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Daily Newsletter, Thursday, 06/06/2002

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The Option Investor Newsletter                 Thursday 06-06-2002
Copyright 2001, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


Posted online for subscribers at http://www.OptionInvestor.com

Earnings and Political Jitters Roll On
by Leigh Stevens

There are definite backdrops to the market jitters besides 
whether the king of the chipmakers Intel (INTC) is going to pull 
out its earnings slump sooner rather than later.  Namely, the 
continued drumbeat of stories on the malfeasance and double 
dealings on the corporate front and the flare up of the latest 
mideast violence - a couple of Indian soldiers were shot dead 
overnight and this dreaded beat goes on. As soon as I saw those 
tanks in front of Arafat's headquarters in the morning news, I 
had that sinking feeling again. 

The market caught the sinking feeling big time over the course of 
the day.  Tech held up relatively better than the S&P, while 
trader waited for the Intel end of day (mid-Quarter progress) 
report. After hours was another story as Intel traded lower in 
active trading, after the company lowered its Q2 revenue outlook 
because of soft demand in Europe.  And we're worried about a 
falling dollar?! Intel lowered its quarterly sales estimate to a 
6.2-6.5 billion dollar range, from a 6.4 to 7.0 billion band.   

The morning began with a Merrill Lynch downgrade of Intel - never 
accuse mother Merrill of closing the barn door after the horse is 
out!  How things have changed from their recent reaffirmation of 
their "strong buy" rating - perhaps all that is different is the 
pressure on Merrill to show how "objective" they are.  

Anyway, after some earlier positive Street comments this week on 
the semiconductor sector, ahead of the end of day Thursday mid-
quarter update, Merrill announced a INTC downgrade to "neutral" 
from a "strong buy". The analyst involved told the firm's clients 
that the stock was "no bargain" on a price-to-earnings and growth 
basis. Hey, what tech stock is a "bargain"? Well, Merrill makes 
it "official" I suppose. They also lowered ratings on LLTC, SMTC, 
TXN and TQNT, with the assessment: "we believe that the early 
cycle semiconductor upturn has now played itself out." 

Thursday is one report day on jobless claims  - for the week 
ending 6/1, there was a decrease of 32,000 new claims from the 
week before, which saw an upward revision to 415,000. The 383,000  
figure was well under the 405,000 forecasted. The 4-week moving 
average, fell 8,500 to 411,250 from the previous week/ 

The fly in the ointment was that, while initial jobless claims 
fell, continuing claims for the week ended May 25 increased by 
29,000 to 3.8 million. The four-week moving average was 3.8 
million, an increase of 12,250 from the previous week. On 
balance, the drop in new claims was offset by the rising 
continuing claims number, as people are just not getting back to 
work so quickly.  This is tough on the people involved, but 
typical of the early stages of a recovery as companies would 
rather pay overtime than take back laid off workers or do new 
hiring. 

Tomorrow will see the release of the nonfarm payrolls, expected 
up 50-60,000, and the unemployment report - the jobless totals 
are expected to rise to 6.1%, from April's 6%. Average hourly 
earnings are expected to be us have risen 0.3 percent.

Biotech, drug and financial stocks took a beating in the non-tech 
areas, followed by the utility and retail sectors. Investors sold 
the retailing stocks following lower May same-store sales 
figures. Only gold and most oil service stocks bucked the trend. 

The healthcare sector ($HMO.X) was off only marginally (-0.29%), 
but based on my analysis of the topping looking stocks in this 
group, am recommending taking profits on stocks in this group 
(was holding 3 of the stocks) - you can see my Sector 
Trader analysis for more on the HMO group.    

Standard and Poor's investment committee came out with a 
suggestion to lower equity exposure from 60 to 55% and it appears 
that some of their institutional customers took heed - S&P 
indicated that "equity valuations remain unjustifiably high." In 
the late 1990s, higher multiples were "justified by accelerating 
earnings growth, a U.S. budget surplus, declining rates and a 
"peace dividend." I don’t recall this statement at Nasdaq 5000, 
but that's another story! 

The software sector was down, after Oracle (ORCL) gave back more 
than half of its 11% Wednesday gain - this after ORCL indicated 
it would not warn on meeting its 12 cent EPS Q4 target. Of 
course, there was bound to be some rain on this parade, as UBS 
Warburg suggested that this would be due to aggressive cost 
cutting and share buybacks and not sales growth. WorldCom (WCOM) 
rebounded 4 percent and was the most actively traded stock on the 
Nasdaq, after the company indicated it would exit the wireless 
business to cut costs and pare down its long-term debt.

On the NYSE, Alcoa (AA), Home Depot (HD), SBC Communications 
(SBC), Merck (MRK), JP Morgan Chase (JPM) and General Electric 
(GE) were all off around 3% or more. Bellwether S&P stock GE at 
its 29.30 close is now under its September closing low at 30.37 
and is nearing its Sept. intraday low at 28.50. This is not going 
to gladden any fund manager's heart!   

AFTER HOURS - 
Intel was trading down some $3 to the $24 area, from its closing 
level of $27.00.  Oracle and Microsoft traded lower as well. Tech 
damage was enough to send the Nasdaq 100 down a further 33 points 
from the NDX closing level of 1157, to around 1124, but not all 
100 stocks were trading actively in the after hours. The NDX has, 
or should have, technical support in the 1120 area, extending 
down to 1100.      

TRADING STRATEGY -

The market is getting quite oversold based on numerous ways of 
measuring it, such as on a price, moving average and bearish 
sentiment basis. Moreover, the CBOE volatility index ($VIX.X) 
has closed over 27 for the first time since early-February. The 
VIX may rise still further tomorrow.  When it starts coming back 
down, it has often been a precursor to a good-sized rally.  

I would not try to catch a "falling knife", but we are getting 
down to an area, where bullish news on one of the troubling 
political fronts and focus on the emerging economic rebound, can 
cause a strong technical rally. Certainly, the odds of continuing 
to profit from the short side and put positions is likely less 
than the potential for even a moderate oversold rebound. Sectors 
that might be bottoming include the brokers, software and the 
semiconductors.  

I suggested a long QQQ position at 29.30 recently in my Index 
Trader writings and would suggest keeping a 28.5 stop. I will be 
watching for another opportunity to get long if stopped out. As 
long as risk is kept reasonable by buying only where the market 
is already extended on the downside, risk to reward on this type 
of trade can be favorable in my estimation.  

I also continue to suggest shorting good-sized rallies - since 
the indices are traveling again in well-defined downtrend 
channels, there have been many shorting opportunities at the 
upper trendlines - it strikes me as amazing how well this has 
been working. And, so far, the "overnight" risk has been far less 
than on the long side - witness the Intel sell off after hours 
Thursday.  

The charts with the channel definitions I refer to are below. I 
can imagine overnight news of the capture of Osama Ben Laden 
might put a little hurt into the bears, but short of that, it's 
"what me worry"! 
 
CHARTS OF INTEREST -

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

 


1030 was where SPX support looked to be but we're likely to get 
an opening under this area.  1020, if reached, may be the area 
for a high-potential long position, using a stop at 1015.  

Selling in the 1050-1054 area looks to also be a good trade, with 
stop protection 5-6 points higher - who knows, peace may "break 
out"!  

