Option Investor

Daily Newsletter, Tuesday, 07/09/2002

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The Option Investor Newsletter                 Tuesday 07-09-2002
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)
      07-09-2002           High     Low     Volume Advance/Decline
DJIA     9096.09 -178.80  9318.10  9081.96 1.31 bln   1113/1845
NASDAQ   1381.12 - 24.50  1415.31  1379.57 1.65 bln   1511/2016
S&P 100   475.24 - 11.05   488.75   474.33   Totals   2624/3861
S&P 500   952.83 - 24.15   979.63   951.71 
RUS 2000  429.25 -  4.36   435.19   428.61 
DJ TRANS 2576.57 - 39.20  2647.63  2575.43   
VIX        33.92 +  2.39    34.23    31.15   
VXN        62.12 +  2.83    62.25    60.05
Total UpVol   650.7M
Total DnVol 2,343.2M
52wk Highs  137
52wk Lows   324
TRIN        2.72
PUT/CALL     .87

What Rally?

The Dow came within 34 points of retracing the entire +323 point
gain from Friday. The SPX, OEX and Nasdaq all hit their July-3rd
closing levels or broke them. The "Rally" is now history for all 
practical purposes and we are back to "earnings" as usual. Those 
earnings will highlight INTC, IBM and MSFT beginning next Tuesday.



The morning started off good despite the multiple downgrades of 
the chip sector. The markets actually traded in positive territory
numerous times both before and after the presidents speech. The 
bulls continued to be in denial that the rally on Friday was just
short covering and those that were long lost their lunch money.
The bears began loading up around 1:30 and the ugliness continued
right into the close.

Merrill Lynch began the morning with a downgrade of 13 chip 
equipment stocks citing a dramatic slowing in orders over the 
last several weeks. They hit companies like AMAT, KLAC, LRCX and
NVLS. They cut ratings, 2002 and 2003 earnings and sales estimates
and told clients they believe there will be a pause in new orders
over the second half of 2002. Pretty negative! As if they knew
about the Merrill downgrade, Deutsche Bank cut its earnings and
price targets on 8 chip equipment makers as well. They cut 2003
growth estimates to +15% from +30% and said stock prices will
likely remain under pressure for the near term. To put this in
perspective the chip market was $230 billion last year and they
are struggling to hit $140 billion this year.

Surprisingly, despite the chip sector downgrade the Nasdaq did 
not immediately crash. There were other tech problems as software
companies RETK, CTXS, CAMZ and IONA warned of lower earnings. They 
joined JDAS, OPWV and ITWO which had already warned. Breaking out
of the pack was Microsoft which posted a $.29 cent gain despite 
the loss in the broader markets. Bernstein said they thought MSFT
would beat current estimates due to last minute orders ahead of
the change in enterprise licensing agreements. They cut their 2003
estimates slightly to $2.09 but are still well ahead of the $1.92
consensus. They said the .NET uptake was slower than expected but
set a price target of $70.

Dell announced they were reaffirming their earnings of $.18 cents
for the quarter but the COO said they were seeing no increase in
demand for personal computers. Rollins said that any glimmer of
hope that demand was increasing was just not happening yet. They
said they were able to maintain their earnings estimates due to 
reduced costs and gains in market share.  Dell finished flat for
the day.

Techs were not the only sectors in trouble. Wyeth said this morning
that the a study of its HRT product was terminated early after it
was found to increase the chances for heart attacks and breast 
cancer. The study was terminated early after it was not determined
to not have any long term benefit to offset the dangers. The Prempro
product is a huge money maker for WYE at something like $2.5 billion
a year. According to estimates over six million women take the two
drugs in the product, estrogen and progestin, to offset the symptoms 
of menopause. WYE dropped nearly -$12 or -25% on the news. The news
rippled through the industry as it caused concerns about other 
products in the pipeline. NOVN, which also sells hormone replacement
therapies for women, dropped -5.62 or -27% on the news. The BTK.X 
fell to close at 301 and its lowest level since Dec-1999. 
Tiffany, TIF, warned that slower consumer sales would impact earnings
for the rest of the year. This news hit TIF stock for nearly a -10%
loss but the impact was broader than just TIF. This is another clue
that consumers are starting to reduce their spending and beginning to
worry that a second recessionary dip is approaching. This is likely
to be shown in the next installment of the consumer sentiment due
out Friday. We will also get Retail Sales on Friday, which could 
be another nail in the recovery coffin despite a couple of positive
early reports. 

IBM issued some financial guidance after the close. No it was not
a warning but it was a reduction in earnings. They are taking a 
-$515 million charge for selling their disk drive operations. The 
"restatement" was to take the earning/losses/revenue of this
unit out of the statements. IBM has been criticized for not breaking
out details of its internal units and accused of hiding costs and
storing profits to manage earnings. This restatement is the first
step but they also announced they would lay out next week a $2.5
billion pre-tax charge for the disk drive business and closing some
electronics manufacturing operations. The stock did not fall in
after hours trading as investors have nothing to compare the 
restatement with. There will doubtless be some second-guessing
and possibly some downgrades before the week is out. I cannot
conceive of any scenario where IBM will beat estimates unless the
massive book losses put them into a different tax bracket. This
story is not over yet.
Now that the retracement of the Friday's gains is complete we are 
free of the technical baggage of an unfilled gap. The markets are
now at the mercy of earnings again but based on the Nasdaq strength
today that may not be bad. Despite the multiple downgrade of the 
chip/software sectors the Nasdaq did not crash until the S&P, the 
weakest index today, pulled it kicking and screaming under water. 
The Nasdaq struggled to hold 1400 and a -5 point loss all day and
was successful until 2:PM. This was remarkable in the face of the
downgrades. The major indexes closed right at support from last week
and pushing them lower would take some doing. The S&P is just 8 points
above the 944 post 9/11 low which held on a closing basis last week. 
The OEX is only 10 points away from its lows from last week. 

