/02

Biotechnology Index ($BTK.X)
STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA; 
ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM; 
MYGN; PDLI; TARO; TEVA; VRTX; XOMA

Biotech has been in pronounced downtrend, which may have 
reversed at the early-May lows in the 380 area. A continued rally 
from this point would suggests that index can work higher as long 
as BTK maintains a pattern of higher (up) swing highs and higher 
(down) swing lows. This pattern would be broken on a downside 
penetration of 393. 

A key technical resistance is 449-450, the area of several 
prior lows and the intersection of daily down trendline. A 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. 
LAST UPDATE: 6/02

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.  Resistance is at 658, then 
682. Close over these levels would turn the trend up. 

Early-May lows in the 580 area now looks like major support. XCI 
has been continuing to trend lower, from its upswing high in the 
680 area. LAST UPDATE: 6/02
 
Computer Boxmaker Index ($BMX.X) 
STOCKS: AAPL; CPQ; DELL; GTW; HWP; IBM; SNE; SUNW; UIS; VRTS  

The Boxmaker 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.  

Resistance is at 94, then 98. Major support looks like 83-85. 
LAST UPDATE: 6/02 

Cyclical Index; Morgan Stanley; ($CYC.X)
STOCKS: AA; C; CAT; CSX; DCN; DD; DE; DOW; ETN; F; FDX; GP; GT; 
HON; HWP; IP; IR; JCI; KRI; MAS; MMM; MOT; PBI; PD; PPG; PTV; R; 
S; UTX; WHR; X 

The cyclical index has been locked in a 552-595 trading range 
since early- March, with current levels closer to the high end of 
this range. 

A breakout above 595 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 552 would reverse the 
trend down. LAST UPDATE: 6/02

Defense Index; Amex ($DFI.X)
STOCKS: ATK; BA; COL; DRS; EASI; EDO; ERJ; ESL; FLIR; GD; INVN; 
ITT; LLL; LMT; NOC; OSIS; RTN; SSSS; TDY; TTN; UIC

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)
STOCKS: ADIC; ADPT; DSS; FLSH; HTCH; IOM; MXO; RDRT; SNDK; STK

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)
STOCKS: ADCT; ALA; AMCC; AVNX; CIEN; CORV; CSCO; FNSR; GLW; JDSU; 
JNPR; LU; MRVC; NEWP; NT; NUFO; ONIS; PMCS; Q; SCMR; TLAB; VTSS; 
WCG

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)
STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL

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)
STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN; PHSY; 
TGH; THC; UNH; WLP

Healthcare ($HMO.X) rebounded strongly from where it needed to 
maintain its bullish technical chart picture, at its up 
trendline. However, the prior high in the 644 area now looms as 
significant resistance. LAST UPDATE: 6/02

** 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)
STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; 
MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX

** SEE SECTOR HIGHLIGHT OF THE DAY **  

Software Index; Goldman Sachs ($GSO.X)
STOCKS: ERTS; INFA; INKT; INTU; ISSX; ITWO; IWOV; JDEC; MANU; 
MENT; MSFT; MUSE; NATI; NOVL; NTIQ; ORCL; PMTC; PRGN; PRSF; PSFT; 
RATL; RETK; REY; RHAT; RNWK; SEBL; SNPS; SY; SYMC; TIBX; VIGN; 
VRTS; WEBM; WIND; YHOO

** SEE SECTOR HIGHLIGHT OF THE DAY **  

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
lstevens@OptionInvestor.com


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The Option Investor Newsletter                  Tuesday 06-04-2002
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:
*****

NOVN $24.50 -1.45 (-2.11) The momentum that carried NOVN up to
its relative high in last week's trading has seem to run out of
steam as the stock pulled back by nearly 6 percent today on the
weakness in its sector.  We were looking for a pullback to support
for new entries, but that support at the $24 level was broken
today, which has us dropping coverage on the play this evening.
Look for early strength tomorrow morning for an exit point, or
set tight stops to protect against further downside. 

CI $103.56 -2.09 (-2.49) CI's short term upward trend came to a
halt in today's session as the stock broke down from its support
line on active trading volume of nearly 1 million shares.  The
pullback in the broader healthcare sector precipitated the break
in CI, and with that we're dropping coverage on the play this
evening.  Look for a rebound up to the 10-dma near the $104.50
area for an exit point early tomorrow.