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

 

9600 on the Dow has been holding as support, but next stop looks 
like 9500 (95 on DJX).  These trend channels are amazing in terms 
of the regular reversals at the resistance lines for sure. When 
we get in a trend channels rule, or rock or whatever - not all 
the time, but it’s a useful tool. 98-98.5 looms as overhead 
resistance, then just look at the prior upswing highs stair-
stepping up the channel. 

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

 

1530 is expected to be potential support on the daily chart, but 
with a good possibility of "slippage" to 1523-1520 or a bit 
lower.  Measuring the height of the (dashed lines) "rectangular" 
hourly consolidation on the hourly chart and subtracting it from 
the lower line (at 1555) generates an objective to around 1515 in 
the Composite. 

With a break of 1555, it immediately "becomes" an area of initial 
resistance on a rebound. Above 1555, next resistance and an area 
to trade again on the short side is in the 1580-1585 zone. 

The Nasdaq 100 ($NDX) - Daily/Hourly charts:

 


The Nasdaq 100 (NDX) was down about 33 points in after hours 
trading - if this is an indication of the opening tomorrow, it 
puts the NDX down close to the low end of the hourly downtrend 
channel and at the lower envelope line (10% under the 21-day 
moving average) that indicates a "typical" area for the this 
index to bottom or at least slow its rate of decline. 

If NDX gets down to around 1020 and stabilizes in this area, I 
favor buying for a short-term rebound. If over the coming days, 
no lower lows are seen and the market shows signs of 
stabilization, this may suggest a longer-term bullish play, 
looking for a move back up to the 1200 to 1245 area.          

Leigh Stevens
LStevens@OptionInvestor.com



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

BULLS GET WHACKED 
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 

Being an equal opportunity dispenser of punishment, the market 
turned on the bulls who went bottom fishing yesterday.  And, 
while the market is oversold - per my view that a bottom is in 
sight yesterday - today's action proved again that what is 
oversold can get MORE oversold.  

I was not completely caught unawares as I thought that the 
indexes might have a lower low before there was a tradable bottom 
and a more sustained rally. The market has a tendency, especially 
in a bear market like this one, for when it does bottom, to do so 
over a 4-7 day period. I still figure risk to reward for NEW 
positions to be better on buying a sharp further dip than to 
short on a break at this juncture. 

I covered the SPX, DJX, COMP and NDX in the Option Investor 
Market wrap tonight. In this space, will look at the widely 
traded OEX and QQQ.  

First, a look at the VIX, which is finally over that 27 closing 
level last seen in February - the intraday peak was 28.22 - the 
Feb. intraday high was 28.66. 

GENERAL MARKET INDICATORS - 
 
 

This close-only chart doesn't show the peak, but at 28.2 was 
getting up near the peak of early-Feb. at 27.6. When the VIX 
starts coming back down, this may be the signal that a bottom is 
in for a while.   

Before moving to the OEX, SPX in the 1030 area as a buy looked 
pretty solid yesterday, with a suggested stop at 1014. I would 
adhere to the stop, but have an expectation that SPX might dip to 
the 1020 area or less.  I suggested a wide stop - it was my 
thought to exit at 1024. 

Those who are long around today's lows and can tolerate a wide 
stop, use 1014 as an exit point for tomorrow only. The low end of 
the hourly downtrend channel is in the 1020-1018 area, which is 
where we're vulnerable to in SPX on the downside. It depends on 
whether the S&P had most of its sell off today or might follow 
tech sharply lower - some big cap techs of course being in the 
S&P 500 also.  

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

 


I suggested buying OEX in the 510 area with a stop/exit point at 
505. Anyone using a 505 stop may be hit at this price in the 
early trading tomorrow - if the fear & loathing of tech that 
surfaced at the close comes into full play at tomorrow's opening. 

503 is the bottom of the hourly downtrend channel on the opening. 
This looks like an area to cash in some puts if you hold em - 
take the money and run! Keep some to hedge against more bad news 
on any war front - at least there will not be any earnings 
estimates coming on Sat. or Sun! 

Buying in the in low 500 area looks like a reasonable play IF 
stabilization appears - with a risk point to 497.  

I don't think the damage on the downside will be long lasting, 
but the market is one sour and nervous mood. Tomorrow should tell 
the story on this.  The market is oversold, so the decline may be 
short-lived - not 2 hours - but perhaps a low tomorrow, a couple 
of more days of doldrums followed by some buying interest coming 
again. 

In the DJX, 96 was offering support but it is threatened tomorrow 
morning - at least Intel is not in the Dow. Microsoft is, and it 
actually was up slightly today - not after hours however. 

I suggest stop protection at 95, but its probably better to set a 
stop point at 94.5 and stay out way if 95 is seen - this level 
would likely be a buy on a risk to reward basis; e.g. a half 
point risk - potential back up to at least the "breakdown" point 
at 96 assuming a break of this level on the opening.   


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

 


Would adhere to stops if long in the 29 area, at prior support - 
the question is whether to leave them at 28.50.  28 now looks 
like it could be the area where support might develop. If the 
opening looks sharply lower, I think its worthwhile to 
temporarily lower stops to 27.7-27.5, moving them back up to and 
above 28 if a rebound develops over the next couple of days.  
Resistance comes in at 29.5-30. 

The bullish rising wedge on the hourly chart prefaced this 
downturn, so the technical caution was there to see - my 
expectation was that prior lows would be tested, not exceeded, 
however. Stay tuned! - for funky Friday.  

Again, focus is on INTC, MSFT, ORCL, CISCO and QCOM, which are 
the key Nasdaq big cap stocks.  Especially have liked way MSFT, 
ORCL and QCOM have been holding up - unless they fall apart, I 
still am looking for a bottom to be not far away.  


Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com



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

Oh, Intel
By Eric Utley

Intel's (NASDAQ:INTC) lowering of guidance after the bell
Thursday changed the market's sentiment in one quick swoop.  Not
to say that it was even remotely bullish ahead of the chip
maker's mid quarter update.  But any hope that was left before
the close of another tough day in the market was most likely
dashed after the close.

Judging by the way that the PC sensitive stocks were trading
in after hours, as well as the futures market, we're in for an
ugly opening tomorrow morning.  We wondered Tuesday night if
Intel could provide the catalyst for the bulls to turn around
the oversold nature of the technology heavy Nasdaq market, and
spark a short term rally in tech shares.  Intel sure enough
provided a catalyst, but it wasn't of the type that we had
speculated.  Tonight, we're wondering if Intel's news will
provide the catalyst to spark a short term washout in the
market.  Let's take a look at the sentiment figures.

The sector scorecard wasn't all too surprising Thursday.  Every
technology sector on my screen was bleeding red, led by the
Fiber Optic Index (FOP.X) and Biotechnology (BTK.X).  What
really stuck out to me was the weakness in the banks, which
had been holding up very well prior to the last two days of
blood letting in the broader markets.  The KBW Bank Sector
Index (BKX.X) finished off by more than 2 percent, which is
a pretty big move for that index.  Two of the lead banks in
the sector, Citigroup (NYSE:C) and Bank of America (NYSE:BAC),
both look pretty ugly.  On the other side, the defensive
natured gold stocks were back to their rally.

The internals of the market were as ugly as I can remember
in a long time.  Decliners swamped advancers, volume was
relatively heavy, and there were a whole lot of new lows
traced during Thursday's session, especially on the Nasdaq
market.  Not too many new highs were hit.

