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Daily Newsletter, Thursday, 07/11/2002

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The Option Investor Newsletter                Thursday 07-11-2002
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)
************************************************************ 
      07-11-2002           High     Low     Volume Advance/Decline
DJIA     8801.53 - 11.97  8854.90  8605.34 2.06 bln   1131/1879
NASDAQ   1374.43 + 28.43  1375.58  1323.59 2.26 bln   1469/2017
S&P 100   462.92 +  4.23   464.06   448.92   Totals   2600/3896
S&P 500   928.44 +  6.90   929.16   900.94 
RUS 2000  416.68 -  3.10   419.78   408.19 
DJ TRANS 2504.58 - 42.58  2548.97  2546.44   
VIX        38.55 -  0.47    41.64    38.55   
VXN        68.60 +  3.38    70.47    66.31 
Total UpVol 2,709.1M
Total DnVol 1,683.1M
52wk Highs   97
52wk Lows   722
TRIN        0.51
PUT/CALL     .89
*************************************************************  

Shorts Are in Trouble!

Is the headline you were looking for? I hope so because Friday's 
opening could be a shorts nightmare. Typically a severe decline
like we had this week ends dramatically with a final negative
news event. Sometimes when things appear they cannot get any worse
a positive event appears to jerk bears back to reality, if only for
a couple days. That positive event came after the close today and S&P 
futures jumped to +7 and Nasdaq futures gained +20. Still a lot of 
darkness before morning trading begins but the prospects are encouraging.

Chart of the Nasdaq


 

Chart of the Dow


 


Helping the rebound during the day was a rumor that Dan Niles 
was going to upgrade Intel and there was another rumor that they
would pre-announce tonight. This powered the semiconductor sector
to a +6.85% gain and it came within three points of filling the 
Tuesday morning gap down. It also helped produce a double bottom
bounce off support at 345. Half of the rumors were true. Dan Niles
did make some positive comments about Intel but also said the 
expectations still need to come down. They did not pre-announce 
after the close and with earnings on Tuesday most traders doubted
that rumor anyway. 

Not everything started off positive with SAP warning that they 
would miss 2002 earnings due to heavy cancellations by customers.
SAP is a major competitor to ORCL, PSFT, SEBL and MSFT and analysts
see the warning as a leading indicator for the PSFT and SEBL earnings
to come. Oracle affirmed estimates yesterday but warned that visibility
was still very bad. The CFO said he believed the worst was over but
he had no proof that things were getting any better. He said he had
no better visibility than he did six months ago. They also said 
business in Europe was slowing. Not very encouraging.

Another software vendor fell on hard times when NET warned that the 
3Q would be less than expected. The stock dropped -3.25 (-18%) after
management cut revenue estimates by up to 10%. One broker cut his 
rating to a rare "sell" due to a lack of growth and weak results.
The company is being investigated by the SEC for accounting problems
in 2000 after the company restated lower results for 1998-2000. Several
analysts voiced concerns that Symantec was taking market share. SYMC
still dropped -1.09 on the news but finished well off the $30.50 low
at $32.86. 

I have kept you in suspense long enough. The big news after the close
came from two companies, DELL and JNPR. Dell, which had just affirmed
earnings estimates last week, came out again and said they would now
beat estimates by a penny on stronger than expected revenue. They 
said market share gains and improving profit margins would boost
their earnings. A real surprise after last weeks inline affirmation.
Dell jumped to $25.40 in after hours after closing at 23.91. The
announcement also boosted Intel who supplies the chips for Dell
computers. INTC jumped nearly $1 to $19.07 in after hours. This is
good news for the sector despite the fact that it represents no
growth in overall PC sales. Just more share for Dell.

Also announcing after the close was JNPR who beat analyst's estimates
by a penny despite a drop in sales to telecoms. JNPR also raised 
guidance for the next quarter. Suddenly the network sector does not
look so bleak despite news from SONS tonight that their sales would
be flat next quarter. JNPR jumped nearly $1 in after hours to $8.05.

While these two events may seem less than exciting, tech investors 
will be glad to get any good news no matter how slight. The severely
shorted tech sector has not seen much positive news and after the 
drop this week it was ripe for a short covering rally. Relatively 
speaking the Nasdaq had resisted the drop better than the other 
indexes but still hit five year lows today of 1323. That severely
oversold condition was crying for some event to release the spring.

Now, the bad news, it won't last. The Dell news is company specific 
and does not represent any greater PC demand overall. There may be an
opening bounce as shorts cover on the news but this should be viewed 
as a new entry point for a short position. The JNPR news was nice
but they also had no real growth news for the sector. Remember, we
have three major earnings events next week. Intel on Tuesday, IBM
on Wednesday and MSFT on Thursday. Where Dell may be gaining market
share from HPQ and Gateway, Intel supplies chips to everyone and 
will be the true measure of demand. It is widely expected that INTC
will guide lower on Tuesday. IBM is the elephant in the closet. They
have so many problems that the odds are good several will appear on
Wednesday. They have said they will disclose more information and 
the attempt to soften the blow this week with the restatement for
the sale of their disk drive business was the first try. It is 
widely expected they will miss earnings and guide lower. MSFT is 
the only major tech that is expected to provide an earnings
surprise or at least not guide lower. This is not an environment
for a continued tech rally.

Economically we will be challenged on Friday with Retail Sales and
the next installment of the Consumer Sentiment. The forecast for
sales is an optimistic +0.6% and for consumer sentiment to be flat
at 92.2. Remember, sentiment is driven in some part by the market
and I can't imagine how it could surprise to the upside. The best 
we can expect is for it to remain flat to only slightly down and
not blunt the short covering rally at the open.

While I would applaud a strongly positive day tomorrow my longer 
term view is still lower lows ahead. There are just too many problems.
The possibility of a second recessionary dip is strong and the new
accounting rules are going to be a killer. What I mean by that is
the fear of prosecution for misstating your financials. Beginning
August 14th the 945 largest corporations will have to certify on
pain of criminal prosecution the truth of their financials. They 
will have to disclose everything that could be material in any way. 
Many companies have skeletons in the closet and those bones are
beginning to rattle. Every CEO has seen pictures of other CEOs 
on TV recently and they do not want to play musical chairs in
front of a congressional committee or worse a criminal judge. You
can bet that before they put their signature on that affidavit they
will grill everyone who prepared the statements about every possible
entry. The buck has stopped at the CEO level but the stock prices
have farther to go. The odds of more companies disclosing embarrassing 
details and stocks reacting negatively are very high. Late news
tonight said that Sullivan (WCOM CFO) has now told congress that
Ebbers knew for a year that the numbers were fraudulent. If this 
is true then expect a high profile criminal proceeding very soon.
The prosecutors will want to move fast to strike fear into the 
corporate community.

The Dow hit a low of 8605 (-204) before rebounding today. That 
low was -804 points below Monday's high. Think about that for a 
minute. -804 points! The rebound from these lows was nice but 
nowhere near the V bottom rocket you would have expected from
extremely oversold conditions. While the other indexes finished
positive the Dow fell short. Despite the heavy up volume and
over two billion shares traded on the NYSE, declines still beat
advancers 19:11. Many analysts claim the current decline is nearing
1929 proportions. We may not have had a "capitulation event" yet
but we are seeing capitulation by breadth as new lows across all
exchanges swamped new highs 722:97. Will we get a short covering 
rally at the open? Futures are pointing to that possibility but 
the consumer sentiment could crush that hope before the bell. 
Should the rally occur you should not expect it to be the ONE
we are looking for. Trade it but don't marry it! 

