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Begin Part 2 of 3

Near Term

We too see the indexes gapping lower on Monday. They may spend the entire session in negative territory. Whether they try to rally or not that day is mere guesswork. A massive selloff (5% or more) will bring buyers into the market. After the selling, the rally attempt will occur. It may start Monday or Tuesday. The big issue is whether that will be the bottom (the final cleansing of the bear market) or just a false hope. Brokerages have noted customers canceling sell orders placed right after the incident. Analysts cite statements about 'patriotic' buying.

This may very well occur. We no doubt will see buyers come in on any heavy selling. Still it may be short term. The economy is still in real trouble. Patriotism may lead some to buy, but after the emotions wane, we have to realize that the markets are about making money and factoring in the future. The economy will no doubt take a hit from this slowdown after the attack. It was weak and is sure to weaken more at least near term. Are investors going to factor in higher earnings if any recovery has been put off further? Those are the hard numbers we have to analyze. What may have been a recovery in the making before the attack is now a big question mark. Thus without some additional stimulus from the government, near term the markets will be waiting for signals as to how much the attack impacted the economy.

Thus we anticipate this scenario until and unless we get news of imminent additional stimulus or some economic numbers (and that will be further off). Selling on the open. Originally we thought that the selling might be muted, but looking at the dollar and the action of foreign markets, we are ready for a full 5% to 6% selloff, maybe more, before the initial rally. A 5% selloff on the Dow is 480 points, dropping it down to just 20 points above its intraday low at 9106. The closing low is 9389.48, just 215 points away.

There will be buyers on such a selloff; the stronger the selling, the more buyers coming in looking for positions. Then we anticipate the upside to last a few days before a re-evaluation of the economic numbers and some more input as to the impact of the attack sends in some sellers again. After the patriotism fades a bit, then the markets have to price in what the future foretells. We then see, without the Fed cutting 50 basis points or more and/or some fast fiscal stimulus, some selling again because the consensus is that the economy is going to suffer from this attack and no one was sure if the economy had really made the turn at the time of the attack. The signs looked promising, but the market was still feeling for the bottom.

After the touchdown to the low and then the recovery, the indexes may find resistance at the former lows. How they handle those levels will be key. Those points could set up downside put plays on the indexes. The lows: Dow (9106 intraday; 9389.48 closing); S&P 500 (1073.15 intraday; 1085.78 closing; March low was 1081.19 intraday and 1103.25 closing); Nasdaq (1619.58 intraday; 1638.80 closing). If we see the indexes rebound to those points and then reverse direction, we will look at downside plays.

The market will of course be in tremendous flux. Uncertainty is the bane of markets, and the uncertainty as to whether the attacks will continue, how long the campaign against terror will last, and how the economy has been impacted will, in our opinion, overcome short term buying unless there is other stimulus, e.g., a. Fed rate cut and fiscal stimulus.

As noted above, several bear markets have ended in the midst of despair and apparent economic weakness (the turn was made but no one was sure it had occurred). After last week's events there is no way to determine where the market or the economy sit right now. That is why we are laying off the downside plays until the market recovers some equilibrium and we can see the direction better after some trading is done. We will let our existing short plays sell down on Monday and then lock in some profits when we see any bounce after a 5% or so selloff. We will wait on further such trades until we get that rally back that fails at a logical point, e.g., the former lows. It is too risky for us to chase downside plays out of the gates; put option prices will be incredibly volatile and thus incredibly pricey. Not the time to be getting in with options.

The upside is all about patterns and strong stocks. Those that survive the selling on Monday while maintaining their patterns are the strong ones, and they will be our upside focus and they are on the reports. If they hold up and breakout sharply on the rally, they could be the next market leaders, the good buys that could lead if the market takes this tragedy and does a historical repeat. We will watch those for the upside moves after the initial selling. Patience and a cool head are indeed necessary at this point.

Options Expiration.

Options expire this week, and contrary to some stories circulating, equity options are not going to be extended beyond Friday. So, that time is lost, but that is what we have to deal with. Most all of our September option positions left are index puts, so we will close them out on the bounce as we were talking about above.

Stop Orders.

There will no doubt be a gap lower on Monday. In such situations we pull our stop loss orders because stop loss orders (as opposed to stop limits) are market orders that will be executed when the price or a lower price is hit. What we mean is, if the stock gaps down and opens below your stop loss price, your stop loss order as a market order is executed on the next trade. Thus, you could get the low trade of the session. That is why we usually simply pull our stop loss orders when major bad news hits, and then just see how things pan out over the session or the next few sessions. We anticipate a rally after the initial selling, and that means we will most likely at least have a better selling point if we need it and potentially we could get a continued rally that obviates the need to sell at all. That will remain to be seen, but what we are looking at Monday is not to be the low trades on the session as we know stocks bounce from big moves down.

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

9-17-01
Business Inventories, July (8:30): -0.4% versus -0.4% prior.
Trade Balance, July (8:30): -29.6B versus -29.4B prior.

9-18-01
CPI, August (8:30): 0.2% versus -0.3% prior.
Core CPI, August (8:30): 0.2% versus 0.2% prior.