WFMI $49.25 -1.00 (-1.92) WFMI failed to follow through in its
breakout attempt late last week.  The stock rolled over in
yesterday’s session from below the $51 level and continued lower
in today's below the psychologically significant $50 level on
increased declining volume.  The stock has support at $48, but
we don't want to hang around to see if it's going to hold.  Use
a relief rally bounce early tomorrow to exit plays quickly into
strength.

THC $71.51 -2.50 (-2.99) So much for the attempted rally in
Health Care stocks.  The persistent market weakness hit this
relatively strong sector again  on Tuesday, knocking it back for
a 1.6% loss.  But that was rather tame when compared to our THC
play, which gave up more than double that amount on strong volume.
The stock came to rest above our $71 stop, but the daily chart
is not pretty.  It looks like it is going to see further downside
straight ahead and we'll take an early exit from the play.  Use
any sort of oversold rebound on Wednesday to effect a more
favorable exit from open positions.


PUTS:
*****

PLAB $22.45 +0.87 (-0.42) PLAB rebounded a little more than we
were comfortable with today.  The stock finished strongly on
further short covering in the technology sector, which looks
like it may have some legs over the coming days.  Instead of
risking our gains, we're looking to take profits on further
weakness tomorrow.  Look for a pullback down into the $22 area
for a potential exit point.

EXPE $72.03 -1.60 (+0.53) Barry Diller got in the way of what was
shaping up to be a nice put play.  With EXPE sitting right on the
$71 support level, the company received an unsolicited bid from
Barry Diller's USA Interactive.  That sent the stock soaring as
high as $76, before it fell back to earth from a lack of buying
interest.  While the stock may not rally much from current levels,
it appears unlikely that it will fall either, with the outstanding
offer.  We'll take advantage of the current price weakness to
close out the play and focus on plays without any strings
attached.

VRTS $22.23 +1.21 (-0.44) The bulls have been stepping up to buy
VRTS near the $20.50 level and has seen two significant
short-covering rallies from this level in the past week.  Despite
a SoundView downgrade this morning, the stock managed a 5.6%
rally to close near its high of the day.  With the markets trying
to put in a bottom near current levels, risk management dictates
that we lock in our gains on the play at current levels and focus
on bearish plays that are showing more weakness.


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

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

CALLS              Mon    Tue

TEVA     66.40   -0.18  -0.41  Holding support despite BTK weakness
ERTS     64.28   -1.07   1.35  Ready to break out above resistance
NOVN     24.50   -0.66  -1.45  Dropped, lost last week momentum
ADBE     35.84   -0.80   0.54  Refuses to break below $35 support
CI      103.56   -0.40  -2.09  Dropped, bullish trend broken Tue
THC      71.51   -0.49  -2.50  Dropped, double top roll from $75
DGX      86.69   -0.02  -0.71  Bouncing above the $85 support
INTU     43.00   -1.13   0.40  News is out of the way, rally???
WFMI     49.25   -0.92  -1.00  Dropped, failed to follow through
BRCD     19.99   -1.38   1.72  New, short covering rally ahead
NVDA     33.08   -1.97   1.58  New, support holding above $30 
LXK      63.49   -0.53   1.57  New, strengthening printer biz


PUTS               

GS       73.80   -1.66   0.01  Steadily making its way to $70
PLAB     22.45   -1.29   0.87  Dropped, showing signs of strength
COHU     22.19   -2.86   0.55  Huge sell off Monday, consolidating
WHR      68.32   -1.25  -1.80  Close below 200-dma is very bearish
VRTS     22.21   -1.65   1.19  Dropped, possibly put in a bottom
WMB      11.21   -3.25   0.26  Late news should spark sell-off!!!
DUK      31.70   -1.31   1.00  The next shoe to fall in energy???
EXPE     72.03    2.13  -1.60  Dropped, USA buyout offer on table
BLL      39.30   -1.30  -0.98  Steadily moving towards 200-dma
IDPH     38.10   -3.13  -1.66  New, breakdown from consolidation
ATK      99.26   -3.58  -5.94  New, sector shift to bearishness
PMI      82.98   -0.91  -1.71  New, bears are circling near top
DHI      22.37   -0.67  -1.48  New, housing heading for trouble???


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

TEVA $66.44 -0.41 (-0.69) The weakness so far this week in the
AMEX Biotechnology Sector Index (BTK.X) has pressured TEVA back
to support right where we want the stock.  TEVA has performed
well relative to the continued heavy selling in the rest of its
sector peers, noting how the $66 level held as support during
today's session.  That's the level to look for future intraday
rebounds following early weakness, using a tight stop just
beneath to protect against a possible breakdown below short term
support.  As long as the $66 level continues to hold, we're
comfortable with taking entries on bounces from that level.
Preferably look for confirmation in the BTK.X before entering
on a rebound in TEVA.  The group is oversold and due for a
bounce, which could be just right around the corner and the
catalyst to break TEVA from its recent consolidation.  Look
for confirmation to the upside on a breakout above the $68
level.

