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Daily Newsletter, Monday, 07/01/2002

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The Option Investor Newsletter                   Monday 07-01-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


Posted online for subscribers at http://www.OptionInvestor.com
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MARKET WRAP  (view in courier font for table alignment)
******************************************************************
      07-01-2002          High     Low     Volume Advance/Decline
DJIA     9109.38 -133.47  9327.10  9106.89  1.42 bln   1134/2098
NASDAQ   1403.50 - 59.41  1459.84  1402.51  2.97 bln   1125/2396
S&P 100   478.94 - 11.16   492.39   478.34   Totals    2259/4494
S&P 500   967.50 - 21.17   994.46   967.43             
RUS 2000  446.67 - 14.92   461.55   446.03
DJ TRANS 2697.03 - 31.79  2734.12  2691.87
VIX        30.58 +  1.45    30.70    28.63
VXN        58.02 +  0.07    58.76    56.55
TRIN        2.19
PUT/CALL    0.85
******************************************************************

New Lows, Investor Woes
By Buzz Lynn
buzz@OptionInvestor.com

A strange thing happened on the way to the OIN web page last week.  
I opined in last Monday's Wrap that this bear market could last 
years and not a single, solitary soul wrote to admonish me for my 
bearish outlook.  Amazing.  Could this market be completely 
oversold and in NEED of a rally just to get some bullish relief so 
it can then resume its downward course?  Perhaps.  But for right 
now, the market continues its slow bleed.

Need evidence?  Look no further than today's close at or near the 
lows of the day.  That's a typical occurrence in a weak market.  
Bulls simple lack the conviction to move this markets higher.  
It's really a supply and demand issue.  All the supply of stock 
available is no longer demanded by and investing public.  And who 
could blame them?  The Dollar continues to lose ground to the Euro 
and the Yen, thus making it awfully tempting to repatriate their 
investments within their own countries.  As a foreign investor, 
you not only lost money in the U.S markets, but you also lost 
another 10% so far in currency conversion out of Dollars - double 
whammy.  If you are one of those people, you had all the more 
incentive to sell the U.S. and buy at home over the last few 
months.  

And as long as Uncle Sam keeps interest rates low, there is no 
incentive to bring those investment dollars back to U.S. shores.  
In short, the markets are bleeding because the Dollar is bleeding.

Oh sure, but now that the window dressing associated with the end 
of the quarter and half has passed, shouldn't we see some 
semblance of a return to "normalcy"?  The answer is yes, if you 
understand that this is a bear market, and that "normal" means 
lower prices.

Speaking of prices, did anybody notice that the NASDAQ closed at 
its lowest level since 1997?  Tech has been toast, is toast, and 
will be toast as far as the eye can see.  Why?  Because few that 
I'm aware of actually earn a profit.  And those that do are 
overpriced compared to rates available from the bond market.  

To be fair, MSFT still makes a ton of money, but sports a P/E of 
46, the equivalent of a 2.17% return.  Their business isn't 
growing enough to convince me (and many others) that I ought to 
buy more of it.  CSCO's P/E is a whopping 87.2, which equates to a 
1.15% return - also a flat business at best.  QCOM?  P/E is a big, 
fat goose egg - ZERO.  ORCL - compared to the others, price much 
more reasonable at 23 times earnings, but still expensive with 
shrinking revenues and a complete tule fog when it comes to 
earnings.  Despite doing well in its business, DELL's P/E of 55 
makes it no great bargain either at a 1.82% return on capital.  
INTC trades at 69 times earnings, a 1.45% earnings return on 
capital.  I can't even put WCOME (formerly WCOM) up for comparison 
anymore since it began trading again today at $0.07.

[Note: Volume today was an eyeball popping 3 bln shares on the 
NASDAQ.  Half of it - yes, over 1.5 bln shares - was in WCOME.  
Don't look at just the volume; see from where it came.]

The thing is that none of these, except INTC at 0.46%, pays a 
dividend.  So what'll it be?  A return of 1-2% in stocks (if the 
share price holds up and the stock paid a dividend from earnings) 
or a U.S Treasury Note at 4.8%?  DUH. . .think I'll take the sure 
thing.  Looks like most of the market agrees except those holding 
on to the tech-investor dogma.  And they'll hang on out of fear of 
taking a loss, a loss that increases with each passing day.  Only 
when those companies are earning money and can afford to pay a 
dividend will the prices be reasonable.  I know. . .heresy.  But 
the nation could only overbuild so many railroads, and utility 
lines (or grow tulips) in past bubbles before those companies were 
forced to make money or go out of business.  Even yester-decade's 
growth stocks then had to get real earnings to stay alive and 
provide a dividend to get respect.  Earnings and dividends made 
them real businesses rather than pieces of speculative paper.