Granted, if the markets are bent on setting new lows these levels 
will just be speed bumps on the way. However, buyers who missed
the boat on last week's rally are being given a second chance. If
we are going to bounce the S&P-944 level is a highly visible number
that can easily be rationalized as a double bottom buy signal. I 
would not attempt to call a bottom here but I would buy any bounce
from these levels as tradable. My overall outlook is still bearish
but there was enough underpinnings of sentiment this morning to 
make me think there could be a long trade on the horizon. With the
VIX at 34.05, VXN at 62.08 and TRIN at 2.72 the markets have gone
full circle again. Extremely overbought to extremely oversold in 
only two sessions. This is a recipe for a bounce, probably another
bear trap, but still a bounce.

In late news S&P announced some major changes to the S&P-500. They
are kicking out seven non-U.S. firms and replacing them with U.S.
companies. The deletions are RD, UN, NT, AL, ABX, PDG and N. The
additions are UPS, GS, PRU, EBAY, PFG, ERTS, SDS. As always the 
deletions will be dumped by all the index funds and the additions
will be bought in volume. Considering the size of many of the new
companies there will be some shuffling to balance market caps. The 
change will be effective as of the close on July-19th. 

Enter Very Passively, Exit Aggressively!

Jim Brown


by Leigh Stevens

The market went back to earnings concerns after President Bush 
did not have enough sugar for the Bears in his mid-day Wall 
Street speech.  A tough crown, these Street people - and, traders 
in general these days.  The consensus seemed to be that there 
were too many generalities and no talk of making em (dishonest 
corporate execs) "walk the plank. It is going to take a lot to 
restore confidence - however, Congress is sharpening its knifes 
and will probably pass the tougher laws that investors seem to 

It didn't take much to remind the market that we have all these 
earnings announcements coming up. In a market that does not 
tolerate disappointment, there is always room for bearish 
surprises as there is little leeway given to be below revenue and 
earnings targets.    

Technically, I was giving the benefit of the doubt to the bullish 
case - thinking that the Nasdaq 100 and DJX breakouts above the 
top end of their hourly downtrend channels might be followed by 
similar "confirming" moves in the S&P and the Nasdaq Composite - 
not to be! I also felt that their had to be upside follow through 
relatively soon or inertia would start pulling prices down again 
- inertia would lead to heavy shorting like it has for months 
whenever any upward momentum slowed and stopped.

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


Hold the presses! - after the freefall of today, the low at 464 
now looks like it is a target for the next push lower. Would be 
buyers don't look like they will stand in the way - they'll 
instead lie down rather than get knocked down.    

The 470 area may provide some interim "support" as suggested by 
the prior hourly low and the lower envelope line. Of course the 
lower envelope line will "tip" and reverse direction soon and the 
lows may then move in lockstep lower with the line. 458 is the 
intersection of the LOW end of the downtrend channel currently - 
if 464 is exceeded the bottom of the channel becomes a next 

A problem with any expectation of a near-term end to the decline 
is the daily close on the low which suggests still significant 
downside momentum. The other bearish element is that there has 
been a strong tendency for substantial further weakness once the 
21-hour stochastic is showing downward momentum.  This has been a 
nearly "perfect" indicator in that regard.  

484-485 was the "breakdown" point today and offers first 
resistance on a rally.  

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

The potential bull flag pattern outlined yesterday (below) is a 
pattern that is one of a relatively SHORT consolidation after a 
first spurt higher, followed by a breakout above the top end of 
the downward sloping flag - when such a breakout does NOT occur 
within a "usual" 3-6 "bars" but instead prices continue to drift 
sideways, "time runs out" for this particular pattern to signal a 
next price swing in the same direction as proceeded the 

Moreover, you may notice that the SPX got to resistance implied 
by the top of its downtrend channel. This line is shifted lower 
relative to the SPX hourly chart shown last night - when I looked 
at the whole 100 days of my hourly history, the upper channel 
boundary was appropriate where you see it above based on the 
hourly swing highs of the last 3 months.    


My thought was that the recent rally might see the SPX breaking 
out above its downtrend channel - instead it was "sameO sameO". 
Time will tell now whether we continue the months long process 
where the indexes fall to ever-lower downswing lows. Continuation 
of this pattern in SPX would suggest that the 935 low may well be 
exceeded in the future.    

My downside warning last night was that: "a break much below the 
low end of the flag at 971 would suggest that SPX will retrace 
more of the first hourly range on Friday (7/5), which extends 
down to 956." Well, we got that and more once 970-971 gave way, 
as can be seen on the chart above with the SPX close around 953. 

An SPX downside target implied by the lower hourly envelope line 
is in the 941 area - not far below that is the prior low at 935 
which also becomes a potential "retest" target. Stay tuned!

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


Forget the suggestion to buy DJX in the 89-89.50 area - if you 
sold above 92.5 per my old suggestion, repeated last night, stay 
short/long puts. DJX looks like it may be headed to back to the 
89 area. Support (dashed level line & arrow) implied by prior 
lows comes in to play in this area. Time will tell.  

There is a "line" of hourly lows in the 92.5 area that was the 
"breakdown" point today - resistance should develop there on any 


MSFT (Microsoft) is holding 53 area where there is technical 
support - this is level to watch on QQQ weakness - however, 
earnings are ahead of us. If I had to bet on its earnings, I 
would guess they are going to "justify" some upside in the stock.

INTC (Intel) - Hanging in there so to speak - no free fall type 
action at least yet, ahead of earnings. Watch the 17.25-17.50 
area for potential support. 

CSCO (Cisco systems) - Close on its low. Stock looking less like 
a rally will set up anytime soon. Continue to watch 13.00 area as 
key support.    

QCOM (Qualcomm) - Also "hanging" in there - one of the "reasons" 
that QQQ and Nasdaq is not into free fall again.  Watch 26.5 on 
the downside as possible support and 29.50 on the upside, as 
potential resistance. 

