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Daily Newsletter, Tuesday, 07/02/2002

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The Option Investor Newsletter                 Tuesday 07-02-2002
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)
************************************************************ 
      07-02-2002           High     Low     Volume Advance/Decline
DJIA     9007.75 -102.00  9135.82  8960.54 1.71 bln    687/2334
NASDAQ   1357.85 - 46.00  1396.25  1356.03 2.66 bln    887/2630
S&P 100   470.11 -  8.85   479.59   468.24   Totals   1564/4964
S&P 500   948.09 - 20.56   968.65   945.54             
RUS 2000  432.84 - 14.89   447.73   432.53
DJ TRANS 2619.88 - 80.00  2709.01  2617.11
VIX        33.69 +  3.13    34.64    31.33
VXN        59.57 +  2.12    61.93    58.95
TRIN        2.33
PUT/CALL    1.08
*************************************************************  

When is a Retest Complete?

The intraday reactionary low for the S&P on 9/22 was 944.75. 
The same low for the Dow was 8062.34. The low on the broadest 
index of all, the Wilshire 5000, was 8722. Today one of those 
levels came very close to following the OEX, NDX and COMPX into
the record books. The SPX dropped to a low of 945.54 and came 
within three points of the 944.75 low three times. All eyes 
were riveted to the index as each sell off attempt failed. 

Chart of the Nasdaq


 

Chart of the Dow


 

The day started out bad and got worse. Almost every major tech
sector was hit with a barrage of downgrades and earnings warnings.
Morgan Stanley led the charge with a downgrade of 16 chip equipment
stocks. Morgan said chip-sector capital spending will drop more
than 20% for the year and forecast an increase of only +20% next 
year. Both estimates were even worse than previous forecasts. 
They said the recovery is underway but growth and earnings 
estimates were unrealistic. This was just the beginning of the
bad news for the morning.

Prudential cut estimates of KLAC saying growth estimates were
overly optimistic. Salomon Smith Barney cut NSM saying the PC
market was weaker than previously thought and the mobile phone
business may soften. They also said NSM was seeing a slow down
in flat panel components. They said the buildup of inventory
was troubling and any increase in orders would go towards 
reducing the buildup and not new production. They also cut
RTEC to a hold citing competition concerns and uncertainty.

All in all this is the deathblow for semiconductors. According
to First Call the consensus revenue forecasts for chip equipment
makers for 2003 will grow by +40%. According to analysts this is
highly unrealistic when measured by the capital spending plans of
chip makers and the IT sector. With growth prospects now at +20%
and dropping these 2003 estimates will soon be dropping like a
rock. This makes the already overvalued chip companies even more
pricey. Morgan Stanley said it was increasingly doubtful that
the chip makers would actually spend the money budgeted for
capital improvements. The SOX lost -5% and closed at 1998 lows. 

To further complicate matters Merrill slashed estimates on PC 
makers and estimates for PC demand. Merrill said its growth 
prospects for PC demand were cut to +2.5% this year from 10.5%.
They cited weakness in state government spending, lack of
corporate spending and increasing signs of decreased consumer
spending. They only cut estimates on Dell by -4% claiming it
had a strong competitive position. Worries continue however 
for IBM, HPQ, GTW and companies that depend on them for sales.
Intel closed at 16.56 and a low not seen since April 1998.

Communication chip companies were caught in the downdraft as
well with QCOM, MOT and NOK fighting for market share of a 
market that could be shrinking instead of growing. These 
companies have been making chips and phones as fast as possible
and inventory levels are suddenly spiking as demand slows. 
Looks like a common thread across all the tech sectors! SSB
also cut estimates for CSCO and EXTR. The analyst said it
appeared the summer doldrums came a month early to the sector
citing flat sales. They cut growth estimates for CSCO to +1%
for the July quarter and slashed revenue estimates by -$600
million. He warned that if Cisco was unable to build an order
backlog in July then the October visibility would be 
seriously diminished. According to the analyst this backlog
was not happening. Due to seasonal trends June is when orders
accelerate for the sector and those gains did not appear. 

The software sector was not spared with group downgrades by
JPM. RATL and ADVS both warned and that triggered another wave
of selling. SYMC, CHKP, MVSN, PSFT and SEBL were among those
downgraded. The $GSO closed at 101.54 and an all time low. MSFT 
was not mentioned in the downgrades but finished at $51.44, down 
-1.22. The company did not warn and is at the lower end of its 
current trading range. We added it as a call play tonight on the
rationale that any rally on Monday would see money going into
bigcap techs because of their high liquidity. Enter it on any
weakness on Friday but be aware of the weekend event risk. 

The storage sector took it on the chin after Lazard Freres 
started coverage on BRCD at "sell". Calling the expectations 
unreasonable and valuations unjustifiable they set a price
target at $12. BRCD lost nearly $2 to close at 14.29. ELX
closed at 19.77, down only -.76 cents but the old EMLX has
lost over -20% since moving to the NYSE on June-24th. 

The scandals just keep coming. The big news today was that
troubled Vivendi may have tried to pull some accounting tricks
and the stock dropped -20% to close at 17.76. This does not
surprise market watchers as more and more analysts are saying
the bubble gains fueled unrealistic expectations and the crash
has caused many to try and cover up those problems with bogus
accounting. First Call, the keeper of earnings estimates, said
that they foresee more scandals ahead as the SEC takes a more
detailed interest in company financials. The warning flag is
out and those with problems know their days are numbered. They
can either come clean on their own or be found out by the 
scores of independent researchers currently ripping financials
apart. Either way the next quarter will be full of surprises.

Despite the unknown there are plenty of problems. Chuck Hill
of First Call said the current second half earnings estimates
are unrealistic and could come down at an alarming rate. Already
the 3Q has seen estimates drop from 22% to 17% and should fall
much further. He feels analysts are behind the curve and will
race to catch up as the 2Q earnings are announced. Chuck sees
the second half as choppy at best with no real growth until 2003.
What a cheerful outlook! According to First Call the warning ratio
is 1.2:1, warnings to affirmations. Earnings begin next week and
unfortunately many of them may have lowered guidance. This is
not a positive environment for a rally over terrorist fears. 