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

BIG VOLUME, BIG BOUNCE BACK
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 
The Dow average, which was leading the market down on heavy 
volume - in a switch, Nasdaq held up the best! - rebounded on a 
positive pre-announcement by Kodak (EK - +11%). A climb in tech 
bellwether Intel (INTC) also helped considerably (+8.5%). There 
were rumors that the company would make a positive announcement, 
such as one raising their guidance on earnings - like many, if 
not most, of these floor rumors, it was unfounded at least as of 
this writing.  
 
I suggested buying OEX calls (with wrong chart published for a 
while due to a glitch) under 455, with a suggested exit/stop 
point at 449.50, which I thought was well "out of the way" - 
WRONG!  The low was 448.82 and the close 462.9. 

If the market is oversold enough and there is a good technical 
projection for where the market is getting "extreme" - even in a 
down market like this - then one philosophy is to make the cost 
of a call the amount risked. This assumes that you don't over-
leverage and commit an excessive amount of your trading capital 
to any one position.  

On the other hand, our guiding principle is to adhere to risk 
parameters that will protect the greatest number of our readers, 
so sometimes the result is that you are right on the market 
direction or on an expected reversal, but your risk-control 
guidelines take you out on a final dip or flip. So it goes!  
 
S&P 100 (OEX) Index - Daily/Hourly charts:


 

My suggested stop at 449.50 was a good guess for the approximate 
low as it turned out. Those with long call positions, at 455 or 
under or at whatever price you are in at - a suggested exit point 
is at 455, just below some near-support. The OEX should keep 
going or the rally gets a bit suspect.  

There is plenty of "room" on the upside in terms of the broad 
hourly channel as seen above. The move to a new low, followed by 
an upside reversal on good volume is suggesting that the rally 
 will carry further.  

However, if the OEX gets up to resistance that starts around 480 
up to 483, AND whenever the longer hourly stochastic gets up to 
an overbought reading again - take any call profits and RUN!   

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


 

I had my ONE lower hourly channel line, which is a line parallel 
to the upper trendline, drawn though the most number of lows 
rather than the absolute lowest low - WRONG! - sometimes this 
technique is what "works" EXCEPT when the market gets real 
extreme in a move. If so, you want the lower boundary line 
touching the LOWEST most extreme low, which offered the best 
outcome here. "Pulling" the lower parallel trendline down to the 
prior "extreme" low at 982 - the one that "stuck out" as a kind 
of "panic" low - then intersected the area of the lows today. 

Sometimes, for comparison, I will draw two trendlines (forming a 
buy/sell "zone") on one end or the other of my channels, which is 
again the case in the way I have the SPX chart above. 

I suggested the 916 area - stop at 912 - as the potential buy 
area for SPX in last night's commentary. However, it is often the 
case that an index gets somehow "pulled" to the even 100/1000 
levels as if by a magnet - this concept worked well today as SPX 
got within a hair's breadth of 900!

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


 

It looks like resistance will first come into play around two 
prior lows at 88.9-89.3.  If this hurdle is cleared, then there 
is not really technical resistance until around 91, then 91.7 at 
the top of the channel. Support is anticipated at 86-86.5. 


KEY NASDAQ STOCKS INFLUENCING QQQ DIRECTION - 

What has kept me bullish or at least tempered my bearishness 
lately is by taking a "bottoms up" approach of always staying 
focused on "key" Nasdaq stocks, at least on a technical basis.  

MSFT (Microsoft) - got back to its 50-day moving average today at 
52.92 - now MSFT needs a close above this level and then above 
55.5 to get something going to the upside.  Thing the stock is 
forming a bottom, so my best guess on upcoming earnings is that 
they will be perceived as at least "OK", if not bullishly. 

INTC (Intel) - Minor upside reversal today - needs follow through 
to above resistance in the 18.8 to 19.5 price zone. 

CSCO (Cisco systems) - Also had minor upside reversal today - key 
overhead resistance now looks like 14.3, then 14.9. 

QCOM (Qualcomm) - Marking time. Could be bottoming, but stock 
looks like to will "follow" the others, rather than lead.

ORCL (Oracle) - Most bullish looking of the Nas 100 that I follow 
- move above $10 suggests a move to around 12.

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


 

I suggested that "I'd feel 'safe' buying at 22 or on an upside 
reversal that pierced the hourly down trendline." I did buy that 
breakout or actually a bit under it, per my suggestion on the 
Market Monitor today when the Q's were trading at 23.90. I am 
inclined to treat this as a "trade" only and exit at 25.5, at the 
top of hourly downtrend channel. 

Let the stock break out above this resistance without me. I would 
rather short the rally at some point or buy the next dip than 
surrender a profit, at least in this market climate. Or, if I 
want to stay long I'll buy ORCL or MSFT on a further breakout if 
I want to play the tech darlings. 

Support is anticipated in the 23.5-24.0 area; then down around 22 
if there is another sharp break.  Above 25.5, resistance levels 
are at the prior highs at 26.5-26.8. 

Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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

Rally Ho or Downward We Go?
By Eric Utley

The market shocked most with its recovery from the abyss during
the day’s session.  But maybe the signs were on the wall, at least
for the ramp in technology shares.

We’ve had the Nasdaq-100 Bullish Percent ($BPNDX) in bull alert
for quite a while now, and that position finally led to some
upside in today’s session on what was a mix of frantic short
covering with a little bargain buying mixed in.  As it often
does, the Nasdaq leads the market as it is the most volatile of
the major averages.  So the early signs of a rally in tech
shares may be a sign of things to come elsewhere in the market.

Elsewhere, the market is getting increasingly oversold.  The
bullish percent readings for the S&P 500 ($BPSPX) and the S&P
100 ($BPOEX) are quickly approaching last fall’s lows, but are
not quite there yet.  What I’m wondering is why the internals of
the market by way of the bullish percent figures have not yet
taken out their September lows, but several of the major market
averages already have, including the SPX, OEX, and NDX.  The
Dow Jones Industrial Average ($INDU) is the only one of the
majors that has not yet broken below its September lows.

Speaking of the Dow, its bullish percent reversed back into a
bear confirmed condition during today’s session after the
indicator shed two stocks.  I didn’t check to see which stocks
went on sell signal in the Dow in the last two days, but
judging by the way the financials, industrials, and health
care sectors have been trading, it wouldn’t be too hard to
spot the new sell signals among Dow components.

The sector scorecard was all about technology during today’s
session.  All eight of the major technology sectors that I
track finished well into positive territory.  The Disk Drive
Index (DDX.X) was the laggard of the group with its measly
0.39 percent gain, which was a blip compared to the 6.85
percent pop in the Semiconductor Index (SOX.X).

If this market is going to rally, it’s going to be led higher
by technology.  Not that I’m a cheerleader for the new
economy, or wishing that it was 1999 again.  Rather, the
indicators I follow are lined up for a run in tech shares,
possibly followed by upside movement in the other recently
beaten down segments of the market.

Finally, I leave you with a question:  Why did the Nasdaq-100
Volatility Index (VXN.X) finish 5.18 percent higher when the
NDX finished 4.06 higher?

Don’t know?  Fair enough.  The answer: skepticism.

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

Market Averages

DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     :  8801

Moving Averages:
(Simple)

 10-dma: 9105
 50-dma: 9683
200-dma: 9823



S&P 500 ($SPX)

52-week High: 1316
52-week Low :  901
Current     :  927

Moving Averages:
(Simple)

 10-dma:  962
 50-dma: 1033
200-dma: 1098



Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low :  946
Current     :  998

Moving Averages:
(Simple)

 10-dma: 1008
 50-dma: 1151
200-dma: 1391



Semiconductor ($SOX)

The SOX was the best performing sector on the day, leading
technology higher throughout the session.  The SOX gained a
very impressive 6.85 percent on the day.

