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Daily Newsletter, Wednesday, 07/03/2002

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The Option Investor Newsletter                Wednesday 07-03-2002
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)
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07-03-2002                High     Low     Volume     Adv/Decl
DJIA     9054.97 + 47.22  9070.89  8897.54 1540 mln   1215/1903
NASDAQ   1380.17 + 22.35  1380.38  1336.06 2629 mln   1492/1910
S&P 100   474.41 +  4.30   474.60   463.65   totals   2707/3813
S&P 500   953.99 +  5.90   954.30   934.87
RUS 2000  429.47 -  3.37   432.84   429.47
DJ TRANS 2596.76 - 23.12  2639.12  2568.18
VIX        33.37 -  0.32    35.35    32.89
VIXN       60.08 +  0.51    62.25    59.61
Put/Call Ratio      0.95
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No Fireworks Prior to the Fourth

There may not be a lot of travelers flying this Fourth of July 
but the markets took a round trip prior to the Independence Day 
holiday.  The morning hours were painful to watch as all three 
major indices traded significantly lower.  Yet after hitting new 
relative lows the selling abated as traders began to "get flat" 
or cover their short positions prior to the holiday closure.  
This bounce began around noon and continued into the afternoon 
for the DJIA, COMPX and the SPX allowing all three to close 
positive.

Volume was decent for a pre-holiday trading session.  The NYSE 
saw over 1.5 billion shares traded and the NASDAQ reported 2.6 
billion shares trading with 1B of that coming from WorldCom 
(WCOME).  Market breadth remained negative with advancing issues 
of 1215 and 52 stocks hitting news highs falling behind 1903 
decliners and 188 new lows on the NYSE.  The NASDAQ turned in 
similar numbers with 1492 advancers and 86 new highs to 1910 
decliners and 247 new lows.  

The afternoon bounce was impressive as the DJIA gained 150 points 
of the lows for the day lead by shares Home Depot (HD) who turned 
in a 9% gain to close at $36.85.  Fellow retailer Wal-mart (WMT) 
also added to the Dow's positive moves with a 3% gain of its own.  
Short-covering in the tech sector had shares of INTC gaining 7% 
and IBM adding 2.8%.  Traders looking at an intraday chart (try 
the 5-minute interval) couldn't help but notice the multiple 
bounces at the 8900 level for the DJIA.  While the close over 
9000 is encouraging the trend is still down and we pray that an 
uneventful weekend will allow for the relief rally everyone 
expects.  

Chart of the Dow Jones Industrial Average

       

The NASDAQ's bounce was worth a 3% move off its low for the 
session.  As outlined in the OI wrap last night, the tech-heavy 
index is below its September 2001 intraday lows and the average 
is trading at levels not seen in years.  The bounce off 1336 was 
near the bottom of its current channel and we're not expecting 
much change in direction.

Chart of the Nasdaq Composite

 

The S&P 500 has not offered much hope for investors either.  The 
broad based index fell to new lows and fell below its September 
2001 intraday lows before reversing course due to the afternoon 
short-covering.  While we expect a rebound if the holiday weekend 
escapes any terrorist events we question if it can break through 
the top of its channel.

Chart of the S&P 500

 


Still Ignoring Economics?

It still appears that the stock markets are ignoring the positive 
(but slow) data that is coming from the economy.  The ISM June 
services index did slide from 60.1 in May to 57.2 in June but the 
U.S. is still seeing expansion in this sector.  Plus factory 
orders rose in May by 0.7%, which beat expectations of a gain for 
0.6%.  The Labor Department published the Jobless claims this 
morning and first-time claims fell by 11,000 to 382,000 from the 
recently revised (upward) of 393,000 for last week.  This 
economic indicator continues to hover below the 400,000 level, 
which many see as the benchmark for additional economic weakness.  
The big report on Friday will be the employment report for June.  
Estimates are for an increase of about 80,000 new jobs but 
economists are also anticipating a small bump in the national 
jobless rate from 5.8% to 5.9%.  As of May there were 8.35 
million Americans unemployed out of the 142.7 million estimated 
Americans in the workforce.

Overseas Divergence

European markets continued to fall in tandem with the U.S. 
declines on Monday and Tuesday this week.  The London FTSE 100 
dropped 81 points or 1.8% to 4466 while the German Xetra Dax 
skipped down 0.9 percent to 4156.  Likewise the French CAC 40 
shaved off 1.6% to 3674 in thanks to additional concerns over 
Vivendi and possible accounting anomalies.  Also suffering from 
rumors of potential accounting mishaps was British mobile-phone 
powerhouse Vodafone (VOD), which fell almost 5% on the rumors.  
Lest you think the U.S. is the only market getting rocked by debt 
downgrades, shares of Alcatel, Europe's largest telecom equipment 
maker, was beaten for a 15% loss as investors fear the company's 
debt will be moved to junk bond status after Alcatel's profit 
warning last month.