Speaking of terrorist fears the government went on record again
with another global warning for the coming weekend. They caution
about attending crowded events both here and abroad. This is the
number one weight on the market today. The fear of the unknown. 
The S&P closed only four points away from the 9/11 reaction lows
and there were several attempts to rally from that level. They 
all failed. The market appears determined to move lower on the
earnings, accounting and terror problems but this selling urge
should dissipate some on Monday. It may not be gone but the normal 
ebb and flow of the markets should return. With the Nasdaq at a
five year low and the continuing flood or warnings and downgrades
it will not be the Nasdaq that races to the rescue. It is already
below the 9/11 lows and still dropping. 25% of the Nasdaq 100 are
at 52-week lows or lower. 

The event risk will be the predominate mover of the markets on
Wednesday. There is no way to factor into already severely oversold
markets another attack with massive deaths. The declining volume
tells the tale. On the NYSE the down volume was 1.5 billion and
the up volume only 182 million shares. Nearly a 10:1 ratio. If 
you subtract the 820 million shares of WCOME traded on the Nasdaq
you are left with 1.6 billion down volume and 229 million shares 
of up volume. I have not heard the word capitulation as much this
week since the sell offs have been gradual and orderly but the
better than 7:1 down volume should be a clue. Advances were severely
beaten by declines 1564 to 4964 on a combined basis. 

Where am I going with this? You can't factor in the terrorist
problem but you can factor in the severely oversold conditions. 
What I expect is a very extreme move on Monday. Up or down we
should move very fast. Several readers have asked about a straddle 
or strangle. We know there will be a multiple hundred point Dow 
move in at least one direction. Using the DJX because they are
cheap options you could do a July-90 straddle for $4.50 net debit.
(2.35 call and 2.15 put) However this would require a significant
move to break even. The 88/92 strangle would make more sense at
a net debit of $2.85. You would have less invested but still need
a significant move. Using the OEX options the numbers get even more
out of line with the 470 straddle costing over $26.00. The best 
vehicle in my opinion is the QQQ with narrow strikes and cheap 
options. The 24.00 straddle is only $2.40 and the 23/25 strangle 
is only $1.50. It is highly likely that the QQQ could see a 2.5
point move in either direction which would make this strategy
profitable. 



 



 



 

However, regardless of those options above the best strategy would 
be to just wait. Without any tragic event over the weekend the 
markets are likely to rally back to resistance again. The odds 
are better than 50/50 that once the relief rally is over the
markets will fall victim to the earnings problem and roll right
back over again giving us a great entry point for another 
directional put play. Should we be attacked again the markets 
will crash and push us into another reaction low like we saw in
September. This would provide another opportunity for a long 
directional play on the rebound. Both of these scenarios require
ready cash to play. If your risk capital is tied up in a straddle
or strangle and you find yourself trying to wish/hope the markets
back to a breakeven position then you can miss out on the best
play of all. To me the event risk is not being in cash with an
open mind and ready to capitalize on whatever the markets give 
us on Monday. Do you really want to spend your holiday worrying
that a Monday relief rally will not occur? Do you want to spend
the weekend hoping for an attack where innocent people die? I
doubt you will answer either question with a yes. Take the 
weekend off and relax with your family. You never know if the 
next attack will hit somebody YOU know. Leigh Stevens worked at
Cantor Fitzgerald and lost dozens of friends in the WTC attack. 
For millions of us the attack was a news event. For thousands it
was very personal. Let's just pray the weekend is peaceful and 
wait to worry about the markets until Monday. 

Enter Very Passively, Exit Aggressively!

Jim Brown
Editor

There will be no newsletter on Thursday July 4th.


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

BUYER'S HOLIDAY
TRADING ACTIVITY AND OUTLOOK - 

Potential equities buyers must be in the holiday mood already as 
they get ready for a slightly apprehensive 4th. Or, maybe they 
want to go home, to the shore, country, mountainside or beach for 
a long weekend and not have any stocks to think about - like what 
the heck will it (the MARKET!) do on Monday, particularly if 
someone or group gets blown up and all that perspective horror 
show that has been brought to our homeland - no security quite 
yet.  

Maybe we can take it more in stride when we get used to living 
with a certain amount of such man-made chaos, like they have done 
in Europe.  You may remember visiting most any decade to such 
global outposts where the guards had machine guns at the ready 
and looked like they knew how to use them.

The lack of buying interest is really noticeable - in period of 
uncertainty, investors don't short stock, they stop buying.  As 
Art Cashin says, they "keep their wallets in their pockets".  Art 
has toiled for many years at PaineWebber and he deserves all the 
attention he gets cause he is a real market pro - you can catch 
him only during market hours on CNBC however.


S&P 500 (SPX) & 100 (OEX) Indexes - Daily charts:


 


We are at a key "test" in the S&P 500 Index, as it closed right 
above its September low at 945.  A weaker opening on more news 
and bearish revelations like streaming out of WorldCom will tip 
SPX to under this prior low.  That one (Sept.) was a "panic" type 
sell off - the current decline is the other aspect of bear 
markets - the drip or erosion method. That is, everyday, every 
week, your stocks lose more in value. 

I tend to think that with stocks at such oversold extremes and 
the VIX (CBOE Volatility) index at a new closing high above 33, 
that - this is the contrarian in me - that with everyone rushing 
for the exits, the "seeds" of the opposite are being planted.  

We're due for a rally, but at what level?  Stay tuned.  The 
hourly charts will give us a better picture of possible downside 
targets - what has been "working" is those darn channel lines in 
terms of defining interim lows - you know those ones that set up 
next rally for shorting.  
  


 

Looks like 937 is a quite possible objective in SPX assuming 945 
gives way (the prior low was 944.75 to be exact) and I don't 
assume the BEST on a close on a close-on-the-low kind of day.

Resistance is likely on a move back up to 953, then to the 970-
971 area. 

For the adventuresome among us, buy the dips into the 937-935, 
risking to 934. From this area (937-935) the risk to reward is 
bad on new shorts, possibly decent on new longs.  

Or, just take some profits on puts, and rest for the battles next 
week. Friday is a half-day session, so don't expect any big 
contest then.   

In the OEX, the 465 area looks a possible next downside target, 
assuming that the index will once again, reliably move to the low 
end of the channel and form another swing bottom.  

