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Begin Part 2 of 4

TOMORROW

Will Friday bring any relief? It may just be to the extent there is no trading on Saturday and Sunday. The CPI, industrial production and capacity, and Michigan sentiment are out in the morning. Industrial production and capacity and sentiment will be the keys as they tell us more about the state of the economy. Production and capacity will be in the tank, so we will see how sentiment is holding up.

We could easily see a bounce tomorrow after some pretty heavy selling showed a crescendo today with the strongest volume in a month. Will it be tradable? Maybe, but the key is what the indexes do at the bottoms of the trading ranges they just broke out of: break back through on good volume or turn back down? That sets the stage for next week's action. Futures are up after the drubbing and even the JDSU news; no guarantee, but it does show that there is some bounce there if the economic news comes out decent in the morning. We will look at a bounce to take positions on true breakouts of good patterns (XCAR on the Technical Trader and WMI on the Daily did that today on high volume even in this market) and some of the really good bounce plays that may be in position for some moves up off of support for short term plays, but we are not going to get too carried away. The breakdown from the trading ranges was serious. If the indexes can recover fast on stronger volume we will be impressed and surprised. But we are always open for both.

If the moves tomorrow take the indexes right back up to the bottoms of the trading ranges on lower volume, we will be looking to short the indexes for Monday. Now Friday is triple witching where options, futures, and everything else you can think of expires. That often leads to higher volume as positions are squared. That will cast some doubt on any high volume move back up into the trading ranges, and we will have to wait for Monday to see if we want to short the indexes at that time. We will forgive one close outside of the trading ranges if the next day they move back into them on higher volume. Otherwise, we get ready to play the downside if they cannot break back over those levels after testing them or trying to do so (i.e., they try to move higher but fail).

Support and Resistance Levels

Nasdaq: Closed at 2044.07.
Resistance: 2052 to 2077 is the bottom of the trading range. 2194 may be some resistance at this point. Then 2250 - 2264.
Support: 2000.

S&P 500: Closed at 1219.87.
Resistance: 1232 to 1240 are the bottoms of the trading range. Then 1250.
Support: 1200 is the next level. Head and shoulders bottom and the breakout support from the double bottom pattern is right at 1182.

Dow: Closed at 10,690.13.
Resistance: 10,800 where the down trendline between the January 2000 all-time high and the September high is currently (and the 50 day MVA is at 10,805.59 as well). 11,000 is possible resistance after that. Then 11,196.53 (the last top). After that, 11,350.
Support: The 200 day MVA at 10,635.35 bounced the index up off of its low today (10,659.47). If that does not hold, we are looking at 10,400.

Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.

6-13-01
Export Prices ex-ag., May (8:30): 0% versus 0% prior.
Import Prices ex-oil, May (8:30): -0.5% versus -0.5% prior.
Retail Sales, May (8:30): 0.1% actual versus 0.3% expected and 1.4% prior (up from 1.1%).
Retail Sales ex-auto, May (8:30): 0.3% actual versus 0.4% expected and 0.8% prior.

6-14-01
Initial Claims, 6/9 (8:30): 428,000 actual versus 425,000 expected and 440,000 prior (revised up from 432,000).
PPI, May (8:30): 0.1% actual versus 0.3% expected and 0.3% prior.
Core PPI, May (8:30): 0.2% actual versus 0.2% expected and 0.2% prior.
Business Inventories, April (8:30): 0.0% actual versus -0.1% expected and -0.4% prior (revised from -0.3%).

6-15-01
CPI, May (8:30): 0.4% versus 0.3% prior.
Core CPI, May (8:30): 0.2% versus 0.2%.
Industrial Production, May (9:15): -0.3% versus -0.3% prior.
Capacity Utilization, May (9:15): 78.0% versus 78.5% prior.
Mich Sentiment-Prel., June (10:00): 91.0% versus 92.0% prior.

SUBSCRIBER QUESTIONS

Q: If I buy the June call option on SCMR at 12.50 what will happen? If the stock reaches $12.50 or more before expiration, can I sell it? Or, do I have to wait for it to expire? How would this work?

A: You have several basic questions about options. There are many factors you have to understand about options before you can successfully add them to your investment arsenal. If you do not understand how the work and how to apply them, you can get hurt much as you can get hurt if you do not know how to drive a car or the rules of the road and jump right in the driver's seat and fire it up.

One thing to understand is the expiration period. Options expire the third Saturday of each month. That means this coming Saturday is an options expiration day. All June options, including the one you were looking at, will expire on Saturday if not exercised. As SCMR is well below $12.50 (the strike price of the option you are looking at), that option would have very little value now and would expire worthless. Why? Because you would not exercise the call option and thus buy the stock at $12.50 when you could go out on the market and buy it for about $9.50. An option's value is made up primarily of intrinsic value (the in the money portion), time value (how much time the option has left before expiration), and volatility. If the stock reaches $12.50 by Friday, the option would be 'at the money,' i.e., the stock price would equal the strike price of the option ($12.50). If it stayed at that price, the option would still expire worthless. Why? Because it has no intrinsic value, there is no time left, and thus there is no volatility. Only if the option is in the money on Friday, i.e., greater than $12.50, would the option have some value. At that point the only thing left is intrinsic value. If the stock was at $13 on Friday, the $12.50 strike option would be worth $0.50 because you could buy the stock at $12.50 and then go sell it for $13.

