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Daily Newsletter, Thursday, 06/13/2002

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The Option Investor Newsletter                Thursday 06-13-2002
Copyright 2001, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      06-13-2002           High     Low     Volume Advance/Decline
DJIA     9502.80 -114.90  9625.40  9491.86 1.36 bln   1059/1895
NASDAQ   1496.86 - 22.30  1526.41  1495.64 1.54 bln   1282/2172
S&P 100   501.16 -  4.86   509.26   501.41   Totals   2341/4067
S&P 500  1009.56 - 10.70  1023.47  1008.12             
RUS 2000  455.98 -  7.01   463.90   455.78
DJ TRANS 2704.82 -  1.90  2731.44  2702.78
VIX        28.73 +  1.72    28.81    27.08
VXN        54.30 +  1.44    55.81    53.51
TRIN        1.14
PUT/CALL    0.84
*************************************************************

Financials Pointing the Way?

Late in the session financial stocks began a fierce drop that 
could be pointing to our future direction. They have been trending
down since the market decline began in mid-May but the rate of
descent accelerated as we neared the close. The Dow transports, 
which had been holding their own on falling oil prices, also 
were showing weakness at the close. This could be a defining 
moment in the markets as all the major indicators and 
corresponding indexes appear to be lining up in the same 
direction. 



 



 



 

The day started off strange after futures had been up strongly
all night only to crash on the Retail Sales numbers falling -0.9%
in May. This was the biggest drop in six months and something 
Greenspan and analysts had been worried about all year. The 
consumer has held up the economy in the absence of corporate 
spending and a boycott now could be disastrous. Despite high 
unemployment consumers have been buying cars, houses and big 
ticket items like there was a constant blue light special. If
these consumer trends are changing then the "soft spot" Greenspan
described last week could turn rotten in a hurry.

This concern for a possible shrinking economy overweighed positive
news from MCHP and MOT that they could meet or beat expectations.
The futures fell to negative territory and the markets opened down.
The Dow fell to triple digit losses at 9510 and stopped. Bargain 
hunters seeing the second pause in the 9500 area in a week started 
nibbling at stocks and the indexes moved back up to trade in 
positive territory again. Considering the negative sentiment this
was a very positive event. Unfortunately this bargain hunting ran
out of steam when the supply of buyers was exhausted. 

According to TrimTabs.com the week ended on Wednesday showed 
outflows of cash from equity funds of $5.2 billion. This compares
to last weeks outflow of -$6.8 billion. This cash drain is even
more depressing when you consider retail investors usually rush
in when the market is perceived to be at a bottom. Obviously the
perception is still a much lower low ahead. If you thought 9500
was the bottom you would not be taking cash out now. Contrarians
would be quick to point out that the herd is usually wrong and
the heavy outflow of cash is signaling capitulation. I agree to
some extent but I think it has to get worse before it can get
better. I talk to many investors every day and for the most part
they are still hanging in for the bounce.

The various factors for this cash drain is the constant barrage 
of negative stock news. I am not talking about earnings! The 
IMCL hearings droned on all day with mind numbing questions 
and responses. Doesn't congress have any real work to do? Add
to that the grandstand play of arresting the ex-CEO in his pajamas
this week and investor confidence already shaken by Enronitis is
taken to the cleaners again. The recent OMC spanking by the media
is another example. On a side note, OMC fired its auditor, Arthur
Anderson, today and retained KPMG. Guess they thought the AA name
had too many negative connotations. (grin) The AA jury is still
deadlocked but questions from the jury room suggest they may decide
in the governments favor.

Lehman decided to change its rating system today to buy, sell, hold
to conform with the SEC inspired changes at Merrill Lynch. Based on
the current market there was a discussion to change the ratings to 
"reduce", "sell" and "get the hell out of the way". Just kidding!
Lehman also downgraded the enterprise software sector today saying
IT spending was not improving and maintaining earnings estimates
could be difficult. On that thought the CFO at ITWO said the slump
in IT spending had deepened in the 2Q instead of showing any gains.
This echoed the comments from the SEBL CEO Tuesday that this quarter
was just as bad or worse than the first. Now, just where is that 
rebound?

Lucent warned yet again today on the revenue side. They said revenue
would be -10% to -15% below the estimates from the prior warning. 
LU closed the day at $2.77. Their main competitor, Nortel, also 
lost ground and closed at $1.60. At these prices you can buy stock
at the price of options. The only concern is whether they will be
around several years from now. I can't imagine these companies would
go under but stranger things have happened.

Microsoft gave back some of its gains from yesterday after the rumor
about a pre-announcement of better than expected earnings did not 
come to pass. Also, comments from the judge in the trial indicated
she may be leaning toward the nine states contesting the settlement.
This would be very negative and could keep a cap on MSFT stocks for
another year or two. Adobe released earnings after the close today
and beat the street by two cents but lowered guidance going forward.
GNSS warned after the close that revenue could fall -30% below prior
estimates due to excess inventory in the pipeline. Sales of LCD
monitors have nearly stopped with no corporate IT spending for these
high ticket items. SANM warned that earnings would come in at the 
low end of the prior estimates. Does this sound like an environment
for a market rally?

The close for the Dow was the lowest since November 5th and has
set the stage for a new leg down. The Friday economic reports 
could push it off the cliff. We get another Consumer Sentiment 
number in the morning and any decrease could be a disaster after
the drop in Retail Sales. We also have Business Inventories, 
Industrial Production and Capacity Utilization. The market consensus
for the sentiment is 97 compared to 96 last time. Give us a 96 or
below and we are in serious trouble. Considering that consumer
sentiment is tied in some extent to the markets could the cash
outflow be our leading indicator? 

There is no reason to detail all the support/resistance levels of
the major indexes tonight. They are all at their last ditch support
levels and everything above us is resistance. I know that sound 
very bearish but every bounce fails at a lower level as the market
ceiling continues to drop. There is a chance that positive economic
numbers could produce another opening bounce on Friday because the
indexes are backed up to the edge and any good news could provide
temporary relief. I would view any rebound as just temporary. Use
it as a chance to buy puts again.

If you have not tried the intraday Market Monitor here is the link
to a recap of today's activity. 

http://www.OptionInvestor.com/itrader/archive/marketmonitor.asp

Enter Very Passively, Exit Aggressively!

Jim Brown
Editor


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

I CAPITULATE
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 
Well if the market hasn’t, I DO - give up that is! A tired but 
true joke, as this yo-yo market is getting harder to figure. The 
patterns are so conflicted that I'm seeing either Head & 
Shoulder's top patterns OR Head & Shoulder's bottom formations.  
Same charts! Go figure. Tomorrow ought to tell us whether the 
trend is going to be sideways, consolidating for some further 
upside next week or if we're going to take out recent lows and 
start another down leg.  

I don't recall ever seeing such a drumbeat of simultaneous 
stories on corporate manipulations, malfeasance and actual 
criminal wrong doing by senior management of such well-known 
companies. At past low points in stocks, the concerns were about 
the economy and earnings - that sure exists in this bear of a 
market. But in addition there is what is being widely called a 
crisis of confidence in the corporate world of stocks. Such, that 
people wonder if the market is a "fair game". Investors used to 
feel that the market was fair, but that it might be a lousy time 
to own stocks - not that managers of companies were taking unfair 
advantage of the investing public by non public double dealings 
and deceit.  How times have changed.      