U.S. Investors aren't seeing any help from their European 
counterparts but the Asian markets were up on Wednesday.  Taiwan, 
Singapore and Japan produced the biggest gains with Japan's 
NIKKEI running up 1.8% or almost 190 points to 10,812.  Market 
observers noted that cyclical stocks and banking issues produced 
the majority of gains since the Japanese government is 
considering the use of public funds to help out their troubled 
banking sector still burdened by non-performing loans.

Bounce in the Russell?

The Russell 2000 index is looking pretty oversold and the 
oscillators have all gone from bad to worse.  I'd be expecting a 
decent bounce or round of short-covering on Friday or Monday 
since it didn't really show up this afternoon.  

Chart of the RUT

 

Getting Softer?

A wave of software companies released warnings and lowered 
guidance after a lackluster month in June.  AZPN was cut in half 
after warning for a quarterly loss on weaker revenues.  Previous 
Internet-darling KANA was hit for a 39% loss after stating it 
would post a Q2 loss of $30M and that revenues would be 
significantly below analysts estimates.  SBYN fell almost 17% 
with news it would turn in a Q2 loss instead of a previously 
estimated profit.  MANU lost 15% on news that previous employees 
had plead guilty to insider trading.  It's been a tough week for 
software stocks but one was able to buck the trend.  
Surprisingly, share of SY gained 8% after warning it would miss 
revenue forecasts.  Unfortunately, the trend in the GSO software 
index remains stuck in its descending channel and below its 
September 2001 lows.

Chart of the GSO.X

 

Covering the Chips

The chip sector rebounded strongly despite a second earnings 
warning in two weeks by chip-maker AMD.  The rebound was lead by 
shares of rival chip-maker Intel, who rallied for a 7% gain after 
hitting lows not seen since April of 1997.  The SOX.X bounced off 
its September 2001 lows of 343 and added 4.3% by the close.  This 
entire move looks like short covering!  Unfortunately for AMD the 
company reported that its Q2 sales will fall closer to $600 
million compared to the guidance given two weeks ago with a range 
of $620 to $700 million.  Earlier this year, AMD had estimated 
revenues would land between $820 to $900 million for the second 
quarter.  Management cited weak computer sales, as if we should 
be surprised, and shares fell 4.2%.  Earnings are expected on 
July 17th.  Believe it or not, Prudential tried to defend the 
stock claiming this was a buying opportunity.  

Chart of the SOX.X

 

Biotech Bounce?

The Biotech index was hammered again this morning with the BTK.X 
hitting levels not seen since late 1999.  The group did manage a 
decent afternoon bounce but this was probably due to short 
covering (again).  The group was hit with more bad news when 
European regulators claimed that NaPro BioTherapeutics' (NPRO) 
patent for its generic formula of its cancer drug paclitaxel was 
invalid.  NPRO said it would appeal but admitted the ruling was 
bad news and "may result in additional competitive marketing 
pressure in Europe" for this product.  No kidding, please pass 
the Zantac.  The sector was also hurt by a downgrade of Genentech 
(DNA) by Deutsche Securities.  The broker said they were 
concerned about valuations and possible risks to DNA's Phase III 
trials for a breast cancer drug.  This sent shares of DNA down 
sharply and below important support at the $30 level but the 
stock did rally off its lows.

Chart of the BTK.X

 

Looking Ahead

Friday could be a volatile session since most of the nation and 
most of the professional traders will be on vacation.  Volume is 
expected to be extremely light, especially with the early close 
for the equity markets at 1:00 PM EST.  Unfortunately, this 
leaves the markets vulnerable to any program trading that will 
take place and we could see any moves exaggerated by the lack of 
human activity.  Of course there is also the strong possibility 
the markets don't do anything and merely idle while we wait for 
Monday and the beginning of earnings season, which actually 
begins to pick up speed on Wednesday, July 10th.  

All bets are off if a terrorist event does occur and we could see 
traders showing up on Friday to protect positions assuming the 
markets are allowed to open.

The best bet will be to wait until Monday.  If the weekend passes 
uneventful then the markets will likely rally strongly off the 
bottom of their current channels and we could get another two-day 
run.  It's breaking through the top of those channels that we 
need to watch for.  

I've mentioned it before but if you haven't checked out the 
Market Monitor on OptionInvestor.com I would encourage you to do 
so.  Everyday we continue to receive glowing emails about the 
contributions and observations of the Market Monitor team.  Even 
if you are not an intraday trader or prone to play index options 
it's still a great window on the markets.  Join the MM team this 
Monday as Friday's session apt to be slow and you'll probably 
have more fun manning your grill than hovering over a PC.

