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Daily Newsletter, Monday, 06/10/2002

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The Option Investor Newsletter                   Monday 06-10-2002
Copyright 2001, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com
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MARKET WRAP  (view in courier font for table alignment)
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      06-10-2002          High     Low     Volume Advance/Decline
DJIA     9645.40 + 55.73  9718.09  9562.54  1.22 bln   1657/1562
NASDAQ   1530.69 -  4.79  1551.80  1526.96  1.51 bln   1573/1885
S&P 100   509.03 +  1.71   513.10   505.63   Totals    3230/3447
S&P 500  1030.74 +  3.21  1038.18  1025.45             
RUS 2000  469.29 -  1.22   473.50   468.60
DJ TRANS 2721.12 + 34.46  2735.67  2685.21
VIX        26.15 -  0.50   27.06     25.47
VXN        52.54 +  0.30   53.09     51.46
TRIN        1.00
PUT/CALL    0.77
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NEWSFLASH!
By Buzz Lynn
buzz@OptionInvestor.com

"Dirty Bomb to be unleashed on U.S. soil!  Markets tank!".  
Furthermore, "We arrested the terrorists responsible.  Markets 
recover and move higher into the day".  So how much headline risk 
can we stand?  If we trade for a living, it's classified as "risk" 
only if we're on the wrong side of the trade.  For the nimble, 
it's called opportunity.  And for everybody else?  Noise.

I could go on for a good filibuster's worth about the current sad 
state of the markets, the U.S. and world economies.  Veteran 
readers would accuse me of being a broken record though, so I'll 
spare us all the agony of another tirade.  Let me just leave it at 
this:  Instead of thinking it's going to rain, I'm building an 
ark.  But you already knew that

However, for those just joining us who doubt the need for an 
umbrella, let alone an ark, I want to share some truly great 
research I picked up over the weekend.  Maybe I should save this 
for another column, but I won't.  It was a piece of material I 
received from John Mauldin, another smart and grizzled veteran of 
Wall Street.  I found the content really interesting since this 
relates to truly smart money at work.  Anyway, Mauldin's research 
is first rate and best of all, it's free.  I don't understand why 
it's free, but I'm not one to look a gift horse in the mouth.  
Anyway, here's Mauldin weighing in a Warren Buffet move.  

Mauldin leads in by noting with regard to the false premise that 
companies know best how to invest earnings.  Consequently 
dividends rate way down in the pecking order of importance to 
management.  How did he reach that conclusion?  In his own words:  
The answer is, "that companies are not very good at investing 
capital.  If a company pays out most of its earning in dividends, 
it only gets to fund its very best ideas.  Evidently, when it can 
fund its 10 best ideas, or pay rich multiples to purchase other 
companies (as Cisco, Tyco and WorldCom did), then many of those 
ideas do not work, and result in losses.  It says something about 
the arrogance of today's CEO's when they think their 10th best 
idea is better than their shareholders first best idea."  

ZING!  Reminds me of the late 1980's when in the frenzy to break 
up companies, whose sum of parts were worth more than the whole, 
one corporate raider (Jacobs, Pickens, Ichan, can't remember now) 
remarked that, "Isn't it funny that that this company is worth 
less with management than are it's assets without management?"  In 
other words, management was a detriment to shareholder returns.  
Hmmm. . .history repeats.  Anyway, continuing with Mauldin. . .

"Unless you are involved in the arcane trivia of the markets, you 
may not have noticed that Warren Buffett just sold a remarkable 
piece of paper.  Dennis Gartman (of the exceptionally well-written 
Gartman Letter) tells us: "It is a convertible debt issue, 
carrying a 3% coupon, with an attached warrant that will allow the 
buyer to "call" from Berkshire shares at approximately 12.5$ above 
the level that Berkshire "A" shares sold at two weeks ago. In 
order to keep the warrant alive, however, the buyer will pay to 
Berkshire an annual fee of 3.75%. In other words, Berkshire has 
sold debt with an annual negative interest rate of 
.75%...retaining the right to sell shares at a substantive premium 
to today's price! We can only recall the Swiss government having 
been able to make such a grand debt issue, doing so back sometime 
in the late 70's or early 80's to the best of our knowledge, when 
money was flowing to Switzerland as a safe haven and the Swiss 
tried to stem that tide by offering a negative coupon."