To reiterate what we observed Tuesday night, the short-term
ARMS Index indicators are still in extreme oversold readings
above the 1.50 level.  Both the 5-day and 10-day are now in
oversold readings above 1.50.

And then there's the fear gauges of the market, the CBOE
Market Volatility Index (VIX.X) and the Nasdaq-100 Volatility
Index (VXN.X).  Both are revealing heightened states of
market fear, and both are poised to stage big follow through
breakouts during tomorrow's session.  We'll see if both can
hold above their respective technical levels, or if they
pullback on any strength in stocks.

The bullish percent data was very active Thursday.  The NYSE
Composite reversed into bull correction mode, which was
probably the most important development because of the broad
nature of the index.  Meanwhile, the Nasdaq 100 fell down to
24 percent.  That index should lose a few more stocks
tomorrow, and by doing so grow much more oversold.  And the
Dow reversed into a bear confirmed mode as well.

With several indicators pointing to a very oversold market,
I wouldn't be surprised by a washout event tomorrow thanks to
Intel.  Be prepared to trade either side, though, as the
volatility should produce plenty of profit opportunities.

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

Market Averages

DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     :  9625

Moving Averages:
(Simple)

 10-dma:  9941
 50-dma: 10116
200-dma:  9879

S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     : 1029

Moving Averages:
(Simple)

 10-dma: 1062
 50-dma: 1093
200-dma: 1112

Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low : 1089
Current     : 1158

Moving Averages:
(Simple)

 10-dma: 1213
 50-dma: 1298
200-dma: 1434


Gold and Silver ($XAU)

The shiny stuff was back in the spotlight Thursday.  The XAU
reclaimed the best performing sector spot after its recent
slide.  The sector finished 0.77 percent higher Thursday,
pathetically earning the day's best performance.

Leading to the upside included Gold Fields (NYSE:GFI),
Agnico Eagle Mines (NYSE:AEM), Harmony Gold (NASDAQ:HGMCY),
Barrick Gold (NYSE:ABX), and Placer Dome (NYSE:PDG).

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

Moving Averages:
(Simple)

 10-dma: 85
 50-dma: 77
200-dma: 63



Fiber Optic ($FOP)

The FOP was back in the dog house, falling 5.03 percent for
the day.  It barely edged out the BTK for the worst
performing sector spot for the day.

Leading to the downside included shares of Nortel
Networks (NYSE:NT), Vitesse (NASDAQ:VTSS), JDS Uniphase
(NASDAQ:JDSU), Alcatel (NYSE:ALA), Lucent (NYSE:LU), and
ADC Telecommunications (NASDAQ:ADCT).

52-week High: 139
52-week Low :  57
Current     :  57

Moving Averages:
(Simple)

 10-dma:  63
 50-dma:  76
200-dma: N/A



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

Market Volatility

The VIX traded above the 28 level Thursday, slightly above its
intraday high traced Tuesday.  We should see some follow
through into Friday's session.  But will have to wait to draw
any conclusions over the weekend, when we see where the VIX
closes Friday.

The VXN penetrated its 200-dma to the upside Thursday, but
couldn't manage a close above despite the weakness in the
Nasdaq-100 (NDX.X).  Intel's (NASDAQ:INTC) news should inspire
a breakout and close above Friday.

CBOE Market Volatility Index (VIX) - 27.36 +2.65
Nasdaq-100 Volatility Index  (VXN) - 49.83 +1.81

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

          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          57      - 1     Bull Correction***
NASDAQ-100    24      - 3     Bull Correction
DOW           50      - 3     Bear Confirmed
S&P 500       52      - 1     Bear Confirmed
S&P 100       51      - 1     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  1.68
10-Day Arms Index  1.57
21-Day Arms Index  1.32
55-Day Arms Index  1.36

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       993           2192
NASDAQ     965           2477

        New Highs      New Lows
NYSE       63            110
NASDAQ     44            194

        Volume (in millions)
NYSE     1,611
NASDAQ   1,622

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

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 - 6/6
by Leigh Stevens


Intel was trading down some $3 to the $24 area, from its closing 
level of $27.00, so expect the Semiconductor sector to take a 
further hit tomorrow, on top of its 3% decline today.


The software sector was down, after Oracle (ORCL) gave back more 
than half of its 11% Wednesday gains - this after ORCL indicated 
it would not warn on meeting its 12 cent EPS Q4 target. Of 
course, there was bound to be some rain on this parade, as UBS 
Warburg suggested that this would be due to aggressive cost 
cutting and share buybacks and not sales growth.

Biotech, drug and financial stocks took a beating in the non-tech
 areas, followed by the utility and retail sectors. Investors 
sold the retailing stocks following lower May same-store sales 
figures. Only gold and most oil service stocks bucked the trend.

The healthcare sector ($HMO.X) was off only marginally (-0.29%), 
but based on my analysis of the topping looking stocks in this 
group, am recommending exiting the sector - see the Sector 
Highlight section below.  

HIGHER ON THE DAY ON Thursday - 

 

DOWN ON THE DAY on Thursday - 

 


SECTOR HIGHLIGHT -

Healthcare Index; Morgan Stanley ($HMO.X)
STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN; PHSY; 
TGH; THC; UNH; WLP

645, at the recent top in the HMO Index is a key resistance.  The 
Healthcare Index has of course been in strong uptrend, but 
selling has been occurring in the group and the momentum has 
slowed. Analysis of key HMO stocks suggests that the sector is 
quite vulnerable to a downside reversal and deeper correction 
than has been seen to date. In a bottoms up approach -- analysis 
of the individual stocks in the group and than generalizing to 
the group, I suggest taking profits and exiting the stocks that I 
suggested previously. 


 

Near support is at 600, then 576. A daily close under 600 would 
suggest possible downside to the later support.   
UPDATE: 6/6

6/6 UPDATE: Suggest exit at the Friday open on PacifiCare Health 
Systems (PHSY) bought on suggestion at 23.5-24.7. Stock momentum 
has slowed and is now sideways to lower. Close: 26.07.

6/6 UPDATE: Suggest taking profits on Wellpoint Health Networks 
(WLP) relative to entry at 70 and 72.00. Stock may be making a 
double top. Close: 75.66

6/6 UPDATE: Suggest exit on Humana (HUM) on entry suggested at 
15.60 & 15.00-15.15. Close: 15.06. Stock is trending sideways and 
further upside potential looks doubtful so will preempt the 
suggested stop and take a small loss.

THC good be making a double top; AET is trending sideways and may 
be building a top; MME shot to new high above a "line" of 
resistance at 37 - then reversed to close on its lows - in a 
possible bull trap reversal pattern; OHP may be making a double 
top here - same pattern on UNH.   

 
SECTOR REVIEW - 

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

 

So far, the Airlines are holding key closing level support in the 
76.50 area. A close under 76.00 would suggest the possibility 
that XAL could go lower still - next potential support looks like 
70. This sector is quite oversold - a further sideways move would 
suggest basing activity. 

Resistance, on a closing basis is at 82, then 84. A close over 84 
would be a bullish positive and at least suggest that some 
further upside progress would be made.  Conversely 


Amex Composite Index ($XAX.X)


 

The Amex Composite downside momentum has accelerated as XAZ 
pierced its up trendline and 50-day moving average.  The next 
downside target area looks like 897.   