Everything is in place for a market bottom - an upturn in the 
economy, the prospects of better earnings, and perceived value in 
some sectors -- everything that is but the buyers.  They are 
scarce and don't stick around to long or stick their necks out 
too long. 

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


 

First, just to repeat on the S&P 500 (SPX), key support is in the 
1000 area (it closed at 1009), just as 500 is in the S&P 100.    

Have been suggesting OEX Index calls with OEX in the 500 area 
although the ongoing pattern of lower relative highs and lows is 
not convincing me that buyers are going to find a magic level in 
OEX.  

What looked like a bullish turnaround yesterday, looks like more 
of the same today, a continued bear trend and limited buying 
interest.  Today's rally failed to even take out minor hourly 
resistance at the downtrend line intersecting in the 510 area.  
A close above 510 is needed to get some traction on the upside. 
Next resistance then is 515, at the top of the channel.

OEX looks lower tomorrow - the pattern presented on the hourly 
charts now looks like the right shoulder of a Head & Shoulders 
top. If the recent 497 low is exceeded, next stop looks to be 
around 493, at the low end of the hourly downtrend channel.  A 
close under 500 is bound to increase the bearish sentiment.  When 
this is enough for "final" capitulation is a guess at this point.   


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


 

Sell in the 96.5-97 area, if reached.  94.7, which is a recent 
double bottom looks like it will be cut through like a knife 
through warm butter - at least judging by the scarcity of buyers 
for the Dow favorites.  Some of the beaten up issues like IBM, 
Merck, and Telephone (AT&T) got some play today, but otherwise, 
green ink was scarce today.   

DJX downside potential now looks to be well under the close at 
95, if the DJX continues to sink within the boundaries of the 
hourly downtrend channel. Downside potential looks to be a couple 
of points or more, to the 93-92.6 area.    

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


 

The bullish breakout in Microsoft (MSFT) had limited follow 
through today, as did a minor upside break out in Qualcomm 
(QCOM). Intel (INTC) may have a "dead cat" bounce, but with Cisco 
(CSCO) languishing, I can't see what is going to lift the Q's, if 
not the tech biggies.  

QQQ failed right at resistance implied by the prior lows at 28.2 
- support "became" resistance.  The longer term hourly stochastic 
reversed right at the point where it has been of late. What more 
to say?  27-26.8 is near potential near support, but I'm not 
confident this area will bring in buyers again with the 
disappointed mood of would-be bulls today. Look for a possible 
move to new lows - the 26 area is a possible next objective. 

The significance of piercing the 27 level is that it also was the 
September bottom  - we're almost there - no bombs, but a far 
different mood exists. It's not a potential panic low, but a low 
of major discouragement with current tech prospects and the high 
prices relative to current earnings. 

Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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

ImCloned
By Eric Utley

Was it the Congressional hearings Thursday afternoon that tanked
the market, or the consumer?  Maybe it was a little bit of both.
It felt like Enron all over again.  The same cast of characters
were asking the questions, only a different frightened bunch of
suits were in the hot seat.  I remember back during the Enron
hearings that the market got a little jumpy just seeing those guys
on CNBC.  Could be a repeat with ImClone.

Of course the sales report from the Commerce Department this
morning kicked the day off on a sour note, which again brought
up a familiar debate: Will the consumer hold on?  I'm not smart
enough to know, but I do know that the retail sector has shown
signs of weakness over the last several weeks.

The market seems very on edge right now, and so do the major
averages.  It feels like we're on the brink of a major washout,
but I've been saying that for quite a while now.  Most oscillators
show an increasingly oversold market, but that doesn't mean it
can't grow more so.  And earnings are just not what they were
expected to be noting tonight's most recent blow ups in Adobe
and Genesis.  All of this has the making for a throw in the
towel sort of session, followed by a sustainable and tradable
rally.

There are just so very many risks to the bulls right now that
no one wants to be the first to try and buy this market.  The
political events around the world, combined with this probe
and that probe into new companies every day, and the lack of
earnings or quality earnings all mix for a recipe to avoid
stocks.  The bond market has been benefiting from these risks
to stocks as witnessed by the further upside in Treasuries
today.

All in all, the market is likely to remain on the defensive
as no discernible catalyst for a rally has emerged just yet.
At the same time, we haven't had the short term washout to
clear the path for a tradable rally.  We could get there
tomorrow, and there are some things to watch for.  For
starters, we need to see a decliners swamp advancers during
the day.  And we need a very heavy volume total on the NYSE
and NASDAQ markets, which we haven't gotten yet, not by a
long shot.  And finally, we need to see the fear gauges of
the market rise and close above key levels.

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

Market Averages

DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     :  9503

Moving Averages:
(Simple)

 10-dma:  9662
 50-dma: 10024
200-dma:  9857



S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     : 1010

Moving Averages:
(Simple)

 10-dma: 1033
 50-dma: 1081
200-dma: 1109



Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low : 1089
Current     : 1107

Moving Averages:
(Simple)

 10-dma: 1151
 50-dma: 1266
200-dma: 1423



Oil Service ($OSX)

The OSX was the day's best performing sector.  The index traded
higher for the second consecutive session Thursday, finishing
the day better by 1.07 percent.

Leaders to the upside included Tidewater (NYSE:TDW), Baker
Hughes (NYSE:BHI), Transocean (NYSE:RIG), Cooper Cameron
(NYSE:CAM), and Nabors (NYSE:NBR).

52-week High: 126
52-week Low :  58
Current     :  97

Moving Averages:
(Simple)

 10-dma:  98
 50-dma: 103
200-dma:  88


Disk Drive ($DDX)

The DDX, an unfamiliar name to the sector spotlight, was the
worst performing sector during Thursday's sell off.  The index
finished the day lower by 4.70 percent.

Leading the way to the downside included Read Rite (NASDA:RDRT),
Quantum (NYSE:DSS), M Systems (NASDAQ:FLASH), Sandisk
(NASDAQ:SNDK), and Maxtor (NYSE:MXO)

52-week High: 120
52-week Low :  59
Current     :  70

Moving Averages:
(Simple)

 10-dma: 77
 50-dma: 90
200-dma: 92

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

Market Volatility

My good buddy Mark Phillips wrote in an e-mail today that the
VIX needs to close above 30 before signaling a capitulation that
leads to a tradable short-term rally.  I don't need to say
anything more.

Make that 60 for the VXN.

CBOE Market Volatility Index (VIX) - 28.81 +1.80
Nasdaq-100 Volatility Index  (VXN) - 54.27 +1.41

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.84        471,438       397,139
Equity Only    0.74        363,520       270,959
OEX            0.91         20,963        19,068
QQQ            0.59         28,694        16,926

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

Bullish Percent Data

           Current   Change   Status
NYSE          54      - 1     Bull Correction
NASDAQ-100    19      + 1     Bull Correction
DOW           47      + 0     Bear Confirmed
S&P 500       47      - 2     Bear Confirmed
S&P 100       48      + 0     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  1.28
10-Day Arms Index  1.48
21-Day Arms Index  1.35
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       1229          1960
NASDAQ     1271          2137

        New Highs      New Lows
NYSE       63            101
NASDAQ     42            167

        Volume (in millions)
NYSE     1,398
NASDAQ   1,572

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

Commitments Of Traders Report: 06/04/02

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 brought in a few of their shorts last week and added
a few longs.  Small traders grew slightly less bullish, but not
by a meaningful amount.

