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Daily Newsletter, Thursday, 06/27/2002

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The Option Investor Newsletter                Thursday 06-27-2002
Copyright 2002, 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)
************************************************************
      06-27-2002           High     Low     Volume Advance/Decline
DJIA     9269.92 +149.80  9269.92  9034.96 1.74 bln   1909/1078
NASDAQ   1459.20 + 29.90  1459.41  1412.96 2.03 bln   2150/1306
S&P 100   491.61 +  9.04   491.62   476.53   Totals   4059/2584
S&P 500   990.64 + 17.11   990.67   963.74             
RUS 2000  458.72 +  5.75   458.74   449.75
DJ TRANS 2692.55 + 54.90  2697.37  2637.60
VIX        30.02 -  2.31    33.60    30.02
VXN        63.13 -  1.01    66.14    63.13
TRIN        1.02
PUT/CALL     .76
*************************************************************

Surprising Strength

The markets posted a decent day after a head fake at the open 
left the markets trading in negative territory for a couple 
hours. Buying began around 1:30 in the big caps as mutual funds 
stashed cash in high dollar, highly liquid stocks for their
quarter end window dressing. The buying spread out to some mid
caps and even some Russell stocks by the day's end. There was 
evidence of some short covering but it was limited since most
bears expect lower levels next week.

Chart of the Nasdaq


 

Chart of the Dow


 

The day started out well with the final GDP for the 1Q coming 
in at 6.1% growth. This was revised upward from 5.6%. Unfortunately
the estimates for the 2Q are more in the 2.5% range. Spending
on homes was still up +14.6% which we already knew. Business
spending declined less dropping only -6.2% compared to -13.8% 
in the last quarter of 2001. The keyword here is "declined". There
was no increase and spending is still declining. Still the report
was bullish for the market. The jobless claims fell to 388,000
and traders were trying to spin this into a positive claiming
the four-week moving average has now fallen for the ninth 
consecutive week. A small straw for investors to grasp.

Helping the market the most today were positive comments about 
the semiconductor sector by two different brokers. Lehman Brothers
analyst Dan Niles said investors were beginning to understand that
demand will not pick up until sometime in 2003 but values on the
equipment makers were beginning to reach compelling valuations. 
He was not so compelled on INTC, HWP and IBM. He cut estimates
on those companies saying the excess PC inventories and the 
weakening European demand would cause them to guide lower. BAC
said the sales of chips could grow by 20% during the next six
months and the bottom was behind us. Bear Stearns recommended
investors aggressively buy AMKR and MTSN due to valuations.

WCOM announced they would cut 17,000 jobs or 20% of their work
force and slash capex spending by half. The race is on to raise
cash to avoid serious hurdles ahead. The main players in the
fraud story were subpoenaed to appear before congress and offer
explanations. There was a rumor after the close that WCOM and the
SEC were on the verge of a settlement in the case. Now that is fast!
According to sources WCOM needs to settle fast in order to pay
severance to the 17,000 employees. I guess it is pay the SEC or
pay the employees and guess who will get precedence. It is in 
their best interests to settle quickly before it gets so blown
out of proportion in the media that settlement becomes impossible. 
The first number is always the smallest number when dealing with
the government. Arthur Anderson would have been much better off
closing a high dollar settlement long before any conviction put
them out of business.

Volume today was decent with the NYSE trading 1.74 billion shares 
and 2.0 billion on the Nasdaq. Combined up volume beat down by 
2:1 with advancers nearly beating decliners 2:1. Good but not
great. Not great for a bounce off the bottom. Helping improve
the internals was the institutional buying for end of quarter 
statements and finally some Russell buying appeared. Friday at
the close is when the Russell 1000,2000,3000 changes take effect.
Fund managers who track the Russell will dump the drops and load
up on the additions at the close if not before. This along with 
the end of quarter window dressing should make Friday pretty
volatile. 

Resistance for the major indexes is still just above us. For the 
OEX it is 502, Dow 9420, S&P 1007, Nasdaq 1475-1485. This gives
the averages plenty of room to run on the buying mentioned above
as well as short covering on any WCOM settlement. While I am not
predicting Nasdaq 800 or the end of the markets as we know them
anytime soon, I still believe there are lower numbers in our future.
If you are a trader then you know what to do. If you are thinking
about buying some long term calls here I would caution you that 
waiting until after the July-4th holiday or even after the July
earnings might make more sense. There are still some big name 
companies that could warn and the summer months are not shaping
up well economically. This could drag on stock prices for another
couple of months. Fortunately the history of the markets back to 
the depression show that 2-3 year bear markets tend to rally in
double digits for three years after. We just have to be patient. 

Patience is not what many investors are showing today. TrimTabs.com
said there were a whopping -$9.2 billion outflow from equity funds
in the week ended Wednesday. That is a lot of money when you 
consider the average daily turnover on the NYSE is only about $40
billion. The $9 billion last week follows a string of outflows
averaging over $4 billion a week. The rapid escalation could be
pointing to the eventual capitulation event. When outflows more
than double it does not take a rocket scientist to see the trend
accelerating to the downside. Makes you wonder how much cash funds
have available to dress up portfolios. It also proves the need to
sell those same stocks next week to meet the next wave of liquidations. 

I would like to welcome back John Seckinger to Option Investor.
John was the editor of NetBulls.com, our Internet stock site 
during the bubble days. We believe he was solely responsible for
the Nasdaq crash by making short recommendations on Internet stocks.
(grin) He was a member of the CBOT at 27, handling institutional 
accounts. He founded a daily newsletter sent to over 70 institutions. 
He has a BA in economics, MBA in finance and accounting. He specializes
in both fundamental and technical analysis. He is a cross between
Abbey Cohen, Barton Biggs and Arch Crawford. (BIG GRIN) Seriously, 
we welcome him back and look forward to his contributions to the 
Market Monitor beginning on Friday. 

Despite the creeping return to positive territory, Enter Very
Passively, Exit Very Aggressively!

Jim Brown
Editor


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

SOME LEGS 
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 
I don't mean that ones that are gorgeous in a dress or tennis 
shorts, but the ability of the market to put together back to 
back rally days - sometimes called "legs", as in the market maybe 
has a leg to stand on - well, maybe it found one good leg to 
stand on.  Hey, that's better than in a wheelchair as of late - 
the market has looked either like a train wreck, or like someone 
who had been IN one!

American Express (+3.95%) and Motorola were storied stocks today 
as each backed their Q2 targets. AXP helped recovery in Financial 
sector. The Motorola indication helped tech in general - Cisco 
finished up nearly 3%, Oracle up 5.5%, Sun Micro (SUNW) was up 
nearly 10% although the stock is just back to $5 area. 

The good economic news of the final revision to GDP Q1 growth was 
upwardly revised to a 6.1 percent growth rate from the prior 
estimate of 5.6. Business investment was also revised higher.
 
S&P 100 Index ($OEX.X) - Daily/Hourly charts:

The continued strong rebound from yesterday, which began at new 
lows for the current downtrend - two back-to-back rally days AND 
a close at the high, is a strong bullish action/pattern - at 
least action suggestive for a move back up to 500, maybe 506. It 
was important to the bulls that the S&P 100 continued to trade 
mostly above the 480 September low. 



 


MARKET MONITOR NOTE: Relative to OEX call buy recommendation made 
at OEX 477.3 - Raise STOP to OEX 476.00 from 474.50. Sell 
objective on long calls is OEX 494. Will revise as needed 
tomorrow (Friday).

The note above was my earlier intraday Market Monitor revision on 
the stop-loss point and giving a trade profit objective on long 
OEX calls as being 494 in the OEX.  The trade strategy here is 
to take a hoped for "easy" potential objective for a move at 
least back to the top hourly envelope line - at 494.  

While I also assess upside potential as being to as high as 500, 
back to the last rally high; and above 500, to the 
505-506 area where the top of hourly downtrend channel 
intersects, and also the area of the 21-day moving average.  

If there is a move back up to the top of the hourly downtrend 
channel to around 505, it should offer a shorting/put buying 
opportunity.   


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

DJX closed in the resistance area implied by the prior low from 
mid-month (in red). Above this area, 94 looms large as an area 
for the bears to come out again.  