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


 

After a significant double top, BKX accelerated to the downside 
after taking out support in the 860-862 area, falling under its 
200-day moving average as it fell. A next downside target is to 
830, equal to a 62% retracement of the sharp Feb. to March 
advance and at a key prior high. 

LAST UPDATE: 6/6

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


 
 
Looked like double bottom low could set up in the 374-375 area, 
but the prior low was exceeded, suggesting the biotech (BTK) 
sector will go lower still.  

LAST UPDATE: 6/6 

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

Bottom may be setting up, but XCI chart also looks like there 
could be a retest of the early-May lows in the 574-579 area. 
LAST UPDATE: 6/6
 
Computer Boxmaker Index ($BMX.X) 
STOCKS: AAPL; CPQ; DELL; GTW; HWP; IBM; SNE; SUNW; UIS; VRTS  

Bottom may be setting up here, but further market action and time 
is needed to tell.  Key support is 85, then 83, which were 
intraday lows of early-May 
LAST UPDATE: 6/6

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 

Double top was made in March and May in 595 area which suggests 
strong resistance at that level.  Next level to watch is key 
support in the 552 area. If this level is penetrated, next 
downside objective and a key support zone looks like 530-535. 
LAST UPDATE: 6/6

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

Double top and bearish RSI divergence has manifested in a 
continued weakness and correction, as suggested previously.  
Think we have lower to go still, perhaps back to the 
600 area. 
LAST UPDATE: 6/6

Disk Drive Index ($DDX.X)
STOCKS: ADIC; ADPT; DSS; FLSH; HTCH; IOM; MXO; RDRT; SNDK; STK

The Disk Drive Sector has been very week, with continued downside 
momentum - next objective is to the 75 area; then, if exceeded, 
we could be looking at a 100%, "round-trip" retracement to the 
September lows at 59-60.

LAST UPDATE: 6/6

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

Continues to make new lows, and I have no downside price target 
for the sector index. The sector is very oversold, but extreme 
overcapacity continues to weigh on the group.  A close above 78 
is needed to signal a reversal.  
LAST UPDATE: 6/6

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

The financials have continued to weaken, recently falling under 
its 200-day moving average. Downside momentum has been seen since 
the rally failure of mid-May. The question is whether NF's second 
down "leg" has run its course after the double top of March-
April. If 580 gives way, a next potential downside target is 570.
LAST UPDATE: 6/6

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

Relevant to the March-May double top, the further apart (in time) 
for a double top the more significant it tends to be - months 
apart is more significant than days or weeks. The key level to 
watch on the downside now is the prior (down) swing low in the 
345 area - this was also the level of price peak in Dec. and the 
again in late-January.  If 345 is penetrated, the next level of 
potential support looks 338.
LAST UPDATE: 6/6


Gold & Silver Sector Index ($XAU.X)
STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL

Recent break in the trend bears watching for a possible downside 
reversal. Key near support is in the 80 area; then, if exceeded, 
at 75.00, which would be a 50% retracement of the March-June 
advance.  88-89, at the recent top, is the key resistance. XAU 
must climb back above this area to suggest that there is much 
more upside than seen already year to date.
LAST UPDATE: 6/6


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

645, at recent top is key resistance.  HMO has been in strong 
uptrend, but appears to running into some selling in the group as 
the momentum has slowed. Analysis of key stocks in the group 
suggests that the sector is quite vulnerable to a downside 
reversal and deeper correction than has been seen to date. 

NOTE: SEE SECTOR HIGHLIGHT OF THE DAY AT TOP TO VIEW THE CHART 

Near support is at 600, then 576. A daily close under 600 would 
suggest possible downside to the later support.   
LAST UPDATE: 6/6

6/6 UPDATE: Suggest exit on PacifiCare Health Systems (PHSY) 
bought on suggestion at 23.5-24.7. Stock momentum has slowed and 
is now sideways to lower. Close: 26.07.

6/6 UPDATE: Suggest taking profits on Wellpoint Health Networks 
(WLP) relative to entry at 70 and 72.00. Stock may be making a 
double top. Close: 75.66

6/6 UPDATE: Suggest exit on Humana (HUM) on entry suggested at 
15.60 & 15.00-15.15. Close: 15.06. Stock is trending sideways and 
further upside potential looks doubtful.

THC good be making a double top; AET is trending sideways and may 
be building a top; MME shot to new high above a "line" of 
resistance at 37 - then reversed to close on its lows - in a 
possible bull trap reversal pattern; OHP may be making a double 
top here - same pattern on UNH.   

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

As with the Software sector, a possible double bottom looked like 
it was forming in the 448-450 area.  This now looks doubtful.  A 
close under 450,suggests a further drop, with a target to around 
417. 

The 14-day stochastic is reading oversold of course it can get 
more oversold. Another down leg would appear to underway based on 
the Intel price break after hours today.
LAST UPDATE: 6/6


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 Index, on a technical basis, has been looking like 
it was forming a double bottom at 114-115. If there is a break of 
this area, next potential technical support looks to be well 
under this, at 100-101. 

There is also a possible bullish wedge pattern on the daily 
chart, but this would only be "confirmed" with a move above 123. 
LAST UPDATE: 6/6 


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                  Thursday 06-06-2002
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:
*****

TEVA $64.30 -1.41 (-2.73) TEVA is getting dragged down by the
biotechnology sector, which continues to bleed lower.  There's
no sense in hanging around to watch our gains disappear in
TEVA as its sector drags the stock lower.  Look for exit
plays if you haven't already into any relief rally in the
biotech sector during tomorrow's session ahead of the weekend.
In the event of further downside, traders might consider setting
a stop just below today's low to protect any built up profits.

ADBE $35.20 -1.17 (-0.90) After numerous attempts to move higher,
it is clear that the bulls in ADBE are losing traction.  The
stock ended on Thursday above our $35 stop, but based on the
bearish news from INTC tonight after the close, we expect that
level to be broken in the morning.  The stock has been losing
relative strength and appears destined to break down.  That
definitely isn't the place to be looking long.  We're dropping
the play tonight so that we can focus on stronger stocks.



PUTS:
*****

ATK $105.15 +3.25 (-3.63) The buyers came rushing back into the
defense sector today after running scared from the technology
sector.  ATK finished on its day high near its 10-dma.  While
a rollover from this level could take place in tomorrow's
session, the weakness in the broader market could spur more
buying in the defense sector and lift ATK even higher.  Look to
exit plays during any intraday pullback tomorrow.

WMB $8.93 -0.19 (-5.27) It was definitely the right move to keep
WMB on the active list for a couple more days as FERC's threat to
revoke the company's energy trading license sent the stock
spiraling lower yesterday and the weakness persisted today with
WMB falling below $9.  While there could still be more downside
in store for the stock, bears are definitely carrying the bulk of
the risk here in the event of a short-covering rebound.  We'll
take this opportunity to close what has been a very successful
play.  