INTU $43.00 +0.40 (+0.73) INTU announced this morning that it
planned to buy Management Reports for $92 million in cash.  The
market's initial reaction to the news had the stock trading
lower, but INTU was able to mount a rebound later in the day on
the rebound in the broader technology sector.  This news may
have been the reason that the stock was trading poorly in the
last two days, as those in the know may have been dumping ahead
of the official announcement.  With the news out of the way,
the stock should resume its upward climb, especially if the
late rally in the Nasdaq follows through into tomorrow's
session.  Look for bounces from above the $42 level on intraday
weakness as potential entry points into this strong software
stock.  Those who'd rather wait for confirmation should look
for the Nasdaq to turn green and watch for INTU to bounce back
above the $44 level of short term resistance.

ADBE $35.84 +0.54 (-0.26) While it hasn't been able to advance
over the past week, ADBE is notable for its refusal to sell off
with the remainder of the Technology sector this week.  Buyers
continue to step up near the $35 level, which is also the level
of our stop.  While our play is definitely skating on thin ice,
it appears to be holding up so far.  Adding to the bullish tone
was the fact that the Software index (GSO.X) rebounded on Tuesday
from the $115 level, the site of both the early-May and September
lows.  If the GSO is going to stage a meaningful rebound, then
ADBE should perform well due to its impressive relative strength
over the past few months.  Continue to use rebounds from the area
of the recent lows to initiate new positions, but keep stops in
place at $35.  If the rally attempt in the GSO fails, then a close
below $35 in ADBE will tell us it is time to let the play go.
Traders looking for more confirmation will want to wait for ADBE
to clear the $38.50 along with the GSO pushing back above the $126
level before playing.

DGX $86.69 -0.71 (-0.73) In contrast to the wild volatility in
the broad market in recent days, the action in shares of DGX has
been rather sedate, as the stock consolidates in the $86-88 area.
What initially attracted us to the play was the fact that DGX once
again found support at the $85 level, just above its long-term
ascending trendline (currently $84).  In light of the widespread
market weakness due to earnings concerns and corporate scandals,
DGX has been attractive to investors due to its strong earnings
growth and a lack of questionable issues regarding the company's
income statements.  Intraday dips in the $85-86 area look like a
good entry point, so long as the stock rebounds off of that level.
With the broad market trying to rebound, DGX should continue to
see significant buying interest due to the fact that it is still
holding its long-term ascending trend.  More conservative traders
will want to see the stock clear near-term resistance at $88
before initiating new positions.  Keep stops in place at $84, as
a break of the ascending trendline would be a significant blow to
the bullishness that has been supporting DGX.

ERTS $64.28 +1.35 (+0.28) To look at the daily chart of ERTS, you
would think that the Software sector (GSO.X) had been in a bullish
trend.  ERTS has been wedging its way higher, posting a series of
higher intraday lows for the past 2 weeks as the bulls chip away
at the $65 resistance level.  This has all come about while the
GSO index has been testing its September lows near the $115 level.
Well, ERTS looks poised to push through resistance, and if the
rebound in the GSO off its lows today has any follow through, it
could be the catalyst to help ERTS finally break out.  Continue
using intraday dips (and bounces) near the ascending trendline
(currently $63.50) to establish new positions or else wait for a
breakout over $65 resistance.  We are raising our stop to $62
tonight due to the fact that the bears have been unable to breach
this support level over the past 8 sessions, despite a clearly
weak market and sector.  Remember that we'll want to see strength
in the GSO index to confirm that we're on the right side of the
trade.


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

LXK - Lexmark $63.49 +1.57 (+1.04 this week)

Lexmark International, Inc. is a developer, manufacturer and
supplier of printing solutions, including laser and inkjet
printers, multifunction products and associated supplies and
services for offices and homes. The Company also sells dot
matrix printers for printing single and multi-part forms for
business users and develops, manufactures and markets a broad
line of other office imaging products. Lexmark International,
Inc. is the surviving entity of a merger between itself and
its former parent holding company, Lexmark International
Group, Inc., consummated on July 1, 2000.