ORCL (Oracle) pattern is suggesting that a bottom is trying to 
shape up, but rally attempts are premature - with ok earnings 
this stock has an upside objective to 12.00 based on a possible 
Head & Shoulder's (H&S) bottom. 8.60 is key support - closes 
under this level suggests further weakness and limited rally 

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


The upside chart gap has now been "filled in", and then some, on 
the decline today. QQQ is back into its downtrend again, like 
"back in the saddle again"!

I think we can anticipate near support as being in the 24 area. 
Near resistance is at 25.4-25.5. We're closer to being "oversold" 
on the hourly (21-bar) stochastic, so this bears watching along 
with the price pattern that shapes up tomorrow.  

The 23.6 low could be retested or exceeded of course.  But we 
also will be getting earnings figures soon for tech stocks and 
the tracking stock may level off without testing or taking out 
its prior low until we get some key tech earnings.  

And, of course, with some decent earnings we have the potential 
to break the pattern of lower (up) swing highs - I'm not holding 
my breath for this event just yet however. 27.00 looms as the 
major resistance hurtle in my mind - at the prior Sept. low.  

Leigh Stevens
Chief Market Strategist 

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Retrace Or Rollover?
By Eric Utley

It’s that simple.  If you have the correct answer to that
question, then you’re making money this week.  Unfortunately
I’m not privy to future events.  So which way she goes is
unknown to me.

But you do have to hand it to this market for the way it
continues to confuse as many participants as possible.  The
holiday rally, or whatever that was late last week, was
pretty much wiped off the books in the last two days as the
major averages came back down to fill the gaps from last week.
Sure there’s a little more downside to be demonstrated, but
judging by the way things closed today downside shouldn’t
be a problem for this market in tomorrow’s session.

But not is all gloom and doom in this market.  In fact in
the last two days we’ve seen some encouraging developments
in the bullish percent data.  Recall that the Dow Jones
Industrial Average Bullish Percent ($DJINDU) was already
in a bull alert position coming into this week.  In yesterday’s
session, the Dow was joined by the Nasdaq-100 Bullish
Percent ($BPNDX) in bull alert mode.  That puts two of the
major averages in bull alert, while a third in the NYSE
Composite Bullish Percent ($BPNYA) is still in a bull
correction phase.  Let me put this all another way.  Three
of the five markets that we track bullish percent figures for
are in a bullish position.  Does that mean we’re heading higher
after the last two days of pulling back?  Not necessarily, but
the risk has shifted to the upside in the Dow and Nasdaq-100,
which could bring some bulls out of hiding or at least push
the bears to the side for the time being.

All we need now is some confirming price action to reinforce
what we’re seeing the bullish percent figures.  Although I
don’t like to rely too heavily on one indicator, the bullish
percent is the one that I give the most credence.  We’ll see
where the Dow and NDX take us this week.


Market Averages


52-week High: 11350
52-week Low :  8062
Current     :  9096

Moving Averages:

 10-dma: 9168
 50-dma: 9726
200-dma: 9820

S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     :  953

Moving Averages:

 10-dma:  972
 50-dma: 1039
200-dma: 1098

Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low :  950
Current     :  990

Moving Averages:

 10-dma: 1017
 50-dma: 1162
200-dma: 1393

Gold and Silver ($XAU)

Pay attention here, very big move in the XAU.  The index was
by far the best performing sector in today’s session with
it 7.45 percent gain.

The sector’s best performing components included Harmony
Gold (NASDAQ:HGMCY), Gold Fields (NYSE:GFI), Anglogold
(NYSE:AU), Meridian Gold (NYSE:MDG), and Newmont Mining

52-week High: 89
52-week Low : 49
Current     : 78

Moving Averages:

 10-dma: 74
 50-dma: 79
200-dma: 65

Drug ($DRG)

The DRG was the worst performing sector for the day.  A
double dose of negative news from Merck (NYSE:MRK)
concerning the delay of its Medco IPO and the study
concerning Wyeth (NYSE:WYE) pressured the DRG 4.38 percent

The worst performing components of the DRG included the
aforementioned WYE, King Pharmaceuticals (NYSE:KG), Forest
Labs (NYSE:FRX), and Merck.

52-week High: 404
52-week Low : 283
Current     : 284

Moving Averages:

 10-dma: 299
 50-dma: 326
200-dma: 369


Market Volatility

The VIX spiked higher, not by surprise, during today’s session
to tune of nearly 8 percent.  A big move indeed!  We’ll see if
it can take out its previous relative highs this week.

The VXN returned to rally form as well with its nearly 5
percent pop today.

CBOE Market Volatility Index (VIX) - 34.05 +2.52
Nasdaq-100 Volatility Index  (VXN) - 60.08 +2.79


          Put/Call Ratio  Call Volume   Put Volume
Total          0.87        505,279       437,681
Equity Only    0.71        407,680       287,790
OEX            1.00         24,070        24,307
QQQ            1.04         43,676        45,360


Bullish Percent Data

           Current   Change   Status
NYSE          46      + 0     Bull Correction
NASDAQ-100    16      - 1     Bull Alert
DOW           33      + 3     Bull Alert
S&P 500       35      - 1     Bear Confirmed
S&P 100       33      + 1     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  1.56
10-Day Arms Index  1.53
21-Day Arms Index  1.43
55-Day Arms Index  1.41

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 


Market Internals

        Advancers     Decliners
NYSE       1257          1975
NASDAQ     1492          1994

        New Highs      New Lows
NYSE        48             97
NASDAQ      41            145

        Volume (in millions)
NYSE     1,343
NASDAQ   1,703


Commitments Of Traders Report: 06/25/02

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

Commercial interests added back about 10,000 contracts to their
net bearish position.  Small traders dropped a number of longs
and a smaller number of shorts for a reduction in their net
bullish position by more than 20,000 contracts.