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

Please view this in COURIER 10 font for alignment
*************************************************
CALLS              Mon    Tue    Wed    Thu

TEVA     64.30   -0.18  -0.41  -0.83  -1.41  Dropped, BTK weakness
ERTS     62.95   -1.07   1.35  -0.18  -1.15  Waiting at resistance
ADBE     35.84   -0.80   0.54  -0.53  -1.17  Dropped, breaking
DGX      88.75   -0.02  -0.71   1.48   0.58  Trending higher still
INTU     43.83   -1.13   0.40   1.43  -0.60  Still holding strong
BRCD     19.77   -1.38   1.72   0.01  -0.23  Ready to breakout!!!
NVDA     32.61   -1.97   1.58  -0.48   0.01  Relatively strong!!
LXK      61.15   -0.53   1.57  -1.98  -0.36  Downgrade entry point
AZO      81.71   -0.84  -2.15   1.81   1.04  New, strong sector!! 
PSFT     21.06   -1.22   1.05   1.35  -0.63  New, inside day set


PUTS               

GS       73.95   -1.66   0.01   1.95  -1.80  Rolled from 10-dma
COHU     20.12   -2.86   0.55  -1.30  -0.77  Trading at $20 level
WHR      68.31   -1.25  -1.80   1.97  -2.01  Inside day setting up
WMB       8.93   -3.25   0.26  -2.09  -0.19  Dropped, book gains
DUK      30.68   -1.31   1.00  -0.38  -0.64  Breakdown points lower
BLL      41.80   -1.30  -0.98   1.77   0.73  Entry point at 10-dma
IDPH     37.50   -3.13  -1.66   0.80  -1.40  Ticking ever lower
ATK     105.15   -3.58  -5.94   2.64   3.25  Dropped, defensive buy
PMI      81.81   -0.91  -1.71  -0.48  -0.69  Steadily walking lower
DHI      24.38   -0.67  -1.48   1.40   0.61  Resistance entry point
ICOS     19.17   -1.30  -0.51   0.15  -1.78  New, key support lost
ATN      32.80   -1.50  -0.60  -0.01  -1.64  New, downside momentum



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

BRCD $19.77 -0.23 (+0.12) Unable to get enough buying interest
together to stage a meaningful rally over the $20 level and in
the wake of INTC's reduced guidance tonight, it looks like we are
going to get a fresh opportunity to target shoot new entries near
support.  BRCD was trading below the $19 level in the after-hours
session, and while a lot can change between now and the opening
bell, we just might get the opportunity to initiate new positions
on a rebound from the $18.50-19.00 area.  But a note of caution
is necessary.  We only want to consider buying the dip if it is
followed by solid buying volume, both in BRCD and the broader
technology market.  We are managing our risk with a stop at the
$18 level.  A close below there will bring our play to an early
end.  The more cautious approach may be to wait for the bulls to
clear the $20.25 resistance level before taking the plunge.

DGX $88.75 +0.58 (+1.33) A lone island of green in a sea of red
was DGX's destiny again on Thursday.  With virtually every sector
of the market going into free-fall, the fact that the stock could
close out the day with a gain is a measure of its relative
strength.  It hasn't been exciting, but DGX has been gradually
marching higher over the past several sessions as investors are
looking for a safe haven for their money.  Thursday's gains
managed to push the stock back above its 20-dma at $88.41 and if
the bulls can get back over the $89.25 level they stand a decent
shot at challenging the $92 resistance level over the near term.
Look to enter the play either on a breakout over resistance or on
a dip and bounce from the vicinity of the recent congestion zone
between $87-88.  Following the recent bullish action, we are
raising our stop to $85.50.

ERTS $62.95 -1.15 (-1.05) Back and forth, back and forth.  The
bulls keep trying to push through resistance at $65, while the
bears continue to test the $62 support level.  Given the dramatic
weakness in the Technology market on Thursday, it is impressive
that ERTS managed to hold above the $62.50 level.  Intraday dips
near this level still look attractive for new entries, as the
bullish outlook for the stock is still predicated on consumers'
willingness to spend money on video games for home entertainment.
The breakout above $65 is unlikely to occur this week in light
of the bad news out from INTC tonight after the closing bell, but
so long as ERTS doesn't violate its $62 support level (also the
site of our stop), tomorrow morning's (expected) dip will likely
make for a solid entry point.  Buy the rebound if we get it, but
keep those stops in place.

NVDA $32.61 +0.01 (-0.85) After tracking consistently higher for
the past 2 days, all of NVDA's recent gains are likely to
evaporate before the opening bell on Friday due to the bearish
news out from INTC after the closing bell.  The proverbial line
in the sand will be the $30 level.  If the bulls can successfully
defend that level, then the morning dip could make for an
attractive entry point into the play.  But if the bearish
sentiment created by INTC's revenue reduction dominates and
pushes NVDA below that level, all bets are off.  A close below
the $30 level will have NVDA moving to the drop list this
weekend.  Even though a good portion of NVDA's business is not
PC-related, concerns about that portion of its revenue stream
could be enough to sink our play.  Wait to see where price
stabilizes and then look for renewed buying in the overall
Semiconductor sector (SOX.X) before buying the dip.  A more
cautious approach will be to wait for the bulls to push NVDA
back through the $33.50 level before playing.

INTU $43.83 -0.60 (+0.10) INTU continues to hold up very well
in this weak technology market.  The stock out paced the market
to the upside during yesterday's short covering rally, and
showed a little follow through early today to the $44.70 level.
But the market dragged the stock back lower into the close of
trading.  Still, INTU held up well again today, losing 1.35
percent for the session compared to the 2.50 percent drop in
the Nasdaq.  Looking forward, the best entry approach in this
play is going to be taking bounces from support.  That could
mean a rebound from the 10-dma at the $43.12 level in tomorrow's
session.  As long as the recent series of relatively higher
lows holds at the 10-dma, then INTU will hang on to its strong
technical position and be ready to breakout once the Nasdaq
turns higher.  But until that happens, play any new entries
with tight stops.

LXK $61.15 -0.36 (-1.30) An analyst downgrade sent LXK reeling
lower during yesterday’s session, but the stock showed signs of
stabilization in today's session.  We view the downgrade in
yesterday's session as a gift of an entry point into this
super strong technology stock, as the downgrade did nothing
more than put LXK back near its ascending support line that has
been in place since early May, and from which the stock tried
to rebound from during today's session but was unable to due to
the weakness in the broader technology sector.  Look for
bounces from above the $60 level in tomorrow's session as entry
points, and look to set tight stops just below the $60 level
just in case the broader market drags the stock lower.


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

AZO – AutoZone, Inc. $81.71 +1.04 (-0.14 this week)

AutoZone is a retailer of automotive parts and accessories,
primarily focusing on do-it-yourself customers.  Each of its
more than 2900 stores in 42 states and Mexico carries an
extensive product line for cars, vans and light trucks,
including new and re-manufactured automotive hard parts,
maintenance items and accessories.  Approximately half of its
domestic stores also have a commercial sales program, which
provides commercial credit and prompt delivery of parts and
other products to local repair garages, dealers and service
stations.