Leading the way to the upside included shares of Xilinx
(NASDAQ:XLNX), Cree (NASDAQ:CREE), NVIDIA (NASDAQ:NVDA),
Broadcom (NASDAQ:BRCM), and Applied Materials (NASDAQ:AMAT).

52-week High: 657
52-week Low : 344
Current     : 372

Moving Averages:
(Simple)

 10-dma: 371
 50-dma: 451
200-dma: 510


Gold ($XAU)

The correlation continues!  Stocks higher, gold lower.  The
XAU was the worst performing sector on the day with its
3.57 percent drop.

Leading the way to the downside included Gold Fields (NYSE:GFI),
Meridian Gold (NYSE:MDG), Harmony Gold (NASDAQ:HGMCY), Anglogold
(NYSE:AU), and Agnico Mines (NYSE:AEM). 

52-week High: 89
52-week Low : 49
Current     : 75

Moving Averages:
(Simple)

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

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

Market Volatility

The VIX traded above 40 today!  But get this, it only finished
the day fractionally lower.

Even better, the VXN finished the day higher.  There may be
something to this rally after all.

CBOE Market Volatility Index (VIX) - 38.55 –0.47
Nasdaq-100 Volatility Index  (VXN) - 68.60 +3.38

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.89        746,418       663,198
Equity Only    0.73        560,152       408,730
OEX            0.84         54,863        45,878
QQQ            0.58         78,078        45,479

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

Bullish Percent Data

           Current   Change   Status
NYSE          41      - 3     Bull Correction
NASDAQ-100    15      + 2     Bull Alert
DOW           23      - 7     Bear Confirmed
S&P 500       26      - 5     Bear Confirmed
S&P 100       23      - 5     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  1.31
10-Day Arms Index  1.42
21-Day Arms Index  1.43
55-Day Arms Index  1.40

Extreme readings above 1.5 are bullish, and readings below .85 
are bearish.  These signals don't occur often and tend be early, 
but when the do, they can signal significant market turning 
points.

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

Market Internals

        Advancers     Decliners
NYSE       1293          1960
NASDAQ     1455          2001

        New Highs      New Lows
NYSE        39            326
NASDAQ      15            266

        Volume (in millions)
NYSE     2,083
NASDAQ   2,297

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

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
 
NASDAQ-100

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 JONES INDUSTRIAL

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

THE SECTOR BEAT - 7/11
by Leigh Stevens

In a "reversal" type day, possible sector upside reversals were 
seen - or, at least rebounds or "continuation" type moves of a  
"trading" nature in: The Cyclical Index ($CYC.X), the Bank Index 
($BKX.X), Brokers ($XBD.X), the Defense sector ($DFI.X) - after 
meeting my downside objective at 565 and then some (540 low) - in 
the High Tech Index ($MSH.X), Networking ($NWX.X), the Drugs 
($DRB.X), Semiconductors ($SOX.X) - see SOX CHART below - 
Utilities ($UTY.X) and Wireless ($YLS.X).    

UP THE MOST on Thursday -


 

DOWN THE MOST on Thursday - 


 


SECTOR TRADE RECOMMENDATIONS & REVIEW -

NEW TRADE RECOMMENDATION(S) -

Buy IJS at 81.60 or less
(S&P 600 Small Cap Value fund iShares)
Stop: 79.50


  

I think that we have finally retraced enough to get down into a 
buying area again in the small cap sector.  IJS got down to the 
lower end of its price channel and has nearly retraced 62% of the 
prior, Sept. - May advance.  

The price gap lower today, IF it is followed by a move up, looks 
like it may be an "exhaustion" type gap that sometimes signals 
the end of a correction. Time will tell on this. 

OPEN TRADE REC(S) -

NONE


OPEN POSITIONS - 

Long HHH at 21.50  
(Internet HOLDR's)
Stop: 20.00

Long SMH at 28.30   
(Semiconductor HOLDR's) 
Stop: 27.00 
NOTE: "SQUEAKED" THROUGH THIS ONE! 
Low was 27.05 - close at 29.43. 

 
TRADE LIQUIDATIONS -
 
Exited SWH on our 26.00 stop; versus a 27.40 entry
(Software HOLDR's)
SWH closed at 26.74, so disappointing to get kicked out on stop.
Still see upside potential back up to 29 area

SPECIFIC SECTOR HIGHLIGHT(S) -

Semiconductor Sector Index ($SOX.X)
STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; 
LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX



 

The rebound, twice now, from the area of the Sept 344 low is 
bullish and suggests the possibility that the SOX could rally up 
to overhead resistance around 400. Stay tuned! 

Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                 Thursday 07-11-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


****************
PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

MO $44.00 –1.17 (-2.21) The inside day set up that we had
detected in MO earlier in the week turned out to a be a
breakdown instead of a breakout.  Hopefully the inside day
offered adequate downside protection with a tight stop.  If
not, look to exit open plays on an signs of strength in
tomorrow’s session.


PUTS:
*****

CAM $46.05 –1.07 (-3.98) CAM offered the quick one day
drop that we were looking for in today’s session, which saw
the stock finish lower by more than 2 percent.  With the
200-dma approaching below from the $45 level, we’re ready to
take our gains out of this play and put them into a more
productive set-up.  Look to book profits on any downside
movement in tomorrow’s session.

CAH $51.90 -0.62 (-7.25) In what turned out to be one of the most
volatile trading sessions in recent memory, shares of CAH gave us
a wild ride as well.  The early morning low at $48.50 turned out
to be the low of the day and after dropping back to the $49.25
level in the middle of the day, the stock moved up for the
remainder of the day on the back of a recovering broader market.
So is this the bottom?  We don't think so, but after the solid
gains we've accrued, this looks like a good point to harvest
those gains.  We're dropping CAH tonight, so use any morning
weakness to exit at a better level.

LLL $44.45 +0.25 (-6.57) Now that was an impressive rebound!
After dropping slightly below the $41 level early in the day,
LLL began a gradual recovery that lasted right up to the final
2 hours of the day.  That's when the short-covering really got
going and strong buying volume propelled the stock to close at
the high of the day.  Given the strong rebound off the lows and
the fact that our PnF price target ($43) has been achieved, this
looks like a good point to harvest gains.  There could be
another dip ahead of the weekend, but we would want to use it to
take an exit at a more favorable level, rather than initiating
new positions.  We're closing the LLL play tonight, while we can
still chalk it up as an unqualified winner.