You can sell an option at any time. You do not have to wait until the expiration day (Friday is the last day you or I can do anything with it as the options market is closed on Saturday). If you have a profit in your option, you can sell it whenever you want and you do not have to exercise the option to buy the stock.

There is a lot to options, but they are a very important part of any investor's arsenal as we can use them to increase our returns, but do so in a safe manner using a variety of strategies. We cover these in our online seminars that will be starting back up in July for the next series.

Q: If a stock has met the buy point but has not yet hit the precise daily volume you want, should a buyer wait until the stock has met or exceeded that volume - perhaps waiting to purchase the stock on the day after the recommended daily volume has been met? Or do you suggest simply keeping tabs on the volume throughout the day as a percentage of the daily volume it is likely to achieve? Generally, is it ever wise to buy a stock when the buy point has been met but the volume has not yet entirely filled out? Thanks for your help. Thanks also for a very helpful newsletter.

A: Volume levels can be hard to gauge. Volume is heaviest in the first hour and last hour as institutions make their bets for the day and position themselves for the next session. Many times we will see volume shoot up on a breakout early in the session, and that is a clear signal to enter. Other times we see the price hit our target, but volume is on a pace that appears to be average for the day. Other times we don't see the target price hit until the afternoon when institutions buy for the close. That is always the easiest point to gauge what is going on, and one of our favorite times to buy as we can see the stock and the market action to make decisions for the next session.

If we see a breakout in the morning but are just not sure of the volume, we often just enter a partial position on the stock. That way we are not wholly committed to that move, but it gets the position started, and if the breakout proves to garner sufficient volume later in the session, we like to take the remainder of the position on a test of the breakout or at the close if the stock has not moved beyond our buy point by 5%. That way we get a better picture of what is going on without losing the first stage of the breakout. If volume is so-so, we can sit pat on our initial position and let the stock build the next session as you indicated. Many times we see that first move up one session, and then we see the institutions pile in even more the following day. At that point we go ahead and complete the position with our stock buys. We will also look at option positions the same way.

THE PLAYS: A lot of stocks that could make solid moves from support.

BONUS PLAYS:

QQQ (Nasdaq 100--$42.25; -2.30; optionable (QQQ):
STATUS: Sold down today and can drop to 40 on continued selling, before the market makes a possible bounce. Look for a move below the low of 42 on continued strong volume.
BUY POINT: On a move through 42 on market selling. Watch 40 for a bounce.
POSITION: July $45 puts to buy (QQQ SI).

OEX (Standard & Poors 100--$629.42; -10.50; optionable (OEY):
STATUS: Sold on stronger volume (1.2 million; avg. 1.1 million) after breaking through the 50 day MVA yesterday (at 646). We are looking for a continued move down from here, with a possible test of 630 early (broken intraday support level).
BUY POINT: Down from here, or after a failed test of 630.
POSITION: July $635 puts to buy (OEY RG).

ELN (Elan--$60.05; +3.44; optionable (ELN): Drugs
http://biz.yahoo.com/p/e/eln.html
STATUS: The stock broke out on strong volume (3.6 million; avg. 1.5 million). The October high of 60.13 is still ahead, but we look for the stock to take that out on the big volume. ELN hit that resistance level twice in early fall of last year, then corrected in a base since. This move is the first time since the stock has tested the resistance again. Target: $70.
BUY POINT: Aggressive: Up from here on continued strong volume. Stop: 55.85.
POSITION: Stock and/or October $55 calls to buy (ELN JK).

WPI (Watson Pharmaceuticals--$60.79; -0.29; optionable (WPI): Drugs
http://biz.yahoo.com/p/w/wpi.html
STATUS: In a 9-month cup with handle (high at 64.10) and pulling back to close below the 10 day MVA today (61.10). Volume was lower and below average the last several days in the handle (today at 531,800; avg. 912,181). The stock will likely test 60 (18 day MVA is at 59.67) before bouncing back; look for that move on strong volume to lead to a breakout (previous basing highs at 70). Strong money flow and good buying. Target: $71-74.
BUY POINT: Aggressive: Up from 60 on rising volume. Stop: 55.87 (50 day MVA). Breakout: 64.23, on volume of 1.3 million or better. Stop: 59.73 (just above the 18 day MVA).
POSITION: Stock and/or August $55 calls to buy (WPI HK).