Speaking of time off, this independence day I would personally 
encourage you to share your thanks with the policemen, fire 
fighters, and armed-forces who go to work everyday protecting our 
lives, our homes and our freedoms.

James


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

BEST BUY
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 

The "best buy" is always at the low - if you can get it! Today, I 
saw what was likely the low in the indexes for a while and was 
reluctant to get in due to the thin trade of today and with the 
expected very light volume of Friday. Will wait and see what 
Monday brings and what the next dip looks like. 

By the way, if you recall the DJX chart I featured a while back 
outlining the DJX or Dow Industrials Head & Shoulder's Top 
pattern. That chart, now a bit out of date, but showing the 
important "measurement" of a downside objective implied by the 
top pattern is below.  Note that the DJX objective was 88.6, 
versus today's low at 88.9 - CLOSE ENOUGH! - a mere pencil lead  
difference. 


 

Perhaps the exact low that was projected (88.6) and more, will be 
seen, but today's action looked like the much talked about 
capitulation possibly. The advance-decline figures were running 
so lopsided at one point in favor of NYSE and Nasdaq declining 
issues that it looked like there was NO value in the market 
anywhere.  

The hourly channels continue to work like "magic" - in at least 
2-3 of the major indexes there is usually a low or high that 
intersects at the upper or lower extremes. You just have to 
"believe" what you're seeing in regards to a "probable" low. 

Bearish sentiment is always thick and heavy at any significant 
low and its like walking in honey (glue?) to go against that 
tide.  But that is the nature of the market beast.     

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

 

It looks like 464 may have been the low for a while, occurring as 
it did right at support implied by the low end of the hourly 
downtrend channel.  I favor buying dips back to the 470 area and 
under.  Near resistance comes in just overhead, around 476, then 
at 480 and lastly, at 487-488.  

It is of course possible that there will be a "retest" of the 464 
low, but because the market is so oversold on the daily and 
weekly oscillators, the single "V" type bottom will be it. A 
retest or move back to the 464-465 area would be a buying 
opportunity.  Stay tuned.  I wanted to buy the index today, but 
had the reluctance of not wanting to get hit with a weekend 
"surprise". 

With the buy side it has been important to get in near the lows.  
On the short/put side, the dominant downtrend has meant that your 
timing didn't have to be so exact to make money as the price 
swings have kept carrying to new lows. 

S&P 500 (SPX) Index - Hourly chart:
 

 

Two key technical features of the SPX action today:

1. While the prior Sept. intraday low at 944.75 was exceeded on 
the downside, the close was back above - a classic "bear trap" 
reversal move to new lows followed by a sharp rebound. 

2. Like the OEX (S&P 100), the SPX rebound came right at the 
intersection of the low end of the hourly downtrend channel and 
in the area of the lower 3 percent envelope line (relative to the 
21-hour moving average - not shown). When this intersection has 
occurred AND the two hourly stochastic models have both been 
registering oversold extremes, a good-sized rally has developed.  

On the bearish end, a move up to anywhere near the high end of 
the channel AND where both stochastic models are overbought, has 
led to a high potential short/long put position. In a downtrend, 
it doesn't take a move into the extremes of chart/technical 
resistance to set up a top.  The envelope lines are at a lesser 
setting for the upside "extremes" also.  

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

 

Buy DJX in the 89-89.50 area if possible - sell in the 92.5 area, 
if reached. We have an approximate double bottom low in the DJX - 
the difference between 89.3 and 88.9 is not significant in that 
regard - it’s a double bottom if there are no lower lows.   



As I said today on the Market Monitor, a "bottoms up" approach to 
the Nasdaq 100 and QQQ Nas 100 tracking stock is often the best 
approach to "see" bottoms developing - or tops.

MSFT (Microsoft) held above its above its prior downswing low in 
the 49 area, and then traded up to close at its intraday high.  
Stock has to clear resistance at 53, then at 56 to "break out" to 
the upside, so stay tuned.  So far, the action is promising. 

INTC (Intel) rebounded strongly from the low end of its downtrend 
channel and from level of low going back to '98 - move today 
looks bullish and like at least an interim bottom is in.

CSCO (Cisco systems) established a probably double bottom low 
relative to its May low.  

QCOM also established a possible double bottom. 

ORCL has most bullish looking chart - its Head & Shoulder's (H&S) 
Bottom pattern was firmly intact on the recent rally failure and 
downswing and today it broke out again above the neckline on the 
H&S.

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

 

I favor buying in the 24.20-23.6 area if available and selling in 
the 25.5 area in the near-term. When the channel lines don't 
"work" (to show the interim tops and bottoms) the hourly chart 
envelope lines do. 