"Think about that. Supposedly sane institutional investors are 
going to pay Buffett for the right to take their money.  Berkshire 
is such a proxy for the stock market that you have to be a major 
bull to enter into such a transaction. 

I for one cannot figure out why anyone in their right mind would 
do this.  There are certain rules in life: you don't play poker 
with guys called Blackie, you don't shoot pool with fat guys 
called Slim, and you don't take the opposite bet against Buffett. 

Berkshire has all the money it needs.  Why would Buffet risk 
serious dilution of his shares by selling these relatively cheap 
options if he really thought his stock was going to rise?  I think 
he decided to take advantage of a few optimists and add to his 
bank account.  He has got to be chuckling to himself late at night 
over this one. 

The obvious implication is that he thinks we are in for a 
prolonged bear market."

Amen.  Read more of John Mauldin's stuff free at www.2000wave.com.  
It would be worth it even if you had pay for it.

Anyway, so many newsy items today that had nothing to do with the 
markets' moves - Imclone insider trading, Tyco's legal counsel 
ousted (who issued his own press report noting that the company is 
in complete disarray), Celebrex is no more helpful than Ibuprofen, 
and the XAU (gold and silver index) fell under its 50-dma.

Nothing here suggests a "return to normalcy" - that of a 
perpetually charging bull - is about to happen.  A 55-point gain 
on the Dow does not make a pivotal day, especially given the fall 
from resistance intraday.  Also true for those indexes that 
actually went negative today.  So forget fundamentals for a 
minute, which stink.  The future is in the charts.

Dow Industrial chart  - INDU (weekly/daily/60-min)


 


Let's keep this short.  Weekly still sliding; daily with shallow 
stochastic gains, big resistance at the 9887 (200-dma) and 10,069 
(50-dma) if it should be so luck as to get there.  60-min is 
rolling over without even hitting the upper channel.  Of course, I 
guess I could change the line to fit the tops, but the end result 
would be the same.  No case for the bulls here with a very meek 
1.2 bln shares trades with advancers fractionally outpacing 
decliners.  The "gain" means little more than a marker of time.

NASDAQ chart - COMPX (weekly/daily/60-min)


 

Same story, only worse for the bulls and good for the bears here.  
Weekly showing some candle support about 100 points down at 1400.  
Daily chart candles are following the downward slope established 
in January.  Support has become resistance and the oversold 
stochastic has fallen and can't get up.  That doesn't mean it 
won't succeed in sucking in a few diehard bulls on the next daily 
stochastic bounce.  Trading resistance at 1550 with the 60-min 
chart suggesting a negative day in store.  All that said, once the 
60-min stochastic cycles up again, it might be time for the market 
to suck in the bulls like canal water, as mentioned above.  200 
and 50-dma's will keep a lid on the bullish action.  A meager 1.5 
bln shares traded with decliners outpacing advancers roughly 6:5.

S&P 500 chart - SPX (weekly/daily/60-min)


 


Pretty weak here too with the weekly stochastic in decline lending 
a direction to the big picture.  Sub 1000 is a real possibility.  
The daily too is stochastically weak with resistance coming in 
today at previous support.  Adding insult to injury, the 60-min 
stochastic is rolling over too at resistance formed by a declining 
trendline.  That isn't a perfect correlation, but it's close and 
follows a familiar downward pattern.  

VIX and VXN?  Does it matter?  Pretty mixed anyway at 26.15.  The 
VXN however has launched upward indicating higher than usual 
option premiums.  Time to sell time premium?  Maybe, but still 
climbing - very unstable indicating that investors are no longer 
sure of direction.