Commercials   Long      Short      Net     % Of OI 
06/11/02      388,751   457,018   (68,267)   (8.1%)
06/18/02      437,530   487,956   (50,426)   (5.4%)
06/25/02      378,214   438,775   (60,561)   (7.4%)

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
06/11/02      174,357    69,464   104,893     43.0%
06/18/02      181,178    88,517    92,661     34.3%
06/25/02      134,380    62,792    71,588     36.3%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 114,510 - 3/26/02

The roles reversed.  Commercials went decidedly short, while
Small Traders went decidedly long.

Commercials   Long      Short      Net     % of OI 
06/11/02       45,946     36,878     9,068   10.9%
06/18/02       54,816     49,169     5,647    5.4%
06/25/02       27,238     35,926    (8,688) (13.8%)

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

Small Traders  Long     Short      Net     % of OI
06/11/02       14,561    25,330   (10,769)   (27.0%)
06/18/02       20,883    29,153    (8,270)   (16.5%)
06/25/02       14,749     7,570     7,179     32.2% 

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


Dow commercials dropped about 2,000 of their net long
position.  Small traders eased into a bullish position.

Commercials   Long      Short      Net     % of OI
06/11/02       20,369    17,172    3,197      8.5%
06/18/02       25,995    19,115    6,880     15.1%
06/25/02       18,016    13,255    4,761     15.2% 

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
06/11/02        7,500     9,925    (2,425)   (13.9%)
06/18/02        5,379    11,813    (6,434)   (37.2%)
06/25/02        6,414     6,597       183     1.40% 

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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DAILY SECTOR TRADER: Tuesday, 7/9/02

by Leigh Stevens

Lots of red ink today in sector-land!  The pharmaceutical 
($DRG.X) sector continued to fall, per my prior highlight of this 
sector as having made a long-term multiyear top. It looks like 
the go-go years of the 90's may be behind us, as consumers demand 
less money go into drug maker's pockets so more is left in their 
own after their prescriptions are filled - empty pockets was 
getting to be the order of the day, particularly for seniors.

DOWN ON THE DAY on Tuesday - 


Healthcare ($HMO.X) and Health Providers ($RXH.X) continued 
lower, per my recent comments also.  I saw this one coming, but 
the charts looked like tops, acted like tops and WERE in fact top 

Semiconductors were weak - no good rally potential exists until 
this group at least stops going down. Software is giving back 
recent gains and an attempt to break out to the upside.  No 
sector is going to escape the bear claws for long!  

If there is going to be little white house support for tough new 
reforms, there is going to be little interest in the broker 
sector - stocks, who wants em anyway! 

The Utility sector ($UTY.X) continued to be in "free fall", which 
is a bit unusual because they are considered to be such 
"defensive" stocks - no place (or sector) to hide!? 
UTY has now retraced more than 62% of its big 2000 run up (240 to 
399) - a next target implied by a 75% retracement is to 280. 

UP ON THE DAY ON Tuesday -


One stand out "up the down staircase" sector performer came from 
the "doom & gloom" gold stocks - consequently, I will feature XAU 
in the Highlight section to try to ascertain how much upside 
there might be and if the correction might may have run its 
course. And, (technical) survey says! - yes, the gold & silver 
sector stocks look like they have another up leg developing.   





Buy IJS at 84.50 or less 
(S&P 600 Small Cap Value fund iShares) 
Stop at 82.50

Buy SMH at 28.30 or less  
(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


Long BBH at 72.00 
(Biotech HOLDR's Trust stock)
Stop at 69.00



Gold & Silver Sector Index ($XAU.X)


SOME PRIOR COMMENTS: Looks like the sector has a potential 
downside target to the 63 area, where XAU would retest its 200-
day moving average.  WRONG!

Looks like I fell "asleep" on this one by not taking note of a 
couple of developments: 
1.) The recent rebound started after XAU retraced just over 62% 
of its prior advance, which is a retracement percentage that one 
should be alert to a possible reversal back in the direction of 
the prior dominant trend.  
2.) There was a minor bullish price/RSI divergence as the index 
fell to a new relative low, "unconfirmed" by a similar new low in 
the RSI.  

XAU pierced its down trendline today and has only resistance 
implied by its 50-day moving average at 78.4 to overcome, which 
it looks like it will do easily.  The down-up-down swings within 
the correction are the typical "segments" or components of a 
completed downside correction.  Look for more upside, possibly an 
eventual new high above 89. 

A next rally should be the last part of the bull move however. 
Play it for further upside, then be ready to short stocks/buy 
puts at the end of it.       
UPDATE: 7/09

Leigh Stevens
Chief Market Strategist

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The Option Investor Newsletter                  Tuesday 07-09-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


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.


BA $43.22 -0.88 (-1.78) The rally attempt from last week has
been soundly rebuffed, with the major market averages giving
back all of their short-covering gains and it now appears
certain that the DOW will retest its recent lows.  While BA
hasn't completely broken down below support, the likelihood of
near-term upside is significantly reduced due to the poor market
action.  Rather than wait for our stop to be taken out, we're
pulling the plug tonight.  Use any sort of rebound in the
morning to close open positions.


GS $70.91 -2.69 (-3.04) Leave it to the unexpected to muck up a
perfectly good play.  GS followed the Brokerage sector lower
throughout the day, ending the session just below the $71 level
and looking ripe for further weakness.  Then after the closing
bell, the announcement hit the newswires that GS would be added
to the S&P500 and 'POP', GS was trading back up at the $73.50
level in the after-hours session.  As funds jockey to add the
stock, it will likely get a boost in the near future and we
don't want to buck that influence.  We're dropping GS tonight, so
use any weakness tomorrow to close out any remaining open

QLGC $37.51 -1.01 (-2.26) While QLGC has fallen back this week,
its rate of descent has been significantly slower than the
broader Technology market.  It looks like the stock is gaining
some relative strength and that isn't what we want to see in our
put plays.  Take advantage of the current weakness to close open
positions.  We can then focus our attention on more appealing
bearish candidates.