The tech darlings or fallen angels! - we may say we hate em, but 
it’s a love-hate relationship. We can never get the little 
darlins entirely out of our hearts and minds.


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***********
OPTIONS 101
***********

Options, Priorities and Balance
by Mark Phillips
mphillips@OptionInvestor.com

For those of you tuning in for another detail-filled episode of
options pricing education, I regret to inform you that we're
going to take a big detour today.  But before you tune out and
head over to another section of the site, let me attempt to grab
your attention by offering this teaser:

What I'm going to cover here today if far more important to your
long term trading success than any "how to" or "detailed
analysis" treatise I could write.

Let me start out by covering a bit of recent history in my life.
The past 7 trading days prior to today have been very good to the
Phillips family.  I have been very focused and trading hard on an
intraday basis, and the results are there in my trading account.
As yesterday's session wound down, I was contemplating my recent
trading results and my prospects for further gains for the
remainder of the week.  I still had a couple of open positions
with significant profits in them and then I remembered something
I learned in my childhood, that variety is the spice of life.  In
this profession, which requires intense focus for discrete periods
of time, I think many of us fail to truly understand the meaning
of that simple saying.

Let me explain.  I work very hard at this profession every day of
the week, both in writing content for the newsletter and
researching and executing trades on my own behalf.  My wife is
extremely patient, listening to me rant about the fools I see on
CNBC, tolerating my late-night sessions in the office, catching up
on research and answering reader emails, while she often goes to
bed alone.  That is the price she is willing to pay for the
lifestyle that trading can provide for our family over the long
haul.

In terms of priorities, nothing is more important to me than
providing my family with the financial security that they deserve,
balanced of course with the necessary investment of time that
keeps the family unit tight-knit and growing.  Sometimes that
means putting the work side of the equation on hold in order to
spend quality time with the ones I love.  It is all about
evaluating the rewards and opportunity costs of each and every
decision.

That brings me back to yesterday afternoon.  With large profits
in my account over the prior 7 days and the likelihood of a light
and choppy trading environment today and Friday, I made the
decision to close out all my open trades and go into the holiday
(beginning today) completely flat.  This isn't related to any
fears about a terrorist act.  It is just an evaluation of the
opportunity cost of being in a trade over the Weds-Sun time
period.  I don't know about you, but I have a hard time doing
anything but watch the markets when I have money at risk in a
trade.  So if I had trades open, it is a foregone conclusion
that I would have spent the day watching the market.  But that
isn't the choice I made.  Instead, I chose to be out of the
market, both physically and emotionally and make a deposit in
a different account.

As I mentioned above, my wife puts up with a lot in terms of my
attention being devoted elsewhere on a daily basis.  Since I
decided to be out of the market, I was free to devote a weekday
completely to what she wanted to do.  She loves the game of golf,
so before she got home yesterday, I called the local course and
got a tee time for 7:30 this morning.  We got up, had a leisurely
breakfast (without the distraction of my computer or CNBC) and
headed off to the links.  It was a nearly perfect day, warm with
a slight breeze and we both enjoyed our outing immensely.  We
finished up just in time to head off for a relaxing lunch at a
local café before I took my wife out for a bit of shopping -- her
second favorite pastime.  We spent a bit of money, but mainly
just enjoyed each other's company.  

After returning home, she decided to lay down for a nap with the
family pets while I typed up this article.  As soon as I'm done
with it, we're piling into the car and heading down to Anaheim,
so that we can spend all day tomorrow at Disney's California
Adventure.  She has been begging me to take her there for the
past few months and this seems to be as good a time as any.
We'll return on Friday, just in time for me to do my writing for
the weekend and then we're planning on spending a couple of
relaxing days with her parents.

So why do I bother to tell you all this and what in the world
does it have to do with trading?  EVERYTHING!  To all you macho
guys out there, how long do you think you can successfully trade
without the unwavering emotional support of your spouse?  Trust
me when I say "not long", especially when you have a few
less-than-stellar weeks.  It is critical to keep your spouse
believing that your trading is a benefit to your life, not just
something that takes you away from her.  This applies to the
female traders as well.  You know how much time it takes in
this business to be consistently profitable.  If you're lucky,
your significant other understands this, but it sure wouldn't
hurt your cause to occasionally close down the computer and
give them some undivided attention doing something that THEY
enjoy.

If this sounds like Family Counseling 101 instead of Options
101, I hope you understand that the two are inextricably linked.
Without harmony in the overall household, it is very hard to
properly focus your attention on profitable trading, and the
current market is particularly unforgiving of distractions.