One note to make for the broad market is the close of the Russell 
2000 under its 200-dma for the third day in a row.  Should the 
$RUT break under 457, that would be a "lights out" for the broader 
markets.  Watch that for clues.  Not looking real strong right 
now.  Dow Transports on the other hand are higher than they were 
last Monday indicating that the Dow may find some strength in the 
next few days (but don't bet the farm expecting the take to fund 
retirement).

For tomorrow?  No a clear signal except to say that the weak 
daily, and the rolling 60-min oscillators across the major indexes 
points to further weakness.  This is the kind of market that has 
me on edge.  It keeps faking us into thinking a bullish trading 
turn is a hand then disappoints.  The only word I think of here is 
erosion and/or rangebound with a bearish bias.  Bears have this 
market by the throat, but are not intent on killing it yet.  Only 
when nobody want to own stock, the last vestiges of speculation 
have been wrung out, when stocks again represent fractional 
ownership of a going concern designed to produce a cash on cash 
return for the owner (as opposed to speculative pieces of paper), 
and when price to book values fall under 1, that will be the time 
for the long haul - say 7-10 years (but I hope not).

See you at the bell.


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

WITCHES OF WALL STREET
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 
It was fear & loathing hits tech again as former tech sweeties 
are now the witches of Wall Street and rallies involving these 
sectors don't go far.  Again acting as big wet blanket was the 
SOX (Semiconductor) Index, with weakness in Intel (INTC) dragging 
the chip sector (and Nasdaq) lower. The early rally in the 
Composite failed right at resistance at the low end of the recent 
trading range before Intel news caused the gap lower opening - 
speaking of this gap, the rally reversal was right at the top of 
it. It's going to take awhile to get a tech rally going. The 
market may be oversold and its possible we've seen the low for a 
while, but it takes BUYING to pull em higher.  

And, anyone who thought that news of the capture of a suspected 
militant who was plotting to plant a so-called "dirty" bomb (to 
spread radioactive material) was "good news" has not seen "Sum of 
All Fears", the popular Ben Afflack flick - the plot of this film 
involves a nuclear bomb that goes off at the SuperBowl. Put the 
fear of Osama in me, as a stark reminder of how deadly the 
nuclear wild card is.  

Keeping the Dow afloat today was strength in Wal-Mart (WMT 
+3.6%), Merck (MRK +3%), Home Depot (HD +2.9%), Citigroup (C 
+1.7%) and Microsoft (MSFT +1.6%). Down on the day was Intel 
(INTC -4.2%), Hewlett Packard (HPQ -2.1%), and IBM (-1.9) were 
off reflecting the sell technology bear rallying cry of the day.  

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


 


Continue to suggest buying a good-sized price pullback, such as 
back to the 504-505 area or even 500 again, if reached.  Backing 
and filling is typical of a bottom in the S&P 100 (OEX). Even the 
last rally, which didn't have a great run to the upside, had this 
pattern.  

I think we will see corrective action on Tuesday and this began 
today as the index reversed in the 513 area as the very short-
term stochastic reached an overbought extreme.  

I also continue to suggest risking to under the recent low 
(498.5) for a "position" type trade, going out beyond the June 
expiration.  My best guess is that the OEX can rally, on balance, 
up into the June 21st. expiration.  

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


 

As with the OEX, look for some corrective action tomorrow 
(Tuesday) as DJX does not look ready to advance beyond the upper 
end of its downtrend channel.  

Resistance is at 97.2-97.5 and support is likely to develop again 
on dips to 95.6 area, down to 95.2-95. We still see the pattern 
of lower rally highs and lower downswing lows, so there is no end 
to the bear trend - not yet. Stay tuned.  
 
Nasdaq Composite ($COMPX) Index -  


 


Weak, weak, weak.  Technical action is poor, except to the bears 
who must have been happy to sell the rally back up to resistance 
implied by the low end of the hourly price range before the gap 
lower opening of Friday.  Once the gap was "filled in", good bye 
Charlie, or tech wrecks.  