 


From yesterday - "If 90.8, at the swing bottom prior to today's 
89.3 low, becomes support on Thursday, the day would shape up 
bullishly.  

So, the 91 area continues to be key near support, 94 
the key resistance, at the top of the hourly downtrend 
channel." 

Above 94, the "pivotal" resistance is 95.6, at the 21-day moving 
average. We may well get there, but probably not straight away. 
My best guess is that Friday will be up again, then Monday will 
likely bring a correction. A likely time for a pullback is after 
3 up days - that always gets the media talking heads attention 
and invites a bearish response especially if there is any 
flare ups in corporate revelations or from the violence hot spots 
in the global arena.   

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


 


MARKET MONITOR NOTE: QQQ stock bought at 25.5 - suggest raising 
stop to 25.20 from 24.50. SELL at 26.60.

26.80-27.00 is the key resistance for QQQ, at the prior (up) 
swing high and also the important September bottom (27.00). I 
would be a buyer at 25-25.25 and a (short) seller in the 27 – 
27.50 area.

Bullish rebounds in MSFT, QCOM, ORCL & CSCO have been key to 
understanding via, the "bottoms up" approach, the relatively 
vigorous rebound (7 percent) in QQQ from its Monday low, although 
of course this being from a "low" starting point. 

INTC only needs to STOP sinking and this tech rally can carry a 
bit higher before we're looking at some more significant 
resistance, especially at 56.00 on MSFT, 15 area in CSCO and 20 
in Intel. 

  
NOTE: The "centered" moving average on the hourly charts is 
not shown (unlike the daily chart) - it is 21; e.g., on the 
hourly chart, the lower band is always 5% below the 21-hour 
moving average. 

My today's TRADER'S CORNER (Thursday) article is on the "ins and 
outs" of moving average envelopes.  

Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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

On A Dime
By Eric Utley

Investors and traders awoke to what could have been the washout
day Wednesday morning following the news about WorldCom
(NASDAQ:WCOM).  But when faced with the possibility, then instead
chose to buy.  And buy they did into Thursday's session, lifting
the major averages solidly higher for the day.

Whatever was the catalyst to turn the sentiment in the market I
don't claim to know.  All I do know is that going into Wednesday's
session we were awful oversold by several counts.  The ARMS
Index was flashing as much, with the short and intermediate term
numbers in extreme oversold readings.  Interestingly, those
extreme readings have already been worked off with the exception
of the 5-day which closed right on 1.50.

The fear measures of the market imploded on the reversal in
stocks which is a pattern that we've seen time and time again
this year.  Moreover, the put/call numbers reversed from their
high readings such that all four numbers we track in this
column are now below the 1.00 level.  So, yes, we're still
oversold but there's been no wall of worry built in the last
two days.  Whatever worry was there seems to have been brought
down in just the last two days.  That does not bode well over
the intermediate-term for stocks, but it might be a back
burner issue over the short term.

The reason I speculate as much is because the gold equities
really took it on the chin today.  In fact the sector earned
the day's worst performing group, staging a little breakdown
of its own.  The unwinding of gains in the gold index may
reveal a belief by the market the stocks in general have some
room to the upside.  So it could be that we're seeing some
money come out of the run in the gold stocks and being put to
work in other stocks in tech, finance, and industrials.

But then there's the issue of quarter's end, which usually
brings out the worst in money managers.  Never mind that the
Street is coming under fire from every direction, I'm sure
there are still plenty of managers out there trying to squeeze
a few basis points of performance out of the last few days of
the second-quarter.  I think that part of today's rally was
attributable to window dressing, which makes it all the more
suspect in my mind no matter how oversold the indicators
are.  I suppose we'll know just how much marking up is taking
place in this market during tomorrow's session.

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

Market Averages

DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     :  9270

Moving Averages:
(Simple)

 10-dma: 9391
 50-dma: 9856
200-dma: 9819



S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     :  991

Moving Averages:
(Simple)

 10-dma: 1003
 50-dma: 1058
200-dma: 1101



Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low : 1089
Current     : 1051

Moving Averages:
(Simple)

 10-dma: 1075
 50-dma: 1207
200-dma: 1402



Fiber Optic ($FOP)

So an index gets crushed to a new all time low the prior day and
then it rebounds by more than 6 percent the next day.  What do
you think that was about?  I'm guessing short covering.  Whatever
the reason, the FOP was the day's best performing index with its
6.41 percent gain.

Sector leaders included Qwest Communications (NYSE:Q), which
gained 50 percent on the day, or about $1, Finisar (NASDAQ:FNSR),
JDS Uniphase (NASDAQ:JDSU), and CIENA (NASDAQ:CIEN).

52-week High: 133
52-week Low : 40
Current     : 44

Moving Averages:
(Simple)

 10-dma: 48
 50-dma: 65
200-dma: N/A


Gold ($XAU)

The recovery in stocks caused a sharp sell off in gold equities
over the last two days.  The XAU was the worst performing sector
for the day with its 3.73 percent drop.

Leading to the downside included Anglogold (NYSE:AU), Agnico
Eagle Mines (NYSE:AEM), Harmony Gold (NASDAQ:HGMCY), Gold
Fields (NYSE:GFI), and Newmont Mining (NYSE:NEM).

52-week High: 89
52-week Low : 49
Current     : 73

Moving Averages:
(Simple)

 10-dma: 77
 50-dma: 79
200-dma: 64

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

Market Volatility

Both the VIX and VXN reached extreme levels in recent sessions,
but there's been no follow-through.  Furthermore, neither index
has been able to hold onto their gains, which tells me there's
no disbelief in this rally.

CBOE Market Volatility Index (VIX) - 30.02 -2.33
Nasdaq-100 Volatility Index  (VXN) - 63.13 -1.01

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.76        556,885       421,867
Equity Only    0.55        449,403       248,926
OEX            0.70         24,892        17,331
QQQ            0.55         43,181        23,741

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

Bullish Percent Data

           Current   Change   Status
NYSE          48      + 0     Bull Correction
NASDAQ-100    14      - 1     Bear Confirmed
DOW           26      + 3     Bear Confirmed
S&P 500       38      + 0     Bear Confirmed
S&P 100       35      + 3     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  1.50
10-Day Arms Index  1.42
21-Day Arms Index  1.47
55-Day Arms Index  1.38

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       2039          1174
NASDAQ     2137          1283

        New Highs      New Lows
NYSE        99            144
NASDAQ      96            155

        Volume (in millions)
NYSE     1,845
NASDAQ   1,941

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

Commitments Of Traders Report: 06/18/02

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

Get this, S&P commercials grew less bearish by a wide margin last
week.  They brought in their net short position by about 18,000
contracts.  Not by surprise, small traders grew less bullish by
about 12,000 contracts. 

Commercials   Long      Short      Net     % Of OI 
06/04/02      369,298   440,027   (70,729)   (8.6%)
06/11/02      388,751   457,018   (68,267)   (8.1%)
06/18/02      437,530   487,956   (50,426)   (5.4%)

Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year: ( 36,481) - 10/16/01

Small Traders Long      Short      Net     % of OI
06/04/02      167,713    58,885   108,828     48.0%
06/11/02      174,357    69,464   104,893     43.0%
06/18/02      181,178    88,517    92,661     34.3%

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 eased off of their recent bullishness by
adding back a few more shorts.  Small traders went in the
opposite direction by adding a few more longs than shorts.

Commercials   Long      Short      Net     % of OI 
06/04/02       47,875     39,100     8,775    9.3%
06/11/02       45,946     36,878     9,068   10.9%
06/18/02       54,816     49,169     5,647    5.4%

Most bearish reading of the year: (15,521) -  3/13/01
Most bullish reading of the year:   9,068  - 06/11/02

Small Traders  Long     Short      Net     % of OI
06/04/02       12,162    21,420    (9,258)    27.2% 
06/11/02       14,561    25,330   (10,769)    27.0%
06/18/02       20,883    29,153    (8,270)    16.5%

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:   8,460  -  3/13/01

DOW JONES INDUSTRIAL

Dow commercials bought into the weakness last week to the tune of
more than 3,000 contracts added to their net bullish position.
Small traders made the money.  They added to their net short
position by more than 4,000 contracts.