TDS $59.40 +1.20 (+0.40) TDS appears to be forming a short
term base.  The stock broke above its 10-dma in today’s
session for the first time in over a month, which was the
first sign that the trend may be coming to an end.  The
other sign, of course, was that the stock finished higher
on a horrible day for the market.  We don’t want to hang
around to see our gains vanish.  Look for a pullback in
tomorrow’s session to exit plays.

EMMS $20.44 –0.23 (-0.04) EMMS is building relative
strength and perhaps even a short term bottom.  The stock
has been holding up very well in the face of increased
market weakness, and we don’t want to stick around to see
it move any higher.  Set a tight stop on open positions
to protect against further upside, or look to exit open
plays on a pullback early in tomorrow’s session.

KMI $39.42 –0.23 (+1.23) KMI reported Monday morning that
it expected to beat earnings estimates for the current
quarter.  The news was enough to buck the overall trend
of weakness in the broader market, and to break this stock
out from its short term declining trend.  As such we’re
dropping coverage this evening.  Look to exit open plays
on a pullback early tomorrow.


Please view this in COURIER 10 font for alignment

CALLS              Mon    Tue    

BA       43.22   -0.05  -0.88  Dropped, weakening Dow hurts BA
ESST     17.49    0.31  -0.79  Raised guidance, stock popped Mon
MSFT     53.21   -1.98   0.29  Finished higher Tue, small victory
MO       46.69    1.19  -0.71  Inside day set up, breakout next?
INTU     46.40   -2.36  -0.63  Pulled back down to rising support
NVDA     18.60    0.66  -0.96  Near entry point at gap or to $20
ORCL      9.39   -0.74   0.08  Holding its own, back near support


TDS      59.40   -0.80   1.20  Dropped, broke above 10-dma today
EMMS     20.44    0.19  -0.23  Dropped, consolidating at support
KMI      38.42    1.46  -0.23  Dropped, raised guidance, popped
LXK      51.26    1.17  -1.91  Awesome entry from 200-dma rollover
QLGC     39.80   -1.28  -1.01  Dropped, short covering lift higher
XL       79.77   -0.12  -2.11  Trading new relative low in trend
LLY      49.98    1.47  -2.11  Big drugs take it on the chin
CAM      48.36   -1.71   0.04  Rolling over from 10-dma, entry pt.
GS       70.91    2.10  -2.69  Ready to breakdown from basing
LLL      46.70   -1.70  -2.35  Trending solidly lower, exit point?
CAH      52.68   -0.16  -5.66  Home run!  Major break in drugs!!!
AMGN     34.88   -1.84  -1.33  New, another hit to biotech group
LM       44.70    0.17  -1.95  New, brokers business hurting more
MRK      45.75   -1.05  -2.06  New, IPO delayed yet again hurts
RE       51.10   -1.16  -2.54  New, WorldCom woes spread to RE

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ESST $17.49 –0.79 (-0.48) ESST announced Monday morning that it
had raised its fiscal third-quarter financial guidance based on
strong sales and demand for its video entertainment products.
The company now said that it would achieve sales of between
$86 and $90 million compare to earlier guidance of $82 to $87
million.  The news helped ESST to buck the trend of weakness in
the markets yesterday, and to trade relatively better than the
broader technology sector during today’s session.  From here
we like taking entries on a pullback down into short term
support between the $15.75 and $16.50 zone.  Traders can look
to set a stop below the relative low to manage against any
further downside beyond that that may come from selling in the
broader market.  To the upside, a breakout above Monday’s high
at $18.79 would offer an entry point into strength provided
that the market is positive.

MO $46.69 –0.71 (+0.48) The bargain buyers moved back into MO
a little more during yesterday’s session.  The stock’s
display of relative strength while the rest of the market was
suffering was impressive and indeed and hopefully it portends
further upside for this beaten down tobacco maker.  Short term
resistance is now set at the high traced during Monday’s
session seeing as MO completed an inside day during today’s
session.  A breakout above Monday’s high at the $47.61 level
could lead to the next leg higher in the stock’s rebound,
while a stop below Monday’s low could prevent the risk of
further downside upon a reversal from here.  Monday’s low was
traced at the $46.41 level.  Look for volume to return on any
upside move from here as a sign that the buyers are gaining

INTU $46.40 –0.63 (-3.69) The pullback in the broader market
so far this week has pressured INTU right back down to where
it we want it, near its short term ascending support line.
The stock has been riding its upward trending support line
Higher since early April, and it is now back at that level and
poised for a rebound if tech can get some of its legs back.
Traders looking for an entry point into further weakness need
only look to the $45.50 to $46 level which is the site of
INTU’s relative lows hit last week on its rising trend line.
Look for a rebound to come from that area, but wait to make
sure that the broader tech sector as least stabilized before
trying to enter a bullish position into market weakness.  A
rebound in technology could lead to a swift recovery rally in
INTU back up to the relative highs near the $50 level.

NVDA $18.60 –0.96 (-0.30) NVDA put in a strong day during
yesterday’s session, when the stock attempted to breakout
above the $20 level.  The fact that the stock actually closed
higher for the session while its peers in technology slid
lower was encouraging indeed, but not enough to keep it
propped up in today’s session, which saw heavy selling in the
broader semiconductor group thanks to several downgrades from
high profile Wall Street chip analysts.  The pullback in
today’s session put NVDA back to its 10-dma which prevented
the stock from falling back down into its gap higher from
last week.  If the stock does penetrate down in the zone
between its gap higher, then we’d look to wait for a further
pullback until the gap is filled at the $17.45 level.  From
there we’d look for a bounce in the broader market and for
NVDA to catch its legs.  If you’d prefer a momentum breakout
entry point, wait for the market to stabilize and look for
NVDA to take out Monday’s high at the $20.24 level.