The "curving" pattern to the rally on the hourly chart is usually 
bearish in its outcome - somehow, its more bullish to see some 
dips on a rally, instead of these little spike up (rally) 
failures.  

If they couldn't take em higher today, my guess is that they'll 
take em lower tomorrow.  Support looks to be at 1520; then, in 
the low 1500 area again. I expect a secondary low at or above 
Friday's reversal point at 1496, but won't bet the ranch on it. 
Stay tuned!  

Stay short if you sold the rally today, but suggest covering 
around 1500 again on signs of stabilization and if hourly 
oscillators again get oversold - say by Wednesday.     

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


 

Still holding my one long QQQ position, and suggest maintaining a  
stop at 27.5 (Friday low was 27.52) for a while longer. 

The 29 area is proving to be tough resistance, but this hourly 
downtrend channel has been a lay up sell all the way down.  
Picture perfect.  Given the sizable short/put position and the 
oversold daily stochastic, my expectation is that the Q's have 
more upside potential into the June 21st. expiration than 
downside risk.  Time will tell. 

This scenario for a rally would also hammer the greatest number 
of smaller option holders - as it's perversely called, the max 
(maximum) pain theory. 

My watch on MSFT, ORCL, CISCO and QCOM is a bit encouraging - 
MSFT looks ready to break out to the upside, as is ORCL.  CISCO 
and QCOM are holding OK - with even a minor oversold rebound in 
INTC, we could get a decent rally in the Q's - maybe one that 
would create a break out of the relentless downtrend channel.  

Not tomorrow I would guess, past tomorrow, such as setting up by
 Thursday.  The stocks we love to hate, Nasdaq.  Now, we got more 
ompetition for the Nasdaq exchange with the merger announcement 
today involving Island.  Makes sense, as why have more pathways 
to continuing to lose in tech for those probing for a bottom or 
bottomless pit!


Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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Pinpointing Profitable Pivot Points
by Mark Phillips
mphillips@OptionInvestor.com

I must have mulled over that title for over an hour, trying to
get the alliteration right.  It may be a misnomer for our topic
today, but I think you'll see the relevance as we go along.  One
of the first lessons I learned to consistently apply in the late
'90s was to avoid entries into new positions during the first
hour of the trading day.  There are two reasons for this.  The
first is that option volatility is frequently higher during the
first hour of trade.  But the more important point is that
frequently the high or low price for the day would be posted
during the first hour, leaving us as option traders entering new
positions at the most expensive point of the day.

This behavior is the most pronounced on days that begin with a
gap move, either up or down.  Frequently the momentum generated
in the opening minutes will run its course and reverse in that
first hour, with the stock or index moving contrary to the gap
move for the remainder of the day.  There are exceptions to this
dynamic, but it is consistent enough to keep me watching for
this action on a regular basis.

In recent months, I have noticed a change, or more correctly a
refinement to this action, with the high or low tick of the day
(that is on gap moves) occurring within a couple minutes of 10am
ET.  A perfect example of this phenomenon was the action in the
broad market indices last Friday.  Let's take a look at the Dow
Jones Industrials for this example, using the DJX.X index.  I had
been playing the downside on the DJX for a couple of weeks,
entering puts on the overbought Stochastic alignments on the
60/30-min charts and exiting with the oversold alignments.  I had
been avoiding the call plays due to the fact that the prevailing
trend had been down.  So here's the situation as it presented
itself last Thursday night.



 

I was looking for a tradable bottom to present itself, meaning
that I would want to exit my puts and switch to the call side,
even if only for a short trade.  As you can see from the chart
above, that point had not yet presented itself as of the close
on Thursday, as the oscillators were not yet bottomed in oversold,
even though the DJX was very close to the 9600 support level.
Given the weak picture presented there, I was already expecting
the 9600 level to fail even before INTC dropped its bombshell
after the closing bell.  That virtually guaranteed a sizable gap
down open and I was looking to use that event to both close my
puts and switch to calls.