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

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

CALLS              Mon    Tue    Wed    Thu    

ESST     17.88    0.31  -0.79  -1.09   1.48  Ready to rock higher
MSFT     52.90   -1.98   0.29  -0.97   0.66  Higher relative low
MO       44.00    1.19  -0.71  -1.52  -1.17  Dropped, broken day
INTU     47.48   -2.36  -0.63  -0.24   1.32  Rebound from support
NVDA     19.93    0.66  -0.96  -0.51   1.84  Poised at resistance
ORCL      9.42   -0.74   0.08  -0.42   0.44  Climbing its way up
MMM     121.40   -0.72  -1.15  -4.00  -2.60  New, ready to rebound
EMC       8.15   -0.17   0.25   0.13   0.35  Pent up demand
OMC      49.39    2.78  -0.56  -0.38   2.77  Corporate reassurance

PUTS

LXK      49.02    1.17  -1.91  -3.12   0.88  Fresh relative low
XL       78.20   -0.12  -2.11  -2.02   0.45  Still going down
LLY      49.70    1.47  -2.11  -1.80   1.52  Waiting for entry
CAM      46.05   -1.71   0.04  -1.24  -1.07  Dropped, 200-dma
LLL      44.45   -1.70  -2.35  -2.50   0.25  Dropped, take gains
CAH      51.90   -0.16  -5.66  -0.16  -0.62  Dropped, book profits
AMGN     34.48   -1.84  -1.33  -2.40   1.95  Dead cat bounce
LM       42.83    0.17  -1.95  -2.23   0.36  Ready to rollover
MRK      44.28   -1.05  -2.06  -2.18   0.71  Short covering pop
RE       50.35   -1.16  -2.54  -1.84   1.09  Bounced from $48
PHCC     18.22   -1.32  -0.25  -0.81  -1.48  New, unhealthy


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

ESST $17.88 +1.48 (-0.09) We continue to believe that ESST could
sine in this market environment if only the Nasdaq could find
its legs for a rally, which is what looks like could be getting
underway after today’s big reversal off the bottom.  ESST has
earnings momentum in its favor, and to a smaller extent the
stock has price momentum since rebounding from relative lows
back in early May.  The 9 percent rebound in today’s session
was proof of our belief.  Now all we need is some follow through
in the Nasdaq tomorrow.  Look for ESST to rebound back above the
$18 level, and look for a breakout above short term highs at the
$18.80 level, which could lead to a quick trip up to the $20
level.

INTU $47.48 +1.32 (-2.61) INTU held the $46 support level near
the ascending support line that we wrote about during Tuesday’s
update.  The stock held that level again in today’s trading,
but this time, INTU rebounded with gusto from that mark to
finish the day solidly higher on the rebound in the broader
technology sector.  Given this stock’s relative strength, any
follow through on the part of the Nasdaq should result in a
breakout above relative highs in INTU.  The stock has some mild
congestion in between current levels and the $48.50 mark.  If
that resistance zone is cleared, then INTU should make its way
back up to the $50 level for the ultimate breakout to new
yearly highs.  Aggressive traders can look to get in ahead of a
breakout with a clearing of the short term resistance zone.
Otherwise look for a pullback down into the $46 support level.

NVDA $19.93 +1.84 (+1.03) The semiconductor sector came back to
life in a big way during today’s session, leading the Nasdaq and
the broader market for that matter higher.  NVDA was one of the
star performers in all of the semiconductor group as the stock
gained more than 10 percent on the day.  Entries taken from the
support of the curling 10-dma should be sitting pretty after
today’s rally, as further upside is likely in tomorrow’s session.
What we’ll be watching very closely for is a breakout above short
term resistance at the $20 level which has capped off NVDA’s
rally attempts in the last five sessions.  The stock has plenty
of room to run to the upside if only it can clear the short
term congestion between its current levels and the $20 mark.
Institutional investors may once again start warming up to the
stock if it can claw its way back above the psychologically and
technically significant $20 level.  Confirm any such breakout
attempt with heavy volume.  In terms of price confirmation,
look for the stock to take out Monday’s high at the $20.24 mark
by trading above the $20.50 level.

ORCL $9.42 +0.44 (-0.63) It seems that ORCL’s pattern of
relatively higher lows is going to hold once again as the
stock rebounded from its ascending support line in today’s
session.  Connecting the lows from early June through today’s
intraday low at the $8.71 level, traders can see the ascending
support line that has held during each one of ORCL’s brief
pullbacks.  The stock appears to be under institutional
accumulation as the buyer makes his or her presence known
through the support line.  That buying pressure should continue
lifting ORCL into the coming sessions so long as the broader
market doesn’t rollover.  Look for the stock to climb back
above its short term highs just above the $9.75 level in
tomorrow’s session.  Confirm such upside directional move
with a breakout above the $10 level.

MSFT $52.90 +0.66 (-1.95) What looked like another day of carnage
for the broad market did an abrupt about face in the middle of
the lunchtime lull.  The rise off the lows was volatile, but it
was encouraging to see the pattern of higher lows throughout the
afternoon.  MSFT once again performed well after the early
decline, posting a solid intraday double-bottom near $51.40 by
midday.  While the late afternoon volatility dragged MSFT down to
the $51.50 in the final hour, in the end the bulls prevailed by
closing the day out at the highs.  One day does not make a rally,
but you can see from the daily chart that MSFT has been building
a series of higher lows since early May, and just maybe this time
we'll get to see MSFT push through that stubborn resistance at
the $56 level.  While earnings season is just kicking off this
week, MSFT won't be doing its song and dance until next Thursday.
That gives us one more week to play.  Dips near support at
$51-52 are still buyable, so long as our $50.50 stop isn't
violated.


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

MMM – Minnesota Mining and Mfg. $121.40 -2.60 (-8.47 this week)

Commonly known as the maker of the ubiquitous, adhesive-backed
Post-It Notes, MMM is also a leading manufacturer of a variety
of industrial, consumer, and medical products.  Reflective
sheeting on highway signs, respirators, spill-control sorbents,
and Thinsulate brand insulations are just some of the company's
industrial products.  MMM also makes microbiology products,
making it easier for food processors to test for the
microbiological quality of food.

The indiscriminate selling that has hit the broad market so hard
this week has even started to hit some of the stronger old-economy
stocks and that is good news for those who are looking for a
bargain.  With the DOW closing at October 2001 levels yesterday,
and falling another 200 points from there this morning, it was
certainly encouraging to see the bulls step up to the plate this
afternoon and drag the market back from the abyss.  Shares of MMM
have been holding up far better than most of the DOW components
over the past few months.  In fact it was only last week that the
stock was flirting with a breakout over the $130 resistance level.
What is impressive about that is that the stock's all-time high
is $130.60.  But then the selling party that has defined this week
got moving and at its low this morning, MMM was trading just
barely above the $120 level.  Can you say entry point?  That's
right, the broad market selling appears to have dragged MMM down
further than is reasonable, especially in light of the fact that
the company actually raised its earnings guidance last Monday.
And with the company set to report its quarterly earnings on July
22nd, it appears there is just enough time for a quick bullish
trade ahead of the announcement.  The $120 level has served as
strong support on the last two dips, and that allows us to
mitigate our risk with a fairly tight stop at $119.  Another dip
back near the $120 level would make for an ideal entry on the
rebound.  Of course, MMM clearly has some overhead resistance to
deal with now, with the first obstacle at $124, the top of
today's downward gap.  More cautious traders may want to wait
for the stock to move through that level before initiating new
positions.