After the drubbing the broad markets have taken over the past few
weeks, it may seem difficult to imagine that one of last year's
best performing stocks is still trading near its all-time highs.
But that is precisely what we have for you tonight.  Shares of
AZO ran up to new all-time highs last week, before suffering a
bit of profit taking early this week.  After dropping to test the
$78.50 support level on Tuesday, the stock got a solid bounce off
the 20-dma (currently $77.87) and has been marching steadily
higher over the past 2 days.  A trade at $84 will put the stock
on a fresh PnF buy signal with a triple top breakout, but first
the stock is going to need to get through that resistance level.
Clearly, AZO is demonstrating good strength relative to the rest
of the market and is even looking stellar when compared to the
rest of the Retailers.  The broad markets are likely going to
open sharply lower tomorrow following the bearish news out from
INTC tonight.  We want to take advantage of that weakness if it
causes a dip in AZO.  A dip and bounce from the $80 level seems
likely and a bounce from the $78.50 area would be a gift, but
only if the buying volume on the rebound is strong.  On the other
hand, AZO could see flight-to-quality buying without the dip and
that could propel the stock to new highs in short order.
Conservative traders may want to wait for the stock to trade
through the $84 level before taking a position.  We are initially
placing our stop at $78.

BUY CALL JUN-80 AZO-FP OI=3051 at $3.10 SL=1.50
BUY CALL JUN-85 AZO-FQ OI=2244 at $0.75 SL=0.25
BUY CALL JUL-80 AZO-GP OI= 201 at $4.70 SL=2.75
BUY CALL JUL-85*AZO-GQ OI= 731 at $2.10 SL=1.00

Average Daily Volume = 1.07 mln


PSFT – PeopleSoft, Inc. $21.06 -0.63 (+0.53 this week)

PSFT designs, develops, markets and supports a family of
enterprise application software products for use throughout large
and medium-sized organizations.  The company provides enterprise
application software for customer relationship management (CRM),
human resource management, financial management and supply chain
management (SCM), along with a range of industry-specific
products.  In addition to enterprise application software, PSFT
offers a variety of services to its customers, including
implementation assistance, project planning, online analytical
processing deployment, consulting, maintenance, customer
education, product support and training.

Other than Biotechnology stocks, it is hard to find an area of
Technology that has performed worse than the Software sector
(GSO.X) in recent months.  The GSO has dropped to test the
September lows (near $115) twice in the past month.  But ORCL's
failure to warn for its current quarter has some investors (us
included) thinking that the GSO may be in the process of
successfully testing its September lows.  PSFT has mirrored the
action in the GSO index, dropping down near its September lows
over the past couple weeks, but refusing to break them.  The $19
level is shaping up as strong support and it has been encouraging
to see the stock moving upwards over the past few days.  We are
expecting to see a drop at the open tomorrow due to INTC's
negative guidance tonight, but that drop is likely to provide us
with an attractive entry point.  Look to initiate new positions
on a successful rebound from above the $19 level, possibly near
$20.  Alternatively, look for strong buying to propel PSFT
through the $22 level before entering.  Due to the strong support
at $19, we can set a tight stop at $18.50.

BUY CALL JUN-20 PQO-FD OI=3458 at $2.15 SL=1.00
BUY CALL JUN-22 PQO-FX OI=7434 at $0.95 SL=0.50
BUY CALL JUL-20*PQO-GD OI= 413 at $3.00 SL=1.50
BUY CALL JUL-22 PQO-GX OI=2260 at $1.80 SL=0.75
BUY CALL JUL-25 PQO-GE OI=5910 at $1.00 SL=0.50

Average Daily Volume = 8.82 mln




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

GS $73.95 -1.80 (-1.50) Yesterday's late-day rally proved to be
just another opportunity to enter bearish plays, as the sellers
re-emerged in force on Thursday.  After rising as high as $76
again this morning, shares of GS sold off with the rest of the
broad market, closing again just below the $74 level, while the
Broker/Dealer index ended the day right on major support at $435.
With the major indices closing right on support and a lack of
positive news after the close, it looks like more selling could
be in the future.  Lower highs are keeping the bulls on the
defensive and a breakdown under the $73 level will likely usher
in a fresh wave of selling.  Use failed rallies below the $76
level to initiate new positions or else enter on a volume-backed
move below $73.  Lower stops to $76 tonight.

IDPH $37.50 -1.40 (-5.39) Once again leading the list of losers,
the Biotechnology sector (BTK.X) gave up 5% on Thursday.  But
that wasn't the bad news.  The really bad news is that the BTK
collapsed to its lowest closing level since late 1999, as the
$375 support level gave way under the latest bearish assault.
Our IDPH play is hanging onto support by its fingernails, as it
fell to a fresh yearly low on continued heavy volume.  With
little in the way of support for the BTK below current levels
until the $300 level, should IDPH give up its support in the
$33-35 area, the resulting drop could be dramatic.  Looking at
the weekly chart, the next level of support rests near $22.  The
late-day short-covering bounce is unlikely to follow through
tomorrow.  Use a rollover in the $38-39 area to initiate new
positions or else wait for a drop below $36.  We are lowering
our stop to $40 tonight.

COHU $20.12 -0.77 (-4.38) Just like that, COHU traded down to
the psychologically significant $20 level during today's
session.  The stock actually briefly traded below the $20
level, but rebounded to finish back above that level.  We've
seen about a $4.50 point swing in our favor in the last four
days, so don't be bashful about taking profits if you haven't
already done so.  Given Intel's news after hours, we should
see some more downside in COHU tomorrow to give traders with
open positions an opportunity to exit plays for a profit
ahead of the weekend.  Just don't get greedy.  As for new
entry points, we still like put plays on COHU, but at higher
prices from where the stock is currently trading.  A relief
bounce early next week could bring about the next round of
entry points.

WHR $68.31 -2.01 (-3.09) After the test of the 200-dma in
Tuesday's session when the stock actually closed below that
level, WHR rebounded back above its 200-dma during yesterday's
session along its way to a strong relief rally.  The rally
fell short once again of the downward sloping 10-dma, plus
the bounce came on relatively lighter volume than we've
seen during down days in the stock recently.  Today's reversal
lower created an inside day situation in the stock in which
we could see a major breakdown in tomorrow's session.  Those
traders looking for new entry points into a breakdown can
look for a decline below yesterday's low at the $68 level on
heavier volume.

DUK $30.68 -0.64 (-1.33) DUK broke down from its inside day
set-up yesterday during today's session after the stock gapped
lower and took out short term support at the $30.80 level.
The stock went on to confirm its breakdown from the inside day
with the decline below the $30.60 level.  Although the stock
rebounded into the close of trading to finish back above the
$30.60 level, we can still expect further downside ahead
because of the breakdown below the inside day.  Failed
rollovers from between the $31 and $32 levels are now the
entry points to watch for as the short sellers look to sell
into any strength that the stock offers.  Tight stops just
above $32 can be used to manage risk in any entries taken
between the overhead resistance range.  Short term support
might be found at the $30 level, but below that we could see
a move down into the mid $20s.

BLL $41.80 +0.73 (+0.22) The short covering bounce that we
have been waiting for finally came in BLL in yesterday's
and again in today's session.  The stock traded up to its
declining 10-dma in today's session, but failed to close
above it as broad market weakness dragged BLL back lower as
the day wore on.  The news that sparked the short covering
rally this morning was Salomon Smith Barney's upgrade to an
out perform rating from neutral based on improving industry
conditions.  The vague upgrade was just the kind of catalyst
that we were looking for to offer a better entry point into
new put plays.  Traders can start looking for rollovers in
tomorrow's session from below the 10-dma for new entry points
into put plays.  Above the 10-dma exists solid overhead
resistance at the $43 that should help to contain any
intraday rally attempt.  Use a tight stop just above that
level in new entries near the 10-dma.  Confirm further
weakness in the Dow to drag the stock back down towards its
200-dma now at the $37.45 level.