That brings me to my newest observation on gap moves on the
indices.  When I've got the longer-term picture lined up for a
near-term bottom with oscillators near or in oversold and the
market is kind enough to give me a gap-down open, frequently that
gap will produce the low of the day within a couple minutes of
10am.  While this is within the amateur hour that I have
traditionally avoided trading within, this observation has
allowed me to fine-tune my rule to take advantage of attractive
swing-trade entries when they present themselves.

So let's come back to the actual action as it presented itself
on Friday.  As expected the DJX saw significant selling pressure
at the open, driving it not only below 96, but below 95 in the
opening minutes.  I know from my study of the 60/30 charts the
night before that we're close to an oversold extreme and with
the VIX spiking to near the 30 level, I knew I wanted to be
looking for an entry to the long side to take advantage of the
oversold bounce.  For our discussion purposes here, I've used
a 2-minute chart.



 

The gap represented by the left-most large red candle was the
result of the INTC fallout and after the reflexive rebound, the
DJX proceeded to drop to $95.63, posting that low at 9:58 am.
Day-traders (like me) that had identified the trading pattern
I've discussed here would then have looked for price to rebound,
with oscillators on the 2/5/10 minute charts to start poking
out of oversold territory.  That gave the first, albeit
aggressive, entry signal to the long side.  For my part, I both
exited my puts and entered calls by 10:05 am, looking for a
short-term swing trade, possibly as high as the 97 level.  A
more conservative entry point presented itself about an hour
later, as the DJX posted a higher low, using the 95 level as
support now.  So let's look at the subsequent market action
and see what developed, shall we?



 

Sure enough, the DJX stutter-stepped its way higher for the next
2 days, clinging to a fairly steep ascending trendline that broke
down this afternoon in the final hour of trade.  That breakdown
was the signal to exit the trade, as price broke the ascending 
rendline and the Stochastics on both the 30 and 60 minute
timeframes fell out of overbought territory.  There is no
question that this is NOT a homerun trade, but capturing 150+
points on the DOW in 2 days' time is nothing to sneeze at.
Normally, buying the low is described as trying to catch a
falling knife, a potentially painful experience that as traders
we try to avoid at all costs.

But when we can line up numerous factors in our favor, it
becomes much more practical to enter near a swing low, while
keeping our risk manageable.  I liken it to still catching a
falling knife, but now we are wearing heavy leather gloves to
protect ourselves.  When I initiated the trade, here are the
standard factors that were in my favor:

1. Oversold (or nearly so) Stochastics on daily/60/30-min charts.
2. Spike in the VIX near the 30 level
3. DJX falling just below significant support near 95.5 on a gap
   down move and then beginning to recover.
4. My observation that gap moves that do reverse find their
   bottom (top) within a couple minutes of 10 am ET.

It isn't a lead-pipe lock and will (I am sure) fail on numerous
occasions in the future.  But due to the fact that I am entering
near what I believe to be an important swing low, I have the
ability to significantly limit my risk.  In this case, I entered
the play when the DJX was trading at $94.85 and set my stop at
$94.70.  The reason that I can place it so tight is due to my
observation of gap moves reversing at a particular point in the
day.  If the 10 am low were to be violated at any time in the
day, I would know that I had read the situation incorrectly and
would want to exit post-haste.

Put another way, the observation of the post-gap action near
significant tops (or bottoms) near the 10am time gave me that
secret weapon that improved my odds of success, while at the
same time allowing me to dramatically reduce my risk while
taking advantage of an expected rebound off the lows.

This is at the very core of what successful trading is all about.
Recognition of patterns that tend to repeat from time to time and
then initiating positions to benefit from that pattern when it
repeats in the future.  But don't take my word for it.  Look at
some past gap moves on the major indices and see if you can see
some merit to the 10am pattern.  While what I've highlighted here
is a gap down that reversed into a bullish move, that isn't the
only way for the pattern to resolve itself.  I have frequently
(5/24 was a good example on the DJX) seen a gap down result in
an attempted reversal that subsequently fails right at 10 am.  I
think my favorite part of this observation is the fact that I
can set my stop just above (or below) the 10am high (or low),
significantly limiting my risk exposure in the play.