The upswings are somehow less fun to play as you hold your breath 
while it feels like you are pushing the ball up hill.  The 
downswings are like the thrill of sledding downhill - whereas the 
rallies are like pulling the sled back up to the top.

OEX resistance (sell pressure) looks like it will come into play 
again on a move up to 480, then 488.

Like the SPX, buying the low end of the channel, if reached - in 
the case of OEX, in the 465 area - may shape up as a place to 
buy, even if only to cover some puts. If stabilization develops 
in this area, I'll suggest buying in this area, but want to SEE 
it first.  Hopefully we could have as long to buy it has the few 
hours that you had to short/buy puts at the recent top - when it 
built a nice little "flat top" on the hourly charts.   


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

Intel (-5.5%) was the most influential tech Dow stock that got 
slammed again today. Telephone (AT&T) was down more on a 
percentage basis but pointwise, it was off only 63 cents. The Dow 
is a price-weighted index so larger priced stock moves are 
influential beyond what is the case with price and capitalization 
indexes like the S&P. 

Money was fast coming out of Home Depot (-5%), Merck (-3.7%), 
Hewlett Packard (-3.1%), Citigroup (-2.7%), Microsoft (-2.3%) and 
Alcoa (off 2.2%).

Money was going IN to Coke, IBM (overdone on the downside 
yesterday), Phillip Morris and Johnson & Johnson. A mixed bag.  
The only constant is that stocks with steady earnings and 
earnings growth (e.g., KO) are holding their own or rising a bit 
even in such a bearish climate as today.   



 

The downside price channel intersects in the 87.7 area currently.  
I think the pattern I'm seeing on the hourly chart suggests that 
DJX can get to or near this target.  

I would be looking to buy in the 87.7-88.00 area in DJX, if 
reached. Resistance is at 90.8-91.0. 89.3, at the prior low has 
not been "tested" (as support) - but, stay tuned! 

A little push under Dow 9,000 and look out below. My major 
downside target on DJX, based on the Head & Shoulder's top on the 
daily chart remains at 88.6.  Hey, were almost there! 


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

Looks lower to me! The last consolidation on the QQQ hourly chart 
has the appearance of a bear flag, ahead of a next downswing.  
Where could that next swing low be?  



 


23.3 is target that I have and it's not far away.  We have 
already slipped under the 5% lower envelope line - some more 
"give" to that line would not be a stretch to the bear brain 
here.  Lets call 23-23.30 as an area to be alert to a turning 
point and a possible upside reversal initially fueled by short-
covering. 

There is some buying interest around current levels in enough 
Nasdaq 100 stocks to get a decent trading bounce IF the key Nas 
stocks like INTC, CSCO and MSFT stop declining.  MSFT still has 
this bottoming pattern intact - barely. Besides Microsoft 
however, at least one of the other "big-3" tech stocks needs to 
participate.    

Resistance looks like 24.4-24.6, then 24.8 - 25.2, with emphasis 
on the later number - 25.2 was the recent "breakdown" point and 
should offer significant resistance on a rally back up to this 
area. 


Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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

How Low Can It Go?
By Eric Utley

I bet that question is on the minds of a lot of investors these
days.  Let’s take a look at some of the numbers being run through
the minds of investors tonight.  The Nasdaq-100 (NDX.X) in triple
digits at 964, the first time it’s closed in triple digits since
January of 1998.  The S&P 500 (SPX.X), of course, is in triple
digits, too.  But the level that concerns technical analysts most
is 940, which is near where the index closed Tuesday.  The 940
level is being watched by most chartists on the Street for its
implications of a break of the long-term head and shoulders that
is so obvious on the weekly chart.  IBM (NYSE:IBM) last traded at
$68 and change; Intel (NASDAQ:INTC) was going for $16.50; a share
of Lucent (NYSE:LU) costs you a buck or two; a share of WorldCom
(NASDAQ:WCOME) sells for a dime these days.

It’s simply amazing to think from where we’ve come in the last
two and a half years.  Yet for one reason or another, the public
keeps hope alive.  The public refuses to throw in the towel.
And until the public quits, until all hope is lost for stocks,
until stocks is a four-letter word, the market is going to go
lower.

We’ve talked about the need for capitulation in this column.
Indeed, the signs have been in the numbers, but each time they’ve
proven premature.  The readings in the ARMS Index (INDEX:TRIN)
are once again in extreme overbought territory, but this indicator
has a lot of credence this year in my opinion.  The bullish
percent figures are dropping to near historic lows, with the
Nasdaq-100 bullish percent ($BPNDX) a stock away from single
digits.  The advancing versus declining volume was horrendous
Tuesday.  Some 90 percent of Tuesday’s volume was down volume.
And forget about the new high/new low index.  All signs point to
the inevitable washout, but each time the market stares into the
abyss, it’s brought back by that lingering hope of a rally.

I’m not smart enough to predict if or when a capitulation will
come, so thereafter the market can begin the healing process.
It seems we’re getting closer with each passing day.  But I’m
starting to question whether or not we get a capitulation in
this bear market.  John Bollinger, one of the few CNBC guests
that I pay attention, held an interview last week in which he
suggested that this bear market would not end with a big
washout event.  I’m starting to agree with him.  A slow bleed
lower seems like the course ahead.

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

Market Averages

DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     :  9008

Moving Averages:
(Simple)

 10-dma: 9241
 50-dma: 9791
200-dma: 9811



S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     :  948

Moving Averages:
(Simple)

 10-dma:  986
 50-dma: 1049
200-dma: 1099



Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low : 1089
Current     :  964

Moving Averages:
(Simple)

 10-dma: 1034
 50-dma: 1185
200-dma: 1397



Bank ($BKX)

The BKX was the best performing sector on my list today.  It
lost 1.37 percent for the day.  Pretty sad state of affairs.

The BKX was propped up by J.P. Morgan Chase (NYSE:JPM), Wells
Fargo (NYSE:WFC), and Banc of America (NYSE:BAC).

52-week High: 924
52-week Low : 691
Current     : 804

Moving Averages:
(Simple)

 10-dma: 825
 50-dma: 865
200-dma: 844


Gold ($XAU)

The XAU was the worst performing sector during Tuesday’s slide in
stocks.  Not even the once defensive gold stocks could muster a
bid.  They got slammed for 6.55 percent!