Commercials   Long      Short      Net     % of OI
06/04/02       20,564    16,169    4,395     11.0% 
06/11/02       20,369    17,172    3,197      8.5%
06/18/02       25,995    19,115    6,880     15.1%

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
06/04/02        7,114     9,639    (2,525)   (14.7%) 
06/11/02        7,500     9,925    (2,425)   (13.9%)
06/18/02        5,379    11,813    (6,434)   (37.2%)

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 - 6/27
by Leigh Stevens

The NYSE Financial sector ($NF.X) is holding the low end of a 
broad trading range - so naturally the Bank and Broker sectors 
were higher.  The Defense, Financial, Gold, Internet and the Oil 
Service sectors are in my SECTOR  HIGHLIGHTS section below.  Some 
bearish sector ideas and a bullish play on the oversold Internet 
index are part of what is actionable in these stock groups.  

HIGHER ON THE DAY ON Thursday -


 

 
DOWN ON THE DAY on Thursday - 


 


SECTOR TRADE RECOMMENDATIONS & REVIEW -

OPEN/NEW TRADE RECOMMENDATION(S) - 

Short OSX at 64.00 or more; Stop at 67.2
(Oil Service HOLDR stock)

Buy HHH at 22.80 or less; Stop at 21.70
(Internet HOLDR stock) 


OPEN POSITIONS - 

Long BBH at 79.10 (Biotech HOLDR's Trust stock)
Stop: 75.15 (5 percent from entry), revised from previous initial 
stop suggested at 76.00


 
TRADE LIQUIDATIONS -

NOTE ON POSITIONS - 
IJS (S&P 600 SmallCap Value fund) and IWM (Russell 2000 iShares), 
listed as "open positions" in 6/25 wrap, were in 
fact stopped out by the 6/25 close, on their respective stops.  

6/25 - Sold IJS at 86.60 on recommended 87.60 stop.

6/25 - Sold IWM at 89.50 on recommended 89.50.

6/27 UPDATE - 
STILL LIKE S&P 600 SMALLCAP VALUE ISHARES & RUSSELL 2000 INDEX 
ISHARES.  BOTH BROKE OUT TO UPSIDE TODAY ABOVE HOURLY DOWNTREND 
RESISTANCE.


SECTOR HIGHLIGHT(S) -

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


 

SOME PRIOR COMMENTS: 660-661 level is the key "line" of technical 
resistance - a close above here, AND the ability to stay above it 
on subsequent pullbacks, is needed to suggest that the bullish 
trend might be back on track. Key reversal at the line of 
resistance at 660-661 area and after completion of a 62% 
retracement (660) of the recent downswing.  I think will it will 
be heading still lower - my target has been to the 600 area.   

TODAY: A closing downside penetration of 620 would "confirm" a 
Head & Shoulder Top pattern, with an objective down to the 565 
area.  A close above 660 however would suggest otherwise in terms 
of this possible top formation.  Time will tell, but some of the 
stocks look extended and offering put play consideration. 
UPDATE: 6/27


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


 

The Financial Index is trading at the low end of a well-defined 
trading range. There have been two recent lows that have 
rebounded from the same area, around 552.  Banks, brokers and the   
other financial type stocks need to be in the position to rally 
and provide some "leadership" to the market if there is at least 
and interim bottom in place.  

We have some evidence that the financial stocks have stopped 
going done - now, the bullish possibilities have to be proved by 
a move back above the 200-day moving average, currently at 583.    
LAST UPDATE: 6/27


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



 

SOME PRIOR COMMENTS: Retreat to below 75 would continue bearish 
pattern. Reversal at XAU's 50-day moving average, suggests that 
recent rally is a retracement rally only - sector is a short/buy 
put candidate - saw this sector as offering a shorting 
opportunity.

TODAY: Looks like start of the next down "leg", with a target to 
the 63 area in a retest of the 200-day moving average.     
UPDATE: 6/27

Internet Index; CBOE ($INX.X)
AMZN; AOL; CHKP; CMGI; CNET; CSCO; DCLK; EBAY; ELNK; EXPE; FMKT; 
HLTH; HOMS; INKT; INSP; JNPR; OVER; RNWK; TMCS; YHOO



 

SOME PRIOR COMMENTS: Internet sector has had recent rebound from 
low end of its downtrend channel. 

TODAY: The Internet sector Index looks like it could have a 
rebound from recent lows made at the low end of its daily 
downtrend channel and accompanied by an oversold RSI extreme.    

For a high-risk play, suggest buying the Internet HOLDR's at 
22.80 or better. Stop at 21.70, risking 5% from entry. 
LAST UPDATE: 6/27


Oil Service Sector Index ($OSX.X)
STOCKS: BSI; BJS; CAM; GLBL; HAL; NBR; NE; RDC; RIG; SII; SLB; 
TDW; VRC; WFT



 

PRIOR COMMENTS: Holding prior lows from April - may be a buy 
again as 93-94 may be low end of its trading range for now.  

TODAY: The whole pattern of the Sector looks like a large top of 
the Head & Shoulder's variety.  One measure of the downside 
potential if this view is correct is to around 75 on the OSX 
index and to perhaps 52 on the Oil Service HOLDR's.  

Suggest shorting the OSX at 64.00; Stop at 67.2. 
LAST UPDATE: 6/27


Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                  Thursday 06-27-2002
Copyright 2002, 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:
*****

DUK $30.84 -0.45 (-0.92) It's the end of the line for DUK.
Despite the fact that it managed to hold up better than the rest
of the market on Wednesday's roller-coaster ride, the action of
Thursday was far from encouraging.  Even with the Utility index
(UTY.X) posting a small gain, DUK rolled over at its descending
trendline to post a fractional loss for the day.  With the stock
losing relative strength, the prudent move is to drop it now
before our stop is violated.


PUTS:
*****

MIL $31.70 +0.76 (+0.66) It's time to bid a happy farewell to
MIL.  The stock has gone nowhere this week.  We were particularly
unhappy with the stock's failure to react to yesterday's sharp
open lower in the broader market, which should have brought on
the sellers in this stock.  But they didn't come, which may
signal that the short term selling in this stock has dried up.
Look to exit into weakness tomorrow, or set a stop at $32 to
protect gains.

NVLS $34.77 +1.86 (+2.54) The sentiment quickly shifted in the
semiconductor sector in the last two days despite the continued
negative news from the technology sector of the market.  The
bulls rushed back into NVLS today on what appeared to be a big
round of short covering.  Though the stock will most likely
turn back lower eventually, we don't want to ride this wave of
bullishness higher.

JCI $79.53 +2.38 (+2.76) JCI turned back higher today to the
tune of more than 3 percent.  The stock stock's reversal in the
last two days has us worried about more upside potential from
here.  Look to take defensive action in tomorrow's session with
a tight stop above today's high.


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

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

CALLS              Mon    Tue    Wed    Thu

DUK      30.84   -0.10   0.04  -0.41  -0.45  Dropped, turned down
DHI      25.45    0.26  -1.84   0.29   0.00  Still holding its own
QCOM     27.46    0.68  -0.44   0.69   0.38  Close to breaking out
BA       44.80    0.23   0.13  -0.15   2.08  Super INDU stock!!!
ESST     18.01    0.40  -1.09   0.96   0.90  New, strong chip turn
AGN      66.20    1.68  -1.04  -0.05   2.03  New, drug recovery
SNPS     54.70   -1.26  -0.25   0.60   1.21  New, Nasdaq leader


PUTS               

MIL      31.70    0.49  -1.06   0.41   0.76  Dropped, not moving
IBM      71.90    0.95  -1.10   1.45   1.85  10-dma rollover entry
ZLC      37.18    0.10  -0.84  -0.72   0.24  Broke below 200-dma!!
TDS      59.50    1.25  -2.00  -1.73  -0.02  Thank you WorldCom!!!
NVLS     34.77    1.21  -1.69   1.16   1.86  Dropped, shorts cover
EMMS     19.61   -0.03  -3.27  -0.03   0.41  Short covering relief
KMI      38.60    0.00  -0.20  -0.93  -0.47  Finally broke 40 mark
EXPE     59.18   -2.87  -3.16  -1.75  -0.71  Rebound from 200-dma
JCI      79.53   -0.72  -3.17  -1.26   2.38  Dropped, auto bounce
LXK      53.94    0.31  -3.33  -0.71   2.60  Short covering bounce
MXIM     38.25    1.64  -2.35   1.01   1.36  Sector rotations in
QLGC     39.33   -1.19  -3.91  -1.25   3.13  Technical damage done
XL       82.70   -0.34  -2.01  -0.30  -3.00  New, change sentiment
ACS      45.48   -1.48  -3.16   0.45  -1.70  New, outsourced out