The office products industry has been doing very well this year
despite the weakness in other segments of the economy.  Small
businesses and home consumers have been spending strongly on
supplies such as printers.  That trend has boosted the financial
performance of LXK this year, as evidenced by the stock's strong
showing since the beginning of the year.  While most other tech
related stocks are trading near March lows, or lower, LXK is
threatening to breakout to new relative highs above the $65
level.  The strength of the stock may have something to do with
the troubles that rival Xerox (NYSE:XRX) has been having, or it
may have to do with simply the strength of the printer business.
Even Dell Computer (NASDAQ:DELL) is considering entering the
printer business because of its strength, which puts LXK in the
sweet spot for a little while longer.  Traders looking to get
into one of the strongest stocks in technology can look for
follow through to the upside in tomorrow's session if the short
covering in the Nasdaq gets its legs and turns into a rally.
Such a move in the rest of technology should allow LXK to
breakout from its recent consolidation from above the $60
level.  Look for high volume to accompany any breakout attempt
above the $65 level as evidence that the move has institutional
sponsorship.  Pullbacks down into the $62 area, with help from
the 10-dma, should offer good entries on a bounce.  Our stop
is initially in place at the $60 level, at the stock's recent
low end of consolidation.

BUY CALL JUN-60*LXK-FL OI= 435 at $4.50 SL=2.75
BUY CALL JUN-65 LXK-FM OI=1253 at $1.50 SL=0.75
BUY CALL JUL-60 LXK-GL OI= 965 at $5.80 SL=3.75
BUY CALL JUL-65 LXK-GM OI=1558 at $2.85 SL=1.25

Average Daily Volume = 1.09 mln


BRCD – Brocade Communications $19.99 +1.72 (+0.34 this week)

Brocade Communications is a provider of Fibre Channel switching
solutions for Storage Area Networks (SANs), which apply the
benefits of a networked approach to the connection of computer
storage systems and servers.  The company's family of SilkWorm
switches enables companies to cost-effectively manage growth in
their storage capacity requirements and improve the performance
between their servers and storage systems.  This provides the
ability of increasing the size and scope of a company's SAN,
while allowing them to operate data-intensive applications,
such as data backup and restore, and disaster recovery on the
SAN.

While certainly susceptible to the whims of the bears, stocks
of the storage equipment vendors are starting to show some bullish
signs that could be signaling a new rally.  We last focused on
shares of QLGC when it gave a PnF buy signal near the $52 level,
but it turned out that we were early to the play as the persistent
NASDAQ selling has now dragged that stock down to major support
near the $44 level.  That stock is looking near a bottom, and as
the leader in the group recently, a bullish move in QLGC is likely
to have a buoyant effect on the other players in this space.  But
BRCD looks like an even stronger play after reaffirming both Q3
and Q4 guidance yesterday.  The stock certainly doesn't have a
bullish trend to work with, but it is looking like the stock is
ready to rally after posting a higher low at $18.25 vs. last
week's bottom just below $18.  If the bulls can push the stock
through near-term resistance at $20.50, that could be enough to
get the shorts to start covering and that would likely lead BRCD
to test its descending trendline near $23.  That's where the bulls
and bears would likely stage their first major battle, as this
trendline has been holding back rallies since early April.  Use
either another rebound from above the $18.25 level or a breakout
over $20.50 to initiate new positions.  Due to the proximity of
strong support, we are placing a tight stop at $17.75.

BUY CALL JUN-20*BQB-FD OI=12425 at $1.45 SL=0.75
BUY CALL JUN-22 BQB-FX OI= 4934 at $0.60 SL=0.25
BUY CALL JUL-20 BQB-GD OI= 2447 at $2.60 SL=1.25
BUY CALL JUL-22 BQB-GX OI= 3317 at $1.50 SL=0.75
BUY CALL JUL-25 UBF-GE OI= 6982 at $0.85 SL=0.25

Average Daily Volume = 17.4 mln


NVDA – NVIDIA Corporation $33.08 +1.58 (-0.38 this week)

NVIDIA Corporation designs, develops and markets 3D graphics
processors, graphics processing units and related software that
set the standard for performance, quality and features for
every type of desktop personal computer user.  Used in a wide
variety of application including games, the Internet and
industrial design, the company's products were the first to
incorporate a 128-bit multi-texturing graphics architecture.
This design approach delivers to users a highly immersive,
interactive 3D experience with compelling visual quality and
stunning effects at real-time frame rates.  NVDA sells its
products to major PC manufacturers such as Compaq, Dell,
Gateway, Hewlett-Packard and IBM.