ORCL $9.39 +0.08 (-0.66) ORCL’s pullback so far this week
feels very routine so far.  After all, the stock did finish
fractionally higher in today’s session which is more than
can be said for most of technology and the broader market.
The stock’s ascending trend of relatively higher lows has
remained intact as well with the rebound and bounce from the
rising 10-dma.  Aggressive traders can take entries at current
levels based on the belief that support will hold once more
and that ORCL will lead to the way back up to the upside once
the Nasdaq reverses its two day trend of weakness.  Others
might consider waiting for the software sector to gain its
footing and for ORCL to breakout above the $10 level in a
decisive fashion on heavy volume. 

MSFT $53.21 +0.29 (-1.69) With weakness permeating virtually
every sector of the market again on Tuesday, MSFT was a beacon
of hope with its ability to remain positive throughout the day.
Even the Software sector (GSO.X) traded down by 3.5%, so the
fact that MSFT managed to close positive is encouraging.  While
the broad market digested (read: gives back) its gains from last
week, MSFT has been trying to build a new base near $52.  Of
course, the fact that Mr. Softee closed near its low of the day
should temper any bullish enthusiasm until buyer's reappear in
numbers.  We want to see MSFT hold support at the bottom of the
gap from last Friday ($52.50) and a rebound from that level could
make for a solid entry for the next leg higher.  Resistance just
above $56 is still firmly in place and momentum traders will want
to wait for a volume-backed move through $56.50 before considering
new positions.  There appears to be a bottom in place with strong
support at $51, allowing us to protect ourselves with our stop at



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XL $79.77 –2.11 (-2.23) XL fell back to its relative low
in its long standing descending trend line during today’s
session with the decline down to the $79 level.  The stock
is at risk for a major breakdown if the $79 level doesn’t
hold in the short-term, which is a very good thing for us
traders holding puts on this expensive stock.  The key to
the breakdown will be the direction of the broader market
averages.  If the Dow and S&P continue sliding lower, then
there’s a much better chance that XL will complete its
breakdown and continue lower over the short-term.  Traders
looking for new entry points can look to enter put plays
on a breakdown below the $79 level in tomorrow’s session
on further weakness in the market.  Look for a high level
of volume to accompany any such breakdown.

CAM $48.36 +0.04 (-1.67) CAM reported during today’s
session that it had been sued by a Houston, Texas resident
over contaminated ground water.  The company said that the
water was suitable for drinking and tried to downplay the
news.  CAM added that the suit would have no material
impact on its financial condition.  The market didn’t pay
much attention to the news as CAM traded pretty much in
line with the oil service sector index (OSX.X) during
today’s session.  Traders seem to seek refuge in the OSX.X
during today’s session as nearly every other sector of the
market was hammered.  The rally in the OSX.X and CAM should
not last long, though, as the technicals for both remain
rather bearish.  CAM is on the brink of a major breakdown
from its head and shoulders pattern on the daily chart
which could come at any time.  Look for the stock to
continue rolling over from current levels, and for a break
below the $47 level.  New entries can be taken at current

CAH $52.68 -5.86 (-6.47) Barely pausing at resistance at $59-60,
CAH got moving to the downside in a big way on Tuesday.  CAH
wasn't alone, as other drug distributors (ABC and MCK) were hit
with heavy selling as well.  Apparently the source of the weakness
came from an NPR segment that investigated whether some drug
wholesalers offered drugs at huge markups or otherwise manipulated
the supply of drugs to enjoy windfall profits.  Of course, the
charts pointed out that there were the seeds of weakness last
week and the oversold bounce gave us a nice entry into the play
before today's sharp fall.  With volume running well over double
the ADV on Tuesday's drop and the stock closing at its lowest
level since August of 2000, it looks like there is more downside
in store.  The intraday lows from last week near $47-48 are a
logical near-term bearish target, but if that fails to hold, we
could be looking at a drop down to major support near the $40
level.  Use oversold rebounds from support to initiate new
positions as the rally attempt fails.  Target levels for entries
are at $54 and then $56.  We are lowering our stop tonight to

LLL $46.70 -2.35 (-4.32) Despite a valiant effort early in the
day, the bulls just couldn't maintain a positive trajectory for
the Defense Industry index (DFI.X).  Once it became clear that
there wasn't enough push to get through the $612 resistance level,
gravity took over, sending the DFI index to close at its low of
the day.  Shares of LLL had been looking weak already and when
the DFI index rolled over just picked up steam to the downside,
ending the day with a 4.8% loss and coming to rest at its lowest
level since early January.  While there could be some mild support
coming up near the $46 level, any bounce from there will likely
just provide a fresh opportunity to buy puts.  Use failed rallies
at intraday resistance ($48.75, $49.50, $50.25) to establish new
positions.  The PnF chart is still pointing to the $43 level for a
price target, so we'll want to consider harvesting gains when LLL
nears that level.  Lower stops to $51.50.

LLY $49.98 -2.11 (-2.27) The bad news parade continues to pound
the Pharmaceutical index (DRG.X) to new multi-year lows, and
Tuesday saw the index falling to its lowest closing level since
January of 1998.  With that kind of weakness in the DRG index and
other stocks like MRK and BMY hitting new yearly lows, it should
come as no surprise that LLY closed at a new low as well.  At the
close, the stock was trading below $50 for the first time since
the middle of 1997 and momentum is clearly in favor of the bears
again.  With earnings set to be released next Thursday, we can
expect LLY to continue to trade lower throughout this week.  We
have a couple different ways to consider new entries at this
juncture.  The best approach will be to enter the play on the
next failed rally, ideally on a rollover near the $52 resistance
level.  A strong rally to the $54 resistance level is probably
too much to hope for, given the sector weakness, but a failed
rally there would be a gift for hungry bears.  Alternatively, a
drop below $49.75 on strong volume can be used for initiating new
momentum-based entries.  Until this level is broken on a closing
basis, we'll leave our stop set at $54.50.