Do a little bit of research to convince yourself there might be
some merit to this pattern and then watch for the next gap move.
Don't trade this pattern until you are sure you understand it,
but keep an eye on the direction of the markets near the 10am
time.  I have found it to be uncanny the frequency with which
the markets set either their high or low of the day at this
time.

Happy hunting!


Mark


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

THE SECTOR BEAT - 6/10
by Leigh Stevens

Most tech sectors turned lower by day's end, led by the chip and 
hardware groups. Internet issues lagged throughout the trading 
day.

Intel (INTC) lost a further substantial 4.2% today, adding to 2  
days of steep losses following a revenue warning by the company 
on Thursday - must be hard to shoot yourself in the foot! 

However, at least one brave soul, First Albany, raised its rating 
on the chip maker to a "strong buy" from a "buy", the  belief 
that INTC was overly conservative during its midquarter update 
late last week. The SOX (Philly Semiconductor Index) fell another 
0.8%, after a rally of nearly 2% during morning trading. 

Speculation is now on SOX (Close: 437.4) retesting its low of 
early-Oct at 350. Time will tell - this sector is now very 
oversold, but the group seems to be the new whipping boy or girl.

The small-cap sector, the leading area of the market since the 
September lows, have under-performed in the past 5 weeks. This is 
being noticed now more as the big cap stocks are not exactly 
taking over market "leadership". 

In the financials, UBS Warburg lowered 2002 earnings-per-
share estimates on Citigroup (C), Bank of New York (BK) and State 
Street (STT), to reflect as they said "continued uncertainties 
and soft business conditions in the capital markets arena." 
Nevertheless, these and other financial stocks rebounded a bit. 

Brokerage stocks held up in general, although Merrill Lynch (MER) 
was off 0.7% following a downgrade from J.P. Morgan to a "long-
term buy" from a "buy."


HIGHER ON THE DAY ON Monday - 


 

DOWN ON THE DAY on Monday - 


 


SECTOR HIGHLIGHT -

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


 

75.00 is the next key support and represents a 50% retracement.  
The decisive downside penetration of the March-May up trendline, 
was the telling reversal event. 

The broken trendline, now intersecting in the 81 area now looks 
to be key resistance. XAU needs to climb back above the trendline 
to suggest that its bullish trend is back on track. Currently am 
inclined to sell key stocks in the Index on a rebound to this 
area. 
LAST UPDATE: 6/10

IShares purchase recommendation on SMALL CAP SECTOR (6/9)- 
IJS, the iShares of the S&P 600 Value segment, opened at 90.90 -  
will assume a fill at 90.90; the Growth iShares (IJT) of the S&P 
600 small cap opened at 74.85 - will assume fill at open; the 
iShares of the Russell 2000 (IWM) opened at 93.80 and someone 
wanting to have full participation in the small to mid cap 
sector, would have these iShares at that price if they bought the 
opening. 
 
Stops are suggested at: IJS - 87.30; IJT - 72.00; IWM - 89.70

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.  
LAST UPDATE: 6/6

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. 
LAST UPDATE: 6/6 

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 

(Securities) Broker Dealer Index ($XBD.X)

Stopped going down Friday at low end of its daily downtrend 
channel (at 423.84) and then closed well above (438.5) key prior 
technical support 429.10 - this close is suggesting we've seen at 
least a temporary bottom in the brokers - maybe even mother 
Merrill will regain its credibility as it scrambles to make 
changes!

Another bullish aspect is the bullish RSI/Price divergence that 
has set up in this sector, as the move to new lows was 
unconfirmed by a similar lower relative low in the RSI.
LAST UPDATE: 6/9

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

75.00 is the next key support and represents a 50% retracement.  
The decisive downside penetration of the March-May up trendline, 
was the telling reversal event. 