So let's come back to the title of my article.  Yesterday, I
chose the OPTION of exiting the market for a few days, giving
up the opportunity to scalp a few more $$ of profit ahead of
the weekend.  What did I accomplish by investing my time
somewhere else besides the markets?  I have one very happy
wife, and that will likely pay dividends from now until Labor
Day.  What did it cost me?  Not much, from the looks of the
day's market action.  There were a couple of quick swing
trades available, but nothing earth-shattering in my opinion.
And I certainly didn't miss my MOCO opportunity, by any stretch
of the imagination.  And the odds of missing anything substantial
on Friday are even lower, as volume will likely be very light.

I took advantage of a period of time when the markets were
unlikely to provide solid trading opportunities to enhance the
balance in my life, and that will find me ready to run with
either the bulls or the bears next week, feeling refreshed after
a 5-day mini-vacation.  Had I chosen the other option, I may have
made a bit more money ahead of the weekend, but I guarantee that
I wouldn't be as ready for battle when Monday rolls around.

Hopefully my little story has helped you to see that index and
equity options are not the only ones that are critical to our
trading success.  Take advantage of ALL the options in your life
and I think you'll see a benefit to both your trading success,
as well as your overall quality of life.

Have a safe and happy 4th of July


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


THE SECTOR BEAT - 7/3
by Leigh Stevens

[NOTE: I WILL BE OUT OF THE OFFICE ON FRIDAY, JULY 5TH. - MY NEXT 
SECTOR COMMENTARY WILL BE ON MONDAY, JULY 8TH.] 

As can be seen below, there was a tech rebound that showed up 
noticeably in the Software, Semiconductors, Internet, and various 
High Tech groups all of which may have bottomed for now. Biotech 
may have put in at least an interim low also.  

The NYSE Financial stock Index fell to new lows in its current 
downswing, which also took out the low end of a multimonth 
trading range.  Not a great omen for the overall market, but 
we'll have to see what next week brings. 

The Health Provider's Index (HMO) has reached the area of its 
200-day moving average and rebounded a bit - it may be time to 
cover put positions in this sector. 

The Software sector ($GSO.X) looks like it is ready to break out 
(to the upside) of a bullish falling wedge. I favor this sector 
for an upside play, with a "confirming" upside breakout if the 
index gets above 107 (Close: 105.9). 

UP ON THE DAY ON Wednesday -

 

 
DOWN ON THE DAY on Wednesday - 

 

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) -

Buy BBH at 72.00 or less ** see chart below **
(Biotech HOLDR's Trust stock)
Stop at 69.00

Buy IJS at 84.50 or less - ** see chart below **
(S&P 600 Small Cap Value fund iShares) 
Stop at 82.50

Buy SMH at 28.30 or less - ** see chart below **
(Semiconductor HOLDR's) 
Stop: 27.00

Buy HHH at 21.50 or less 
(Internet HOLDR's)
Stop: 20.00

Buy SWH at 27.40 or less
(Software HOLDR's)
Stop: 26.00

OPEN TRADE REC(S) - 

NONE


OPEN POSITIONS - 

NONE 

 
TRADE LIQUIDATIONS -
 
NONE 


SECTOR HIGHLIGHT(S) -

Biotechnology Index ($BTK.X)
STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA; 
ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM; 
MYGN; PDLI; TARO; TEVA; VRTX; XOMA


 

SOME PRIOR COMMENTS - Another move to the low end of the 
downtrend channel may offer a buying opportunity for a relatively 
low risk trade - an exiting stop can be placed just under the low 
which is close by - making for a "tight" stop/exit point. 

TODAY: The Biotech Index has again fallen to the low end of its 
hourly chart downtrend channel and has rebounded.  The move to a 
new low, followed by an upside reversal is a "bear trap" reversal 
pattern. Play the sector and the stocks for a trading "bounce", 
such as back up to 376 area.  
UPDATE: 7/3


S&P 600 Small Cap Index ($SML.X) - "Value" segment iShares

 


There are three things I like about the technical picture 
presented by the S&P 600 SmallCap Value fund:  

1. The stocks is oversold
2. The most recent decline occurred on a bullish Price/RSI 
"divergence", as RSI held above its prior low
3. Today's potential "double bottom" relative to the Feb. low 

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: 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: A potential double bottom low at 344 has set up in the 
Semiconductor stocks - moreover, today's low coincides the low 
end of the daily chart's downtrend channel, a common area to look 
for a turnaround rebound.    
UPDATE: 7/3


SEMICONDUCTOR STOCK - Applied Materials (AMAT)

 

Subscriber QUESTION: "Any comments on AMAT as it is rebounding 
much like INTC?" 

RESPONSE: Applied Materials (AMAT) also got down to the low end 
of a downtrend channel and rebounded - like INTC - only AMAT has 
not gone to new lows relative to its Sept. bottom - in fact the 
stock has retraced 75% of its Sept. - Apr/May advance. 