In a rare bright spot in the Technology market, sales of
Microsoft's Xbox game system have been picking up lately, helped
in part by recent price cuts.  Shares of MSFT are unlikely to see
much bullish action from the robust sales, due to the reduced
margins that will come with the reduced prices.  But that won't
dampen the profits of company's that are providing critical
components in the game units.  That's where NVDA comes into the
equation, as the company provides the advanced graphics chipsets
used in the Xbox game system.  NVDA tends to trade in tandem with
the broader Semiconductor sector (SOX.X), and the weakness in the
sector has kept NVDA under significant selling pressure over the
past two weeks.  But with the SOX seeming to find a bottom near
the $450 level over the past 2 days, and NVDA continuing to find
support near the $31 level, it looks like it may be time for the
bulls to come out and play.  NVDA had a good day on Tuesday,
posting a 5% gain after once again finding support near $31.  This
is an aggressive play, as the hoped-for rally in the stock could
be just as quickly erased if the bears get hungry again and take
another swipe at the SOX.  Look for a renewed bounce from above
the $31 level or a rally through the top of yesterday's gap
($34.50) to trigger new entries.  Our stop is initially in place
at $30, just below the late-April lows.

BUY CALL JUN-30 RVU-FF OI=1855 at $4.10 SL=2.50
BUY CALL JUN-35 RVU-FG OI=7586 at $1.35 SL=0.75
BUY CALL JUL-32*RVU-GZ OI= 100 at $3.80 SL=2.25
BUY CALL JUL-35 RVU-GG OI=1116 at $2.55 SL=1.25
BUY CALL JUL-37 RVU-GU OI= 367 at $1.65 SL=0.75

Average Daily Volume = 11.1 mln



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

COHU $22.19 +0.55 (-2.31) What an entry point last Friday!  COHU's
brief rally attempt that ended at its downward sloping 10-dma
turned into a brilliant entry point after yesterday's slide
lower and this mornings continuation below the 200-dma.  The
bounce back on short covering this afternoon was to be
expected given the importance of the 200-dma as well as the
short covering that came into the broader market.  If anything,
the rebound today should set up another favorable entry point
into new put plays later this week.  For now, traders holding
open positions from last Friday's rollover might look for
further downside into tomorrow's session for a possible quick
exit point.  We expect some consolidation around the 200-dma
in the coming days, so use that level to your advantage as
entry and exit points for the rest of this week.  If the
selling continues in the broader technology sector and
pressures COHU lower, then we'll look for a quick trip down to
the $20 level as another possible exit point.  For new entries,
we're best off waiting for some short term resistance to
develop above the 200-dma.  For open positions, play it with
a tight stop to protect this week's profits so far.

WHR $68.35 -1.80 (-3.05) We had hoped for some more upside
movement late last week in order to give us a good entry point
into new put positions, but WHR didn't want to cooperate.  We're
not complaining with the stock's slide lower, so we'll just have
to take what the market gives us.  In the last two days, we've
seen the rally attempt from last Friday up to the 10-dma
completely give way to further selling, which took WHR below its
200-dma in today's session.  The stock tried to bounce back above
that level, but couldn't quite muster the strength, which may
reveal that more selling and downside is on the way.  There's not
much in the way of immediate support below the 200-dma until the
$65 level which is certainly a feasible downside target with the
way that this stock is acting.  Traders with open positions should
simply trail down tight stops to protect profits and let the
stock work in your favor.  Make sure to monitor the INDU closely
for clues into the broad market sentiment for blue chip issues
like WHR.  For new entry points, we'd like to take rollovers
from the $70 level using the downward sloping 10-dma as an
upside protective stop.

DUK $31.70 +1.00 (-0.31) Energy traders were under attack again
yesterday when fellow OI put play WMB was defending against
allegations that it had played a role in the manipulation of
energy prices in California.  And of course the tragic news out
of El Paso cast a cloud over the sector for most of the day.  The
sentiment caused another sharp drop in DUK which saw the stock
take out its short term support at the $31 level.  The stock and
broader sector staged a minor relief rally today, which came on
much lighter volume and was unable to take out even yesterday's
relatively lower low at the $32 level.  Today's short term relief
rally could have possibly set up another entry point into this
stock as the sentiment in the sector remains incredibly bearish.
We'll look for short term resistance to start forming at the $32
level, and look to possible rollovers from that level as entry
points through the rest of the week.  Of course we'll take
breakdowns below short term support as well, if the selling in the
sector resumes on a news driven event.