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

QCOM $24.46 +0.38 (+1.34) QCOM came so very, very close to
breaking out of its short term resistance today.  The stock's
intraday high reached to $27.90.  We were just $0.10 away from
a breakout, but the stock couldn't manage it.  The 10-dma
may have had something to do with during today's session.  The
stock closed right on its 10-dma, which is setting up for an
explosive short covering rally in tomorrow's session if the
Nasdaq can find its legs.  Just keep watching for a breakout
above the $28 level and confirm it if it comes with heavy
volume on the way up.  Ideally we'll see the Nasdaq confirm
such a breakout as well.  Once the $28 level is cleared, QCOM
has a shot are trading back up to the $30 level in the next
day or two.  Beyond there, there's a big gap that needs to be
filled up to the $32 area.

BA $44.80 +2.08 (+1.83) We were initially attracting to the BA
play due to the fact that it looked like the $41.50 level would
provide a springboard for the stock to rally on the first hint
of improvement in the broad markets.  Things couldn't have gone
any better, as BA dipped to $41.87 on Wednesday before staging
an impressive rally.  That rally continued on Thursday, with the
stock gaining 4.86% as the bulls propelled it through the $44.50
resistance level.  From the looks of the last 2 days gains
(likely due to the recent contract awards the company has
received), there is still more upside to come.  An intraday
pullback to the $43 area, followed by a strong rebound would be
ideal, although we would settle for a dip and bounce from the
$44 support level for initiating new positions.  Buying a
breakout still doesn't seem like the prudent way to play this
one, especially with the next level of resistance looming
between $45.50-46.00.  If you're looking to buy the breakout,
then wait for the $46 level to be crested first.  We're
snugging our stop up to $41.50 tonight.

DHI $25.45 +0.00 (-1.29) In contrast to some of the explosive
action seen in the Housing sector ($DJUSHB) in recent weeks,
the past couple days have been rather quiet.  Thursday's price
range for the index was a perfect example with a rally, then
decline, then rebound to end the day unchanged.  True to form,
our DHI play also ended the day unchanged, as investors continue
to jockey for position, wondering whether the next move will be
up or down.  We're siding with the bulls on this one, relying
on the relative strength that has supported this sector of late.
Sure enough, in the wake of more positive housing numbers, the
bears were not able to even get close to challenging the recent
lows near $22 earlier this week.  In fact it was encouraging to
see the $24.75 support level hold up on both of the past 2 days.
It looks like dips near this level continue to provide solid
entries, allowing us to effectively manage risk with our stop
set at $24.50.  This is not the environment for momentum traders,
as they should be on the sidelines until DHI clears the $27.50
resistance level, ideally with DJUSHB once again pushing to new
highs, this time above $400.


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

ESST - ESS Technology $18.01 +0.90 (+1.27 this week)

ESS Technology, Inc. is a designer, developer and marketer of
highly integrated digital system processor chips. The Company
offers a broad array of DVD chips, video CD chips,
communication chips and personal computer (PC) audio chips.
These chips are the primary processors driving digital video
and audio players, including DVD, video CD and MP3 players.
The Company's chips use multiple processors and a programmable
architecture that enable it to offer a broad array of features
and functionality. The Company is also a supplier of chips for
use in modems and similar communication products, and a
supplier of PC audio chips. The Company sells its chips to
distributors and original equipment manufacturers of DVD,
video CD, MP3, modem and PC products.

Wall Street's bulls were out calling for a rally in the
semiconductor sector Thursday morning.  What other sector
would they expect to lead a tech recovery?  It began with a
call from SG Cowen.  The brokerage firm believes that a
launching of the 64 bit Hammer processor by Advanced Micro
Devices (NYSE:AMD) could provide a short term trade to the
upside.  Separately, Lehman Brothers' Dan Niles recommended
that investors start looking at chip stocks from a valuation
basis, because so many in the sector had been beaten down
he said that he expected a rally in the group.  That was
enough to spark some momentum in the beaten down Semiconductor
Sector Index (SOX.X) which led the recovery in the Nasdaq
today with its 3 percent gain.  The move could have some legs
given the oversold nature of the technology group.  We're
turning to a stock in the group that has held up relatively
well during the most recent downturn, which is ESST.  The
stock has essentially traded sideways since late April, which
is a lot more than can be said for the semiconductor sector
as a whole.  The stock's relative strength should offer some
favorable upside if indeed the chip sector stages a rebound
over the next week or two.  Watch for a breakout above
today's high at the $18.26 level on a pick up in advancing
volume.  Target the $20 level to the upside.  But if the
$20 level is broken, the stock could easily see the upside
of $22 in the short term.  Dips down to the $16 level can
be used to pick up entries on weakness.  Our stop is
initially in place at the $15.25 level.

BUY CALL JUL-17*SEQ-GW OI=2396 at $1.75 SL=0.75
BUY CALL JUL-20 SEQ-GD OI=2237 at $0.75 SL=0.25 
BUY CALL AUG-17 SEQ-HW OI=  54 at $2.90 SL=1.50
BUY CALL AUG-20 SEQ-HD OI= 101 at $1.65 SL=0.75

Average Daily Volume = 2.85 mln


AGN – Allergan, Inc. $66.20 +2.30 (+2.89 this week)

Allergan is a technology-driven, global healthcare company that
develops and commercializes specialty pharmaceutical products
for the ophthalmic neurological, dermatological and other
specialty markets, as well as ophthalmic surgical devices and
contact lens care solutions.  Its revenues are principally
generated by prescription and non-prescription pharmaceutical
products in the areas of ophthalmology and skin care,
neurotoxins, intra-ocular lenses and contact lens care products.
The company's are sold to drug wholesalers, independent and
chain drug stores, pharmacies, commercial optical chains,
commercial optical chains, food stores, hospitals and
individual medical practitioners.

The Biotechnology sector (BKX.X) has not been favorable to bulls
over the past couple months, but that may be about to change.
Similarly, the Pharmaceutical index (DRG.X) has been trekking
its way to new multi-year lows recently, but it is looking like
it wants to put in a bottom near the $300 level.  That brings us
to AGN, which after some vicious selling took it down to the $56
level last month, has been gradually improving despite a negative
broad market.  In fact, today's 3.5% rally sent the stock through
its descending trendline ($65) for the first time since last
November.  This improving picture is seen on the PnF chart too,
with the recent double-top breakout giving us a solid upside
target of $83.  There are still some formidable obstacles to
scale before we reach that lofty target, and the first of them
will be the 200-dma at $67.40.  Right now, we want to target
intraday dips back to the $64-65 support zone for new entries.
A drop to strong support at $63 would be even better, but given
the stock's breakout today, that doesn't look likely.  Traders
looking to enter on a breakout will need to wait for a push
through $68 on strong volume before playing.  And of course,
there is more resistance looming right at $70, the site of the
April highs.  Initial stops are set at $62.25, just below
Wednesday's intraday lows.

BUY CALL JUL-65*AGN-GM OI=3780 at $2.85 SL=1.50
BUY CALL JUL-70 AGN-GN OI= 300 at $0.75 SL=0.25
BUY CALL AUG-65 AGN-HM OI=   2 at $4.00 SL=2.50
BUY CALL AUG-70 AGN-HN OI=  16 at $1.70 SL=0.75

Average Daily Volume = 1.44 mln


SNPS - Synopsis, Inc. $54.70 +1.21 (+0.31 last week)

Synopsis is a supplier of electronic design automation software
to the global electronics industry.  The company's products are
used by designers of integrated circuits (ICs), including
system-on-a-chip ICs, and the electronic products (such as
computers, cell phones, and internet routers) that use such ICs
to automate significant portions of their chip design process.
SNPS' products offer its customers the opportunity to design ICs
that are optimized for speed, area, power consumption and
production cost, while reducing overall design time.