Commercials   Long      Short      Net     % Of OI 
05/21/02      354,039   429,803   (75,764)   (9.7%)
05/28/02      362,607   442,845   (80,238)   (9.9%)
06/04/02      369,298   440,027   (70,729)   (8.6%)

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
05/14/02      163,035     58,587  104,448     49.8%
05/21/02      172,313     57,803  114,510     49.8%
06/04/02      167,713     58,885  108,828     48.0%

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 quite a bit more bullish last week by
bringing in a large number of short positions.  Small traders
meanwhile grew increasingly bearish with their addition of a
number of short positions, to just off of their yearly high in
bearishness.

Commercials   Long      Short      Net     % of OI 
05/21/02       51,448     45,375     6,073   (6.3%)
05/28/02       49,669     44,900     4,769   (5.0%)
06/04/02       47,875     39,100     8,775   (9.3%)

Most bearish reading of the year: (15,521) -  3/13/01
Most bullish reading of the year:   8,775  - 06/04/01

Small Traders  Long     Short      Net     % of OI
05/21/02       12,567    19,899    (7,332)    22.6%
05/28/02       12,562    16,969    (4,407)    14.9%
06/04/02       12,162    21,420    (9,258)    27.2% 

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

DOW JONES INDUSTRIAL

Dow commercials added a few more shorts than longs last week for
a reduction in their new bullish position.  The small traders
were much more active with a significant drop in their bearish
position.

Commercials   Long      Short      Net     % of OI
05/21/02       20,173    15,317    4,856     13.7%
05/28/02       20,289    15,513    4,776     13.3%
06/04/02       20,564    16,169    4,395     11.0% 

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
05/21/02        3,661     9,585    (5,924)   (44.7%)
05/28/02        5,709     9,180    (3,471)   (23.3%)
06/04/02        7,114     9,639    (2,525)   (14.7%) 

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   1,909  -  1/16/01

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


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

THE SECTOR BEAT - 6/13
by Leigh Stevens

The financial stocks as a group will tend to lead market 
advances, or decline.  The NYSE Financial Index ($NF.X), composed 
of all the financial stocks that trade on the exchange, went into 
"free fall" today, which is not the bullish indication for the 
market that I thought we might see. After today, NF.X looks 
headed to a retest of its Feb. double bottom low. This sector 
along suggests that the broad market may not be poised to rally 
anytime soon. 

Continued weakness in the Bank Sector Index ($BKX.X), trading 
since the end of last week under its 200-day moving average and 
in the Brokers (Securities Broker Dealer Index - Sym: $XBD.X) are 
a big part of this weakness.  In my mind the strength of the 
economic recovery is called into question with the performance of 
these sectors. This view is also suggested by the new closing low 
in the Morgan Stanley Cyclical Index ($CYC.X) - at 551.3. CYC's 
200-day moving average is currently at 534 which may where the 
cyclicals are headed next.  

In the Nasdaq market, our key focus is on the Semiconductor Index 
or SOX ($SOX.X). While the Index has apparently "stabilized" 
around its recent lows around 426, which represents a 75% 
retracement of the September-March advance and is at an oversold 
extreme, it remains a guess as to whether SOX will hold in this 
area or retreat back to the 345 area of the September bottom.      

In short, we are at a key juncture - if the market is going to 
hold around current levels and rally, gains will be built on the 
ability of some key market sectors going up.  Right now, its not 
apparent where that leadership will come from.  Especially with 
the loss of the sectors that had been in strong uptrends like 
oils, oil services, cyclicals, small and mid cap stocks, and even 
healthcare, which may be building a top.  The big cap consumer 
"defensive" stocks like PG, MO, WMT and the like are not enough 
to carry the broad market higher.  

UPDATES today - 
Biotech; Broker-dealer index; Financials; Health Providers;  
Health Payors (HMO); Russell 2000; Semiconductors; Utilities.    

HIGHER ON THE DAY ON Thursday - 


 

DOWN ON THE DAY on Thursday - 


 

SECTOR HIGHLIGHT -

IShares purchase recommendation on SMALL CAP SECTOR (6/9)- 

Continued weakness in the small and mid cap sectors is bringing 
the iShares closer to the suggested stop points.  I would adhere 
to these exit points, as the anticipated support has not 
materialized around the recent purchase prices and next lower 
support looks to be well under the exit points. 

IJS, iShares of the S&P 600 Value segment - long at 90.90; stop 
at 87.3
Growth iShares (IJT) of the S&P 600 small cap - long at 74.85; 
stop at 72.00.
Russell 2000 (IWM) iShares - long at 93.80; stop at 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; below this area, I don't see 
potential support before 863. 
LAST UPDATE: 6/13

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. Downside target to 
830, a 62% retracement of the Feb.-March advance has been 
exceeded.  We could be looking at a retest of the Feb. lows in 
the 780 area. 
LAST UPDATE: 6/13

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



 


At the low end of its downtrend channel around 340, but action is 
weak.  Only bullish technical is RSI divergence, as it has not 
"confirmed" the recent low - this is only "potential" - sector 
continues very weak.  Needs close back above 375 to reverse. 
LAST UPDATE: 6/13 

Broker Dealer Index ($XBD.X)


 

If 62% retracement (of Sept.-Feb. rally) can't "hold" in 412 
area, next target is 380. Bullish Price/RSI divergence, but this 
is unrealized potential at this point. XBD needs to get back 
above 436 to reverse. Hard to imaging much of a rebound in the 
S&P without some rebound in the brokers. 
LAST UPDATE: 6/13

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

Possible double bottom in 580 area - if this level is taken out, 
then next potential support looks to be at the Sept. lows in the 
541 area. 
LAST UPDATE: 6/13 

Computer Boxmaker Index ($BMX.X) 
STOCKS: AAPL; CPQ; DELL; GTW; HWP; IBM; SNE; SUNW; UIS; VRTS  

Possible double low is setting up in the 83 area. If this gives 
way, BMX may be headed to 74-75 area, where sector bottomed in 
Sept.
LAST UPDATE: 6/13

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 

New closing low in 551 area, suggest the cyclical index could be 
headed to a convergence with its 200-day moving average in the 
534 area. Needs to stay above 550-551 on closing basis to suggest 
that we're merely back at low end of a trading range. 
LAST UPDATE: 6/13

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

Looks lower still - "bear flag" pattern looks to be forming, 
which suggests that there will be another downswing ahead.
Continue to have objective to lower levels, perhaps back to 600 
area. Close above 655 is needed to reverse downtrend.  
LAST UPDATE: 6/13

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. 



 

Financial Index as acceleration downside momentum and appears 
heading toward the 552 area, where NF bottomed in Feb. Close 
above 580 is needed to reverse the (down) trend. 
LAST UPDATE: 6/13

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)


 

This sector represents the hospitals, urgent care facilities and 
the like - the health care providers that bill for health 
services. 

RXH has been "hugging" the 50-day moving average, which has been 
acting as a sort of curved trendline.  Sector looks like upside 
momentum has slowed considerably and does not appear to have 
enough strength to pierce its April peaks in the 368 area.  If 
they can't take them higher, the tendency has been to take stock 
groups lower at some point.  Loss of momentum tends to reach a 
point where prices start to fall due to too few buyers left to 
keep the stocks going up.  If so, fund managers like to book some 
profits and rotate into the next promising sector.  

Key support is in the 343 area - a close below this level, 
suggest a trend reversal, with potential back to 325. 
LAST UPDATE: 6/13


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



 .   