When an index or a stock does not retrace more than 3/4ths of its 
prior rally, the stock is showing better relative strength than 
one that retraces ALL of its prior upswing. The most potentially 
bullish aspect to the daily chart pattern is that of a bullish 
falling wedge. 

A decisive upside penetration of 18.5 would tend to "confirm" a 
trend reversal and that a bottom was in place. 


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The Option Investor Newsletter                Wednesday 07-03-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


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*****************
STOP-LOSS UPDATES
*****************

EXPE - put
Adjust from $63.50 down to $59.25

KMI - put
Adjust from $41 down to $40

LLY - put
Adjust from $57 down to $54.50

TDS - put
Adjust from $63.50 down to $62.50

XL - put
Adjust from $87 down to $85


*************
DROPPED CALLS
*************

None


************
DROPPED PUTS
************

IBM $70.51 +1.93 (-1.49) IBM broke out from yesterday’s inside
day.  The breakout may portend a short term reversal of trend
in this stock, not to mention the close above the 10-dma for the
first time in six weeks.  The stock is heavily shorted, and
today’s rally may have been just the beginning of a short
covering rally that could last into the next several sessions.
To protect against that, and because our coverage stop was
violated by a penny, we’re dropping the play and taking our
gains off the table.  Look to exit plays on a pullback in
Friday’s session if the stop didn’t take you out today.


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

ESST - ESS Technology $16.93 +0.92 (-0.61 this week)

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

Most Recent Update

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.

Comments

We had the feeling that ESST would snap back if only the
broader market would stabilize.  That’s exactly what happened
today when the stock rallied for nearly six percent, far out
pacing the broader market.  We’re expecting ESST to continue
higher into Friday’s session.  Look for a breakout above today’s
high at the $17.30 level, or wait for a pullback down near the
$16 level.  Confirm any follow through rally by an advance past
the 200-dma, and on a volume spike such as the one we witnessed
during today’s rebound.

BUY CALL JUL-15*SEQ-GC OI= 840 at $2.55 SL=1.25
BUY CALL JUL-17 SEQ-GW OI=2688 at $1.00 SL=0.50
BUY CALL AUG-17 SEQ-HW OI= 107 at $1.95 SL=1.50
BUY CALL AUG-20 SEQ-HD OI= 154 at $1.10 SL=0.50

Average Daily Volume = 2.85 mln



*****************************************
BIG CAP COVERED CALLS & NAKED PUT SECTION
*****************************************

Bargain-Hunting Investors Spark Rally!
By Ray Cummins

Stocks battled back from the abyss today, rallying to a positive
close after the widely watched S&P 500-stock index slumped to a
four-year low amid sagging confidence in the equity markets.
 
The Dow Jones Industrial Average finished up 46 points at 9,054,
erasing a morning slide of more than 100 points that had pushed
the blue-chip barometer to levels not seen since last October.
Notable old-economy performers included Intel (NASDAQ:INTC), Home
Depot (NYSE:HD), and Hewlett-Packard (NYSE:HPQ), all of which
rebounded from recent steep losses during the volatile session.
Meanwhile, the NASDAQ Composite climbed 22 points to 1380 after
being down more than 1.5% in early trading.  Internet, computer
hardware and software shares were the focus of the buying spree.
Standard & Poor's 500-stock index rebounded 5 points to 953 as a
surge of speculation rejuvenated the biotechnology segment.  Also
popular were shares of oil service issues while airline stocks
slumped after news of a fare increase.  In the last full day of
trading this week, before the July 4 holiday, volume on the New
York Stock Exchange was 1.5 billion shares, slightly greater than
the year's average of almost 1.4 billion.  Volume was also heavy
at 2.5 billion on the NASDAQ, with almost 1 billion shares coming
from WorldCom (NASDAQ:WCOM).  About five stocks fell for every
three that rose on the Big Board, while losers outpaced winners
five to four on the technology exchange.  The bond market ended
mixed with the benchmark 10-year note down 4/32 to 101 1/32 while
its yield was 4.74%, up 1 basis point from the lowest yield in
seven months.  The 30-year long bond gained 14/32 to yield 5.47%.

The market will be closed Thursday and will shut down early, at
1 p.m. EDT, on Friday.