Over the past 2 months, the Semiconductor index (SOX.X) has
been absolutely taken apart, losing more than 40% of its value
as of the lows posted yesterday.  But we're starting to see the
first signs of improvement for the SOX.  Now if we're looking
bullish on the SOX, we don't want to just pick any Chip stock. 
No, we want to grab one with high relative strength.  And SNPS
appears to have that in spades.  While the SOX has dipped to
within a few points of its September lows, SNPS is closer to
its December highs than to its September lows.  It is a safe
bet that a big part of this strength is attributable to the
company's recent earnings report, beating estimates by 2-cents.
Not only that, but the company raised revenue guidance for the
third quarter.Making the picture even more bullish, the stock
has recently broken out above its 5-month descending trendline
and is right on the cusp of a breakout over the $56 resistance
level.  That sure doesn't sound like anything we've seen in the
broader Semiconductor arena lately, now does it?  The PnF chart
confirms the stock's strength, showing that it is currently on
a buy signal, with a price target of $78, if you can believe it.
Note that a trade at $78 would represent a new all-time high
for the stock, but first we'll need to get through the $60
resistance level.  With mild support near $54 and firmer support
down at $51-52, it appears that there is plenty of support to
give us the ability to enter new positions on an intraday dip
and bounce.  Alternatively, with the stock's relative strength,
we can even consider new positions on a breakout over the $56
level, targeting a near-term rally to $60.  Initial stops are
in place at $50.50, just below the 200-dma.

BUY CALL JUL-55*YPQ-GK OI=1197 at $2.85 SL=1.50
BUY CALL JUL-60 YPQ-GL OI= 810 at $1.00 SL=0.50
BUY CALL AUG-55 YPQ-HK OI= 103 at $4.10 SL=2.50
BUY CALL AUG-60 YPQ-HL OI=   6 at $2.05 SL=1.00

Average Daily Volume = 1.53 mln



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

ZLC $37.18 +0.24 (-1.22) Well it finally came, now what?  ZLC
broke down below its 200-dma during yesterday's session and
confirmed the breakdown with a decline below the $37 level.  But
the stock rebounded in today's session, so what gives?  No stock
moves down in a straight line, plus the rebound in the broader
market most certainly gave relief to ZLC during today's
session.  But the important thing is that the stock gave the
confirmation yesterday, which definitely shifted the stock
into a bearish position, and forecast further downside over the
short term.  From here, we like entries on rollovers from the
now overhead 200-dma very much.  The level is right below the
$38 mark now, and should be met by the declining 10-dma in the
next session or two.  A crossover of the 10-dma and 200-dma
should help to accelerate the selling in ZLC.  Look for that
crossover as a potential entry point into new put plays.

TDS $59.50 -0.02 (-2.50) Thank you WorldCom!!  TDS got whacked a
good one in yesterday's session and never really recovered like
the rest of the market.  Prior to the revelations at WorldCom,
the stock bumped its head up against the downward sloping 10-dma
in Tuesday's session which proved to be another excellent entry
opportunity into new put plays.  From here, we expect that the
stock will continue working lower as further revelations come
to the surface in the telecom industry.  And we just know that
there are more coming.  For new entry points into put plays,
look for the stock to fill its gap from the WorldCom news.  A
rollover from that point could be used to take new entry points.
If you would rather try to get the stock a little higher, then
wait for a relief rally back up to the pressuring 10-dma, which
is now around the $62.50 level, just slightly higher than the
site of the stock's gap.  Momentum traders can try a breakdown
below yesterday's low at the $57.90 level on increased declining
volume.

EMMS $19.61 +0.41 (-2.92) For whatever reason, Banc of America
Securities upgraded EMMS from a market perform to an investment
buy rating yesterday morning.  Whether or not that was the
reason the stock traded well relative to the rest of the market
is unknown.  But rebound the stock did.  However that slight
showing of relief only lasted for one day as the stock resumed
its tumble in today's session.  Another brokerage firm was on
the horn this morning, but this time it was a downgrade.
Wachovia lowered its investment rating from a strong buy to a
buy rating.  The stock proceeded to continue lower in the
early going, reaching as low as the $16.76 level on an intraday
basis.  But it did manage a rebound into the close of trading on
the rally in the broader market.  Without that help, who knows
how low EMMS would have fallen today.  The stock certainly looks
poised to continue lower, which a short term target now at the
September lows down around the $14 support level.  Look for new
entries on an intraday rollover from the $20 level, or on a
break below today's low in a weak market environment.

KMI $38.60 -0.47 (-1.60) We could smell a breakdown coming in the
last few sessions prior to which KMI spent a couple of days
hovering dangerously above short term support at the $40 level.
And sure enough, the stock broke down in a big way during
yesterday's session and most certainly followed through to the
downside during today's.  The stock reached as low as the $37.11
level on an intraday basis, which was very close to the level
that the stock traded down to during the spring sell off earlier
this year.  Hopefully the traded down near that area early during
the day offered a good exit point for positions taken earlier
in the week.  Going forward, that level traced in late February
is the only point of reference before the $35 level, and it's a
weak point of support at that.  Should the selling in the
Natural Gas Index (XNG.X) continue as it has in the last couple
of days, then KMI should easily reach down towards the $35
level.  But the key will be the XNG.X's price action, so make
sure to tune into the trading in the sector.  Watch for a
breakdown, and consider taking new entries into downside
momentum into KMI.  Otherwise, wait for a one or two day
relief rally on relatively lighter volume as an entry point.

EXPE $59.18 -0.71 (-8.51) PCLN lowered its financial outlook for
the current quarter based on the lower than expected seasonal
increase in airline ticket sales.  The company added that it
was experiencing a surprisingly weak June, which had in the
past been its strongest month.  Through PCLN has become one of
the weaker competitors in the marketplace, its news does not
bode well for PCLN, which staged a sharp gap lower during
yesterday's session in part from the PCLN news.  The stock
continued to slide to just above its 200-dma in today's session
before it staged a sharp rebound into the second half of the
day on what appeared to be window dressing and a mix of short
covering.  The rebound has set up another favorable entry point
into new put plays, with the 10-dma now coming down from the
$66 level.  Because this stock is very volatile, we want to
give it plenty of room to trade, so we'd like to take an
entry up near the downward sloping 10-dma.  If it doesn't get
that high, we'd take entries around the $62 to $63 range and
look for another retest of the 200-dma.      

IBM $71.90 +1.85 (+3.15) After much intraday volatility over the
past week, bullish investors are hoping that the worst is behind
for IBM.  On the surface it looks like they might be right, with
the strong rebound over the past 2 days that has brought shares
of Big Blue right back to the $72 resistance level, also the site
of the 10-dma ($72.32).  It is interesting to note that this
moving average has constituted major resistance twice in the past
month, turning back the bulls and leading to IBM moving to new
multi-year lows.  Can the 10-dma do it again?  We think so,
especially given the fact that the daily Stochastics are already
halfway to overbought, while the price is just approaching
resistance.  We're looking at current levels as an attractive
level for initiating new positions as IBM rolls over.  With our
stop set at $72.50, it makes risk easy to manage, with solid
return potential as we look for IBM to head back for a retest
of its lows near $66.

LXK $53.94 +2.60 (-1.13) If you were looking for a short-covering
rally, it would have been hard to find a better candidate than
LXK, as it followed yesterday's rebound off the low's near $50.75
with a 5% rally on Thursday.  Not only was it a strong rebound,
but the stock came to rest right at its high of the day.  In
favor of the bears though is the fact that LXK came to rest just
below the 200-dma ($54.04).  And just above there, the stock has
some formidable resistance in the $56.00-56.50 area.  With the
potential for a printer price war emerging between LXK and HPQ,
the stock will likely have a hard time breaking out of the
declining trend, without a strong broad-market recovery to help
it along.  Note that the 4-week descending trendline is resting
at $56, right at resistance.  Look for a rally failure near this
level to provide attractive entry into the play.  Alternatively,
wait for the rollover to get moving and drive LXK back under
the $52 level before initiating new positions.