BUY CALL JUL-120 MMM-GD OI=3693 at $4.00 SL=2.50
BUY CALL JUL-125 MMM-GE OI=4131 at $1.35 SL=0.75
BUY CALL AUG-120 MMM-HD OI=  88 at $6.50 SL=4.50
BUY CALL AUG-125*MMM-HE OI= 427 at $3.90 SL=2.50
BUY CALL AUG-130 MMM-HF OI=1403 at $1.95 SL=1.00

Average Daily Volume = 1.82 mln


EMC - E M C Corp $8.15 +0.35 (+0.56 for the week)

EMC Corporation is the world leader in networked information 
storage, information management software and the provider of 
information storage infrastructure. Major customers include the 
world's largest banks and financial services firms, 
manufacturers, telecommunications providers, airlines, 
transportation companies, Internet providers, retailers, 
educational institutions, pharmaceutical companies and regional 
and national government agencies.  (Source: company website)

Thursday July 11, 2002 EMC has been riding an upward trend line 
from a low of approximately $6 for the last couple of weeks.  
Bulls are probably encouraged that shares have actually been 
setting a series of higher lows from its late June bottom while 
the broader markets have been setting new relative lows.  The 
tech sector has been a pretty tough place to go long but any 
relative strength, like we see in EMC, could draw the attention 
of investors and managers looking for a place to put cash.  The 
recent article out today (July 11th) regarding Goldman Sach's IT 
spending survey didn't do much to revive the second half recovery 
theory but the survey did reveal EMC was seeing pent up demand 
despite the IT spending drought.  This news could have played a 
part in EMC's breakout over the crucial $8.00 level of 
resistance, which has formed a ceiling since early May. EMC's 
next significant resistance level appears to be in the $10 range 
(about $9.65 to $10, a strong psychological target for traders). 
However, the $9.00 mark might offer some round number resistance 
and traders looking for an entry point will also want to keep an 
eye on the $8.50 level.  Traders can set an upside entry point 
above $8 and the OI newsletter feels that today's close at $8.15 
qualifies as an entry point.  Traders should note that volume was 
pretty strong today at 25.9 million versus the average of just 16 
million.  This looks a lot like short covering and odds are EMC 
could see a continuation of any short covering now that it has 
broken the $8 level.  In recent news, EMC recently announced a 
major expansion of its professional services portfolio through a 
pact with Accenture.  It will expand into the consulting business 
by offering Open, Platform Independent Storage Consulting 
Services through its new Information Solutions Consulting Group.  
Pacific Crest today reaffirmed their buy rating.  We will suggest 
a stop at $7.58, near today's lows, which will avoid a trendline 
break to the downside.  We will probably exit the play between 
$9.60 and $10.00 if the opportunity presents itself.  Please note 
that EMC is expected to announce earnings Thursday, July 18th 
before the opening bell.  Therefore we will close the play on the 
Tuesday or Wednesday before earnings.  Plan your exits!

BUY CALL AUG- 7.50 EMC-HU OI=8571 at $1.15 SL=0.50
BUY CALL AUG-10.00 EMC-HB OI=3643 at $0.20 SL=0.00 
BUY CALL OCT- 7.50*EMC-JU OI=8204 at $1.55 SL=0.75
BUY CALL OCT-10.00 EMC-JB OI=9364 at $0.60 SL=0.00

Average Daily Volume = 16.6 mln


OMC - Omnicom Group Inc $49.39 +2.77 (+4.61 for the week)

Omnicom is a leading global marketing and corporate 
communications company. Omnicom's branded networks and numerous 
specialty firms provide advertising, strategic media planning and 
buying, direct and promotional marketing, public relations and 
other specialty communications services to over 5,000 clients in 
more than 100 countries. (Source: company press release)

Omnicom has been in a very strong uptrend since the beginning of 
the month.  It has held up well the past couple of weeks in spite 
of the market sell off and it has maintained itself above its 10 
dma.  Looking at the last three to four weeks the stock appears 
to be putting in a decent attempt at a bottom and most of the 
technicals have reversed.  The MACD, Stochastics and RSI are all 
rebounding strongly.  It would be natural to suspect this is just 
another dead cat bounce but the strength and length of the bounce 
is encouraging. OMC rode today's rebound to a level just under 
resistance of $50 and created a bullish engulfing candlestick to 
further inspire fear in the bear camp.  To the upside, a break 
above $50 would provide an entry point for traders, as it would 
both break resistance and overcome a psychological barrier.  To 
that end, the OI newsletter will use the $50.00 mark as our entry 
point.  Once OMC trades there we'll consider ourselves long.  
More conservative traders may want to look for a little bit more 
confirmation of the breakout and use $50.11 or $50.26 as trigger 
points.  Omnicom has recently been beaten down due to the very 
popular "accounting concerns."  On Monday it addressed these 
worries with a 48 page "investor presentation" on its website, to 
reassure investors regarding its acquisitions policies, 
accounting practices and cash flow.  This has helped fuel a 
recovery from its recent low at the end of June below $40. Also 
on investors minds may have been a WSJ interview with Aegis CEO 
Douglas Flynn, forecasting a 1.5% growth in U.S. advertising 
spending this year, which was in contrast to earlier forecasts of 
a decline. This was followed by Fitch Ratings' affirmation of 
Omnicom's 'A' rating on senior unsecured debt and 'F1' commercial 
paper rating. Fitch also commented in their press release on 
Omnicom's demonstrated ability to attract new clients and its 
excess free cash flow after expenditures, earn out payments and 
dividends, which provide financial flexibility to the company.  

On a trading note, some investors might consider us a bit late to 
the game since we're going long a stock that has just made a two-
week 25% advance.  Normally we would agree.  However, OMC is 
still incredibly oversold from its pre-accounting concerns level 
of $85.  A 50% retracement from $85 to the late June low of 
$36.50 would put the rebound in OMC near $60.  A move over the 
$50 mark could be just the spark bulls need to ride a short-
covering fueled rally up to its next level of resistance.  
Initially, we would place a stop below OMC's recent $46 support 
level, where shares bounced this morning.  At $45.90, we're still 
within 10% of our entry price.  Short-term traders may want to 
consider a tighter stop and a tighter profit target close to $55.  
We plan to exit the play on any move above $58.50.

BUY CALL AUG-50 OMC-HJ OI=2576 at $4.40 SL=2.20
BUY CALL AUG-55*OMC-HK OI= 535 at $2.15 SL=1.00 
BUY CALL OCT-50 OMC-JJ OI= 190 at $7.00 SL=5.00
BUY CALL OCT-55 OMC-JK OI= 456 at $4.40 SL=2.50

Average Daily Volume = 3.62 mln



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

XL $78.20 +0.45 (-3.80) XL traced another relative low in its
descending trend during today’s session before being brought
back to life by the recovery rebound in the broader market.
The stock is still very weak, and if anything, we view the
rebound in today’s session as a potential path to another
favorable entry into new put plays.  But in the meantime,
we’d actually like to see a little bit more upside movement
before pulling the trigger.  So if you have open positions
and are holding onto gains in XL, it may be a good move to
look to book profits on a pullback in tomorrow’s session, or
at least set a protective upside stop to conserve any
profits accrued up through this point in the play.  In terms
of resistance that we favor using for an entry point, we
like the idea of another failed rally at and subsequent
rollover from the downward sloping 10-dma which finished
today’s session at the $81.29 mark.

LM $42.83 +0.36 (-3.75) The weak brokerage sector got a bit
of relief in today’s session from the rebound in the
broader market.  The lift caught up with LM who was
struggling earlier in the session near fresh relative lows
in the two month long downward trend.  The stock reached as
low as the $41.40 level during the early going, which may
have been enough for quick and profitable put play for
those who were early to enter the play during yesterday’s
session.  The stock looks like it could stage a small
relief rally over the next two or three sessions, which
should keep traders out of entering new positions until
LM gets a little closer to resistance.  We would favor
taking new put plays from a rollover between the $44 and
$45 levels which, by that time, should be reinforced by
the downward sloping 10-dma.

MRK $44.28 +0.71 (-4.58) Even the beaten down drug stocks
got a small reprieve from their selling thanks to the
rebound in the technology segment of the market.  MRK was
no exception.  The stock popped higher during the day’s
session on relatively active volume as the shorts who have
been riding this stock lower for the last several months
decided to take some gains off of the table.  But the
buying in MRK today was most likely no more than routine
short covering in a trend that appears to be far from over.
The stock is still very fundamentally and technically
weak.  And unless there are some positive developments
concerning the launch of its Medco IPO, the stock is most
likely to remain under pressure.  Look for new entry points
near resistance closer to the $47 level, or watch for a
rollover from current levels.  Confirm direction in the
Drug Sector Index (DRG.X) before entering new plays.