The potential for a top and downside reversal suggested by the 
bearish Price/RSI was showing up today, as the action today 
looked like a reversal. A close below 620 would tend to provide 
initial evidence for a downside reversal, but "confirmation" 
would be on a close under 600. 

LAST UPDATE: 6/13

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)



 


The Russell 2000 has had one close under the Feb. double bottom 
low in the 456 area. A rebound is needed to above this level to 
suggest that the RUT was going to stop its correction here. 
Below, 456, a next downside target is projected at 449-450; then, 
around 432. The RUT iShares (IWM) are, so far, holding above its 
prior (Feb.) low at 90. A key juncture. 

  Next support (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



 

Completed 75% retracement - SOX needs to hold 425-426 to suggest 
that it could rebound further, say back up the 470 area at least.  
A close under 425-426 suggests potential for a retest of the 
Sept. bottom around 350. 
LAST UPDATE: 6/13

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

Bullish Price/RSI divergence and possible exhaustion gap signals 
some further upside.  Bullish falling "wedge" pattern is bullish 
as well. A move above 120 would be an initial indication that GSO 
could reverse its downtrend for a time. Software sector index has 
fallen from the 200 area in Feb. to 114 recently. A close below 
1113 would suggest that further weakness was possible as it would 
exceed both the early-May bottom and the September lows.  
LAST UPDATE: 6/13 

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

Transportation Average; Dow Jones ($TRAN)

Airborne Inc. (ABF); Alexander & Balwin (ALEX); AMR Corp (AMR); 
Burlington Northern (BNI); CNE Transportation (CNF); CSX Corp 
(CSX); Delta (DAL); FedEx Corp. (FDX); GATX Corp (GMT); J.B.Hunt 
Transport Services (JBHT); Norfolk Southern (NSC); Northwest 
Airlines (NWAC); Roadway Express (ROAD); Ryder System (R); 
Southwest Airlines (LUV); UAL Corp. (UAL); Union Pacific (UNP); 
US Airways (U); USFreightways Corp. (USFC); Yellow Corp. (YELL) 

The DJ Transportation average has been rebounding off the key 
200-day moving average and is therefore performing better than 
the Dow Industrials.  But its failed the "test" of also getting 
above its 50-day average - this was also the area of its down 
trendline.  These stocks probably have buying interest due to 
being perceived as "low risk" and an oil price decline play, 
which improves their bottom line.  They are probably going to 
need more than this to get them up.   

Charles Dow's theory on the market said that if goods are being 
transported, it results in a pick up of the revenues & earnings 
of the transportation companies - the resulting rebound in these 
companies' stock prices is sometimes the first tip off that 
manufacturing is picking up. 
LAST UPDATE: 6/11


Utility Sector Index ($UTY.X)


 

A trading range market like this is what momentum or 
"overbought/oversold" oscillators are very effective for, as when 
prices retreat back to such a well-defined "line" of support AND 
the Stochastic, RSI or MACD indicators are registering oversold, 
it usually represents a good trading opportunity.  Once again, 
the UTY sector index rebounded from the low end of its range in 
the 304-305 area.  328-330 is resistance, then 335.  

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 06-13-2002
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:
*****

None


PUTS:
*****

ICOS $18.10 +0.40 (-1.50) The broader Biotechnology sector
appears to be finding support judging by the way the group
traded during today's session when the broader market took
another tumble lower.  ICOS finished fractionally higher for
the day, but could be in for more upside on short covering if
the biotech index continues rebounding.  Look to set very
tight stops on open positions, or exit into weakness during
tomorrow’s session.


DUK $31.00 +0.87 (+1.00) The inside day set up that we had
been targeting for the second time ended up being a breakout
to the upside in yesterday's session.  Hopefully you had a
protective stop in place to hedge against the breakout,
because DUK continued higher again today.  Look to exit plays
on any weakness tomorrow if you haven't done so already.

IDPH $33.00 +1.16 (-5.24) We've been pretty successful playing
the recent downward move in the Biotech sector.  IDPH has given
us better than a $5 drop since we began covering it a couple
weeks ago, helped along by some negative news and analyst
comments on Tuesday.  Since dropping to the $31 level, the stock
spent all day today recovering and this has the looks of a move
that is over.  Rather than look for a new entry point here, we'll
book our gains and focus on other plays with greater potential.
Use any weakness in the morning to negotiate a more favorable
exit from the play.


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

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

CALLS              Mon    Tue    Wed    Thu

DGX      88.27    0.96  -0.50  -2.17  -0.95  Back down to support
BRCD     19.42    0.56   0.13  -0.89   0.13  Holding its ground
AZO      81.00   -0.43  -0.25  -0.23  -1.04  Held back by market
WLP      82.40   -0.11   5.80   0.80  -2.15  Taking a breather
OHP      49.70    0.45   0.68   0.06  -0.54  Pulling back to entry


PUTS               

GS       71.30    0.79  -2.64   0.40  -1.20  Working lower again
WHR      67.33   -0.22  -1.45   1.78  -1.53  Failed rally on news
DUK      31.00   -0.91   0.03   1.01   0.87  Dropped, broke out
IDPH     33.00    0.13  -6.34  -0.19   1.16  Dropped, take gains!
PMI      76.02   -0.80  -3.04  -0.53  -2.41  Steady trend lower
ICOS     18.10   -0.11  -1.14  -0.65   0.40  Dropped, bio bounce
MMC      92.05    0.86  -2.39  -1.14  -1.62  Lost $95, come on $90!
MIL      33.94   -0.37  -1.42  -1.43  -0.06  One day bounce, break
HIG      59.60    0.00  -2.20   0.50  -1.70  Stepping its way down
SPW     120.68   -6.86  -3.40   3.20  -2.52  200-dma rollover entry
ENZN     23.24    0.82  -1.86   1.01  -0.39  Another failed run
IBM      75.60   -1.50  -1.31  -0.86   0.95  New, new warning?
RYL      49.18   -2.41   1.03   0.16  -3.22  New, housing bubble
IWM      91.00   -0.10  -1.50   0.30  -1.30  New, small cap break
LLL      54.70    1.19  -1.00  -1.14  -2.90  New, next leg down
CB       69.35    0.02  -2.30  -0.30  -2.00  New, classic break!!
ZLC      39.00   -0.43  -0.55   0.08  -1.08  New, retail rollover


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

WLP $82.40 -2.15 (+4.34) SG Cowen reiterated its strong buy
rating on WLP yesterday morning.  The momentum coming off of
the company's raising of guidance and the reiteration from SG
Cowen was enough to carry WLP up to just below the $85 level.
The stock's high in yesterday's session was $84.89.  That
move may have offered traders who got in ahead of Tuesday's
monster move higher a chance to book some very solid profits
over three days of trading.  In today's session, the stock
pulled back to consolidate some of its recent gains.  The
volume was extremely light during today's session, revealing
that the weakness was most likely profit taking related.
From here, traders with open positions should have stops in
place to protect profits.  It remains to be seen if the
lower end of the gap gets tested during WLP's current
pullback.  If it does, we'll look for a rebound from the
$81.25 level.