OK, support levels are now broken on the NASDAQ and Dow, and 
only 1 measly point above the September closing low on the S&P.  
Yet oscillators are oversold on all charts except the daily, which 
has rolled over in mid-ascent.  What next?  Charts please. . .

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


 

I'm not going to spend a whole bunch of time on these tonight.  
But I do want to point out that the 50-dma (magenta line on the 
daily) is right at the 200-dma (gray line) and headed south.  The 
weekly chart is oversold and moving lower, the daily chart has 
rolled over in mid-ascent and the 60-min is buried.  That's really 
bearish for the coming weeks.  However, with so much oversold, I 
would not be surprised to see a re-test of 9000 and have it hold 
from which a mild relief rally could ensue.  The daily chart might 
make that tough though.

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


 

NASDAQ - toast.  No love, no respect, no support.  What little 
support there was fell today as the NASDAQ closed at it lowest 
level since 1997.  While daily stochastic rolled over, the others 
became even more oversold.


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


 

Similar story here except that the SPX, despite closing at a new 
low for the year, remains above its September closing low support 
of 965 at 967.50.  Nonetheless, the rolling daily stochastic 
doesn't lend much hope of support.  Yet, the others are buried and 
begging for mercy.

VIX too isn't really giving a full story.  While 30.58 is showing 
plenty of fear, it hasn't gone much past 40 or even approached 50 
in recent days.  Nobody throwing in the towel - just a slow bleed.

So what for tomorrow?  Charts don't offer much of a clue.   
However, I suspect that with Independence Day on Thursday, 
Wednesday is going to be pretty slow, as will be Friday too.  That 
leaves only tomorrow as the last really full trading day of the 
week.  Yet, economic news (Initial Claims) could stir the pot on 
Wednesday, as could payroll and unemployment on Friday.  Still, 
without the prospect of much volume (except more WCOME), price are 
likely to bounce around for some quick but limited action.  I see 
it much the same as last week when I noted then: 

"With sentiment still negative as measured by daily and 60-min 
stochastics [only it's weekly and 60 now], coupled with a VIX at 
29.97, I think there will be further tests of support to come this 
week.  And with every test, hopeful bulls will jump the gun to buy 
the very bottom to which the bears will respond by shorting the 
rally.  If that sounds like a week of solid volatility with big 
potential for swings, you're right!  Just what a trader wants!  
But for the buy and hold crowd, the day to buy is not yet here.  
But when it comes, there may be even a few weeks to perhaps months 
of profit potential as the weekly stochastic emerges to begin 
another up-cycle from oversold.  Again, it won't be permanent, but 
merely a bull rally within a primary bear market."

Trade 'em but don't fall in love.  Yup, cornbread and beans again.

See you at the bell!


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

HUGE VOLUME, SOME DAMAGE
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 

You have to wonder who was trading those 1.5 BILLION shares of 
WorldCom. What was not in doubt was that the continued fall out 
from the WorldCom double dealings and the probe into the other 
nooks and crannies of their business, put renewed pressure on the 
overall market. 

Nasdaq didn't need much help to slip and fall again, as IBM's 
weakness (-6%) spilled over into the rest of the tech stocks, 
notably in Cisco Systems (CISCO) off 6% also, Intel INTC) off 
4% and Sun Micro down nearly 6%, to 4.72 - SUNW gets no respect, 
now trading under 5 bucks no less! 

Even Oracle (ORCL), which appeared to have broken out to the 
upside, was pulled rudely back to earth - off 5%.  Maybe there 
will be a summer rally beyond 2-3 days. But suppose, it came and 
went already! - instant summer for those who don't want to wait.

We're nearly back in earnings season! Didn't we just get through 
all that? No wonder investors get "worn down" during a prolonged 
bear market. Easy to figure why so many end up "walking away" 
from the market, thinking, who needs this unending grief. A 
tough market for those still hanging onto stock and most of us 
still got some tucked away even if in our 401K. However, be a 
BEAR and you're on a tear! Too bad we can't go short in our 
pension accounts - you can't even buy a put!  