BLL $39.30 -0.98 (-2.28) BLL continued trending lower for the
seventh straight day in today's session.  The stock stopped its
fall just short of the $40 level in yesterday's session, but gapped
below that level in today's session.  After the brief rally
attempt earlier in the day, which acted to fill the gap overhead
just above the $40 level, the stock rolled over from yesterday's
low at the $40.25 level.  From there BLL trended lower throughout
the day towards the $39 level, for another decline of more than
$1.  As long as the stock keeps up this $1 a day to the downside,
our play will be working nicely in our favor.  But not too far
away is the 200-dma just above the $37 mark.  We should expect a
rebound from that level unless a broad market sell off pushes the
stock below it.  Readers who have taken entries during the last
two days might look to the 200-dma as one possible exit point in
the next few days.  As for new entry points, we would like to see
a one or two day rally set up a favorable entry point and rollover
from resistance.

GS $73.80 +0.01 (-1.65) The broad markets staged an impressive
rebound off their lows on Tuesday, but the Broker/Dealer index
(XBD.X) was notably absent from the list of sectors staging
late-day rallies.  Weighing on the group was the news about
alleged improper trading practices at Knight Trading (NITE).
This wet blanket helped to keep the XBD pinned near its May lows
($432), also the site of the 50% retracement of the fall rally
on Tuesday.  The lack of buying interest could be seen in shares
of GS, as the stock fell back from its intraday high of $74.60 to
post its second consecutive close below the $74 level.  This is
important due to the fact that the $74 level had been viewed as
strong support.  Once the bears are done breaking this support
level, it appears very likely that GS will visit our bearish
price objective (from the PnF chart) of $70.  Resistance is
strengthening at $75 level, with more overhead at $76.  Use a
failed rally near either of these levels to initiate new
positions, or else target a breakdown under the $73 intraday
support level.  Keep stops in place at $77.

WMB $11.21 +0.26 (-2.99) We got just what we were asking for from
our WMB play as the stock collapsed to just below the $11 level
on Monday, driven by more selling in the energy traders.  After
achieving its bearish price target of $11.50 and the company
reaffirming its trading practices this morning, the stock firmed
near the $11 level.  This looked like a good point to lock in
those gains and move on to the next winning play until the late
breaking news that FERC may revoke the company's power trading
license.  That just goes to show that where there's one cockroach,
there are likely more.  The news just keeps getting worse and
investors responded in the extended-hours session by pushing the
stock back below the $11 level.  Since we don't want to leave this
party before it is truly over, we're going to keep the play open
and see how the news plays out over the next couple days.  We want
to be very careful about initiating new positions here, although
any sort of failed rally below the $11.75 level could be used for
aggressive entries.  We don't want to give back our recent gains
in the play, so we are aggressively tightening our stop to $12,
just above yesterday's intraday highs.  A dramatic drop under the
$10.50 level (read:volume) can be used for new entries as well,
but watch out for a bounce on any potentially good news.


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

ATK - Alliant Tech Systems $99.26 -5.94 (-9.52 this week)

Alliant Techsystems Inc. conducts business through three industry
segments: Aerospace, Conventional Munitions and Defense Systems.
Within these segments, Alliant has four business lanes: Propulsion
and Composites, each of which falls within the Company's Aerospace
segment; Conventional Munitions, which corresponds to the
Company's Conventional Munitions segment; and Precision
Capabilities, which corresponds to the Company's Defense Systems
segment. In fiscal 2001, the Company moved its missile products
business, Alliant Missile Products Company LLC, to its Aerospace
segment.

Increased insider selling at major defense firms is causing a
shift in the previously bullish industry.  This comes in spite of
heightened tensions in the global conflict.  Add to the insider
selling a recent wave of downgrades, and the sentiment in the
defense sector has switched to downright bearish.  Merrill Lynch
was the most recent brokerage firm to issue a downgrade on ATK,
one of the high flyers in the defense business, from a near
term strong buy to a near term buy rating based on the
valuation of shares.  That was followed by another SEC filing
that revealed the CEO of ATK had filed to sell another 60,000
shares.  The news inspired fear into investors who are sitting
on big gains in this stock after riding it higher following the
events of September 11, which increased the appeal of defense
related stocks.  But with the recent developments, combined with
the lofty valuations of the sector, the short term outlook for
the group is more bearish than bullish.  For its part, ATK
broke back below the psychologically significant $100 level
in today's trading on a pick up in trading activity.  The break
should lead to further downside in the coming days, with short
term support not seen until the $90 level.  We'll target that
level, which is reinforced by the 200-dma at the $88 level, as
a short term downside target as a rebound from the 200-dma is
likely.  Use further weakness in tomorrow's session to enter
momentum based plays.  Use a relief rally followed by a rollover
below $105 resistance as another entry strategy.  Our stop is
at $105 to begin with.