AZO $81.00 -1.04 (-1.95) After attempting to break out to new
highs earlier in the week, shares of AZO have been struggling
under the burden of the broad market weakness, as all the
intraday rallies have been rebuffed by the bears.  The stock has
been obediently creeping lower in a descending channel for the
past 3 days, and we'll need to see some bullish action to break
this pattern if it is going to remain on the playlist.  We are
approaching solid support at $80 and this is the most likely
level for bulls to make a stand.  So we'll look for a bounce near
this level (strong volume required) to initiate new positions.
Alternatively, wait for a rebound through the top of the channel
($81.50) or better yet, the $82 resistance level before taking a
position.  We're keeping our stop in place at $79.50.

BRCD $19.42 +0.13 (-0.07) Eager bulls in the Technology sector
are wondering whether they are on the right track or if they are
just going to be the first sent to slaughter. If you're looking
to play the long side in this sector of the market, you need to
focus on relative strength and BRCD is trying hard to build some.
In fact it was encouraging to see the stock trade in positive
territory all day on Thursday.  But that's where the good news
ends.  After once again being turned back at the $21 resistance
level on Tuesday and $20 today, BRCD is once again approaching
solid support at $19.  Additionally, each intraday dip over the
past 2 weeks has found willing buyers at the $18.25 level.  A
solid rebound from either of these levels looks like a solid
rebound, provided that there is solid volume supporting the
rebound.  Otherwise, we'll want to wait for a move through the
$22 resistance level (also the site of the long-term descending
trendline) before taking a position.  Our stop remains at $18.

DGX $88.27 -0.95 (-2.66) Entry point or lights out?  DGX had a
pretty nice rally off the $85 level, but the pullback over the
last 3 days is really causing the bulls some heartburn.  It
isn't helping that the Health Care Payors index (HMO.X) hasn't
been able to hold altitude.  Rather than pulling back on light
volume, we've seen the selling volume running slightly ahead of
the ADV.  But the stock is still above its bullish trendline and
caught a bit of a late-day bounce off the 20-dma at $87.97 to end
the day just slightly above our $88 stop.  We need to see the
bulls step in to buy the stock near current levels or else the
play will be destined for the drop list this weekend.  A
volume-backed rebound from the $88 level can be used for new
entries, but make sure to keep stops tight.  Should this level
fail as support, DGX will likely head back to its ascending
trendline near $86 before finding stronger support.  The HMO
index may have to drop back near the $625 level before finding
willing buyers again and that could cause further problems for
DGX.  

OHP $49.70 -0.54 (+0.65) So much for that move to new highs in
the Health Care Payors index (HMO.X).  After pushing through the
$655 level earlier in the week, the index has been unable to hold
altitude under the drag of the broad market weakness.  This lack
of bullish conviction is likewise weighing heavily on shares of
OHP.  The stock has been dropping back over the past 2 days after
tagging a new all-time high of $51.94 on Tuesday.  Intraday
support rests at $49.50 and a rebound from that level can be used
for new entries.  But if the sector weakness continues (very
likely with the HMO index looking like it wants to retest the
$625 level), then the better entry will likely be a drop to and
rebound from the $47.50-48.00 support level.  This was the site
of the recent breakout and if there is any life to the bullish
move, the bulls should show up to defend that level.  Should
support fail to hold, then we'll be out of the play in short
order, with our stop currently resting at $47.


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

None


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

WHR $67.33 -1.53 (-1.42) Maytag, another major appliance maker,
said yesterday morning that an unexpected surge in sales of its
washing machines and vacuum cleaners would lead to higher than
previously expected earnings.  The news resulted in a sharp
rise in MYG shares, and spilled over into our WHR put play
which saw the stock rally back up to the $70 level.  As it
turned out, the early rally in WHR yesterday was a good entry
point into new put positions as the stock promptly rolled
over from the $70 level and continued to slide into today's
session on the weakness in blue chip issues.  The $68 level
that provided support earlier in this play may once again try
to hold, but is less likely to given the breakdown we witnessed
during Tuesday's session.  A retest of the relative low down
around the $67 level is likely, especially if the Dow continues
to weaken over the coming sessions.  Look for intraday
rollovers from the $69 level which is now the site of the
overhead 10-dma.  A breakdown below $67 should lead to a move
down to the $65 level.

PMI $76.02 -2.41 (-4.78) PMI pushed lower in today's session on
further selling in the broader market.  The stock's trend is
still very much intact after yesterday's brief but failed
rally attempt during midday action.  PMI reached only as high
as the $79.32 level before rolling over once more and heading
below the $78 level for the first time in over two months.
The stock continued below $78 during today's session on
continued relatively active trading volume.  We could very well
see a decline down to the $75 level in the coming sessions if
the broader market continues to trade in a weak fashion.  Short
term exit points might be taken in the coming sessions if the
stock reaches $75.  Taking new entries on a breakdown of
today's low might be a suitable choice, but we'd like to see
the stock rally for one or two days in a relief fashion to
remove some of the short term oversold nature.  If you're
holding open positions, look for a decline down to $75.  But
if you're still on the sidelines in PMI, wait for a better
entry point near resistance overhead around the $79 level.

MMC $92.05 -1.62 (-4.29) We made the mistake of referring to
MMC as an insurance company when in fact the company is not
an insurance play.  Sorry for the mistake.  The stock's
rollover from the 10-dma in Tuesday's session at the $98.25
level proved to be a most favorable entry point into new put
plays as MMC continued lower through the last two sessions.
The stock traded as low as $91.80 before finding enough
support to stage a relief bounce in today's session.  MMC
looks weak, and is poised to get weaker with further selling
in the Dow and S&P.  Look for market weakness to pressure the
stock below today's low in tomorrow's session for a possible
exit point at or near a new relative low in the descending
trend.  The stock could possibly find support near the $90
level if it hits that level tomorrow or early next week.
That may also be a good exit point over the short term for
traders who took the entry on the rollover from the 10-dma
earlier this week.  For new entry points, we'll look for
another rollover from the 10-dma in the coming days.

MIL $33.94 -0.06 (-3.28) The downside in the biotechnology sector
continued to wreak havoc on MIL in the last two days, which was
a welcome development.  The stock's full fledged breakdown in
Tuesday's session was followed by good downside in yesterday's
session which saw MIL fall below the $35 level on a huge increase
in volume.  Nearly 1 million shares exchanged during yesterday's
sell off versus the stock's 30 day average trading volume of under
500 K shares.  Today's modest bounce was most likely a day of
short covering as the Biotech Sector Index ($BTK.X) rebounded as
well.  From here, traders with solid gains in this play might
consider trailing down a tight stop to protect profits.  For new
entry points, we favor taking rollovers from resistance, possibly
somewhere between the $36 and $37 level, with the 10-dma coming
down from the $37 level to provide pressure on a rollover.  If
the right market conditions present themselves, traders could
look to enter new positions into a breakdown below the $33.50
level.

HIG $59.60 -1.70 (-3.40) HIG spent yesterday's session gyrating
around the $61 level following its big breakdown below the
200-dma during the day prior.  A small day of consolidation is
normal following such a big move, especially a short lived
relief rally before a resumption of downward trend.  And the
stock's trend certainly resumed in today's trading on the
return of weakness in the broader market.  With little support
immediately below current levels, HIG looks to be heading
lower.  Look for further weakness in the Dow tomorrow to
pressure HIG further down along its declining trend.  Momentum
entries can be taken into weakness below the prior day's low
as long as the broader market is weak.  If the stock does
rebound in the coming sessions, then start looking for rollover
entry points into new put positions around the $61.50 mark.
Above there, the converged 10-dma and 200-dma just below the
$63 level would offer a favorable entry point.