The OEX has retraced some 75% of the rebound from last week's 
low. The Nasdaq composite has given back a like percentage 
amount.  Can a 100% "retracement" be far behind - the 1375 prior 
COMP low and 971 in the S&P 100 look VERY near now.  I was playing 
with shorting where I suggested exiting on long positions in OEX 
and QQQ, but didn't figure that the "window dressing" was all 
window and no "dressing".  No stuffing in the dressing - no beef 
in the burger! 

While the single candle representing the weekly open, high, low, 
close on the OEX chart last week looked like a "hammer" signaling 
a bullish reversal, the S&P may get hammered instead. While I 
never place complete stock in a single day/week's reversal, 
the pattern looked promising.  Well, as they say in New York, a 
promise and a subway token will get you on the subway.


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

I said that 480 was important to hold - From my Sunday weekly 
wrap: "On the downside, for a bullish case here it's important to 
see daily closes at and above 480, although we could get some 
intraday price dips to this area." And how! 

So much for a successful "retest" of the prior Sept. low - our 
elite group of S&P stocks failed the test.  Of course tomorrow 
could bring some stabilization but we went out with an Arms Index 
(TRIN) reading again above 2, at 2.13, showing extreme selling 
pressure. This sell "sentiment" doesn't look likely to vanish by 
morning. 



 

In terms of call purchases in the 480-485 area suggested in a 
bullish moment, I would adhere to an exit on a break of 475 but I 
trust not many stuck their necks out with the market acting like 
its old bear self?  We need to see where the indices go in the 
morning to know whether the prior lows evaporate like water 
before the Western forest fires. 

Nasdaq looks like it is in free fall again - like a black hole, 
this index is liable to suck all the life out of the non-tech 
sectors also. 475 looks like next minor support - below this, we 
are looking at the lower envelope "bands" in the 473 area as an 
area where the OEX may slow its downside momentum some but the 
key level is the prior 471 low. A next lower potential downside 
target is 465, the low end of the hourly downtrend channel.  

On the upside, OEX has to regain 488 to suggest a bullish 
recovery.  The 21-hour stochastic is not yet oversold. I have 
noticed a strong tendency in regards to this indicator - no 
oversold, no rally.  

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

The Dow as has often been the case, has best resisted the 
decline, but weakness in JP Morgan Chase (JPM), AT&T (T), IBM, 
General Motors (GM) and Merck (MER) was dead weight pulling 
against more minor rallies in advancing Dow stocks 3M (MMM), 
Phillip Morris (MO), and American Express (AXP).  



 

I'll cancel my prior day's thought to buy DJX calls in the 90.8-
91 area, and see what tomorrow brings.  Stair-stepping prior lows 
at 90.8, 89.3 and the bottom of the hourly downtrend channel at 
87.7 are possible downside targets.  Of these, 89.3 is the most 
important single number - as the prior low.  

The lower envelope lines intersect at 89.5 currently, so we could 
have a retest of the low and also be in the area of the lower 
envelope, which tends to be mark an extreme.  Not yet at an 
extreme, is the longer hourly stochastic. I tend to only "trust" 
the rallies that develop AFTER this oscillator is fully oversold 
again.  

DJX has to regain 92.5 and stay at or above this level to get 
something going on the upside again.


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

The Nasdaq Arms Index ($TRINQ), influenced by the Worldcom 
downside volume and other tech stock sell imbalances, went out at 
a record high 6.70 closing level, indicating extreme sell 
pressures. I went back to early-1999 and could not find a higher 
intraday or closing Nasdaq TRIN! 



 


24.4-25.5 looks like a key downside area, at the prior low (24.4) 
and at the lower envelope line (24.5), which has coincided with 
the prior low "extremes".  

I've noticed very much that QQQ never regained its Sept. low at 
27.00 - its been all downhill after that.  And talk about a 
"line" of resistance at 26.8 - there is a prior low and two prior 
hourly (up) swing highs right at the same level.  Plus, at 26.8, 
the Q's were at the top of the channel. Great short! Although not 
in it, I wish I was just cause they slide down so much faster 
than they bump up. More fun to watch the slippery slope, 
especially when short or long puts.  

Trade strategy -  
If you are short, look to cover in the 23.5-24.00 area if 
reached. If the 21-hour stochastic is fully oversold at the same 
time and it should be, then look at trading the long side for a 
rebound.  Overhead resistance is at 25.5-25.6, then in the 26 
area, at the top of downtrend channel.  


Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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

Trust Your Eyes, Not The Experts
by Mark Phillips
mphillips@OptionInvestor.com

This isn't the first time I've railed against the so-called Wall
Street professionals, and I'm sure it won't be the last.  But
certain events in my own life over the past week have compelled
me once again to focus on the stupidity (I'm being generous here, 
as I haven't accused the industry of intentional duplicity, yet)
so often demonstrated by the group of individuals that we
collectively trust with the responsibility of advising us in our
investing decisions.

It is my hope that by using a member of my own family as our
example today that I am better able to drive the point home.
I'll call him Roland to preserve his anonymity, but rest assured
this is an actual tale of woe.  Our story begins back in early
2000, when the Tech bubble was reaching its apex.  The NASDAQ
had crested 5000 second and very likely final time.  This was the
first market mania I had experienced, and had cut my teeth in the
trading profession on the runaway bull market of the late 1990's,
but everything I looked at told me we were either at or nearing
a blowoff top.  Bringing it back to Roland, he had a rather large
position in CSCO, which was trading near $70 in early March.
With a cost basis less than $3, nearly the entire position was
pure profit.  The company was due to split its stock yet again at
the end of March, and to me it had all the earmarks of a stock
that was going to make one final run at new highs before the party
was over.

So I called Roland, explained my rationale to him and advised him
to take advantage of the next runup in price to take some profits.
As you might expect, Roland demurred, having been convinced over
the years that CSCO would always go up.  But here's the really
interesting part of the story.  The reason he wasn't willing to at
least sell a portion of the position was that he didn't want to
have to pay the Capital Gains taxes.

Of course you remember that CSCO hit its all time high just below
$82 shortly thereafter, and began its long slide lower.  Roland
and I have had several conversations in the past 2 years, where
we have discussed his CSCO position.  Each time, I have implored
him to lighten up on the position, and each time he has been
unwilling to do so.  What was particularly interesting to me was
that he had no defined exit strategy.  In each conversation, I
have asked how much further he is willing to let the stock fall
before selling.  At $60, I asked him if he would sell when the
stock fell through $50.  At $45, I asked if he would sell when
the stock fell through $35, and when it fell through there, I
asked him if he would consider selling when CSCO fell below the
$25.  Each time, the response was that he didn't think it could
fall that far.  When pressed for the basis for that conclusion,
I came to find out that after each conversation that Roland and
I had, he called to talk to his broker, who we'll call Jason.  In
each instance, Jason would cite research done by his firm, that
showed how CSCO would continue to dominate the Networking industry
and how it should continue to grow at a robust pace for the
foreseeable future.

My advice was repeatedly ignored and Jason's followed due to an
inability to accept that I might be right.  Here we are more
than 2 years later, and I can tell you how painful it has been to
watch Roland's CSCO position lose nearly $1 million.  Jason is
still defending the stock due to the inherently flawed
institutional research provided to him by his firm.  Look at the
chart below, and you can see where there were numerous strong
signals to get out, based on some very simple technical analysis
tools.



 

But the story gets even worse, as Roland had a substantial
position in Worldcom (symbol now changed to WCOME).  Due to my
own analysis of the Telecom industry and in
fundamentals-oriented conversations with our own Buzz Lynn
(aka Fundamentals Guy) earlier this year, I became convinced
that the company was headed for the scrap heap.  After coming
to this conclusion, I picked up the phone and called Roland,
telling him my concerns.  By my analysis, he should have taken
action to exit the stock if it fell under the $12 level, which
was the site of the September lows.  You don't have to be
psychic to know that Roland called Jason and after being
reassured that everything would be fine, discarded my advice.
Since then, Roland and I have talked about WCOM on several
occasions, and each time I have reiterated my view that the
company would go bankrupt and his stock would become worthless.