PMI $81.81 -0.69 (-3.79) PMI continued walking lower in
today's session on the further spread of weakness into the
broader market.  The stock's decline in yesterday and
today's session came on relatively active volume, which
suggests that the sellers are still many and strong.  Short
term support might come into play at the $80 level in
tomorrow's session, or early next week, which may result in a
short term relief rally in shares.  Any such rally should set
up another good entry point into bearish positions given the
downside momentum in the stock.  Traders can look to take
profits from the $80 level if the stock does bounce, then
look to establish new positions once again after any relief
rally runs its course.  Below the $80, there's a wide gap
without support to the $75 level which can be used for a
downside target over the next several weeks.

DHI $24.38 +0.61 (+0.14) The bullish analysts were out again
trying to defend the housing sector in the last few days.
The relief rally in the group set up another excellent entry
point into DHI near its resistance level.  The stock rallied
up to its 10-dma and its downward sloping resistance line in
today's session from which it promptly rolled over.  We
would actually like to see a brief trade higher in tomorrow's
session from current levels to give an entry point that is
slightly closer to resistance.  That way traders can set even
tighter stops in new plays and look for a rollover going into
next week's trading.  In DHI, look for the sellers to emerge
once more below the $25 level.  Use a tight stop just above
the $26 level in any such entries.  Target $22 to the downside
next week, and breakdown below the 200-dma thereafter.


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

ICOS - ICOS $19.17 -1.78 (-2.34)

ICOS Corporation develops pharmaceutical products with significant
commercial potential by combining its capabilities in molecular,
cellular and structural biology, high-throughput drug screening,
medicinal chemistry and gene expression profiling. The Company
applies its integrated approach to erectile dysfunction and other
urologic disorders, sepsis, pulmonary arterial hypertension and
other cardiovascular diseases, as well as inflammatory diseases.
The Company has established collaborations with pharmaceutical
and biotechnology companies to enhance its internal development
capabilities and to offset a substantial portion of the financial
risk of developing its product candidates.

The biotech sector is crumbling and it doesn't look to be getting
any better.  Former high flyers are now trading in single digits.
And that's where ICOS appears to be headed.  Following its huge
gap down from negative developments in late April, the stock
spent most of may bouncing below the $25 level consolidating its
huge breakdown.  Once the consolidation was complete last week,
the stock began to drift lower towards the $20 level.  And in
today's session, the $20 level was broken down below.  The level
is a key technical price for institution who hold the stock,
because many large fund companies don't permit holding stocks
below certain prices such as $20.  Plus the bears like to jump
on stocks that breakdown below the $20 for the first time in
several years because it generally represents a further serious
deterioration in the company's business.  Given the negative
sentiment in the biotechnology sector and the growing downside
momentum in ICOS, the stock should continue heading lower into
the summer doldrums ahead.  Traders looking for new positions
into the stock's breakdown can look for further weakness in
the biotechnology sector index (BTK.X) in tomorrow's session to
pressure ICOS below its intraday low today at the $19.05 level.
Those looking for a relief rally ahead of further downside can
wait for a short covering pop to first the $20 level, or
slightly higher near the 10-dma at the $22.31 mark.  Our stop
is initially in place just above the 10-dma at $22.50.

BUY PUT JUN-20*IIQ-RD OI=331 at $1.60 SL=0.75
BUY PUT JUL-20 IIQ-SD OI=131 at $2.60 SL=1.75

Average Daily Volume = 1.60 mln



ATN - Action Performance $32.80 -1.64 (-3.75 this week)

Action Performance Companies Inc. is engaged in the design and
sale of licensed motorsports collectible and consumer products.
The Company's products include die-cast scaled replicas of
motorsports vehicles, apparel, including t-shirts, hats and
jackets, and souvenirs. Action Performance markets its products
through United States and German subsidiaries under an extensive
portfolio of license arrangements with various drivers, team
owners, sponsors, sanctioning bodies and others. Third parties
manufacture all of the Company's motorsports collectibles and
most of its apparel and souvenirs, generally utilizing Action
Performance's designs, tools and dies.

Good news is not always enough to keep a stock moving higher.
Sometimes the delivery of good news is the catalyst for a
reversal of a bullish trend.  That's exactly what happened
after ATN's most recent earnings report in which the company
reported record sales and earnings for the most recent quarter.
The company's heavy bet on the popularity of Nascar Racing is
starting to worry some investors due to the prospects of a
weakening consumer segment of the U.S. economy.  Since late
April, ATN's long standing bullish trend was reversed and the
stock has been trapped in a steep, ugly descending trend that
has taken ATN down below the $34 level through today's trading.
The momentum appears to be building to the downside along with
an increase in daily trading activity on the way down.  The
sellers don't appear any where near finished with this stock
as the trend remains solidly to the downside.  Look for further
weakness and entries into downside momentum on a breakdown
below today's intraday low at the $32.70 level during tomorrow's
session, which looks to be weak for stocks in general judging by
the after hours action in the futures market.  A relief rally
in the coming days could set up a favorable entry point near
resistance such as the downward sloping 10-dma at the $36.50
level.  Our stop is initially in place at $36.75, just above
the 10-dma.

BUY PUT JUN-35*ATN-RG OI= 42 at $3.30 SL=1.50
BUY PUT JUL-30 ATN-SF OI=141 at $2.40 SL=1.00

Average Daily Volume = 1.53 mln




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


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

WHR - Whirlpool $68.31 -2.01 (-3.09 this week)

Whirlpool Corporation is a worldwide manufacturer and marketer
of major home appliances. The Company manufactures in 13
countries under 11 major brand names and markets products to
distributors and retailers in more than 170 countries. The
Company manufactures and markets a full line of major
appliances and related products, primarily for home use. The
Company's principal products are home laundry appliances, home
refrigerators and freezers, home cooking appliances, home
dishwashers, room air-conditioning equipment, and mixers and
other small household appliances. The Company also produces
hermetic compressors and plastic components, primarily for the
home appliance and electronics industries.

Most Recent Update

After the test of the 200-dma in Tuesday's session when the stock
actually closed below that level, WHR rebounded back above its
200-dma during yesterday's session along its way to a strong
relief rally.  The rally fell short once again of the downward
sloping 10-dma, plus the bounce came on relatively lighter volume
than we've seen during down days in the stock recently.  Today's
reversal lower created an inside day situation in the stock in
which we could see a major breakdown in tomorrow's session.
Those traders looking for new entry points into a breakdown can
look for a decline below yesterday's low at the $68 level on
heavier volume.

Comments

We have another inside day set up in WHR.  The stock is poised
dangerously on its 200-dma, and could breakdown in a big way
during tomorrow's session.  Look for a decline below the $68
level on an increase in volume.  Short term traders with open
positions can set a tight stop at the near term relative high
traced Wednesday at the $70.54 level.  Look for downside to the
$65 level next week upon a breakdown from the inside day setup.