***************

Summary of Current Open Positions

***************
(As of 07-02-02)

Naked Puts

Stock  Strike Strike  Cost Current  Gain  Potential
Symbol  Month  Price Basis  Price  (Loss) Mo. Yield

CCMP     JUL    35   34.25  39.28   $0.75    5.04%
QLGC     JUL    35   33.90  34.43   $0.53    3.55%
EBAY     JUL    50   49.20  57.68   $0.80    5.92%
RYL      JUL    47.5 46.70  49.48   $0.80    5.18%
SNPS     JUL    50   48.85  52.23   $1.15    6.48%
EBAY     JUL    50   49.20  57.68   $0.80    7.34%
ERTS     JUL    55   54.40  65.42   $0.60    4.57%
SNPS     JUL    45   44.40  52.23   $0.60    5.85%

Previously Closed Positions: Nvidia (NASDAQ:NVDA) and
Emulex (NYSE:ELX).  The Qlogic (NASDAQ:QLGC) position,
which is positive, should be closed on any further
downside activity.


Naked Calls

Stock  Strike Strike Break Current  Gain  Potential
Symbol  Month  Price  Even  Price  (Loss) Mo. Yield

EXPE     JUL    70   70.85  52.00   $0.85   7.65%
LLL      JUL    60   60.40  51.48   $0.40   4.30%


Put-Credit Spreads

Stock                                              Gain
Symbol  Pick   Last  Month L/P S/P Credit   C/B   (Loss)  Status

FNF     30.52  29.27  JUL   25  27  0.30   27.20   $0.30   Open
ERTS    64.10  65.42  JUL   50  55  0.50   54.50   $0.50   Open
NOC    121.80 118.36  JUL  105 110  0.40  109.60   $0.40   Open
CTX     56.56  54.54  JUL   45  50  0.40   49.60   $0.40   Open
ERTS    64.86  65.42  JUL   50  55  0.40   54.60   $0.40   Open
EXPD    31.25  31.88  JUL   28  30  0.37   29.63   $0.37   Open
KSWS    24.08  24.77  JUL   20  22  0.37   22.13   $0.37   Open
LEN     59.18  61.63  JUL   50  55  0.80   54.20   $0.80   Open
UNH     97.30  90.25  JUL   85  90  0.65   89.35   $0.65  Closed
GD     103.06 101.90  JUL   90  95  0.60   94.40   $0.60   Open
INTU    47.15  46.00  JUL   35  40  0.35   39.65   $0.35   Open
LEN     60.38  61.63  JUL   50  55  0.65   54.35   $0.65   Open
SII     71.73  67.00  JUL   60  65  0.55   64.45   $0.55   Open

Previously Closed Positions (most of which are positive): Anthem
(NYSE:ATH), Aetna (NYSE:AET), Cigna (NYSE:CI), Quest (NYSE:DGX),
HCA Inc. (NYSE:HCA) and Tenet Healthcare (NYSE:THC).


Call-Credit Spreads

Stock                                             Gain
Symbol  Pick   Last  Month L/C S/C Credit   C/B  (Loss) Status

BGEN    42.44  37.50  JUL   60  55  0.25   55.25  $0.25  Open
CYMI    40.59  29.15  JUL   55  50  0.60   50.60  $0.60  Open
C       42.34  37.48  JUL   50  48  0.30   47.80  $0.30  Open
EDS     49.28  30.12  JUL   60  55  0.45   55.45  $0.45  Open
VIA     46.59  41.95  JUL   55  50  0.70   50.70  $0.70  Open
BWA     60.15  58.22  JUL   70  65  0.60   65.60  $0.60  Open
CDWC    43.87  43.99  JUL   55  50  0.55   50.55  $0.55  Open
COF     58.73  56.75  JUL   70  65  0.65   65.65  $0.65  Open
KSS     69.82  68.30  JUL   80  75  0.65   75.65  $0.65  Open
LEH     59.66  60.14  JUL   70  65  0.55   65.55  $0.55  Open
MMM    122.42 125.77  JUL  135 130  0.60  130.60  $0.60  Open


Synthetic Positions:

Stock  Pick     Last    Position   Credit   C/B    M/V   Status

DLTR   39.19   36.47   AUG45C/35P   0.25   34.80   0.35  Closed
CNF    36.55   36.22   SEP40C/32P   0.10   32.40   0.70   Open

Synthetic positions in United Health (NYSE:UNH), General Dynamics
(NYSE:GD) and Lockheed Martin (NYSE:LMT), all provided favorable
profits prior to the recent broad-market slump.


Debit Straddles:

Stock   Pick   Last    Position   Debit   M/V    G/L   Status

DGX    85.72   75.01  AUG85C/85P  10.60  12.50   1.90  Closed
FLIR   44.75   37.02  JUL45C/45P   7.25   8.00   0.75   Open?

The Quest Diagnostics (NYSE:DGX) straddle achieved profitability
on both sides of the play as the underlying issue traded beyond
the "break-even" points in the bullish and bearish positions.
Flir Systems (NASDAQ:FLIR) hit the downside profit point late in
today's session with the bid price of the JUL-$45 Put exceeding
the initial cost of the straddle.