MXIM $38.25 +1.36 (+1.58) After tagging a new recent low early
on Wednesday, shares of MXIM took a northerly turn along with
the rest of the Semiconductor sector (SOX.X).  While much
speculation has surfaced that the Chip stocks are ready to
rebound, there is little in MXIM's chart to suggest that the
current rebound is anything more than short-covering.  Note that
despite the bullish environment on Thursday, MXIM ran into a
brick wall of resistance just below $39.  This was the site of
the highs on Monday, as well as the bottom of the gap.  While
the rollover from that level would likely have made for a solid
entry point today, an even better entry would come from a
failure to rally through the $40 level, at the same time that
the SOX rolls over from its own formidable resistance at $400.
Keep stops set at $40.50.

QLGC $39.33 +3.13 (-3.16) After plunging to a fresh 8-month low
yesterday morning, shares of QLGC have been rebounding strongly,
with Thursday's volume running nearly 90% above the ADV.  On top
of that, the past 3 days' action has created an island reversal
chart pattern, which can be a potent bottom formation.  But we've
got an ace in the whole here (or at least we think we do), in
that there is now heavy overhead resistance in the $42-42 area.
That is why we initiated the play with such a wide stop in the
first place.  And coming back to the island reversal pattern,
while it can be potent, it also tends to give a lot of false
signals, so we don't want to place too much weight on it.
Despite the fact we're still leaning bearish, we do want to wait
for a rollover before entering new positions.  A fresh blast of
short-covering could push QLGC through our stop and have us
moving the stock to the drop list this weekend, but we don't
think that is the most likely scenario.  At any rate, wait for
the rollover either at $40 or near the $41-42 area, keeping
stops set at $42.50.


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

ACS - Affiliated Computer Services $45.48 -1.70 (-5.89 this week)

Affiliated Computer Services Inc. (ACS) is a global Fortune 1000
company that delivers comprehensive business process outsourcing
and information technology outsourcing solutions, as well as
system integration services, to both commercial and federal
government clients. In the commercial sector the Company provides
its clients with business process outsourcing, systems
integration services and technology outsourcing. Within the
federal government sector, ACS provides business process
outsourcing and systems integration services.

Spending on information technology products and services has
not yet even shown a sign of bottoming, let alone rebounding.
WorldCom's recent problems scratch just the surface of how
bad the corporate spending environment has gotten.  The only
industries that have enough momentum to spend and investment
on new technology are the health care and defense industries.
But that's not enough to spread around to the very many IT
companies still in the marketplace, competing for investment
dollars.  Not long ago, it was thought that outsourced work
performed by the likes of ACS would help to stem the problems
in corporate America.  But we're finding out now that even
the outsourcing firms are facing troubles of their own.  The
optimism for the outsourcing sector was seen in ACS through
April and May when the stock traded at lofty levels up around
yearly highs at the $56 mark, but since then it has fallen
just like the rest of anything related to technology.  The
biggest threat to ACS is that it has a lot of catching up to
do to the downside.  The stock slid sharply lower this week
through its 200-dma, a sign that the long term outlook for
the company has changed.  There's a minor support zone near
the $46 level where the stock closed during today's session
that was created earlier this year.  Once below that level,
there's not much support remaining for ACS until its lows hit
last fall.  Look for a breakdown below the $44 level to
trigger further technical selling in this stock.  Rollovers
from the $48 level can be taken as entry points into a
relief rally.  Look to set stops at $48.25.

BUY PUT JUL-45*ACS-SI OI=5493 at $2.70 SL=1.75
BUY PUT AUG-45 ACS-TI OI= 183 at $3.60 SL=2.75

Average Daily Volume = 1.01 mln


XL - XL Capital $82.70 -3.00 (-4.10 this week)

XL Capital Ltd., formerly EXEL Merger Company, is a provider of
insurance and reinsurance coverages and financial products and
services to industrial, commercial and professional service
firms, insurance companies and other enterprises on a worldwide
basis. The Company provides property and casualty insurance on
a global basis. XL Capital generally writes specialty coverages
for commercial customers. Specific lines of business written
include third-party general liability insurance, environmental
liability insurance, directors and officers liability insurance,
professional liability insurance, aviation and satellite
insurance, employment practices liability insurance, surety,
marine insurance, property insurance and other insurance covers,
including program business and political risk insurance. 

The insurance stocks were a favorite way to play the post
September 11 rebound and the impending recovery in the economy.
Many insurers of broad types were given the chance to hike
premiums due to the increased demand from corporations and
individuals.  But the theme is being revisited by the market with
the recent weakness in the leaders of the insurance business.
The question of the strength in the U.S. economy as well as the
continued turmoil around the globe has decidedly shifted the
sentiment in this once very bullish sector.  XL epitomizes that
trend as the stock continues to slide lower from its yearly
highs reached only one quarter ago.  The stock is now on the
verge of a major breakdown, which may have already begun with
today's decline on relatively heavier volume.  The stock is
coming out of a short term bottom with three successive tests
of relatively lower lows, and with today's close, the selling
could really open up in tomorrow's session.  Look to take new
put entry points on a breakdown below the $82 level on
continued active trading volume.  Confirm direction in the
insurance sector, as well as the broader market.  If on the
other hand the stock does stage a short term relief rally, look
for a rebound up to near the downward sloping 10-dma, which
closed today at the $86.50 level, for a potential entry point
into new put plays.  Our stop is initially in place at the
$87 level.

BUY PUT JUL-85*XL-SQ OI=214 at $4.20 SL=2.50
BUY PUT JUL-80 XL-SP OI=383 at $1.85 SL=1.00

Average Daily Volume = 871 K



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The Option Investor Newsletter                 Thursday 06-27-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.
 

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

ZLC - Zale $37.18 +0.24 (-1.22 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 Jewelers and Piercing Pagoda.
Zales Jewelers provides jewelry to a broad range of customers.

Most Recent Update
Well it finally came, now what?  ZLC broke down below its
200-dma during yesterday's session and confirmed the breakdown
with a decline below the $37 level.  But the stock rebounded in
today's session, so what gives?  No stock moves down in a
straight line, plus the rebound in the broader market most
certainly gave relief to ZLC during today's session.  But the
important thing is that the stock gave the confirmation
yesterday, which definitely shifted the stock into a bearish
position, and forecast further downside over the short term.
From here, we like entries on rollovers from the now overhead
200-dma very much.  The level is right below the $38 mark now,
and should be met by the declining 10-dma in the next session
or two.  A crossover of the 10-dma and 200-dma should help to
accelerate the selling in ZLC.  Look for that crossover as a
potential entry point into new put plays.

Comments

ZLC didn’t respond with the gusto that was seen in the market
averages.  In fact, the bulls might have considered ZLC’s
feeble rally attempt a let down today.  Since confirming the
trend with the break below the 200-dma yesterday, the stock
is suspect to further downside.  Its failure to put in a good
day today confirmed as much.  Look to enter new put plays on
a rollover from the 200-dma in tomorrow’s session, or on a 
break below relative lows.

BUY PUT JUL-40*ZLC-SH OI=58 at $2.30 SL=1.50
BUY PUT JUL-35 ZLC-SG OI=46 at $0.40 SL=0.00

Average Daily Volume = 253 K



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MOVING AVERAGE ENVELOPES/BANDS, Part 1
Another significant means to see support and resistance levels 
and one that will help define specific price levels where a 
market may be temporarily overbought or oversold, is by the use 
of moving average envelopes.  Moving average envelopes are formed 
from upper and lower lines that “float” at a set percentage above 
or below a particular moving average.  

My favorite moving average length to use for this purpose is 21, 
which I use on time frames from Daily to Hourly; i.e., 21-days, 
21-hours.  The stock market, especially as represented by the S&P 
500 Index, in an “average” market cycle or trend duration, will 
tend to see prices fluctuate in a range that is approximately 3-4 
percent above or below this moving average. As we are interested 
in also seeing the high and low extremes relative to the envelope 
lines, bar or candlestick charts are used.  

In a strong uptrend, the band or envelope will expand to 4-5%, 
which will then contain within the envelope lines most of the 
highs and lows.  Keep in mind that I demonstrate the use of 
moving average envelopes for the Indexes ONLY.  Due to the bouts 
of volatility associated with earnings, business developments, 
etc., individual stocks tend to work less consistently than for 
the indexes, which "smooth" out the individual stock "hiccups" 
and reversals. 