RE $50.35 +1.09 (-4.45) RE’s trend of relatively lower
lows from this week continued into today’s session as the
stock reached an intraday low at the $48.01 level, from
which it rebound into the close of trading.  Still, we
liked the quick move down to the $48 level in the last
three days that hopefully offered traders a very quick
and profitable trade to the downside.  From here, it would
not be out of the ordinary for the stock to continue
slightly higher before resuming its downward trend.  The
intraday high traced during yesterday’s session at the
$51.20 could be a spot to start looking for new entries
into put plays if the sellers return in the next session
or two.  If the stock clears that short term resistance
level, however, it could potentially trade up to the 10-
dma, which is closer to the $53 mark.  But we’d gladly
take a rollover from that level as well.

AMGN $34.48 +1.95 (-3.59) Even with a nearly 6% rebound today,
the Biotechnology index (BTK.X) didn't even manage to erase
Wednesday's losses, much less break out of the persistent
downtrend.  Once again mirroring the BTK, AMGN caught a 6%
updraft off of the $32.25 support level as the broad market
recovered.  But even with that strong recovery, AMGN couldn't
even reach the $35 level, where it opened for trade yesterday.
The only item that supports a bullish case is that AMGN's volume
today was particularly strong at 50% above the ADV.  But that
doesn't rule out that all of today's action was simple
short-covering.  We continue to view rallies as entry
opportunities, especially given the lack of a positive catalyst
in the Biotech space.  A rollover near the $35 level may make
for a decent entry, but a rollover near $36-37 would be even
better.  Just keep in mind that our stop is now set at $37.

LLY $49.70 +1.52 (-2.55) After the carnage we've seen in the
Pharmaceutical sector (DRG.X) in the past 2 months, today's 1.8%
gain is small consolation to investors in that area of the
market.  The DRG sector was clearly not leading on the rebound,
but lifted by the rising tide of the afternoon bounce in the
broader market.  Hitting a fresh 4-year low near $260 this
morning, the DRG index did manage to recover its steep morning
loss and close in positive territory and that is something.
But it seems like nothing more than short-covering, as conditions
in the industry haven't shown any signs of improvement.  LLY was
just one of many Drug stocks that tagged fresh multi-year lows
this morning, and given the 25% decline in the past 2 weeks, it
should come as no surprise that we got a bit of an oversold
bounce.  It looks to be setting us up for another attractive
entry, and a rollover in the vicinity of $50 or even $51 can be
used for initiating new positions.  LLY will likely follow the
lead of the DRG index, so make sure that the index is rolling
over as well before taking a position.  Recall that last night
we tightened our stop to $51.10, and a close above that level
will bring this play to an end.  Take the entry if it appears,
but don't force it.

LXK $49.02 +0.88 (-3.28) Just like the rest of the market, shares
of LXK went on a roller-coaster ride on Thursday.  Heading down
at the open, the stock bottomed at $46.50 in the middle of the
day before recovering on the back of the broad market to actually
close with a gain.  Apparently the $49 level is still acting as
resistance.  Although it could give way tomorrow if the broad
market continues its fledgling rally attempt.  Keeping us bearish
on shares of LXK is the fact that there is no indication of
demand growth, a fact borne out by DELL's comments tonight after
the close.  DELL guided higher for Q2 due to continued market
share gains in the midst of weak overall demand.  The price chart
of LXK certainly bears that out with its long series of lower
highs and lower lows.  The first test of resistance will come at
$50.75 and then at $51.50, which is the current level of our
stop.  Take advantage of weakness near resistance to initiate new
positions, but make sure to pull the plug if the bulls succeed
in rallying through our stop.  A close over that level will have
us dropping the play in short order.


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

PHCC – Priority Healthcare $18.22 –1.48 (-3.85 this week)

Priority Healthcare Corporation (PHC) is a national distributor
of specialty pharmaceuticals and related medical supplies to the
alternate site healthcare market, and is a provider of patient-
specific, self-administered biopharmaceuticals and disease
treatment programs to individuals with chronic diseases. The
Company sells over 3,500 SKUs (stock-keeping units) of specialty
pharmaceuticals and medical supplies to outpatient renal care
centers and office-based physicians in oncology and other
physician specialty markets. PHC offers value-added services to
meet the specific needs of these markets by shipping refrigerated
pharmaceuticals overnight in special packaging to maintain
appropriate temperatures, offering automated order entry services
and offering customized distribution for group accounts.

The not-too-long-ago favored health care sector has quickly
fallen out of favor.  The bulls have given up hope for even the
health care sector, which speaks of just how weak this market
has become.  The biotechnology stocks were the first to take it
on the chin in the health care space, followed by the major
pharmaceutical makers.  Most recently, the health maintenance
organization shares have fallen under heavy selling pressure,
which has spread into other segments of the broader health
care market including the distributors of drugs.  Indeed,
major firms in this space have come under increased amounts
of scrutiny and pressure from the legal and market front.
PHCC has been no exception as the stock is one of the weakest
among the major distributors.  The stock fell from its recent
consolidation in the last two days on heavy declining
volume as it broke down below the psychologically significant
$20 level, which most likely triggered a whole new round of
institutional selling during today’s session.  Add to that
the prospect of margin calls and pouncing short sellers,
and PHCC’s short path of least resistance appears to be to
the downside.  Momentum traders can enter new put plays on
follow through to the downside in tomorrow’s session.  If
on the other hand the stock snaps back on a relief rally
start looking for rollovers from the $20 level, which should
now serve as resistance.  Our stop is initially in place at
the $21.25 level.

BUY PUT JUL-20*UHP-SD OI=0 at $2.05 SL=1.05
BUY PUT AUG-17 UHP-TW OI=0 at $1.35 SL=0.75

Average Daily Volume = 393 K



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The Option Investor Newsletter                 Thursday 07-11-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


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

NVDA – NVIDIA $19.93 +1.84 (+1.03 this week)

NVIDIA Corporation designs, develops and markets graphics and
media communication processors and related software for
personal computers (PCs), workstations and digital
entertainment platforms. The Company provides an
architecturally compatible top-to-bottom family of
performance 3-D graphics processors and graphics processing
units (GPUs) that set the standard for performance, quality
and features for a broad range of desktop PCs. They range
from professional workstations to low-cost PCs and mobile
PCs, and from performance laptops to thin-and-light
notebooks. NVIDIA's 3-D graphics processors are used for a
wide variety of applications, including games, digital
image editing, business productivity, the Internet and
industrial design.

Most Recent Update

The semiconductor sector came back to life in a big way during
today’s session, leading the Nasdaq and the broader market for
that matter higher.  NVDA was one of the star performers in all
of the semiconductor group as the stock gained more than 10
percent on the day.  Entries taken from the support of the
curling 10-dma should be sitting pretty after today’s rally, as
further upside is likely in tomorrow’s session.  What we’ll be
watching very closely for is a breakout above short term
resistance at the $20 level which has capped off NVDA’s rally
attempts in the last five sessions.  The stock has plenty
of room to run to the upside if only it can clear the short
term congestion between its current levels and the $20 mark.
Institutional investors may once again start warming up to the
stock if it can claw its way back above the psychologically and
technically significant $20 level.  Confirm any such breakout
attempt with heavy volume.  In terms of price confirmation,
look for the stock to take out Monday’s high at the $20.24 mark
by trading above the $20.50 level.