SPW $120.68 -2.52 (-9.58) Following yesterday's relief rally in
SPW, the stock tried to follow through to the upside in today's
session but the rally fell short right near the 200-dma.  SPW
reached only as high as the $124.44 level before rolling back
lower during a quiet day of trading back below the 200-dma.
We have the feel that the 200-dma could turn out to be quite
the battle ground between the bulls and bears in SPW over the
next several sessions if the market doesn't break in one
direction or another.  The 200-dma now stands overhead at the
$123.30 level.  Traders can continue looking for rollovers
from that level as long as the market remains weak.  SPW will
have a difficult time trading and closing above its 200-dma
without a sharp rally in the broader market.  To the
downside, a breakdown below the relative low at the $118.76
level can be used as an entry point into momentum.  Confirm
market direction and an increase in volume before entering
on a breakdown.

ENZN $23.86 -0.39 (-0.42) There hasn't been much good news to
focus on in the Biotechnology sector of late, and the current
IMCL hearings certainly aren't helping the bulls' case.  But
maybe the news from BGEN after the closing bell will inject some
life into the sector.  Why are we talking about bullish catalysts
in a put play?  Because we want to see a rebound in the sector to
provide us with a better entry point.  ENZN gave us a decent
entry today as it finally rolled over from the $24.75 level, but
the slide wasn't all that we had hoped for.  ENZN is currently
trapped between recent support ($23) and resistance ($25).  Those
are our action points, as renewed rally failures near the $25
level will make for solid entries, as will a breakdown below
yesterday's intraday low at $22.60.  There is further resistance
near the $26 level and that would make for an even better entry
point on a rollover, but we will need to wait for the rollover
before playing.  Our stop remains at $27, as a move above that
level will represent a break of the 2-month descending trendline.

GS $71.30 -1.20 (-2.65) Another day, another new low.
Yesterday's early weakness in the broad market drove GS down to
the $70 level before buyers appeared to prop the stock up.  This
action is significant because the bearish price target on the PnF
chart is $70 and we can now say that that target has been
achieved.  That doesn't mean GS can't fall further, but we need
to remain cognizant of the achieved price objective.  At a
minimum, GS is still looking like a favored target of the bears,
as evidenced by the stock's most recent rollover at the $73
level.  So the pattern of lower highs and lower lows is still
intact.  Like much of the broad market, GS is on the cusp of
either rebounding or breaking down.  A failed rally near the
$73.00-73.50 level looks good for new entries, but we're lowering
our stop to $73.75, just in case the bulls get frisky and manage
a solid rebound as we head into the weekend.  Traders looking to
enter on further weakness will need to very careful, given the
proximity of the September lows.  A drop below $70 can be used to
open new positions (so long as the XBD index is confirming the
move), but keep a sharp eye out for an oversold rebound near the
$68 level.


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

IBM - International Bus. Machines $75.60 +0.95 (-2.70 this week)

International Business Machines uses advanced information
technology to provide customer solutions.  The company provides
value to its customers through a variety of solutions including
technologies, systems, products, services, software and
financing.  IBM's three hardware product segments are comprised
of Technology, Personal Systems and Enterprise Systems.  Other
major operations consist of a Global Services segment, a
Software segment, a Global Financing segment and an Enterprise
Investments segment.

Some of the best bearish trades in recent weeks have been the
result of negative company-specific news stories, among them
WMB, EP, TYC and of course OMC.  Well we've got another one for
your consideration.  Big Blue investors may be about to get a lot
bluer.  Rumors have been surfacing that IBM will be forced to
warn due to approximately $4 billion in services orders to
companies that have recently filed for bankruptcy.  Putting 2
and 2 together tells us that companies that are now bankrupt are
highly unlikely to need the services that IBM provides.  Add in
this catalyst with the fact that the stock has been trading heavy
for the past week, breaking the important $75 support level
earlier this week.  That was enough to prompt the analysts to
come out of the woodwork this morning in defense of the stock.
SG Cowen raised estimates and reiterated their price target of
$112.  Not to be outdone, UBS made positive comments as well,
issuing a price target of $120.  Those targets may be possible,
but we obviously disagree.  In fact, the lift that IBM got on
the positive comments looks to be providing us with a better
entry point into the play.  As you know, we like to reference the
PnF charts to see where supply and demand levels lie, and IBM is
clearly under heavy selling pressure.  In fact, the most recent
sell signal (from earlier this week) gives us a price objective
of $61.  It looks like there is plenty of room to fall and if the
company does warn, we could be headed there sooner, rather than
later.  Look for failed rallies below heavy resistance at $79 to
provide attractive entry points into the play.  Otherwise, wait
for IBM to fall of its own weight, entering new positions on a
drop below the $73 level.  Initial stops are in place at $80.

*** June contracts expire next week ***

BUY PUT JUN-75 IBM-RO OI=19251 at $1.75 SL=0.75
BUY PUT JUL-75*IBM-SO OI=29623 at $3.70 SL=2.00
BUY PUT JUL-70 IBM-SN OI=11555 at $1.90 SL=1.00

Average Daily Volume = 8.55 mln


IWM – Russell 2000 iShares $91.00 -1.30 (-2.60 this week)

The iShares Russell 2000 Index Fund seeks investment results that
correspond to the performance of publicly traded U.S. small-cap
stocks, as represented by the Russell 2000 index.  The index
represents the 2000 smallest companies in the Russell 3000 index.

Get ready for the Russell Shuffle.  That's right, at the end of
the month, the Russell 2000 will adjust the components of the
index, and it is a safe bet that fund managers will be adjusting
their holdings accordingly between now and the end of the month.
Observant traders will recall that small-cap stocks have been
particularly strong since the September lows, with the IWM iShare
moving to a new 18-month high in mid-April.  Since then
conditions in the index have been deteriorating rapidly, with
volume on the rise, as the IWM has fallen back to the site of the
February lows.  This is a critical juncture, as the bulls need to
step up to defend support in the $90.50-91.00 area, or else we
could be in for a nasty stumble.  The next significant support
level is $87, followed by $83.50.  The PnF chart paints a dire
picture as well, with the recent double-bottom breakdown pointing
to an eventual price objective of $80.  Note also, that a print
of $90 break the bullish support trend and will give us a fresh
triple-bottom breakdown, underscoring the bearish outlook.  We
would prefer to get an oversold rebound before initiating new
positions, but we don't want to rule out entries taken on a break
below the $90 level.  If you have the patience to wait for the
bounce, look to open new positions on a failed rally near $93 or
$94.50.  We are initiating the play with our stop set at $95.

*** June contracts expire next week ***

BUY PUT JUN-95 IWM-RS OI= 482 at $4.40 SL=2.75
BUY PUT JUN-90 IWM-RR OI=  72 at $1.20 SL=0.50
BUY PUT JUL-95*IWM-SS OI=2500 at $5.50 SL=3.50

Average Daily Volume = 1.16 mln


LLL - L-3 Communications Holdings $54.70 -2.90 (-3.85 last week)

As a leading supplier of sophisticated secure communication
systems and specialized communication products, LLL provides
critical elements of virtually all major communication, command
and control, intelligence gathering and space systems.  The
company's high data rate communication, avionics, telemetry and
instrumentation systems and components are used to connect a
variety of airborne, space, ground-based and sea-based
communication systems.