BUY PUT JUN-70*WHR-RN OI=602 at $2.80 SL=1.75
BUY PUT JUL-70 WHR-SN OI= 25 at $4.20 SL=2.75

Average Daily Volume = 555 K




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

Milking Q-Charts, Part XIV, An Owner's Manual, Plus Loose Ends Now Tied Up
Buzz Lynn
buzz@OptionInvestor.com

I love our readers.  I wish I could answer all the mail that comes 
in.  Were it not for the constraints of the time, everyone would 
get a personal response to their e-mails.  So please, take heart 
and know that just because an individual does not hear from me, 
the question or comment has been received in vane.  With that kind 
of an intro, can you guess what some of the most common questions 
are?  If you guessed Q-Charts, three gold stars and pats on the 
back for everyone!  I hope today's episode answers a few of the 
most common questions.

For those just joining in this never-ending series on Q-Charts and 
its functions, feel free to check in on the links below to know 
where we've been so far.  Most of these episodes I - XII deal with 
an earlier version of Q-Charts.  Part XIII pertains mostly to the 
new version 4.2.  


http://www.OptionInvestor.com/traderscorner/011002_1.asp

http://www.OptionInvestor.com/traderscorner/011702_1.asp

http://members.OptionInvestor.com/traderscorner/012402_1.asp

http://www.OptionInvestor.com/itrader/archive/traderscorner/031801_1.asp

http://www.OptionInvestor.com/traderscorner/013102_1.asp

http://www.OptionInvestor.com/traderscorner/020702_1.asp

http://www.OptionInvestor.com/traderscorner/021402_1.asp

http://www.OptionInvestor.com/traderscorner/022602_1.asp

http://www.OptionInvestor.com/traderscorner/022802_1.asp

http://www.OptionInvestor.com/traderscorner/030702_1.asp

http://www.OptionInvestor.com/traderscorner/031402_1.asp

http://www.OptionInvestor.com/traderscorner/032102_1.asp

http://www.OptionInvestor.com/traderscorner/032902_1.asp

At first, version 4.2 had too many bugs for practical usage.  
Since those have been worked out, we think the new version 4.2 
upgrade has some pretty neat features, some of which we outlined 
in the previous installment.  This week, we're going to spend some 
time customizing some studies - studies meaning moving averages, 
Bollinger bands, stochastics, and the like.  I'm at a lack for 
words here, so lets get started.

One of the biggest problems with using Q-Charts in the past has 
been the requirement to re-invent the wheel (so to speak) every 
time we put a particular study in place on a chart.  Wouldn't it 
be great if the program remembered that we like our 50-dma in 
magenta three lines thick?  Or that we like our Bollinger bands 
two lines thick without the thin, red line representing the 20 
period MA in the middle?  Or how about that we like our stochastic 
oscillator lines in two thicknesses of red and blue?  It used to 
be that we had to set those by hand every time we added them to a 
chart.  No more.  Follow along as we take the easy road to making 
a new chart.

Let's start with the moving averages.  I like my 50-dma to be 
magenta so it stands out, and my 200-dma in gray so that it's 
visible but doesn't get in the way.  To do this, let's first go to 
Studies in the top dropdown menu and select Preferences.  It looks 
like this:


 



Once we click on Preferences, the following huge dialogue box with 
tabs shows up:


 


In this case working with Moving Averages, we simply click on the 
Moving Averages tab to get the following:


 



Note in the above example the red-circled variables that we may 
want to change.  Simply type in the number of periods for the 
moving average, choose the color and thickness, and then click OK.  
Say we want a magenta 50-pma with three thicknesses.  Complete the 
following:


 


POOF!  Done!  Now every time you plug a moving average on to a 
chart, it will show up per our custom selection.  Let's see that 
chart:


 


Select Moving Average to get the following box:


 

Click OK and it will pop up on our chart as follows:


 

Voila' - the finished result.

So what if we want to add other moving averages in a different 
color?  Follow the same steps.  Select Studies from the top menu 
bar, select Moving Average.  The same dialogue box pops up that 
now has the 50-pma.  Again, it looks like this:


 


How about we add the 200-pma three lines thick in gray?  From this 
box, click Add.  The following again pops up:


 


Change the criteria to show 200 in length with three thicknesses 
of gray, and then click OK as follows:


 


Use the same process as before to add it to any other chart by 
selecting Studies, Moving Averages, highlight the gray 200-pma, 
then click OK.  Here's what it looks like once we hit OK.:


 


Very nice!  Now how about those Bollinger bands in blue without 
the red line in the middle?  Piece of cake - let's go!

Again, select Studies form the top menu bar, highlight 
Preferences, click OK, and then select the Bollinger Bands tab.  
The following box pops up:


 


From here, we can set these as we see fit.  Again, select blue in 
color, change the numbers box to three thicknesses, and be sure to 
UN-check the Display box to remove the red line from the chart (if 
that is your preference).  Last, click OK.  Shall we install it in 
our chart now?

One more time, click on Studies and select Bollinger Bands to get 
the following box:


 


Simply click OK, and the band will appear (sans red line if we've 
unchecked the Display box) in the chart as follows:


 


Now you all know how my charts get so cluttered!  Lots of 
information in one convenient, compact place.

Last thing. . .let’s add that stochastic.  Same process - Studies, 
Preferences, Stochastic - in a lesson from weeks gone by, we used 
5(5),3, but let's use 10(5),3 with two thicknesses of blue and 
red, both.  Insert the settings, and then click OK.

We can then install it into our chart the same as before by 
selecting Studies, Stochastic, and then click OK.  It pops into 
our chart with the following finished look:


 

Simple, no?  That's it for Q-Charts tonight.

I could just leave it here and say, "The End".  However, I've got 
two housekeeping items to handle here in a quick closing 
paragraph.  

First, in Monday's "Wrappin' Rant" article I speculated the John 
Templeton may have picked Australia, Canada, and New Zealand for 
his list of stable economies that might be suitable for bond 
purchases based on those countries possibly still adhering to a 
gold standard.  NNNGGG!  WRONG!  Many thanks to Andrew R., 
presumably from "Day-own Undah" (Australia) for writing in that 
Australia has been off the gold standard since 1914 and simply 
tied its currency to a floating exchange rate.  I have yet to hear 
from Canada or New Zealand - will report as soon as somebody 
writes in.

Second, I got a great follow-up note to "Seize the Debt", an 
article I did last Thursday on debt/equity ratios.  The reader 
offered a great suggestion that I follow up with "contingency 
lines of credit".  Those are bank promises, as part of bigger loan 
packages, to offer umbrellas to those companies for whom it is 
really starting to rain.  They were essentially extorted from 
lenders by corporate borrowers for which lenders were paid a 
pittance to provide.  The corps demanded the coverage for a rainy 
day as part of the deal if the lender was going to get the 
business.  As companies in financial trouble exercise those lines, 
the banks will be on the hook.  Guess what?  Those contingent 
liabilities cannot be found on the lenders' balance sheets!  Can 
you say "off balance sheet accounting"?  Keep an ear open for 
mentions of this.  We'll have to get to it in another column.  
Thanks, Alan, for the suggestion!

Make a great weekend for yourselves!



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

Bears beware.  A squeeze is around the corner in tonight's two new 
watch list plays.


To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/060602.asp


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

Financials are at resistance.  Will they breakout?


To Read The Rest of The OptionInvestor.com Market Posture Click Here
http://www.OptionInvestor.com/marketposture/060602.asp


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

Please read our disclaimer at:
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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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