Comments

The chip sector is back in favor after today’s rally that was
led by the SOX.  The group as a whole gained nearly 7 percent
for the day.  One of the stocks that really stuck out with its
strength was NVDA.  Fortunately it’s also on the OI call play
list.  The stock finished today’s session poised for a major
short term breakout above resistance.  Look for that move in
tomorrow’s session with an advance first past the $20 level
followed by confirmation above the $20.50 mark.

BUY CALL JUL-17 UVA-GW OI=2466 at $3.00 SL=1.50
BUY CALL JUL-20*UVA-GD OI=5261 at $1.35 SL=0.75 
BUY CALL AUG-17 UVA-HW OI=2408 at $4.20 SL=2.00
BUY CALL AUG-20 UVA-HD OI=1791 at $2.75 SL=1.75

Average Daily Volume = 11.2 mln



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

BOLLINGER BANDS
By Leigh Stevens
lstevens@OptionInvestor.com

I don’t make as much use of this variation for setting upper and
lower trading bands, but I do look at them for the unique 
information they provide.  Fellow technician John Bollinger 
invented the Bollinger band envelope variation.  My reservations 
about their use is that it is hard to pinpoint a specific buying 
or selling area, as these bands expand or contract according to 
market volatility.  This is both, I suppose, the technique’s 
strength and weakness.  

Bollinger Bands (BB) combine a centered moving average, which is 
part of the indicator but is usually NOT shown.  BB basically 
combine the moving average envelope technique with a measurement 
of current and recent price volatility to determine the optimal 
placement of the upper and lower lines.

The PURPOSE of the BB indicator is basically the same as moving 
average envelopes: Are prices high or low on a relative basis?   

Just as with (moving average) envelopes, two bands – the 
convention is to call these lines “bands” to distinguish from the 
fixed percentage envelope technique – are placed above and below 
a centered moving average, which is often set or "defaults" (by 
the charting software) to 20-days.  However, unlike lines that 
are a fixed percent above or below the moving average, Bollinger 
bands are plotted two standard deviations above and below the 
average. 

The charts below offer examples for a stock (INTC) that was in a 
stable trend and another (QCOM) following it that is of a more 
volatile period of wide-ranging price swings.  In the former, the 
bands are of a   relatively narrow width and in the later 
significantly wider apart at least during a top-building process. 

Bollinger Bands: in a more "stable" (narrow range) trend -


 


Bollinger Bands: in a more wide-ranging (volatile) trend -


 

Standard deviation describes how prices are arrayed around an 
average value.  One standard deviation is a set of values that 
contains close to 70% of the price fluctuations that occur above 
and below the moving average used in the Bollinger band 
calculation.  95% of the fluctuations will occur within two 
standard deviations of the moving average in question.  

Since each Bollinger bands is placed at a fluctuating line that 
is equal to two standard deviations, 95% of all price action will 
theoretically occur within the upper and lower lines.  Each band 
represents therefore, implied support or resistance.  Price 
swings are unlikely to be sustained above or below these lines 
for long.

Because of how they are constructed, Bollinger bands expand or 
contract in order to adjust to market volatility or the degree of 
movement in the price swings that are developing at any given 
time.  

If prices are fluctuating in a relatively narrow price range, 
this is a situation of low (price) volatility. If the bands are 
relatively narrow, the market is experiencing lower price 
volatility or narrower price swings and the lines will intersect 
at upper and lower points that will tend to mark the extremes 
(highs and lows) for these quieter market conditions.  

If prices are experiencing wide-ranging price movement, the bands 
expand to reflect the higher volatility that exists.  If the 
bands are wide and you can usually quickly see this visually in 
the pattern of price activity, the market is experiencing higher 
volatility – the lines then suggest where an extreme will be 
reached based on a more volatile and stronger recent price trend. 

As with envelope lines, they can be used on everything from 
intraday to daily to weekly charts, although the most common use 
is with daily charts.  

MORE IDEAS: FROM A TALK WITH JOHN BOLLINGER - 

John spoke at the Market Technicians Association, which we both 
belong to, and a major theme of this talk (February 2002) related 
to the "diversity" of people's use of his indicator. For example: 

MARKETS - Boli bands are being used in all markets, ranging from 
stocks, index options, index futures, commodities, currencies, 
etc. 

TIME FRAMES - Ranging from years, quarters, months, weeks, days, 
hours, minutes and with "tick" charts. 

DIVERSITY - This BB indicator is being used to detect the 
beginning and end of trends, to highlight the potential for 
reversals, to assess "continuation" patterns, to identify 
overbought/oversold conditions and to place stops. 

CHART PATTERN IDENTIFICATION - John cited an increasing use of 
his indicator in helping spot or clarify chart patterns. For 
example, a Head & Shoulder's top or bottom has a typical 
Bollinger Band "signature", or a pattern for the Bands that is 
similar, but slightly different than the actual H&S pattern.  

The help in defining a pattern can be seen in the chart above, 
where the Bands made an even better "definition" of something 
that looked like and a Head and two peaks that looked even more 
like "shoulders" - well, the right one has a bit of a "spike" to 
it. But there was especially good definition of the Head. 

HOW CAN BOLLINGER BANDS DO SO MANY THINGS? - Well, for one thing 
they are a "tool", not a "system". Tools, as is well known, can 
be employed in different ways and the ability to use them 
skillfully varies quite a bit - my use of woodworking tools will 
not produce finished cabinets, but my brother can do that with 
the same tools. 

For another thing, Bollinger bands are highly adaptive as it is 
volatility that drives the width of the bands. This means that 
they can be deployed successfully in many different types or 
phases of markets.  As an interest in volatility has grown, using 
Boli bands is an easy way to include volatility in the trading 
decision process. 

NOT WELL KNOWN - John's defaults were derived from studies of the 
U.S. stock market using daily data over a period of many years. 
The default length for the moving average is 20 periods or 
"bars".  The default for the bandwidth is two standard 
deviations.  John makes greatest use of the Bands on daily or 
weekly charts. Sometimes he uses them on hourly charts for trade 
execution, or on monthly charts to gain a long-term perspective. 

BEST USE - By definition, prices are "high" (on a relative basis) 
at the upper band and "low" at the lower band. Armed with this 
information, you can compare price action to the action of the BB 
indicator to help you arrive at trading decisions. If prices are 
high and the indicator confirms this, you have a "confirmed" 
high.  If prices are high and the indicator fails to confirm 
this, you have an "unconfirmed" high, which is suggesting that 
the stock or index has more "room" on the upside. John indicated 
that this use or purpose was the goal he had in mind when he 
developed his trading tool. 

KEEP IN MIND - 

1. As with moving average envelops, prices can and do "walk" up 
or down the Bollinger Bands. 

2. The average used was designed to best detect the 
"intermediate" trend; e.g., 2-3 weeks or longer.  

3. Unlike moving average envelopes, at least the way I use them, 
closes above or below the Bollinger Bands can be "continuation" 
signals rather than "reversal" type signals. 
 
4. If the (centered) moving average is lengthened, the number of 
standard deviations needs to be increased; e.g., from 2 at 20 
periods, to 2.1 at 50 periods. Likewise, if the average is 
shortened, the number of standard deviations should be reduced; 
e.g., from 2 at 20 periods to 1.9 at 10 periods.
 
5. The moving average used is a "simple" moving average because a 
simple moving average is used in the standard deviation process, 
so the same type of average is "logically" consistent. 