Leading downside movers included Gold Fields (NYSE:GFI), Agnico
Eagle Mines (NYSE:AEM), Anglogold (NYSE:AU), Harmony Gold
(NASDAQ:HGMCY), and Placer Dome (NYSE:PDG).

52-week High: 89
52-week Low : 49
Current     : 70

Moving Averages:
(Simple)

 10-dma: 76
 50-dma: 79
200-dma: 64

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

Market Volatility

The VIX finished much higher relative to the VXN Tuesday.
The VIX gained more than 10 percent, while the pop in the
VXN was good for just under 4 percent.

The key here is if the two can take out their relative highs
hit last week.

CBOE Market Volatility Index (VIX) - 33.64 +3.08
Nasdaq-100 Volatility Index  (VXN) - 59.59 +2.14

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

          Put/Call Ratio  Call Volume   Put Volume
Total          1.08        561,563       606,082
Equity Only    0.92        418,184       382,308
OEX            1.64         26,742        44,034
QQQ            0.86         55,355        47,345

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

Bullish Percent Data

           Current   Change   Status
NYSE          47      - 2     Bull Correction
NASDAQ-100    10      - 3     Bear Confirmed
DOW           30      + 0     Bull Alert
S&P 500       36      - 2     Bear Confirmed
S&P 100       33      - 2     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  1.67
10-Day Arms Index  1.76
21-Day Arms Index  1.49
55-Day Arms Index  1.39

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        804          2468
NASDAQ      881          2598

        New Highs      New Lows
NYSE        50            220
NASDAQ      33            304

        Volume (in millions)
NYSE     1,805
NASDAQ   2,718

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

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 - 7/2
by Leigh Stevens

Well, nothing could escape today and there is no "green" showing 
on my sector-board!  We could say what is off the least, which I 
will do as a matter of possible interest.  

"A" for Airlines and you have a sinking "ship". The free fall in 
the Airlines sector (XAL) is hardly noticed any longer, but XAL 
is fast approaching its Sept. low at 58.8 which is noteworthy, 
versus the close today of 62.5. This surprised me, as somehow I 
thought it was under that post-9/11 panic low already. 

The Amex Composite, along with the other small and mid cap 
"champions", the S&P 600 Small Cap and the Russell 2000, was off 
today, but (also typically) less than most other sectors.

The Biotech stocks were off again, with the Biotech Index sinking 
a substantial further 4% today  - it sank to a new intraday and 
closing low in both the index (BTK) and the HOLDR's (BBH) - 
stopping me out I might add, of the HOLDR'S, which was an attempt 
to play an oversold bounce.  The bounce was not a RE-bound like a 
ball, but only a thud like a "dead cat" bounce. 
 

The Defense Index ($DFI.X) was not the biggest loser but the 
index is now accelerating to the downside, fulfilling the 
expectation of the Head & Shoulder's Top pattern, I've been 
pointing out for a while now. 

The Home Construction sector was not immune today - this index 
looks like it is topping out to me, but is above support so the 
jury is out on this group.  Healthcare (HMO) also retreated 
further - has now given back 50% of its March-June strong 
advance. The Health Providers Index ($RXH.X) is outpacing the 
fall of the HMO health "Payors" substantially - falling nearly 5% 
in two days, versus 3.5% for HMO over the first two days of the 
week - good thing it’s a short week!  

XAU, the index of Gold & Silver mining and production companies 
fell below its recent trading range - looks like another 
downswing is ahead per my target of a further move to the 64 
area, from around 70 today.  The recent rally was a bust and 
selling opportunity - you heard it here first folks! 

Natural gas, oil and oil services took it on the chin too.  
Natural gas didn't hold its line of prior support and oil 
services, which I have been bearish on, fell to under its 200-day 
moving average.  Retail stocks ($RLX.X) continued to fall, but in 
the context of having had a good early year run up - sector has 
now retraced more than 50 percent, but less than 62. 

The Semiconductors (SOX) Index fell to a new low at 348.5 - the 
prior Sept. low at 344 is not far away now.  Earnings downgrades 
are to blame - cut the earnings (expectations), whack the stocks 
down some more to get them in line.  Good thing that Analysts are 
"infallible"!

OFF LESS THAN 1% ON THE DAY ON Tuesday -

Now this is new one - I've usually been able to show some "green" 
in this section of "UP on the day" - not today. 

Fear & loathing (of stocks) reigns instead - meanwhile, investors 
are saying "forgetaboutit!" to stocks and turning their attention 
to July 4th barbecues. 



 

 
DOWN ON THE DAY on Tuesday - 


 

In case you were wondering why the Goldman Precious metals index 
is off so little relative to the XAU - the former index 
represents the price of the metals held in a variety of ways 
(e.g., futures, bullion, etc.) whereas XAU, is an index 
comprising the stocks of the companies involved in production and 
sales of the metals.  

XAU reflects a built in expectation for the future rise and value 
of precious metals - if that built-in expectation for the gold 
stocks has projected earnings that assumes a rise in prices equal 
to Q1 when gold rose strongly, but instead gold prices level and 
then start falling off as has happened lately, the XAU stocks can 
fall even further than the metal prices. Nothing comes down 
faster than a stock that gets knocked down several rungs on 
reduced earnings projections.  


SECTOR TRADE RECOMMENDATIONS & REVIEW -


NEW TRADE RECOMMENDATION(S) -

NONE 


OPEN TRADE REC(S) - 

Short OIH at 64.00 or more; Stop at 67.2
(Oil Service HOLDR stock)
NOTE: The Oil Service sector keeps slipping further away from my 
suggested entry - 7/2 close: 58.64  
CANCEL ORDER - PRICE IS OUT OF RANGE


OPEN POSITIONS - 

 NONE 


 
TRADE LIQUIDATIONS -
 
Sold BBH 75.15 on Stop-loss versus 79.10 entry 
(Biotech HOLDR's Trust stock)

Sold HHH at 21.70 Stop-loss, versus 22.80 entry
(Internet HOLDR stock)



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 - reversal there signals further weakness ahead. 
The closing downside penetration of 620 "confirms" a 
Head & Shoulder Top pattern, with an objective down to the 565 
area. 