BUY PUT JUN-100*ATK-RT OI=118 at $4.00 SL=2.50
BUY PUT JUL-100 ATK-ST OI= 27 at $5.80 SL=3.25

Average Daily Volume = 337 K


PMI - PMI Group $82.98 -1.71 (-2.62 this week)

The PMI Group, Inc. is an international provider of credit
enhancement products and lender services that promote home
ownership and facilitate mortgage transactions in the capital
markets. Through its wholly and partially owned subsidiaries,
the Company offers residential mortgage insurance and credit
enhancement products domestically and internationally, title
insurance, financial guaranty reinsurance, mortgage servicing
and other residential lender services. Residential mortgage
insurance protects lenders and investors against potential
losses in the event of borrower default.

Upward trending stocks since last fall are becoming favorite
targets of the bears.  It seems as though not even the
strongest of stocks are safe from downside in this market
environment.  PMI has been trending higher since late last
fall along its rising support trend line.  The support is in
danger of breaking with any further downside in the stock
this week.  Bear Sterns helped to kick off the short term
downward trend with its downgrade two weeks ago of PMI from a
buy rating to an investment hold rating.  The stock gapped
lower on the news, and spent the following week consolidating
the move lower, when it finally gave way for further selling
on relatively heavier volume during yesterday's session and
followed through to the downside in today's session.  The
stock stopped short of breaking below minor short term support
at the $83 level, but that support could easily be broken
tomorrow on further downside.  Momentum traders can look for
weakness in the broader market and the INDU for signs that
PMI is heading lower on a breakdown below today's intraday low
at $82.70.  Traders who like rollovers near resistance can
wait for a relief rally on relatively lighter volume up to the
$85 resistance level before entering new put plays.  Our stop
on PMI is initially placed at the $86 level, just above its
short term congestion from last week.

BUY PUT JUN-85*PMI-RQ OI= 32 at $3.20 SL=1.50
BUY PUT JUL-80 PMI-SP OI=150 at $2.20 SL=1.00

Average Daily Volume = 325 K


DHI - DR Horton $22.37 -1.48 (-2.15 this week)

D. R. Horton Inc. is a national builder that is engaged primarily
in the construction and sale of single-family housing in 39
markets and 23 states in the United States. The Company designs,
builds and sells single-family houses on lots developed by it and
on finished lots that it purchases, ready for home construction.
Periodically, the Company sells lots it has developed. D. R.
Horton also provides title agency and mortgage brokerage services
to its homebuyers. It does not retain or service the mortgages
that it originates but, rather, sells the mortgages and related
servicing rights to investors.

We've had recent success in economically sensitive stocks that
have taken a turn for the worse.  One segment of the economy
that hasn't been hit yet is the housing group.  But many market
watchers and analysts have suggested in the past that the housing
market was sitting on the edge of a bubble that is primed to
burst.  Recent weakness in a slew of housing stocks reflects the
market's growing pessimism for the housing segment of the
economy, evidenced by the recent breakdown in DHI.  The stock
had been trading in a consolidation between the $23 and $27
levels for the last several months, until this week when the
stock broke down in a big way.  Declining volume really picked
up in today's session, reaching more than double the 30 day
average trading volume for the stock, indicating that investors
wanted out in a big way.  The downward spike from consolidation
on heavy trading volume may forecast the beginning of a longer
term trend of lower prices in this stock.  Traders looking to
get in early on the trend can look for follow through downside
movement in tomorrow's session below the $22 level.  The 200-dma
below at the $20.92 level could provide a bounce over the short
term if the stock's recent decline continues into the rest of
the week.  Traders can either enter into a breakdown and prepare
for a bounce from the 200-dma, or wait for a rollover from
resistance just below the $24 level.  We're starting the play
with a stop just above the 10-dma at $25.

BUY PUT JUN-22*DHI-RX OI=30 at $1.10 SL=0.50
BUY PUT JUL-22 DHI-SX OI= 2 at $1.70 SL=0.75

Average Daily Volume = 1.53 mln


IDPH – IDEC Pharmaceuticals $38.10 -1.66 (-4.79 this week)

IDEC Pharmaceuticals is a biopharmaceutical company engaged
primarily in the research, development and commercialization
of targeted therapies for the treatment of cancer, autoimmune
and inflammatory diseases.  IDPH's first commercial product,
Rituxan, and its most advanced product candidate, Zevalin
(formerly Y2B8), are for use in the treatment of certain B-cell
non-Hodgkin's lymphomas.  The company is also developing
products for the treatment of various autoimmune diseases such
as psoriasis, rheumatoid arthritis and lupus.