 

Believe it or not, we had another one of those conversations
last Wednesday, after the company admitted it had engaged in
massive accounting fraud.  I don't have to tell you that I was
shocked when Roland and I talked again this weekend and he
informed me of the details of his most recent conversation with
Jason.  Citing that one of his coworkers was well-connected with
the beleaguered Telecom concern and that he had good information
that Worldcom would be able to weather the storm, he urged
Roland to not sell his stock in the company.  This
well-connected individual (Jack) got a lot of airtime on CNBC
last week, after Mike Huckman cornered him on the street to ask
whether he thought Worldcom would survive and if he was surprised
by the recent revelations of fraud at the company.  Simply put,
Jack got caught with his pants down and those brokers that relied
on his research did too.  That left Roland and thousands of
investors holding the bag as the company continued to implode.
The moral of the story is that the Wall Street professionals
haven't been doing their job, especially in the Telecom arena for
the past 2 years.  Until I see some intelligent research come out
of the industry on a consistent basis, I will proceed on the
premise that they are all fools or liars.  Their inability to
read a simple chart is truly frightening in light of the damage
they (as a group) have done to the portfolios of thousands of
individual investors that have depended on their "quality
research".

So what happened to WCOME today?  The mad rush to get out sent
the stock below $0.10 on volume that exceeded 1.5 billion shares,
easily setting a volume record on the NASDAQ.  I spoke with
Roland again this afternoon, and he is clearly depressed by what
has happened to the stock.  The real issue to me isn't so much
that he lost a lot of money on another investment, but that he is
just one of many who have recently taken a beating due to placing
their financial futures in the hands of those that are completely
out of touch with the reality of a bear market.  Even without the
recently-revealed fraud, I believe the company would be headed
for bankruptcy due to its heavy debt load and lack of pricing
power in the Telecom marketplace.

I think there are two important lessons to be learned from this
tale of woe.  First, a decision to exit an investment should
NEVER be made on the basis of tax consequences.  The risks are
simply too great!  Certainly, tax consequences will factor into
your exit strategy, but should be done with an eye toward
overall portfolio management.  Decisions relative to the exit
of an investment should be made at the time the investment is
made, or based on the prospects of the trade going forward
given current conditions.

The second lesson is that we should never base our investment
decisions on what another person (or group of people) tell us.
We need to each put in the effort necessary so that we know we
can rely on our own research and decisions and don't need to
depend on any outside "expert" to guide us.

My intent here is not to beat up on Roland or his broker for
the repeated mistakes that are all too obvious now.  The real
important point is that the warning signs were clearly evident
in the charts long before the stocks fell to their current
levels.  What we aim to do here at OptionInvestor is to educate
our readers first and provide possible trade recommendations
second.  The reason why is that if you learn how to do the
research on your own, you are far more empowered than if you
rely on ANYONE else to make your investment decisions.  It has
often been said that we want to teach you how to fish, not hand
you a fish that you can eat.  Hopefully we are accomplishing
that goal.  If we can prevent a few stories like that of Roland,
I will consider the effort very much worth it.

Have a great week!


Mark


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

THE SECTOR BEAT - 7/1
by Leigh Stevens

The Gold & Silver index, XAU, was the only sector up on the day. 
Well, we could also count GPX, the Goldman Precious Metals index 
also - so, it was "metals and metals" - of course, just two 
indexes measuring the same sector in slightly different ways - 
XAU being the best known. I don't see an upside reversal on the 
chart however, unless we get, and stay, above 77.5. 

There was weakness across the board today, but the Home 
Construction Index ($DJUSHB) continues relatively firm, as does 
Forest Products, what with all that lumber being burned up and 
all the lumber going into home building. 

Even the Healthcare Index, per the bearish chart I have been 
highlighting for some time now, slipped further.  The sectors 
down the most are found below as they are of course ranked by 
which was off by the greatest percentages.  Biotech led the way, 
followed by the Airlines, which recently had a "dead cat" bounce 
- it's still a DEAD cat. Other than these - it's tech, tech, tech 
that is dying, dying, dying.  "FOP" is fiber optics - I would 
hate to be in that business, since we seem to have enough 
bandwidth capacity to last us until the next century.  Not quite, 
but there is a glut to say the least. 

I highlighted the Pharmaceutical Index in my Sunday sector wrap 
up and showed the long-term chart picture, which suggests that 
you may not want to be in that business for a while either as the 
sector looks like it may just be starting into a longer term 
decline.  

There is no hope in "techland" with the Semiconductor (SOX) or 
Chip stocks able to reverse its very weak course and SOX is 
featured in the Sector Highlight section below.  

Natural Gas is holding its own, as are the Oil stocks - not so, 
oil services which looks weak in terms of its chart pattern which 
is that of a Head & Shoulder's top.    