TODAY: Now you would think with the build up of defense under 
Bush, that the defense stocks would continue to forge ahead and 
not be topping out, at least for now - WRONG! Stocks get ahead of 
themselves (ahead of their "fundamentals") and price all the good 
news in - now we find, with the tax cut and other social and 
homeland security obligations, etc., there are limits to how much 
defense spending can grow.   
UPDATE: 7/02


Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                  Tuesday 07-02-2002
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:
*****

AGN $62.10 -2.15 (-4.65) Since we added it, AGN has been a big
disappointment.  The breakout over the $65 level has now been
reversed and the strong selling volume is not encouraging.
Despite the strength the stock had been showing, it just can't
buck the bearish action in either the BTK or DRG indices and the
bears have now clearly reasserted their control.  And to make
matters worse, our stop was violated at the close on Tuesday.
Use any sort of oversold rebound in the morning to exit at a
more favorable level.

DHI $25.48 -1.00 (-0.55) Another failed rally in the Home
Construction sector ($DJUSHB) makes it clear that this isn't the
place to be looking for tradable bullish moves.  The DJUSHB
rolled over at the $383 resistance level early in the day on
Tuesday, and the effects were felt in shares of DHI, which gave
up nearly 4% to end near the $25.50 level.  While well off the
intraday lows, our motivation for dropping the play is the
sector weakness and the fact that DHI has been unable to make any
upward progress since we began coverage.  We're dropping
coverage tonight, so use any continuation of the rebound to
close open positions.

QCOM $24.80 –1.63 (-2.71) The enthusiasm over QCOM’s raised
guidance proved short lived after the last two day’s of
downside movement in shares.  We can thank WR Hambrecht for
today’s weakness.  The brokerage firm downgraded shares of
QCOM from a buy rating to a market perform outlook based on
their view that next year’s consensus estimates for earnings
are too high.  The news caused QCOM to fall back to its
relative lows, which was the third retest of that support.
The chances are good for a breakdown, so we don’t want to
hang around to find out if support is going to hold again.
Use any short term relief rally in the next two sessions to
exit plays.


PUTS:
*****

ZLC $38.24 –0.26 (+1.99) On no news, ZLC exploded higher in
yesterday’s session.  The stock broke back above its
resistance zone between the converged 10-dma and 200-dma.
The breakout came on a slight increase in advancing volume,
but the trading activity was abnormally high.  What comes
of ZLC’s reversal yesterday remains to be seen.  We’re
dropping coverage on the play because of the big reversal
yesterday.  Set a stop at Monday’s high at $38.90 or look to
exit plays on weakness into tomorrow’s session.

MXIM $35.68 -0.50 (-2.65) The Semiconductor sector (SOX.X) has
been a favored target of the bears in recent weeks and that
pattern continued today, with the SOX ending a mere 4 points above
the September lows.  That could be setting us up for a pretty
strong rebound in the sector.  Combine that with the fact that
MXIM seems to be finding support at the $35 level has us leaning
to the side of caution tonight.  The fact that the stock hasn't
broken down with so many of its other chip brethren leads us to
conclude it could see some significant buying on a SOX rebound.
So take advantage of the current weakness to lock in gains and
focus on the next high-odds play.


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

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

CALLS              Mon    Tue  

DHI      25.48    0.45  -1.00  Dropped, losing technical position
QCOM     24.80   -1.06  -1.63  Dropped, downgrade ended the run
BA       44.54   -0.40  -0.06  Holding its own despite Dow selling
ESST     16.01   -0.93  -0.60  Back to support on very low volume
AGN      62.10   -2.50  -2.15  Dropped, drug sector weakness
SNPS     52.23   -1.76  -0.82  Found support near 200-dma, entry?
MSFT     51.44   -2.02  -1.22  New, big cap tech near support


PUTS               

IBM      68.58   -4.40   0.98  Another breakdown around corner???
ZLC      38.24    2.25  -0.26  Dropped, unexplained rally, no news
TDS      58.53   -0.65  -1.37  Moving steadily lower, new low next
EMMS     18.91   -1.61  -0.67  Rolled over at 10-dma, $18 next???
KMI      37.60    0.28  -0.70  XNG.X broke down below its support
EXPE     52.00   -1.88  -5.41  Closed on its 200-dma, big break???
LXK      50.37   -3.50  -0.53  Hardware woes help put holders!!
MXIM     35.68   -2.15  -0.50  Dropped, showing signs of strength
QLGC     34.43   -2.21  -1.46  Break down below long-term support
XL       81.61   -1.67  -1.42  Broke down to new relative lows!!
ACS      43.48   -1.83  -2.17  Outsourcing firms in the dog house
LLY      52.12   -2.64  -1.64  Heavy selling hitting drug makers
CAM      47.70    1.15  -1.87  New, breakdown in oil service group


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

ESST $16.01 –0.60 (-1.53) If you were looking for a better entry
point into ESST, you certainly got it so far this week.  The
stock has been pulled lower by the weakness in the broader
market in the first two days of this holiday shortened trading
week.  But we would note that the selling in ESST in the last two
days has lacked conviction in the form of trading volume.
Trading is measurably lower in the last two days from the recent
norm that we’ve observed in ESST.  The stock only traded 1
million shares during today’s session versus the close to 3
million average daily volume over the last month.  The lack of
volume to accompany the downside movement in the stock tells us
that the weakness has been market related, and that ESST could
snap back as soon as the market turns around.  Look for a bounce
in tomorrow’s session from above the $15 to $15.75 support
area.  Use a tight stop just below your entry to protect against
any further downside caused by the market.

BA $44.54 -0.06 (-0.46) What's the meaning of relative strength?
Look at this for a comparison.  The DJIA is down 235 points
(2.5%) so far this week, while BA has shed a mere 46-cents
(1.0%).  Not only that, but even when the selling was at its
worst on Tuesday, the bears couldn't push the stock significantly
below the $44 support level and it came bouncing back in the
afternoon session, closing down a mere 6-cents on the day.  With
all the easy pickings in other areas of the market, the bears
are content to let BA rise on its own improving fundamentals,
rather than fight the emerging bullish trend.  Before we get
carried away, we have to remember that the bulls still have to
contend with resistance at $46 before they can think about
challenging the $48 and then $50 levels.  But without a doubt,
intraday rebounds from the $43-44 area still look attractive for
new positions.  The wild card is the 4th of July weekend, and
prudent investors will want to wait for an uneventful conclusion
to the weekend before initiating new positions.  Keep stops set
at $41.50.