BGEN (Biogen--$64.24; -1.16; optionable (BGQ): Biotech
http://biz.yahoo.com/p/b/bgen.html
STATUS: Still holding the wedge as it dropped back on lower volume to test the 10 day MVA on the low (63.66). BGEN can still test the 18 day MVA at 63.12 and hold the pattern; in fact, the up trendline supporting the pattern is at the 50 day MVA (62.41). Volume down to 2.2 million (avg. 3.4 million). Money flow is strong. Target: $75 (high at the start of the 3-month base).
BUY POINT: 65.83, on volume of 4.6 million or better. Stop: 61.22. A buy up to 69.12 on the breakout.
POSITION: Stock and/or October $60 calls to buy (BGQ JL).

BEST PLAYS: Besides the plays set forth below best plays, there are some other stocks that also look good. Many of them might not be plays tomorrow, but if they hold on will likely move if we get a better market. These include Pre-Announcements CHV; Pre-Splits FRED, ESRX and FCEL (a put); Continuing Candidates MMM and MERQ (a possible put play that might not happen until Monday), and Post-Splits FIC, IVX, JNJ and WFMI, with EMLX and SEBL as possible puts like MERQ.

PRE-ANNOUNCEMENT BEST PLAYS:
1) FITB - Holding up well
2) BMET - Moved back up off of support
3) KRB - Strong breach of support

FITB (Fifth Third Bancorp--$59.40; -0.38; optionable): Forecast to announce a split on 6-21-01 in conjunction with earnings. At this time the company cannot confirm the date.
http://biz.yahoo.com/p/f/fitb.html
BACKGROUND: Last announced a 3:1 split on 6-20-00 at a stock price of $61. The annual shareholder meeting was on 3-20-01 at which time authorized shares were increased.
STATUS: Still testing its breakout from a cup with handle, holding its 18 day MVA (59) with a doji today (prior pivot point and the high in the left side of the cup at 59.23 and 59.50, respectively). Holding up well going into next week's forecast we will look for it to continue to hold, and make a move up to give us a solid entry point going into the announcement. The stock shows good relative strength and money flow, with solid buying. We are targeting the 68-70 level for this one if we can get a breakout (high is 61.11) and a decent market.
BUY POINT: A move over 60.30 on increased volume (up to 1.18 million today; average 1.77 million). Stop: 56.07 or just below the 50 day MVA (56.81).
POSITION: Earnings play, so we take short-term options positions to ride up to the split, taking profits on the move up to that time, then ride stock and/or longer-term options positions through the announcement. Stock and/or July and August $55 calls to buy (FTQ GK and FTQ HK).

BMET (Biomet--$46.21; +1.06; optionable): Medical equipment. Forecast to announce a split with a board meeting 6-29-01.
http://biz.yahoo.com/p/b/bmet.html
BACKGROUND: Last announced a 3:2 split on 7-6-00 at a stock price of $29. The annual shareholder meeting was on 9-16-00 at which time no additional shares were authorized. The company has sufficient shares for a 2:1 split.
STATUS: Bounced back up from support at the 18 day MVA (44.94), with volume kicking in at 2.64 million (average 1.78 million). However, the stock could not hold its high of 47.26, pulling back to close. That indicates a pullback, but it was still a solid move in a rough day, and we will look for BMET to continue to lead. If we get a pullback, we will watch for it to hold support at the 18 day, and make another move back up. Has been strong, breaking from a large ascending wedge and then a smaller version over the last couple of months. Last week it made an intraday high of 48.75 before pulling back. That will be the first point of resistance to focus on with a move over 47.
BUY POINT: After holding the 18 day on a pullback, a move back over 47 in a better market, looking for continued strong volume. Stop: 43.71 (50 day at 42.85).
POSITION: Stock and/or October $45 calls to buy (BIQ JI).

KRB (MBNA Corp--$34.15; -1.25; optionable): Forecast to announce a split on 7-10-01 in conjunction with earnings. At this time the company cannot confirm an earnings date.
http://biz.yahoo.com/p/k/krb.html
BACKGROUND: Last announced a 3:2 split on 7-14-98 in conjunction with earnings. The stock price was $40. KRB is a holding company and does not hold annual shareholder meetings.
STATUS: Has really tanked, dropping from its cup with handle and giving up its 200 day MVA (35.55). It has not been a weak drop, with volume the last three sessions above the average (2.6 million today; average 2.49 million). It has some support here from February-April levels, and some October-December lows in the 33 range. It could start down Friday, but after an initial drop we could see a bit of a bounce; we will wait for that bounce move to fail before entering downside positions. That could be Monday. The stock hit below 28 in March, but we will initially target 30-31 on a play down.
BUY POINT: After a move down and bounce up, a failure of the move up at the 34-35 range. Looking at a put on a move back down on continued strong volume in a weak market.
POSITION: Stock and/or July $45 puts to buy (KRB SI).

End Part 2 of 4

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