LXK $51.26 -1.91 (-1.04) The mild rise in the price of LXK from
last week's lows came to an abrupt halt right at the 200-dma
($54.24) over the past 2 days.  The weekend comments in Barron's
about the company being a possible acquisition target of DELL had
little lasting effect other than to provide us with another entry
point as the stock rolled over.  Now that the stock has moved
into the gap left by last Friday's rally, that gap will likely
fill and quite possibly tomorrow.  But there is some decent
support near the bottom of that gap ($50.50) and it could produce
another bounce.  We want to take advantage of that bounce to
initiate new positions as it runs out of steam and rolls over,
ideally from the $52 level.  However, we could see LXK run as
high as the month-long descending trendline ($53.25) before
rolling over and that would also make for a solid entry point.
We're keeping our stops set at $54.50 until the stock breaks its
recent lows near $49.


LM – Legg Mason $44.70 –1.95 (-1.78 this week)

Legg Mason, Inc. is a holding company, which, through its
subsidiaries, is principally engaged in providing asset
management, securities brokerage, investment banking and
related financial services to individuals, institutions,
corporations and municipalities. The Company's principal
asset management subsidiaries are Legg Mason Funds Management,
Inc., Western Asset Management Company and Western Asset
Management Company Limited, Perigee Investment Counsel Inc.,
Brandywine Asset Management, Inc., Batterymarch Financial
Management, Inc., Legg Mason Capital Management, Inc.,
Bartlett & Co., LeggMason Investors Holdings plc, Barrett
Associates, Inc., Gray, Seifert & Co., Inc. and Berkshire
Asset Management, Inc. The Company's real estate finance
subsidiary is Legg Mason Real Estate Services, Inc., and
Legg Mason Wood Walker, Incorporated is its primary
broker-dealer subsidiary.

The broker dealer sector is coming increasing amounts of
downside pressure as stocks continue to slide.  The
public’s growing disinterest in the stock market is wreaking
havoc on the business of the market.  Individual investors
are growing more and more leery of the market as was
underscored by President Bush’s speech in Wall Street
during today’s session.  One of the stocks in the broker
dealer sector that is leading to the downside is LM, which
was hit during today’s session on extremely heavy trading
volume.  It seems as though the market didn’t like the
fact that LM purchased bonds in troubled telecom provider
Level 3 Communications, which was announced during
yesterday’s session.  Whatever the reason, we took notice
of LM’s sharp drop in price on the extremely heavy trading
that overtook the 30 day average trading volume by more than
1.3 million shares.  The stock is poised for further
downside in the short-term as there is little to no
support immediately below current levels.  Look for the
selling in the broader financial sector continue into
tomorrow’s session, and watch for LM to take out its
intraday low from today’s session at the $44.64 level.
In turn, confirm those entries with a breakdown below the
$44 level.  If the stock does attempt of a short term
relief rally in the coming sessions, watch for signs of
weakness to start showing near the rolling 10-dma, which
is now overhead at the $47.27 level.  Our stop is initially
in place at the $48.50 mark.

BUY PUT JUL-45*LM-SI OI= 60 at $1.35 SL=0.75
BUY PUT AUG-45 LM-TI OI=920 at $2.70 SL=1.50

Average Daily Volume = 390 K

MRK – Merck $45.75 –2.06 (-3.11 this week)

Merck & Co., Inc. is a global, research-driven pharmaceutical
company that discovers, develops, manufactures and markets a
broad range of human and animal health products, directly and
through its joint ventures, and provides pharmaceutical benefit
services through Merck-Medco Managed Care, L.L.C. (Merck-Medco).
The Company's operations are managed principally on a products
and services basis and are comprised of two business segments:
Merck Pharmaceutical, which includes products marketed either
directly or through joint ventures; and Merck-Medco. Merck
Pharmaceutical products consist of therapeutic and preventive
agents, sold by prescription, for the treatment of human

Disinterest is building for new public offerings of
securities, especially of the equity variety.  That’s not
a good sign for this already troubled pharmaceutical giant.
Merck reported this morning that it had withdrawn its
initial public offering for its pharmacy benefits manager
division Medco Health Solutions.  Merck reported that
investors again balked at buying the new issues as confidence
in the market continues to slide.  The delay in the IPO comes
on the heels of criticism over the way that Medco has
accounted for revenues in the past, which itself has
resulted in two postponed offering attempts.  The longer it
takes for MRK to get Medco off the books, the longer that
MRK is going to remain under pressure, which is what we’re
betting on by initiating coverage on the stock as a new put
play.  Momentum traders can look for a breakdown below the
$45 level in tomorrow’s session for an entry point just as
long as volume remains relatively active as it has been in
the last two days as MRK has slid lower.  If the stock
decides to rebound before ultimately heading lower, then
look for a reversal from a relatively lower high near the
descending 10-dma now at the $48.63 level.  Our stop is
initially in place at the $49 mark.

BUY PUT JUL-45*MRK-SI OI=4116 at $1.25 SL=0.75
BUY PUT AUG-45 MRK-TI OI=3179 at $2.20 SL=1.00

Average Daily Volume = 6.92 mln

RE – Everest RE Group $51.10 –2.54 (-3.70 this week)

Everest Re Group, Ltd.'s principal business, conducted through
its operating subsidiaries, is the underwriting of reinsurance
and insurance in the United States, Bermuda and international
markets. The Company underwrites reinsurance both through
brokers and directly with ceding companies, giving it the
flexibility to pursue business regardless of the ceding
company's preferred reinsurance purchasing method. The
Company underwrites insurance principally through general
agency relationships.