SNPS $52.23 -0.82 (-2.58) Semiconductor stocks have been under
heavy selling pressure again this week and negative analyst
comments targeted at select chip companies this morning certainly
didn't help with the bulls' indigestion.  By the time the closing
bell rang on Tuesday, the Semiconductor index (SOX.X) was sitting
at $348, a mere 4 points above the September lows.  If this is
going to be a successful double-bottom for the SOX, we want to
concentrate our bullish efforts on chip stocks that are
exhibiting relative strength.  And it is hard to find a better
candidate than SNPS, which continues to find support near the $51
level, which happens to be the 38% retracement of the stock's
rally off of the September lows.  The key to SNPS staging a
meaningful advance will be renewed life in the SOX, but a decent
rebound off the lows could inject some excitement into shares of
SNPS.  Continue to use bounces from the $51-52 area to establish
new positions, but keep stops tight at $50.50.  The first proof
that the bulls are gaining strength will be when SNPS scales the
$56 resistance level, and that move could be used to establish
new momentum-based positions.  With the light volume which is
expected between now and the close of trading on Friday, the
prudent course of action may be to wait until Monday to establish
new positions.


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

MSFT – Microsoft $51.44 -1.22 (-3.26 this week)

Although best known for its ubiquitous Windows PC operating
system, MSFT develops, manufactures, licenses and supports a
wide range of software products for a multitude of computing
devices.  The company's software products include scalable
operating systems for servers, PCs and intelligent devices,
server applications for client/server environments and software
development tools.  The MSFT's online efforts include the MSN
network of Internet products and services and alliances with
companies involved with broadband access and various forms of
digital interactivity.

The issue of retesting the September lows is now a moot point,
especially in the Technology arena, with the NASDAQ-100 now fully
125 points below its September lows.  And numerous narrow sectors
like the Biotechs (BTK.X) and Software (GSO.X) are well below
those September lows.  In contrast to this persistent weakness,
MSFT (the king of all Software stocks) is holding up remarkably
well.  While it came down to test its September lows near $48 in
early May, since then the stock has been posting a series of
higher lows, as the bulls chip away at resistance in the vicinity
of $56.  In an environment of rampant rumors that this company or
that company is going to miss earnings estimates or warn about
not achieving earnings, MSFT has been experiencing slightly
different rumors.  In MSFT's case, the talk is that the company
might surprise to the upside due to "coming clean" with 'extra
earnings' the company has been saving up for a rainy day.  These
rumors are simply that and remain unconfirmed for the time being.
But there is no arguing with the stock's relative strength.
Sure, Tuesday's session was not particularly encouraging with the
2.3% decline, but if there is going to be a rally in Tech-land,
MSFT is going to be one of the primary leaders.  Dips into the
$50-51 area look attractive for new positions, but we need to wait
for the bounce before playing.  Nobody wants to catch a falling
knife!  A volume-backed rally through the $53 level can be used
for new entries as well, although the upside will continue to be
limited by the $56 resistance level until a real rally breaks out.
With the light volume expected through the remainder of this week,
the prudent course of action may be to wait until next week
before plunging into an uncertain market.  Initial stops are in
place at $48, just below the May lows.

BUY CALL JUL-50*MSQ-GJ OI=30600 at $3.40 SL=1.75
BUY CALL JUL-55 MSQ-GK OI=47255 at $1.05 SL=0.50
BUY CALL AUG-50 MSQ-HJ OI= 1139 at $4.40 SL=2.75
BUY CALL AUG-55 MSQ-HK OI= 7742 at $2.05 SL=1.00

Average Daily Volume = 35.9 mln



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

IBM $68.58 +0.98 (-3.42) After just managing to keep IBM below
our $72.50 stop at the close last Friday, the bears were rewarded
by a huge drop in the stock on Monday due to renewed fears about
an earnings warning.  With Big Blue coming to rest just above
critical support in the $67 area yesterday, UBS Warburg threw the
bulls a lifeline this morning, defending the stock and stating
that its books are clean.  The firm reiterated its $120 price
target and although intraday trade was volatile, IBM ended the
session with a gain of almost a dollar.  Bearish traders are
likely viewing the bounce with renewed hunger, figuring it for
yet another opportunity to get short.  We considered closing the
play tonight, but given the possibility of a warning from the
company, we're going to give it a couple more days.  Use a failure
of the current rebound near the $69-70 level to initiate new
positions, but lower stops to $70.50, just above yesterday's
intraday resistance.  In the absence of a warning between now and
then, we'll drop coverage over the weekend.

LLY $52.12 -1.64 (-4.28) When we initiated coverage of LLY over
the weekend, that $56 support level looked like it was in danger
of being broken, but we had no idea that it would come so quickly
and with such force.  Heavy selling volume has been the theme for
the past 3 days, and that $56 level failed first thing on Monday
and the bears haven't looked back since.  While the stock managed
to find some support this afternoon near the $52 level, the
Pharmaceutical index (DRG.X) appears to have given up all vestiges
of support.  Speaking of support, LLY doesn't appear to have any
of consequence until the $50 level and today's downgrade from
Bernstein certainly didn't help.  An oversold rebound to the $54
level would provide for a solid entry point, although a real rally
in the group could raise LLY to heavy resistance at $56.50 making
for a great entry on the rollover. We are lowering our stop
tonight to $57.  Of course, a breakdown below the $52 support
level on continued heavy trade would be just what momentum traders
are looking for in order to add new positions.  Just be sure to
play with caution through the remainder of this week due to the
expected light volume.

LXK $50.37 -0.53 (-4.03) After adding our bearish play on LXK last
week, we couldn't have asked for a better entry point.  Monday's
early rally attempt lifted the stock right to the $55 resistance
level before the bulls ran out of conviction and the bears
attacked with a vengeance.  By the end of the first day of this
holiday-shortened week, LXK was resting at its lowest closing
level since late February and it didn't end there, with the stock
falling further on Tuesday, finally finding some weak support at
the psychologically important $50 level.  Whether this level holds
over the near-term likely depends on the action of the broad
market, but judging by the PnF chart, there is still substantial
downside to come.  The PnF price target is currently $38.  Now
that the $55 level has been solidly broken, we can look for
oversold rebounds to find solid resistance near there.  Target
new entries on a failed rally either at $52 or in the $54 area.
Remember that our stop is currently resting at $54.50, limiting
our upside risk.  Momentum traders can consider new entries on a
drop under the $50 level, but will want to make sure the breakdown
is accompanied by heavy volume.  That is unlikely to occur during
the remainder of this week, as volume is expected to be light
until traders return en masse on Monday.