A bar chart with a moving average envelope:


     


The 10-year U.S. Treasury bond, which has replaced the 30-year 
issue (the “long bond”) as the most active – in either cash or 
futures markets – is very similar in its behavior relative to 
trading +/- 3% above or below its 21-day average.  More volatile 
markets, stock averages or individual stocks will regularly trade 
at 5-10 percent or more above or below the 21-day moving average.  
The percentages best used as the envelope values, will vary from 
period to period.  

In a bull market, the upside rallies will usually extend to a 
greater percentage and the downside will be contained by a lesser 
percentage; e.g., 5% on the upside, 3% on the downside or vice 
versa.  

Charting software will typically allow different numbers to be 
used on the upper envelope or band versus the lower envelope.  It 
is desirable usually that the moving average, which is in effect 
the centerline, would also be displayed - this due to it being 
the "mid-range" key support and resistance area.  Someone looking 
for trading opportunities, either just on the side of the 
dominant or major trend or, on both sides of the market, can 
benefit from the use of the moving average envelope indicator.  

An investor looking for initial or additional entry buy points 
can often improve their entry point if they wait for prices to 
dip to the lower envelope line.  A seller should do the reverse 
and watch rallies for an approach to or above the upper envelope.  

It is worth saying again that in a bull market the UPPER band 
will tend to see highs that are a somewhat GREATER percentage 
above the "center" moving average.  In a bear market, the reverse 
tends to be true and the declines will typically bottom at a 
further distance from the centered moving average; i.e., it falls 
to lows that are a greater percentage than the upper envelope 
line. However, this is not typically a huge gap - for example, 
currently on SPX, I am using a 5% envelope line for BOTH the 
upper and lower envelopes.

On the Nasdaq 100 ($NDX.X) currently, the most volatile of the 
major indices, my current settings for the two Daily chart 
envelope lines are 9% for the upper band and 10% for the lower 
envelope line. So it's not a huge difference between where the 
index tops out or bottoms, in percentage terms. However, there 
are other differences.  

In a downtrend or bear market, there will tend to be MORE 
instances of the index topping out in the area of the "centered" 
moving average and there will be more "touches" to the LOWER 
line. The reverse is true in a dominant uptrend or bull market, 
where there will tend to be a number of lows that are "contained" 
or held at the centered moving average and more "touches" to and 
along the UPPER envelope line.  

The following 7 characteristics categorize the tendencies of 
market action and behavior that are commonplace relative to 
moving averages and their upper and lower envelopes:   

1. Determination of what moving average to use somewhat arbitrary 
but is found by what “works” in the most number of markets.  The 
biggest variation is with the percentages above and below this 
line.  I suggest starting with a 21-day moving average for most 
daily charts in stocks, most commodities and for other markets.  

2. A common starting point for the index envelope size is 3-5%.  
The envelope size varies from trend to trend and market to 
market.  For an envelope size that “works” – for example, the 
percent figure that contains within it 90% of the price swings 
above and below the moving average -- start with 3 to 5% and 
expand or contract the envelope size as is appropriate for the 
dominant trend. 

3. If the last high was 5% above the moving average, keep the 
upper envelope line set at 5% -- the next high will often reflect 
the same extreme.  Conversely, if the last significant downswing 
low was 3% below the moving average, keep this figure as the 
lower envelope setting until market action otherwise dictates.  

4. If prices cross above the moving average, assume that this 
line will act as support on pullbacks and the next rally will 
have the potential to advance to the upper envelope line. If the 
stock or other item is in an uptrend, the envelope line may act
 as a rising line of resistance for multiple rallies – the rally 
tops will “hug” and move up "along" the upper envelope line. The 
key thing is that rate of increase will SLOW - the index will not 
always reverse on move to or above the line. 

5. If prices cross below the center moving average, assume that 
this line will act as resistance on any rebounds and that 
downside potential is to the lower envelope line.  If the trend 
is down, the envelope line may act as a falling support line and 
there may be multiple downswings that touch or “hug” and move 
down "along" the lower envelope line.  

6. In an uptrend, buy declines to the lower envelope line – this 
area will both define where the stock or other item is both 
“oversold” and the specific price area that offers a opportune 
buying opportunity.  If in a downtrend, sell advances to the 
upper envelope line – this area will help define where the market 
is both “overbought” and the specific price area that may be most 
opportune as a selling point.

7. Even if there is an extension of a price swing to above or 
below the envelope lines, the probability for a significant 
further move in that direction is limited, especially if the 
price swing is a counter-trend move.  At a minimum, there should 
be a reaction (countertrend move) once prices are above or below 
the envelope line in question.    

This chart provides a further illustration of these points:


     

Jim Brown here at Option Investor noticed that moving average 
envelopes applied to hourly charts "contained" most of the short-
term trading swings. 

I have not used them as much on hourly charts, but with index 
options, moving average envelopes work well in general. The 
results of blending the prices of many stocks "smoothes" out the 
index such that the envelope "bands" do intersect most of the 
dominant highs or lows as can be seen with the S&P 100 ($OEX.X) 
chart below.  

There is generally a "touch" to the line - sometimes, in a sharp 
move lower, the index will break through the percentage envelope 
that has been generally or heretofore "working" in terms of 
measuring the extremes for that index in that TIME frame; e.g., 
within the last 6 weeks to 6 months, or longer.  



 


Unlike Bollinger Bands, the percent envelopes don't narrow in 
appreciably during times of narrow price swings. Or, conversely, 
expand way out during times of big price swings. 

More on Bollinger bands next week, which will be the subject of 
my next Trader's Corner. Every time I think of Bollinger, I think 
of John out on some expense account good time dinner I fated at 
Dow Jones Telerate and John holding his own in the drinks dept. 
He's a fun guy.  

I can't give his indicator too little attention, just cause I 
happen not to use it.  Indicators are like a prospective mate, 
there are so many types and someone gets along and loves, the one 
that you have little interest in. 

Another chart example: Hourly Nasdaq 100 Tracking Stock (QQQ) -


 


On the QQQ chart above, the "spike" up to above 29 - intraday 
high was 29.75 - was no end of frustration as to surety that it 
was either a "bad tick" or reflected actual trading.  In this 
case it did, as QQQ trades until 15 minutes after the Nasdaq 
hours or until 4:15 eastern. Some company announcement came that 
caused a big spike up, in very thin volume. 

Notice that when the index goes through and STAYS ABOVE the 21-
day average it does it quickly and maintains a pattern of higher 
highs. When a rally "fails" very quickly and fairly soon again 
has a pattern of falling relative highs and lows - and, within a 
few trading periods dips under the average - this technical event 
becomes a sell point. 

The sell areas in the overall downtrends seen in the two hourly 
charts above, is at the area of the moving average when the rally 
reverses there AND at the UPPER envelope line when there is a run 
(often rapid) through the moving average and a second swing 
higher. A trader could just concentrated on selling the rallies 
in a downtrend and buying the dips in an uptrend.  

Next time on Trader's Corner - Part 2 - Bollinger Bands


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

Follow-Through
Buzz Lynn
buzz@OptionInvestor.com

With the crackup of WCOM yesterday, I decided to cruise some of my 
old articles for a follow-up to see how my previous thinking, 
reasoning, and ultimate conclusions turned out.  Sometimes, the 
blind squirrel actually finds the acorn!

Anyway, I did a lot of writing in February about the negative 
state of the economy and the markets.  Back then, I noted: "I'm 
still of the belief that excess leverage and fictional accounting 
- read that, huge debt - world-wide deflation, even greater 
declines in the Japanese economy, and recent demand for gold 
suggest all is not well in the world, which I expect will lead to 
falling equity prices in the long run.  My ballpark take on it 
all?  100-point lower highs and 100-point lower lows on the Dow 
for months, maybe years, to come.

Follow-through:  Well, since those comments, the markets have, in 
fact, drifted lower.  Americans have incurred larger debt and 
still have no savings.  Profits have not sprung back as 
anticipated, as prices of manufactured good continue to fall.  
Japan was a surprise though as the Nikkei tacked on roughly 20% 
following, but has since given most of that back.  Gold rose from 
$300 to $320 per oz.  