Remember the good old days when Defense stocks did nothing but go
up?  Judging by the recent action in the Defense Industry index
(DFI.X), the glory days are over for awhile.  Since hitting its
all time highs near $680 in early May the DFI index has been in a
steady downtrend.  Even the bounce off of strong support near $625
couldn't get the bulls' interest and it looks like the index is
about to roll over once again.  Should the $625 support level give
way, it could be a quick trip to the $600 level.  And that may not
be the bottom.  LLL was one of the best-performing stocks in the
sector after the September lows, rising more than 100%.  But it
is acting very poorly (unless you are a bear!) and is now testing
major support in the $54-55 area.  Should this support fail, LLL
looks destined to visit $50 on its way to major support in the
$44-45 area.  The PnF chart seems to agree, as its recent sell
signal generated a bearish price target of $43.  Looking at the
daily chart, the $60 level has shaped up as formidable resistance,
although more realistically, the $57-58 area will likely turn
back any feeble bullish moves.  Ideally we'll look for new
entries on a failed rally below the $59 level.  Of course, if
support gives way, a drop through the $54 level can be used for
new entries.  Due to the recent volatile market action, we want
to give LLL some room to move, so we are initiating coverage with
a fairly liberal stop at $60.50.  Once LLL breaks down below
support, we'll be lowering that stop to the $58 level.

*** June contracts expire next week ***

BUY PUT JUN-55 LLL-RK OI=781 at $2.25 SL=1.00
BUY PUT JUL-55*LLL-SK OI=648 at $4.00 SL=2.50
BUY PUT JUL-52 LLL-SX OI=578 at $3.10 SL=1.50

Average Daily Volume = 956 K


RYL – The Ryland Group $49.18 -3.22 (-4.44 this week)

The Ryland Group is a homebuilder and mortgage-finance company
that has built more than 175,000 homes.  Additionally, the
Ryland Mortgage Company (RMC) has provided mortgage financing
and related services for more than 155,000 homebuyers.
Currently, Ryland homes are available in more than 260
communities in 21 markets across the United States.

It seems everyone is wondering whether the housing market is in
a bubble similar to what Technology stocks experienced in early
2000.  Judging by the recent action in Housing stocks, investors
are voting "Yes" with their wallets.  Since charging to new all
time highs near $400 in early May, the Dow Jones Home
Construction index (DJUSHB) has been experiencing steady selling
pressure.  The DJUSHB has been building a descending wedge with
lower highs capped by the descending trendline at $370 and
support defined by the $345 level.  This type of pattern is
usually resolved in favor of the bears and it looks like that
will be the case here.  Shares of RYL have been trading in a
similar pattern, but it looks like it is further along the
bearish path than the overall sector and that spells relative
weakness.  Support had been holding near the $50 level, but the
heavy selling on Thursday broke that support level and opened the
door for the bears to take a run at lower levels of support, first
at $47-48 and then $45.  But looking at the PnF chart gives an
indication that the stock is headed significantly lower.  The
double-bottom breakdown in late May gives us a price target of
$42, which would correspond to a retest of the lows from late
March.  We want to use any sort of failed rally to initiate new
positions, first at $52 and then up at $53.  Of course, a trade
below $49 can also be used for new entries as this will create
another double-bottom breakdown on the PnF chart and increase
the selling pressure.  Until we see whether we get a bounce or
breakdown first, we are setting a fairly wide stop at $54.

*** June contracts expire next week ***

BUY PUT JUN-50 RYL-RJ OI=1042 at $2.05 SL=1.00
BUY PUT JUL-50*RYL-SJ OI= 958 at $3.60 SL=1.75
BUY PUT JUL-47 RYL-SW OI= 459 at $2.50 SL=1.25

Average Daily Volume = 700 K


CB - Chubb $69.35 -2.00 (-4.58 this week)

Chubb Corporation is a holding company with subsidiaries
principally engaged in the property and casualty insurance
business. The Company's property and casualty insurance
subsidiaries provide insurance coverages principally in the
United States, Canada, Europe, Australia and parts of Latin
America and the Far East. Chubb also operates Chubb Financial
Solutions, which is engaged in developing and providing risk
financing services through the capital and insurance markets,
and a Real Estate Group, composed of Bellemead Development
Corporation and its subsidiaries, which are involved in
commercial development activities, primarily in New Jersey,
and residential development activities, primarily in central
Florida.

A renewed wave of asbestos fear is sweeping the market.  But
it's not impacting the manufacturers that were hit earlier such
as Haliburton.  The insurance companies are the ones coming
under fire as the fear of increased claims is mounting.  Major
insurers are preparing for a large number of claims of personal
injury.  The problem is expected to top $65 billion in claims,
with $3 billion of that total just coming in the last month.
The major problem is that the court cases aren't going in the
favor of the insurers, which has many simply throwing in the
towel and writing a check for the damages.  The cloud hanging
over the industry is only adding to the weakness coming from
the broader market weakness as well as uncertainty over the
U.S. economic rebound.  Major insurers such as CB are staging
major breakdowns due to the pressure from several corners.  The
stock broke down from its four month consolidation during
today's session, signaled by the drop and close below its
200-dma at the $71.50 mark.  Volume has been on the rise in
the last two sessions, signaling that the sellers may not be
finished with this stock.  Further pressure in the Dow and
the broader market should continue pushing CB lower in its
downward trend.  Traders looking for entry points can use
a breakdown below the $69 level in tomorrow's session after
confirming weakness in the broader market averages.  Future
rollovers from the 200-dma can be taken as new entry points
if the stock stages a relief rally on relatively lighter
volume.  Our stop is in place at $73.

***June contracts expire in two weeks***

BUY PUT JUN-70 CB-RN OI= 282 at $2.00 SL=1.00
BUY PUT JUL-70*CB-SN OI=2664 at $3.30 SL=1.50

Average Daily Volume = 960 K


ZLC - Zale $39.00 -1.08 (-1.98 this week)

Zale Corporation, and with its wholly owned subsidiaries, is a
specialty retailer of fine jewelry. As of July 31, 2001, the
Company operated 2,344 specialty retail jewelry stores and
kiosks located primarily in shopping malls throughout the
United States, Canada and Puerto Rico. The Company principally
operates under six brand names including Zales Jewelers, Zales
the Diamond Store Outlet, Gordon's Jewelers, Bailey Banks &
Biddle Fine Jewelers, Peoples Jewellers and Piercing Pagoda.
Zales Jewelers provides jewelry to a broad range of customers.

The retail sector was hit today after a government report
revealed a drop in sales during the month of May.  The report
was a surprise to many economists.  The Commerce Department
said that sales dropped by 0.9 percent, with hard hits to auto
sales.  The report once again brought into question the
strength of the U.S. consumer, and his or her ability to hold
the U.S. economy out of a double dip recession.  Obviously
the report put into question the relative strength of many
high end retailers who have been holding up well during the
most recent leg lower in the market such as ZLC.  The stock
reached a relative high earlier in the year and spent most
of the following month trading sideways between the $40
support and $44 resistance levels.  The high-end retailer
could be in for a major spill as the sentiment appears to be
shifting in the retail sector, and a breakdown below the
support at the $38 level could set up such a scenario.  Watch
for ZLC to trade lower into tomorrow's session on further
weakness in the broader markets.  The stock may bounce from
the $38 level on the first test of that support, but should
continue lower in the week ahead.  Look for an entry if the
stock does in fact breakdown below $38.  A relief rally in
the coming days followed by a rollover from the $40 level
would offer traders another entry opportunity.  Our stop is
initially in place at the $41.50 level.