QLGC $34.43 -1.46 (-3.67) Offering proof of just how weak the
Technology sector is right now, shares of QLGC barely paused from
their decline yesterday to acknowledge the positive comments from
Thomas Weisel.  The firm said that QLGC offers the most potential
for upside relative to June estimates and that channel checks
suggest SAN implementations are up sequentially.  The market just
yawned and after the opening blip, it was all downhill into the
close.  Tuesday's session wasn't much better, with a gap down that
filled in the middle of the day before the stock closed down by
4%.  That makes for a nice day week for a hungry bear and those
that have already harvested some gains would likely do well to
take the rest of the week off (due to the expected light volume)
and enjoy a few extra days off.  But if you must play, look for
a rollover in the vicinity of strengthening resistance at $36,
with the possibility of a better entry near $37-38.  As deeply
oversold as the market has become, entries on a further breakdown
need to be carefully monitored and followed with a tight stop.
Lower stops to $38.25.

TDS $58.53 –1.37 (-2.02) TDS has been a picture perfect put
play so far.  The stock continues to creep lower along with
the broader telecommunications and technology sectors.  It
has displayed a pattern of rallying for one or two days to
work of its short term oversold condition, only to be
followed by another leg lower in the three month long
downward trend that is in place.  Given the current position
of the stock, we would expect another leg lower in the coming
days possibly to a new relative low in the trend.  There may
be a quick scalp trade over the coming sessions down to the
next relative low.  Of course we would take a big smash down
move lower, but if the stock continues along its pattern, it
could stage another rebound back to a more favorable entry
point.  If the stock does continue lower in the coming
sessions, then look for a possible near term exit point near
the $55 level, which could act as support.

EMMS $18.91 –0.67 (-2.28) EMMS followed through by a small
amount during last Friday’s session which brought an end to
the short covering rally which helped to remove some of the
oversold condition in the stock.  Funny enough, and not by
coincidence, the stock rolled over once again from its 10-dma
in Friday’s session and again in yesterday’s session, which
saw the stock’s intraday high reach the 10-dma.  From there,
it’s been another two days of heavy selling coming into EMMS
which we suspect will continue into the short term and carry
the stock ever lower towards its September lows.  If you didn’t
take an entry on the rollover from the 10-dma during
yesterday’s session, continue to watch for short covering
rallies to fail near that downward sloping short term moving
average, which finished today’s session at the $21.28 level.
It should fall further in tomorrow’s session after the last
two days of weakness.  Those looking for a momentum entry
point into weakness can watch for a breakdown on a pick up
in intraday trading volume below the $18 level during
tomorrow’s session.  From there we would expect a retest of
the relative low reached during last week’s big sell-off down
around the $16.75 level.  You can use that level as a short
term exit point, or wait for a break and confirmation below
that level that the stock is heading lower.

KMI $37.60 –0.70 (-0.42) The slow, steady movement lower in
KMI continued over the last two sessions as the stock fell
back below the $38 level which was broken late during last
week’s trading.  The stock is again approaching its low hit
earlier this year in late February at the $36.81 level.  The
shorts might be targeting that level as an exit point.  As
such, a rebound from that level is possible if it’s reached in
the next several sessions.  We’ll take it as we see as KMI
approaches that level.  But until we get further confirmation
of trend and weakness, and until KMI reaches that level, we
favor taking new entries on a short covering rally that stops
near short term resistance.  That could mean a rollover from
the downward sloping 10-dma which is coming down, now at the
$39.37 level.  There’s some congestion just below that level
to $39 which may prevent KMI from reaching its 10-dma and
offer a favorable rollover entry point into new put plays.
Make sure to keep an eye on the Natural Gas Index (XNG.X) as
well.  The XNG.X finally broke down below the 155 level during
today’s session, which we hope opens the way for further
selling in KMI.  Confirm the breakdown in the XNG.X tomorrow
with a break below the 154 level.

EXPE $52.00 –5.41 (-7.29) And like that, EXPE is more than
$7 lower this week!  The news flow from EXPE has been quiet
so far this week, other than the announcement this morning
that the company would replace its auditor at the request of
USA Interactive.  Never mind the news, the stock fell back
down to retest the lows traced last week.  Perhaps more
importantly, EXPE fell to test its 200-dma for the first time
in eight months.  The test could lead the way to further
downside movement in the stock if institutional investors
decide to pull the plug on this one.  Look for confirmation of
a breakdown below the 200-dma with a decline below the $51
level in the coming days.  Such a breakdown should be
accompanied with heavy declining volume, which itself would
help to confirm the breakdown.  The stock may try to bounce
from the $50 level for its psychological significance, but
that much remains to be seen.  If the $50 level does not hold
over the near term, then it’s very possible that EXPE could
trade down to its next support level down near the $42 to $43
range.  We’ll target that support zone for an exit point if
the 200-dma is broken in the coming days.

XL $81.61 –1.42 (-3.09) XL continued lower into today’s
session after attempting a feeble rally attempt during last
Friday’s session.  The subsequent inside day that was traced
during Friday’s session set up a most favorable entry point
upon the breakdown in today’s session.  The stock fell below
its short-term support levels and in doing so hit a new
relative low in its three month long descending trend.  From
here, the stock is poised to fall further as the bids seem to
be drying up at an increasing rate.  The stock has very little
in the way of support below current levels because of its sharp
rise last fall from the $65 level to up above the $85 level.
The lack of support may help to accelerate the downside in XL
over the coming sessions given its breakdown below support in
today’s.  The only meaningful technical level that we can
find as support is the 200-WEEK moving average which is coming
up at the $70 level.  That’s still more than $10 away from
current levels, and we’ll obviously take that downside from
here!  Traders can try entering new put plays into further
weakness in tomorrow’s session, but as we’ve seen in the
recent past, XL has the propensity to sell off for two or three
days to a new relative low, then rebound for one or two days
back up near declining resistance.  With that said, we’d prefer
to take entries following a short term relief rally, which
would help to remove some of the stock’s short term oversold
condition.