Going forward:  None of this has changed, nor do I see anything on 
the horizon that would modify my long-term view.  As it turned 
out, the Dollar reached an all time high against foreign 
currencies and as the Dollar has fallen, money has been flying out 
of the markets and repatriating the countries who had previously 
been profit participants in the great U.S. bull market.  Without 
profits, why keep the money here?  No good reason if the returns 
are no longer around.  This weakening Dollar is probably the 
single biggest reason that the U.S markets have taken their 
dramatic fall.  Only it didn't take 19 homicidal hijackers this 
time around.  

I'm still thinking downward markets for years to come until those 
pieces of paper we call "stock' actually represent an ownership 
interest in a going business concern created to provide profits to 
its owners.  That won't preclude bullish moves from the eternally 
hopeful though.  One of the favorite tricks of the bear is to lure 
it's prey back in just enough for the prey to find itself "safe to 
get back in the water". . .just before it get eaten.  Bears are 
patient.  This will not end until everyone and their brother, or 
at least a vast majority of same, refuse to own stock even with 
double-digit dividends.  For even those will  severely scrutinized 
and shunned by investors burned from the most recent Enronitis, 
Tyco tricks, or WorldCom washouts.  

Then I remembered another article from February 12th in an open 
letter to CEO's and CFO's everywhere:  "Fire AA (Arthur Anderson).  
To continue to use them is a liability to shareholder value.  As a 
shareholder of a company that does continue to use AA, my 
confidence in your business judgment is greatly diminished and I 
am tempted to sell company stock now before I or anyone else gets 
"Enroned".  If I was considering the purchase of an interest in 
your company, interest has since passed once I found out that AA 
did your books and offered you advice.  I can't trust hem and I 
don't know why you do now knowing what you do about their 
involvement in numerous similar incidences, though none as 
spectacular as Enron.  Nonetheless, shareholder value is of far 
more importance to the owners than any loyalty you have to the fox 
guarding your henhouse."

"You report accurately, I buy shares.  You don't, I save cash.  
Simple as that."


Speaking of which. . .many speculated that Enron was an isolated 
incident, GX was an unfortunate victim of market conditions, and 
TYC had a renegade for a CEO.  Meanwhile, Ford cut its dividend, 
as did AT&T a year before that, and K-Mart filed for Bankruptcy.  
Now, Mistress Martha of The Splendid Household is under heavy 
investigation for insider trading.  Oh and did I mention that 
little old phone company, WorldCom, that fraudulently overstated 
its income by nearly $4 bln?

These are not isolated incidents.  There is still a very real 
danger of companies that have previously used AA, even those 
companies have since fired them, to have an accounting explosion 
for outright fraud.  Previous accounting mistakes taken from the 
AA playbook are potential time bombs awaiting discovery or 
disclosure even after AA has long since left the scene.  I would 
still as a matter of principle exclude those companies that used 
AA previously, even if they have since fired them, from a serious 
Buy consideration.  The risks are too great. 

Here's another comment from February where I kind of blew it, or 
at lease underestimated the possibilities of retreat:

"Philip Morris also has my interest as I've noted in previous 
articles.  It still owns over 95% or Kraft Foods (KFT), which 
makes a nice slush fund from which to draw cash should tobacco 
litigation rear its head again.  Meanwhile, MO pays a 4.63% 
dividend and sells for $50.65.  Personally, I would be a buyer of 
MO at a later date when the price is more attractive as determined 
by chart oscillators.  It is currently overbought across all 
timeframes and is looking ripe for a fall to lower levels.  
Support looks good around $45-$46; $43 if you want to press the 
entry.  But it may never get there."

Ummm. . .litigation is pretty ugly when it goes against you.  That 
said, some tobacco jury awards have squashed the sector and it 
appears to have further room to fall, despite the juicy dividends.  
MO closed under $43 support today and doesn't look like such a 
great buy right now.  Why?  A casual look at the P and F chart 
tells the story.

MO P and F chart (courtesy of Stockcharts.com):


 

That long column of "O's" suggests that the price objective is 
$24.  No guaranty that it will ever get there.  In fact, it could 
reverse with a new column of "X's" should the price hit just $43, 
the Buy target mentioned above from February's column.  But boy at 
$24, the dividend yield would be a whopping 9.6% and I'd be all 
over that.  In fact, I'm likely to buy bits in the IRA on the way 
down.  But I'll keep an eye on the P and F for clues.

Again from February. . .It's related to total debt load and WCOM.  

Anyway, "Recovery or not, the Telecom-related companies are going 
to burn a bigger hole in planet Earth and perhaps vaporize their 
bankers in the process (unless they are wearing asbestos bunny 
suits).  If you thought things were tough on JPM who had exposure 
to K-mart, Enron, and Global Crossing, stay tuned as the dominos 
continue to fall in banking and telecom.  WCOM ought to be on our 
"ball of flames" lists too.

I honestly had no idea just what a large ball of flames WCOM would 
turn out to be.  I can't stress enough to keep your eyes open for 
companies with huge debt.  That's just about the unhealthiest 
thing a company can have on its books in a deflating economy.  It 
means that debts get paid from a shrinking stream of income.  
Still, in the case of WCOM there was no way to tell that income 
had been overstated.  There were clues when bad debt from 
shenanigans at the MCI division got preserved as an asset under 
accounts receivable for years.  I bet they count founder, Bernie 
Ebbers' debt of nearly $400 mln to the company as an asset under 
accounts receivable too.  Even if they don't, they have not gone 
out of their way to defend themselves or deny the issue exists.

I leave with this final though from February 5th:  "Until then, 
the public sits in cash, or. . .buys gold.  Until accounting 
scandals, or at least murky accounting issues are resolved, there 
will be no outpouring of cash into the equity market."

I still think hard assets are relevant to the future and paper 
instruments are taboo unless there is a safe stream of income 
associated with it.  Oh, yeah, and stay away from debt unless it's 
making the company some money.

Make a great weekend for yourselves!


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

Bollinger Bands on Long-term Charts
By: Surya Kavuri

One way to look at technical analysis is as a way of applying what 
we learn from history. Simply put, finding patterns that
reoccur.

Let us take a look at the Monthly chart for S&P500. 




Looking at the candles since 1996, we see that there were no two 
consecutive months when like-colored candles pierced through 
the Bollinger Bands.  What does that mean?  This means that if 
a red candle pierced through the lower band, there is a very 
good chance that the next candle will pierce back as a white 
candle. If S&P-500 trades well below the lower band (at 970), 
there is a  very good chance that it will come back above this 
level, at least temporarily, by next month.  

This gives us a tradable plan.  

If the index dips to, say, 950 or below:  Watch the intraday 
technicals and buy calls on the first bullish setup.  

There is one problem with this idea. Monthly candle represent
a lot of time.

We know that SPX options would drain time value and we 
cannot afford to buy 4 weeks prior to expiration and hold 
for 3 weeks.  

To get better timing, let us look at the weekly chart of 
S&P-500.






Here, the index is pushing down along the lower Bollinger 
Band. Monthly chart is telling us that, from here, there cannot 
be more than one large red weekly candle before we get a buy 
opportunity.  This reduces wait time to a large red candle.

Now look at the last two times we had a piercing of the lower 
band on the monthly chart.  It was around Feb-Mar 2001 and 
September 2001.  Can you see how the large red candles during 
those times in the weekly chart gave a buy signal ?

What does this mean?  If we get a major sell-off in S&P-500,
We will get a long red weekly candle that pierces significantly 
through the lower band on the weekly chart as well.

When you get a long red weekly candle that takes you beyond 950,
we can buy calls for a tradable rally, at least to 970 level.

This setup already occurred and worked once on Wednesday.

It can occur again during this week or next week.


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

Two plays were triggered in recent days, and several others are 
near action points.  Here’s two more ideas.


To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/062702.asp


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

It’s been a busy two days for Market Posture.  Does that mean 
we’re in for a period of inactivity?


To Read The Rest of The OptionInvestor.com Market Posture Click Here
http://www.OptionInvestor.com/marketposture/062702.asp


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