The broken trendline, now intersecting in the 81 area now looks 
to be key resistance. XAU needs to climb back above the trendline 
to suggest that its bullish trend is back on track. Currently am 
inclined to sell key stocks in the Index on a rebound to this 
area.
LAST UPDATE: 6/10

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 the recent top is key resistance.  HMO has been in strong 
uptrend for months, but appears to running into some selling in 
the group as the momentum has slowed. Moreover, the sector could 
be setting up a double top here, as suggested both on a 
price/pattern basis and by the bearish Price/RSI divergence, as 
RSI is not within a country mile of "confirming" a new high in the 
Index. 

Analysis of key stocks in the group also strongly suggests that 
the sector is quite vulnerable to a downside reversal and deeper 
correction than has been seen to date. 



 

Near support is at 600, then 576. A daily close under 600 would 
suggest possible downside to the later support.   
LAST UPDATE: 6/10

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)

6/10 UPDATE: The iShares of the Russell 2000 (IWM) opened at 93.80 
and someone wanting to have full participation in the small to mid 
cap sector, purchase IWM at that price if they bought the opening 
per my 6/9 suggestion.  Stop: 89.70


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.

GSO, at Friday's low at 114.75 has held its prior bottom (114.75) 
and this sector is looking more like it is forming a double 
bottom.
LAST UPDATE: 6/9 

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                   Monday 06-10-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


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STOP-LOSS UPDATES
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DGX - call
Adjust from $87 down to $88.50


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**********************
PLAY OF THE DAY - CALL
**********************

DGX – Quest Diagnostics $91.89 +0.96 (+0.96 this week)

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

Most Recent Write-Up

Health Care-related stocks flexed their relative strength muscles
again on Friday, with the Health Care Payor index (HMO.X) ending
the day with a nearly 2% gain and closing at its highest level in
over a month.  The pattern of higher lows and higher highs over
the past four weeks seems to be pointing to a move to new
all-time highs in short order.  While not a component of the HMO
index, DGX is benefiting from the strength in the group along
with its own positive earnings growth trend.  After falling back
in late May to the $85 support level, we suspected that DGX had
been gathering its strength for another bullish run and we were
right.  The flight-to-quality buying propelled the stock through
near-term resistance at $88 on Thursday and that close over the
20-dma led to a stellar performance on Friday.  DGX blasted
through the $90 resistance level on solid volume.  While the stock
actually pushed as high as $92 intraday, DGX couldn't hold that
level with the broad markets backing off from their highs in the
final hour of trade.  It is no surprise to see the late day
weakness in DGX, as $92 is a significant level of resistance that
will take a bit of momentum to get through.  DGX will likely need
to pull back a bit before advancing further, so we want to look
to initiate new positions on intraday dips near support.  Look
for buyers to show up first at $90, but more likely in the $88-89
area.  The recent bullish move gives us the freedom to move our
stop up to $87.

Comments

Continuing its upward climb on Monday, DGX further distanced
itself from the $90 level, trading as high as $93 before
succumbing to a bit of profit taking in the afternoon as the
broad markets weakened.  There just wasn't enough volume to
sustain a push through the $92 level, but if buyers continue to
push the Health Care Payor's index (HMO.X) towards its all-time
highs, that positive action is likely to aid DGX in its move
through the $92 level.  The next challenge will be $94, followed
by $96, the site of the stock's all-time highs.  Continue to use
the dips to initiate new positions, first at $91 and then $90.
A rebound from the $89 level would make for a great entry if we
get it, but only if it comes on strong volume.  Raise stops to
$88.50.

*** June contracts expire in less than 2 weeks ***

BUY CALL JUN-90 DGX-FR OI= 683 at $3.20 SL=1.25
BUY CALL JUN-95 DGX-FS OI=2144 at $0.70 SL=0.25
BUY CALL JUL-90 DGX-GR OI= 154 at $5.30 SL=3.25
BUY CALL JUL-95 DGX-GS OI=  77 at $2.70 SL=1.25

Average Daily Volume = 911 K



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