ACS $43.48 –2.17 (-4.00) It has been a wild last couple of
sessions for ACS.  Fellow outsourcing firm EDS has been in
the spotlight for various reasons, which has translated into
measurable weakness in ACS in the last two days.  The stock’s
rollover from its 10-dma in yesterday’s session was followed
by a steep sell off that carried over into today’s session.
The selling didn’t subside until ACS broke down below the $42
level in today’s session.  The stock did rebound, but not
before a lot of technical damage had already been done.  Given
the breakdown below the congestion zone traced earlier this
year in February, we suspect that ACS will head lower into the
coming weeks.  The short covering that came into the stock in
the latter part of today’s session should subside in the coming
days, depending on the action in the broader market.  We
actually wouldn’t mind if the stock continued slightly higher
to offer a better entry point into new put plays.  A rollover
near today’s high just below the $46 level would offer a good
entry point into new plays.  As reference to support, we’ll
use today’s intraday low to the $41.13 level for either exit
points for open positions or a breakdown entry point play,
depending on you individual style and risk tolerance.


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

CAM – Cooper Cameron $47.70 –1.87 (-0.72 this week)

Cooper Cameron Corporation is an international manufacturer of oil
and gas pressure control equipment, including valves, wellheads,
controls, chokes, blowout preventers and assembled systems for oil
and gas drilling, production and transmission used in onshore,
offshore and subsea applications. Cooper Cameron is also a
manufacturer of centrifugal air compressors, integral and
separable gas compressors and turbochargers. The Company's
operations are organized into four separate business segments,
Cameron, Cooper Cameron Valves, Cooper Energy Services and Cooper
Turbocompressor, each of which conducts business as a division of
the Company.

Even the once strong are falling in this market environment.  The
Oil Service Index (OSX.X) had been one of the lone bright spots of
the market this year.  But its shine ended about a month ago when
the sector began its most recent slide lower, which gave back the
final gains that it had built up for the year through late April.
The OSX.X itself fell to its 200-dma in today’s session, which
stands at the $88.50 level.  A breakdown below $88 in the OSX.X
should open the way for further downside from a sector perspective.
Surprisingly, the price of crude oil has not yet pulled back like
the oil stocks have already done.  But more often than not, the
stocks will lead the commodity.  So in this case, we may see a
move lower in the price of crude over the coming months, which
would be used as confirmation for the bearish play that we’re
initiating on CAM.  The stock hovered above the $48 level late
last week and during yesterday’s session, but that level was lost
during today’s session.  The $48 level had acted as strong
support during March and April, and with that level now broken,
CAM doesn’t have much support immediately below current levels
until its 200-dma, which is coming up near the $44.50 level.
Below there, the stock could see the other side of $40 if the
trend continues at its current rate.  Traders can take new
entries into put plays on further weakness below today’s intraday
low at the $47.36 level.  Confirmation of a breakdown would come
on a decline below the $47 level.  Target the 200-dma to the
downside for a short term exit point.  If the stock does stage
a relief rally along with the same in the OSX.X, the wait for
the selling to subside, and watch for CAM to rollover near its
resistance overhead around the $50 level where the 10-dma is
moving down.  Our stop is initially in place just above that
short term resistance at the $51 level.

BUY PUT JUL-50*CAM-SJ OI=28 at $3.40 SL=1.75
BUY PUT JUL-45 CAM-SI OI= 0 at $1.05 SL=0.50

Average Daily Volume = 843 K



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The Option Investor Newsletter                  Tuesday 07-02-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


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

EXPE - Expedia $52.00 –5.41 (-7.29 this week)

Expedia, Inc. is a provider of travel-planning services. The
Company's global travel marketplace includes direct-to-consumer
Websites offering travel-planning services located at
Expedia.com, Expedia.co.uk, Expedia.de, Expedia.ca, Expedia.nl
and Expedia.it. The Company also provides travel-planning
services through Voyages-sncf.com, as part of a joint venture
with the state-owned railway group in France. In addition, the
Company provides travel-planning services through its telephone
call centers and through private label travel Websites through
its WWTE business. WWTE is a division of Travelscape, Inc.,
one of the Company's wholly owned subsidiaries. In February
2002, a controlling stake in the Company was acquired by USA
Networks, Inc.

Most Recent Update

And like that, EXPE is more than $7 lower this week!  The news
flow from EXPE has been quiet so far this week, other than the
announcement this morning that the company would replace its
auditor at the request of USA Interactive.  Never mind the
news, the stock fell back down to retest the lows traced last
week.  Perhaps more importantly, EXPE fell to test its 200-dma
for the first time in eight months.  The test could lead the
way to further downside movement in the stock if institutional
investors decide to pull the plug on this one.  Look for
confirmation of a breakdown below the 200-dma with a decline
below the $51 level in the coming days.  Such a breakdown
should be accompanied with heavy declining volume, which
itself would help to confirm the breakdown.  The stock may try
to bounce from the $50 level for its psychological
significance, but that much remains to be seen.  If the $50
level does not hold over the near term, then it’s very possible
that EXPE could trade down to its next support level down near
the $42 to $43 range.  We’ll target that support zone for an
exit point if the 200-dma is broken in the coming days.

Comments

With losing more than $7 already this week, EXPE could be in
for much more downside if its 200-dma is broken tomorrow.  The
stock closed right on its long-term moving average today, which
set up a favorable entry opportunity tomorrow upon a breakdown.
Watch for a decline early tomorrow morning below the $51 level
and confirm with a breakdown below $50.  Make sure to monitor
volume in such a scenario, as declining volume should increase
on program selling below the 200-dma.  Confirm weakness in the
Nasdaq.

BUY PUT JUL-55*UED-SK OI=2803 at $5.60 SL=3.50
BUY PUT JUL-50 UED-SJ OI=1857 at $3.10 SL=1.50

Average Daily Volume = 1.92 mln



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

Bullish candidates come oh so close.  Meanwhile, bearish 
candidates are working like crazy!


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http://members.OptionInvestor.com/watchlist/070202.asp


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

Several sectors and market averages are on the brink of another 
breakdown below support.  But what’s new about that?


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