6. A "touch" to the upper or lower line is just that - a tag or 
touch. These are NOT, in and of themselves, a buy or sell 
"signal"


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

Another Newsflash!
Buzz Lynn
buzz@OptionInvestor.com

Dateline OIN, Left Coast, Great Scott reporting:  This just in -
new scientific data studies, which began in early-May, reveal 
proof of global warming.  Yes, it's true.  Seems that daily high 
temperatures recorded over the last 70 days have become 
successively higher.  Having reached a high in Redding, California 
of 118 degrees yesterday, scientists were alarmed at the stellar 
rise, which led them to conclude that global warming (at least on 
the Left Coast) is definitely here.  In an effort to give time to 
citizens to prepare, the scientific community has pushed the alarm 
bell to warn us that life will never be the same if the current 
trend keeps up, especially in the coming weeks.  

While it isn't clear what has caused the rise in temperature, one 
researcher with HEAT (Humans Escaping Ascending Temperatures), who 
wished to remain anonymous, cast the blame squarely on rich 
people.  When queried further about the exhaustive research 
undertaken to arrive at this conclusion, he explained, "Plumes of 
exceptionally hot air are constantly expelled into the atmosphere 
from running air-conditioners.  This incredibly hot air is ever-
increasing and causes atmospheric temperatures to rise, which 
feeds on itself and requires offices, cars and homes to use even 
more air-conditioning - a vicious cycle.  Clearly, the largest 
users of air-conditioners are rich people, as they tend to work in 
offices, have larger homes, drive SUVs, and thus can most afford 
it.  Our only hope is that the stock market continues to tank and 
makes them feel not quite so rich.  Perhaps then they will use 
their cooling units less, which will avert this pending global 
disaster." 

Judging from current conditions, nobody is quite sure how long 
this will go on.  But according to the same HEAT researchers, if 
the trend continues, we could see temperatures "approaching 212 
degrees by late December".  He added, "Expect human beings to 
spontaneously combust starting in early-March, 2003."

That's it for now.  Back to you, Buzz

Great Scott, thanks for that startling report!  Excuse me while I 
remove my tongue, previously firmly-planted in my cheek.  Did I 
mention it was hot?  108 degrees in Reno yesterday, a new record I 
believe.  Anyway, the above was a microcosm example of technical 
trends running amuck.  As it applies to the market, there are a 
bucket of bears out there right now that see nothing but a fertile 
stream for biting dead fish stocks (tech), and a bucket of bulls 
too who still believe in the "buy and hold" theory.  Trouble is, 
they are both on the wrong side of the trade.  The other trouble 
is that they are probably one in the same people.  Being right 
depends on your time line.

Let me quickly explain.  Without going into much detail since I 
know our fearless Rocket Scientist and LEAPS editor, Mark Phillips 
will soon cover this in great detail, there are long term trends 
and short term trends, otherwise known as secular and cyclical 
trends, respectively.  I believe that markets are bearish for the 
long term (secular) and nearing bullish for the near-term 
(cyclical) market - exactly the opposite from what most investors 
currently believe.  And while the short-term looks currently 
bearish to many, I would suggest that the markets might be 
readying for a bullish reversal that could last longer than the 
standard 1-day rally we've become accustomed to.  Yes, I'm still 
building an ark.  But I'm also happy to grow some grain between 
storms.  Hear me out on this, as we revisit one of my favorite 
"smart guys", Ken Fisher.  

For those that don't know him, he is the founder of Fisher 
Investments in Woodside, California and manages $12 bln in 
investor capital, which has doubled from $6 bln over the last two 
years.  Some of that is from earnings, but mostly from new inflows 
far as I can tell.  Anyway, he is also one of the longest-running 
Forbes Magazine columnists, and son of legendary investor, Phil 
Fisher.  He is not a market timer, per se, but his track record 
is, nonetheless, really good.  This is a guy I pay attention too.

There's more.  Ever hear of The Great Humiliator?  That's Fisher's 
definition of the market, which states that the market's job is to 
humiliate and embarrass as many people as possible.  In a strong 
sense, he is a contrarian.  So, anyone interested in what he 
thinks constitutes a bottom?  Me too.

Fisher breaks this down into three segments:  Sentiment, 
Fundamentals, Technicals, plus other stuff nobody looks at.

For starters under sentiment, he lists the "Time Magazine 
Indicator".  That's where Time and other major news publications 
start spouting, "Death of Equities", "Why Stocks Eat the Green 
Burrito and Suck Canal Water", or other such widely-disseminated 
and negative headlines.  According to Fisher, Time has a nearly 
perfect contrarian record of calling pivot points.

Next, folks just plain give up on the market and don't want to own 
stocks.  Few will be asking, "Is this a bottom yet?"  They will 
already be already convinced that it is.  This is accompanied by 
analysts shifting to the bearish side, which they really haven't 
done yet.

One other item falls under the sentiment heading according to 
Fisher.  People lose faith in the Fed.  Don't laugh.  Not many 
have yet.  There is still a belief that Greenspan has the ability 
to see around corners.  Fisher explains that having believed from 
the start that interest rate cuts can shut down the bear, bottoms 
are formed when most folks believe that further cuts can't help.

Fundamentally (my favorite), Fisher looks for a major brokerage, 
bank, or other financial institution failure.  Maybe some 
insurance companies are looking weak right now, but no major 
failures yet.

Bankruptcies are a completely different matter.  Enron and K-Mart 
can certainly lay claim here.  But Fisher bets that it happens to 
at least one major industrial company too.  It could also be a 
segment of the market or certain class of securities that default 
too, like a major muni-bond issuer.  By the way, taken a look at 
the utility index lately?  Trouble on the horizon there - prices 
say so.

Furthermore, every industry and sector will fall in value.  When 
the ones that have tended to perform well during a bear market 
finally lose steam too and can no longer claim "the last holdout" 
status (because there are no more holdouts), that offers the sense 
of a bottom.

What else?  Bearish mutual funds will be all the rage.  Earnings 
forecasts will fall and there will be no visibility.  Bear market 
forecasters will figure prevalent in the news, which I presume is 
why current noted bear, Bill Fleckenstein, notes something to the 
effect that a bottom would be reached when CNBC goes off the air 
(!)  Debt spreads will widen as junk bonds are treated like a bad 
case of leprosy - shunned.  Auto sales should fall (happening now) 
and unemployment should increase by at least 1% from its pre-
recession low (hit that and then some).

Technical items are few, but widely available to watch.  At least 
one 90% down volume day will occur, the VIX will spike, and the 
oscillators will peg near the 0 line (on a scale of 1-100) in 
oversold.

Just a couple of other things that really don't fall into any of 
the above categories:  1.  Fundamentals actually mean something 
and are sought in extensive research, then factored into the 
price.  Speculation is unheard of.  2.  Positive factors will be 
widely ignored.  3.  Finally, when we are ridiculed for suggesting 
the future will be better in a few years, that will be the bottom.

Interesting, huh?  I thought so too.  We are "there", or 
approaching "there" on a quite a few different data points.  But 
are we truly "there" yet?  I don’t' think so.  But we could 
possibly be getting closer to a cyclical bottom, though I think 
the secular part has a long way to go.  After all, CNBC is still 
on the air (big grin), fundamentals like P/E ratios still mostly 
stink, and people still hang on to Greenspan's every word.

One other thing - it is important to point out, as does Fisher, 
that not all indicators need to be present to indicate 
bullishness, nor is a single data point indicative of a market 
turnaround.  Still the lesson is helpful.

Let's put the lesson to good use as the cyclical traders move into 
super-bear mode, which would perhaps ready us for actually bullish 
trading.  Hey, we can dream can't we?

Make a great weekend for yourselves!


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

Are the bulls ready to run?  Or will stocks roll again?


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

It’s been a busy two days.  Get your levels in order!


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