***************

NEW CANDIDATES - No Plays Today...

The "Big-Caps" editor is on vacation with his family, so there
will be no new plays until after the Fourth of July holiday.  To
help fill the void, we have included a popular narrative on the
pitfalls of emotion-based trading and the problems associated
with the subjective mental states of overconfidence and denial.

***************
Success Basics: The Mentality Of Profitable Trading
By Ray Cummins

Success in trading often depends as much on the psychology and
temperament of the individual as the method used to participate
in the market.

The first rule of trading: You should feel comfortable with any
strategy or procedure you utilize.  A system that is customized
to your personality and particular needs will be easier to obey
and administer, eliminating the majority of problems associated
with discipline and emotional reactions.  To ensure the success
of any approach, you must develop tactics that are compatible
with your unique character and comfort level.  In this manner,
decision-making stress is limited and positions are more easily
managed for maximum profit while unnecessary risks are avoided.
We often forget that humans make decisions based on emotions and
then justify them with logic.  The assumption that we can easily
learn to be rational in the market is regrettably inaccurate and
when it comes to trading, it is natural to become illogical.  In
most cases, we make judgments based on our past experiences and
associations or unrealistic desires and perceptions.  That's why
it is so important to remove these emotional components from our
trading methodology.

There are other psychological pitfalls you must avoid including
complacency and the subjective mental states of Overconfidence
and Denial.  Complacent traders are those that are too passive in
their approach to position management.  These nonchalant players
initiate a trade and then leave it unattended until a profit is
achieved or the play is stopped-out (if they were wise enough to
use a loss-limiting order).  In contrast, the astute trader will
note any abrupt changes that occur in the market and act quickly,
changing his (or her) plans as the situation dictates.  At that
point, the difference between profit and loss may depend more on
a timely adjustment or a revised exit strategy, rather than the
initial forecast or projection.  When trading with stop orders,
it is important to adjust the downside loss-limit as the issue
moves higher to "lock-in" gains.  This rule is often ignored by
inexperienced traders because they become comfortable after the
initial profit is achieved.  In today's volatile markets, prices
rise and fall hundreds of points in a matter of minutes and huge
gains can become disastrous losses with little or no warning.

Overconfidence is a positive attribute in many fields but in the
stock market there is little room for vanity and self-esteem.
Obviously, a certain amount of conviction is necessary to make
decisive judgments but that comes from thorough research and a
well-defined plan of action.  Traders who fail to employ these
concepts usually don't last very long, because their portfolios
are quickly wiped out.  The most visible indication of egotism in
trading is lack of fear and that often occurs after a string of
successes.  Unfortunately, a common result is that you begin to
over-trade, with less preparation and a wider margin for error.
The outcome is never favorable and courage is quickly replaced
by remorse.  Overconfidence can also lead to an affinity with a
particular position, thus limiting your ability to be objective.
The longer you hold a position, the greater that attachment will
become and the result is seldom profitable.  There are plenty of
opportunities in the market and remaining in a position after it
has changed character or turned in the wrong direction will only
extend your losses.

Denial comes in many forms but the simple definition applies
directly to traders: refusal to admit the truth or reality.  In
markets with long-term primary trends, setbacks have far less
affect on an investors' mentality because corrections are seen
as new buying opportunities.  However that does not mean every
position will recover.  Eventually, the market reverses course
and the price of your issue moves in the direction opposite to
the one you originally hoped it would follow.  As the value of
the position dwindles, common phrases such as, "It can't go any
lower," or "It will come back...it always has before" are used
to dismiss the need to make a decision.  Realizing when a trade
as "gone bad" and controlling losses effectively is the key to
consistent profits.  Indeed, when emotions affect your actions,
it is easier to justify why the market is wrong rather than
focus on the obvious signals.  Remember, winning positions are
easy to manage but the manner in which a trader reacts to losing
plays will define his success.

Experienced traders use a variety of techniques to profit in
the market but regardless of their individual approach, everyone
agrees with this simple rule: control your emotions and it will
be easier to maximize profits and limit losses.

Happy Independence Day!


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*******************
FREE TRIAL READERS
*******************

If you like the results you have been receiving we
would welcome you as a permanent subscriber.

The monthly subscription price is 39.95. The quarterly
price is 99.95 which is $20 off the monthly rate.


We would like to have you as a subscriber. You may
subscribe at any time but your subscription will not
start until your free trial is over.

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and click on "subscribe" to use our secure credit
card server or you may simply send an email to

 "Contact Support"

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or you may call us at 303-797-0200 and give us the
information over the phone.

You may also fax the information to: 303-797-1333


**********
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**********

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