Less than a week ago, it looked like the Biotechnology sector
(BTK.X) was poised to help the overall Technology market begin
the next rebound.  But in the past few days, a lot of technical
damage has been done, with the BTK flirting with a breakdown
under multi-year support at the $375 level.  While the BTK managed
to hold above that level at the close on Tuesday, there are
several stocks in the sector that didn't fare nearly as well.
IDPH broke down in a big way on Monday, falling below its
early-May low near $41 at the close.  With selling pressure
remaining heavy on Tuesday, IDPH continued its slide, briefly
falling below the $38 level, and closing near that level to post
a new 52-week low.  Selling volume was heavy too, running 70%
above the ADV.  This week's selloff completed a bearish triangle
breakdown on the PnF chart.  If the BTK does break down under the
$375 level, it seems a foregone conclusion that IDPH will be
testing its lows from last spring in the $32-34 area.  Following
the stock's breakdown this week, there is now heavy overhead
resistance at the $42 level.  A failed rally near that level
would make for a great entry point, although we could see any
rally attempt turned back at the $41 level or even as low as
today's intraday resistance level near $39.50.  Given the weakness
in the BTK, the next entry point could even be a breakdown below
Tuesday's lows.  If IDPH heads south tomorrow, look to enter on
a drop below the $37.50 level, using a breakdown in the BTK as a
confirming indication.  Initial stops are in place at $42.50.

BUY PUT JUN-40*IDK-RH OI=1531 at $3.50 SL=1.75
BUY PUT JUN-35 IDK-RG OI= 859 at $1.35 SL=0.75

Average Daily Volume = 4.52 mln



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**********

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The Option Investor Newsletter                  Tuesday 06-04-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.



*********************
PLAY OF THE DAY – PUT
*********************

BLL - Ball Corp. $39.30 -0.98 (-2.28 this week)

Ball Corporation is a manufacturer of metal and plastic packaging,
primarily for beverages and foods, and a supplier of aerospace and
other technologies and services to commercial and governmental
customers. Ball's principal business is the manufacture and sale
of rigid packaging products, primarily for beverages and foods.
Polyethylene terephthalate packaging is Ball's newest product
line. The aerospace and technologies segment includes civil space
systems, defense operations and commercial space operations. The
defense operations business unit includes defense systems,
systems engineering services and advanced antenna and video
systems, as well as electro-optics and cryogenic systems and
components.

Most Recent Update

BLL continued trending lower for the seventh straight day in
today's session.  The stock stopped its fall just short of the $40
level in yesterday's session, but gapped below that level in
today's session.  After the brief rally attempt earlier in the
day, which acted to fill the gap overhead just above the $40
level, the stock rolled over from yesterday's low at the $40.25
level.  From there BLL trended lower throughout the day towards
the $39 level, for another decline of more than $1.  As long as
the stock keeps up this $1 a day to the downside, our play will
be working nicely in our favor.  But not too far away is the
200-dma just above the $37 mark.  We should expect a rebound from
that level unless a broad market sell off pushes the stock below
it.  Readers who have taken entries during the last two days might
look to the 200-dma as one possible exit point in the next few
days.  As  for new entry points, we would like to see a one or two
day rally set up a favorable entry point and rollover from
resistance.

Comments

BLL is off the ball.  And that's a very good thing.  The stock
is on the fast track to its 200-dma below current levels at the
$37.28 level.  Traders with open positions should be looking to
book gains on a decline to that level in tomorrow's session.
Those looking for a quick scalp trade can look for a breakdown
below today's low at the $38.85 level with sights set on the
200-dma as well.

BUY PUT JUN-40*BLL-RH OI= 99 at $2.20 SL=1.00
BUY PUT JUL-40 BLL-SH OI=139 at $2.95 SL=1.75

Average Daily Volume = 414 K



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

Many bearish candidates were triggered in the last two days, while 
the bullish possibles drifted away from action points.  We’re 
replacing two more bullish candidates tonight.


To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/060402.asp


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

Much movement in recent sessions.  Posture is busy tonight!


To Read The Rest of The OptionInvestor.com Market Posture Click Here
http://www.OptionInvestor.com/marketposture/060402.asp


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**********

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