***June contracts expire in two weeks***

BUY PUT JUN-40 ZLC-RH OI=0 at $1.40 SL=0.75
BUY PUT JUL-40*ZLC-SH OI=3 at $2.05 SL=1.00

Average Daily Volume = 253 K



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The Option Investor Newsletter                 Thursday 06-13-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.



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

HIG - Hartford $59.60 -1.70 (-3.40 this week)

Hartford Financial Services Group, Inc. (the Hartford) is a
diversified insurance and financial services company. The
Hartford is a provider of investment products, individual life,
group life and group disability insurance products, as well as
property and casualty insurance products in the United States.
It writes insurance and reinsurance in the United States and
internationally, and is organized into two major operations:
Life and Property & Casualty. Within these operations, the
Company conducts business principally in 10 operating segments.

Most Recent Update

HIG spent yesterday's session gyrating around the $61 level
following its big breakdown below the 200-dma during the day
prior.  A small day of consolidation is normal following such a
big move, especially a short lived relief rally before a
resumption of downward trend.  And the stock's trend certainly
resumed in today's trading on the return of weakness in the
broader market.  With little support immediately below current
levels, HIG looks to be heading lower.  Look for further
weakness in the Dow tomorrow to pressure HIG further down along
its declining trend.  Momentum entries can be taken into
weakness below the prior day's low as long as the broader market
is weak.  If the stock does rebound in the coming sessions,
then start looking for rollover entry points into new put
positions around the $61.50 mark. Above there, the converged
10-dma and 200-dma just below the $63 level would offer a
favorable entry point.

Comments

HIG broke down after its one day consolidation today.  The
stock is very technically weak and its trend is accelerating
to the downside.  Look for further downside in tomorrow’s
session on selling in the broader market.  A momentum based
entry point can be taken on a decline below the $59.50 level
on heavy intraday trading volume.  Confirm weakness in the Dow
and S&P before entering on a breakdown.  Target the $58 level
for a quick day trade scalp, and look into next week for a
decline below the $56 level.

***June contracts expire next week***

BUY PUT JUN-60 HIG-RL OI=146 at $1.60 SL=0.75
BUY PUT JUL-60*HIG-SL OI= 54 at $2.65 SL=1.50

Average Daily Volume = 891 K



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

Milking Q-Charts, Part XV, An Owner's Manual
Buzz Lynn
buzz@OptionInvestor.com

Yes!  Another Q-Charts episode!  I'll bet many loyal readers are 
biting their nails just waiting to discover yet another really 
cool thing about the latest version, 4.2 .  Pardon me 
while I remove my tongue, which was firmly planted in my cheek.

Ok, that was the teaser.  So what are we in for today?  I'll keep 
it short - today, we finally get to see how to use a chart overlay 
and we'll explore the use of that funky, new "Projection" drawing 
tool.  For those who missed the first 14 articles on this, you can 
brush up or catch up with the following.

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

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

http://www.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

http://www.OptionInvestor.com/traderscorner/060602_1.asp

So let's get to it with no further delay.

Ever been interested in learning how a particular stock is holding 
up to an index, how a beloved tech stock might be holding up 
against the COMPX, or how the S&P 100 (OEX) compares to say the 
VIX?  It would be so cool to be able to do that, and with the 
latest version, unlike versions of old, we can do that!  Here's 
how.

First, open up a chart within your workspace or pick one of the 
many that you may already have.  Let's say we want to compare 
Philip Morris (MO) to the OEX and the COMPX.  Get MO on to the 
chart so it looks like this (your chart will vary depending on how 
many moving averages, Bollinger bands, oscillators, etc. that you 
may have already applied.  I'm keeping this one simple.):



 


Now let's overlay the COMPX to see just how badly the NASDAQ got 
stomped by this stodgy, old company over the last nine months.  Go 
to the Studies button on the main menu and click it.  A whole 
bunch of choices pop up.  What do you know!  There's one that says 
Overlay Expression!



 


Click it and we get a dialogue box to pop up that looks like this:


 


What it's asking for here is for us to add the symbols to which we 
will compare with MO.  We want to add the COMPX first.  So click 
on Add, which will produce the following box:



 


This looks more intimidating than it really is.  All we do is type 
in the symbol under Type a Continuum Expression - COMPX in this 
case.  For simplicity, forget the moving averages part for now.  
But this is a good place to select a color preference and 
thickness for the line.  Back to the Expression. . .it looks like 
this once we fill in the blank and change the color to three 
thicknesses of green:



 


All finished?  Click OK, and our original dialogue box now has 
content:



 
If we want to add another overlay, say the OEX, now is a good time 
to do that.  Simply repeat the steps by clicking Add from the 
above box, then fill in the blanks as before.  Click OK, and there 
will be two Overlay Expressions in the above box.  But for this 
example, we'll stick with just one overlay, the COMPX.  From the 
above box, click OK, and Q-Charts paints the overlay on the chart.  
The finished product looks like this:



 


A steady cash flow from which dividends are paid, plus a 
reasonable price.  The above chart is my proof that this stuff 
matters now.

We are not just limited to a comparison of stocks to indexes.  We 
can compare the OEX to VIX with this too.  Follow the same steps.  
Simple, no?

OK, how about something a little more sexy and mysterious?  I 
can't begin to describe the number of reader e-mails received 
asking what the Projection drawing tool is for.  Unfortunately, 
I've had to write you back stating, "Not a clue".  Well, tonight I 
still have no clue even after getting through to Lycos twice by 
phone.  But that won't stop us from demonstrating the use!  It's 
like retracements, only with an added twist.  Sort of like a 
retracement of a retracement as far as I can tell.  When I get 
more on its application, I'll let you know.  But drawing it is 
easy.

Start by opening a chart, then going to the drawing tools icons.  
The newest one that looks like a double-jointed retracement is the 
Projection tool, and that is what we want.  It looks like this:



 


Click it to make it live.  You'll know it's live because a little 
pencil appears where your cursor used to be.

Again, I don’t understand why this tool is now available.  But 
let's take an example using the same MO chart.  

With our live cursor, we click on the fist point to form the 
anchor position, then we pull the line down to its low to make our 
second click.  That creates a vertical distance or a certain 
number of dollars lost.  Then we move it back up above our first 
click to finish the second line.  Notice the retracements from 
there.  The 100% retracement from that high is exactly the number 
of dollars lost in the first line.  

It looks like this:


 


How is this helpful to us as traders?  Dang if I know.  But that's 
what makes this newsletter such a happy family of readers.  
Usually, somebody knows the answer.  So if you have an idea, send 
it in!  In fact, next week, I'll publish the feedback in a 
Reader's Write format.  Let's see if we can't get this puzzle 
solved.  Just to make some fun out of it, not only will we publish 
the serious answers, but also we'll publish the most intentionally 
humorous too just to keep it interesting.  

So have at it you Divas of Drawings and Rogues of Regression!  
Send in your best guess and pearls of wisdom.  Let's solve this 
puzzle together!

There - short, just like we promised.  Make a great weekend for 
yourselves!


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

Several plays were triggered in the last two days.  Most of them 
turned out to be big winners.  Let’s see if these three can do the 
same.


To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/061302.asp


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

The major averages are hovering just above support.  Could 
tomorrow be the day?



To Read The Rest of The OptionInvestor.com Market Posture Click Here
http://www.OptionInvestor.com/marketposture/061302.asp


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**********

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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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