HIGHER ON THE DAY ON Monday -


 

 
DOWN ON THE DAY on Monday - 


 


SECTOR TRADE RECOMMENDATIONS & REVIEW -

OPEN/NEW TRADE RECOMMENDATION(S) - 

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

The Oil Service sector keeps slipping further away from my 
suggested entry - 7/1 close: 60.45.  Will cancel the order if OIH 
continues lower this week. 


OPEN POSITIONS - 

Long BBH at 79.10 (Biotech HOLDR's Trust stock)
Stop: 75.15 

Long HHH at 22.80; Stop at 21.70
(Internet HOLDR stock)

 
TRADE LIQUIDATIONS -
 
NONE  


SECTOR HIGHLIGHT(S) -

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

SOME PRIOR COMMENTS: Nothing has developed yet that suggests any 
kind of big turnaround to the upside. A close above 400-405, 
would be needed suggest that a turnaround in the SOX 
was underway. Above 400-405, major resistance comes into play in 
the 450 area. 

The obvious major expectation on the downside for SOX support to 
come into play again is the area of the Sept. 344 low - at least 
this has been the pattern with the Nasdaq indices so far and many 
key stocks as well - they have been digging in at the post-9/11 
lows.   



 

TODAY: SOX reversed recently at the first level of significant 
resistance.  The Semiconductor stocks have been then under sell 
pressure, which accelerated today.  Intel (INTC) fell to a new 
closing low today which does not bode well for the other chip 
makers. 

SOX is not looking so healthy - it came out of intensive care 
only to go back in the operating room as the bears pounded on 
these stocks again over Friday and today. SOX is looking more and 
more like the 344 level, equal to the Sept. low, will be 
retested.  
UPDATE: 7/1


Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                   Monday 07-01-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.



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EXPE - put
Adjust from $67 down to $63.50

LLY - put
Adjust from $60.25 down to $58

LXK - put
Adjust from $56.50 down to $54.50

MXIM - put
Adjust from $40.50 down to $39.50

QLGC - put
Adjust from $42.50 down to $40


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DROPPED CALLS
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None


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

IBM - International Bus. Machines $67.60 -4.40 (-4.40 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.

Most Recent Write-Up

After rebounding off its lows on Wednesday, IBM has recovered a
lot of ground and the close just below $72 on Thursday was
looking like a pretty good entry point.  But apparently the
bulls weren't done, or maybe it was end of quarter window
dressing.  Whatever the cause, IBM quickly moved through our
stop on Friday morning, with the stock actually moving above
$73.50 in late afternoon trade.  But the gains were
unsustainable and for those who were quick on the trigger, they
got an unusually good entry point into the play as IBM fell
back to unchanged on the day.  We've got lots of catalysts for
our play next week, beginning with the window-undressing that is
likely starting on Monday.  And then we have the increasing
likelihood that Big Blue will issue a warning for the quarter.
The broad markets have now gone a long ways towards relieving
the oversold condition that existed Wednesday morning, and look
susceptible to a return to the lows from last week.  That slide
will drive IBM back down to test its lows from last week (near
$66) enroute to its bearish price target of $60.  Use weakness
near current levels to initiate new positions or else wait for
price to drop back under intraday support at $70.75 before
jumping in.  We are maintaining our stop at $72.50.  A close
above that level will leave us no choice but to send our IBM
play packing.

Comments

Salomon Smith Barney added a fresh list of stocks to their
pre-announce list this morning, and although they didn't mention
IBM (Big Blue is already on the list), the SSB's comments seemed
to refocus attention on the downside risks.  After being up
above $72 early in the day, IBM got hit hard this afternoon,
ending the day with a 6% loss on volume about 30% greater than
the ADV.  That dropped IBM back to major support near $67, its
lowest close since October of 1998.  The $72 level is shaping up
as strong resistance and things aren't looking good for the
bulls.  A rebound from current levels should provide for fresh
entries on another rollover either at the $70 or $72 resistance
levels.  Otherwise, wait for a drop through the $66 level (last
week's intraday lows) to provide momentum traders with an entry
point.  Until those lows are broken, we're leaving our stop at
$72.50 to avoid being shaken out of this winning play prematurely.

BUY PUT JUL-70 IBM-SN OI=40157 at $4.80 SL=3.00
BUY PUT JUL-65*IBM-SM OI=25526 at $2.45 SL=1.25

Average Daily Volume = 9.25 mln



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