The insurance industry is taking it on the chin from
several very different directions.  The most recent hit came
from the troubles at Worldcom (NASDAQ:WCOM).  RE reported
late last week that it cut its fiscal second-quarter
financial forecast due to the Worldcom debacle.  The company
said that it would sustain a loss of about $30 million from
exposure to Worldcom.  The company said that its earnings
per share would be reduced by 60 cents on a net income
basis and by 10 cents on an operating basis due to the fixed
maturity of the debt investments that it held in Worldcom.
The news was not welcomed by investors of RE who have
already seen their stock slide from the high $70s so far
this year, and it has only led to further downside in
this week’s trading.  The stock broke down during today’s
session below all of its short-term support and looks to be
entering into a new descending trend lower, which could
take the stock to as low as the $46.50 level which is the
only site of support in the immediate future.  The weekly
chart offers a better view of where support may lie ahead
for RE.  Momentum traders can look to enter into further
weakness below today’s low on further signs of heavy
institutional distribution.  Look for the stock to break
the $50 barrier some time this week, possibly as early as
tomorrow’s session, then look for the rest of last fall’s
low.  Any rally short of the $54 level would offer an
entry into put plays on strength.  Our stop is initially in
place at the $55 level.

BUY PUT JUL-50*RE-SJ OI= 5 at $1.25 SL=0.50
BUY PUT AUG-50 RE-TJ OI= 0 at $2.55 SL=1.50

Average Daily Volume = 582 K

AMGN – Amgen, Inc. $34.93 -1.28 (-3.14 this week)

The biggest of the Biotech big guns, AMGN makes and markets
therapeutic products for hematology, oncology, bone and
inflammatory disorders, as well as neuroendocrine and
neurodegenerative diseases.  Anti-anemia drug Epogen and immune
system stimulator Neupogen account for about 95% of sales.  Its
Infergen has been commercialized as a treatment for hepatitis C,
and Stemgen is approved for stem cell therapy in Australia,
Canada, and New Zealand.  The company has a strong pipeline of
new drugs in various stages of development as well as research
and marketing alliances with Hoffman-La-Roche and
Johnson & Johnson.

The Biotechnology sector (BTK.X) has once again lost that loving
feeling, falling on Tuesday to a fresh 2-year closing low.  Coming
to rest just above the $300 level, the BTK appears intent on
testing $290 in the near-term and quite possibly heading lower
from there.  The carnage hasn't been limited to just the
speculative names in the group either, as the big guns like AMGN
have come under heavy selling pressure as well.  It didn't take
the bears long to wipe out the transitory gains in the stock from
last Friday's ramp-job, and by the closing bell, AMGN was sitting
just below $35, its' worst close in 3 years.  To make matters
worse, there isn't much in the way of support until the $30 level.
With all the current scrutiny on corporate balance sheets, it is
highly likely that the stock will continue to move lower ahead of
the company's earnings report on July 24th.  Resistance at the $38
level has been tested twice in the last week and both times the
result has been to send the stock southward.  Another failed rally
near this level would make for an ideal entry point, although the
odds of that much of a bounce are rather low.  A more realistic
approach will be to initiate new positions on a failed rally at
either the $36 or $37 levels.  Momentum traders will want to enter
the play on a volume-backed breakdown below $34.40 (the intraday
lows from last Wednesday), provided the BTK continues to push to
new multi-year lows as well.  Stops are set at $38.25.

BUY PUT JUL-37 AMQ-SU OI=2905 at $3.30 SL=1.75
BUY PUT JUL-35*AMQ-SG OI=5058 at $1.75 SL=0.75
BUY PUT JUL-32 AMQ-SZ OI= 953 at $0.90 SL=0.50

Average Daily Volume = 13.8 mln

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The Option Investor Newsletter                  Tuesday 07-09-2002
Copyright 2002, All rights reserved.                        3 of 3
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MO – Phillip Morris $46.69 –0.71 (+0.48 this week)

Philip Morris Companies Inc. is a holding company whose
principal wholly owned subsidiaries, Philip Morris
Incorporated, Philip Morris International Inc., Kraft
Foods Inc. and Miller Brewing Company, are engaged in the
manufacture and sale of various consumer products. A wholly
owned subsidiary of the Company, Philip Morris Capital
Corporation, engages in various leasing and investment
activities. The company's significant industry segments
are domestic tobacco, international tobacco, North American
food, international food, beer and financial services.

Most Recent Update

The bargain buyers moved back into MO a little more during
yesterday’s session.  The stock’s display of relative
strength while the rest of the market was suffering was
impressive and indeed and hopefully it portends further
upside for this beaten down tobacco maker.  Short term
resistance is now set at the high traced during Monday’s
session seeing as MO completed an inside day during today’s
session.  A breakout above Monday’s high at the $47.61 level
could lead to the next leg higher in the stock’s rebound,
while a stop below Monday’s low could prevent the risk of
further downside upon a reversal from here.  Monday’s low was
traced at the $46.41 level.  Look for volume to return on any
upside move from here as a sign that the buyers are gaining


MO traced the infamous inside day pattern during today’s
session.  The stock could be in for a big upside move in
tomorrow’s trading if it can break out from its tight
range.  Look for a breakout on heavy volume above Monday’s
high at $47.61 which, if it comes, could signal that MO is
heading towards the $50 level.  Watch others in the tobacco
sector such as RJR and UST.

BUY CALL JUL-45*MO-GI OI=3594 at $2.35 SL=1.00
BUY CALL JUL-47 MO-GW OI=9054 at $0.80 SL=0.25 
BUY CALL AUG-47 MO-HW OI=3725 at $1.85 SL=1.00
BUY CALL AUG-50 MO-HJ OI=9353 at $0.95 SL=0.25

Average Daily Volume = 7.67 mln

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One more bullish and one more bearish idea on the Watch List 
tonight.  Several others are poised for action!

To Read The Rest of The OptionInvestor.com Market Watch Click Here


By surprise, there was little movement in Market Posture in the 
last two days.  Although that could change quickly in the next 

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