9-19-01
Fed's Beige Book (14:00)

9-20-01
Initial Claims, 9/15 (8:30): 420K versus 431K prior.
Housing Starts, August (8:30): 1.633M versus 1.672M prior.
Building Permits, September (8:30): 1.584M versus 1.558M prior.
Philadelphia Fed, September (12:00): -14.6 versus -23.5 prior. Core PPI, August (8:30):

9-21-01
Treasury Budget, August (14:00): -44.7B versus -10.4B prior.

THE PLAYS: Removed TUP.

Note for reading plays: A "prior high" refers to the high at the start of a base.

All prices are current as of the close of trading Monday.

BEST PLAYS: SMTL bounced from support, but volume was lower (still above average, however, and strong); a nice move in the wedge pattern. Stronger volume popped SMTC over its 10 day MVA, NBP bounced slightly from the 10 day MVA, and SLE surged off its 18 day MVA. BBY dropped just under 2 points on the put play.

Best Plays:
1) MIMS: Looks ready for a move up from support.
2) OSIP: Ready for a roll back up.
3) WLP: Surging on strong volume in the cup with handle.
4) CL: Broke resistance on a breakout from an ascending wedge.
5) AOT: Moving up on strong volume.
6) NBP: Nice-looking ascending wedge.
7) ESCM: A lower-volume pullback to support.
8) BBY: Can continue down to the 200 day MVA (put).

NEW PLAYS:

MIMS (Mim Corp--$11.00; +0.30; no options): Health Services
http://biz.yahoo.com/p/m/mims.html
STATUS: Is stepping up its short term MVAs since mid-July, after a June bounce from the 50 day MVA. MIMS actually broke out of a nice-looking cup base in late July, then after a couple of pullbacks made it to a September high of 12.58, from which it has made to most recent pullback as volume decreases (down last Monday to 353,400; avg. 614,000). The 18 day MVA is providing the support now (at 10.81); the stock opened just below that level before moving back over it to close just under the 10 day MVA (11.06). It's an orderly pullback of the type we like to see; look for another move up on surging volume. The 50 day MVA is at 9.35. Super money flow and buying. Initial target: 15
BUY POINT: Aggressive: 11.40 (over Monday's intraday high) on rising volume. Stop: 10
POSITION: Stock.

Back on:

OSIP (Osi Pharmaceuticals--$38.73; +0.63; optionable): Health Services
http://biz.yahoo.com/p/o/osip.html
STATUS: Was covered as a put 8-30, and the stock made a 5-point move down for the play. However, it showed a doji Monday after tapping recent support at 37.50, the level of the last 2 dips since mid-July. Showing a doji, the stock looks ready for a move up. The July low is 36.80, and we would like to see OSIP hold above that level to hold the pattern. Target: 45, at the upper level of the rolling pattern.
BUY POINT: 39, on rising volume (closed Monday at 403,200; avg. 347,000).
POSITION: Stock and/or October or January calls to buy (GHU JG or AG).

WLP (Wellpoint--$106.46; +3.97; optionable): Health Services
http://biz.yahoo.com/p/w/wlp.html
STATUS: Previously covered in a cup with handle pattern, but the stock dropped back to a test of its 50 day MVA (currently at 102.48). After hitting that support on lower volume 9-07 (Friday), the stock made a strong bounce back last Monday, with volume surging to 975,100 (avg. 601,000), pushing WLP back over the short term MVAs (the 10 day is at 106.33). We will look for a continued move up from here, and a breakout over the August (handle) high of 109.94. Relative strength is breaking out ahead of price, a bullish indicator. Target: 127-132
BUY POINT: Aggressive: 107 on continued rising volume. Breakout: 110.07, on continued rising volume (minimum breakout volume is 902,000). Stop: 102 (just below the 50 day MVA).
POSITION: Aggressive: Stock and/or October $105 calls to buy (WLP JA), or January $100 calls to buy (WLP AT).

CONTINUED PLAYS:

Semiconductors: Could be bottoming and we are looking to be ready if it turns this week.

SMTC (Semtech--$36.71; +0.62; optionable): Integrated Circuits
http://biz.yahoo.com/p/s/smtc.html
STATUS: Is in the year-long base and recently has bounced twice from the 50 day MVA (currently at the 34 range). The stock popped from the support Friday, and Monday continued the move, crossing over both the 18 day and 10 day MVA s on rising volume (1.7 million; avg. 1.1 million). It pulled off the high of 37.36, hitting the buy point of 36.50. We will continue to watch for the run up to the August high of 41.70, our initial target. The pullback from 37.36 is an opportunity to get back in on a move up from here, in a chip sector rebound. The 50 day MVA is at 34.72.
BUY POINT: Aggressive: 36.75 on continued rising volume. Stop: 33.80
POSITION: Stock and/or October or December $35 calls to buy (QTU JG or LG).

LSCC (Lattice--$22.51; -0.01; optionable): Specialized
http://biz.yahoo.com/p/l/lscc.html
STATUS: In a large base but recently in a rolling/trading range since earlier June. LSCC moved up from the 200 day MVA support Friday, and held Monday at the level of that day's closing price, with volume dropping back to 2.1 million (avg. 1.5 million). The doji suggests the stock can retest the 200 day before making a move over the short term and 50 day MVAs (the 10 day MVA was tapped on the high of 22.83, and the 50 day MVA is at 23.37). We are looking for a roll back up to the 25-26 range in a chip sector rally; in a more sustained rally we'd like to see a breakout from the pattern and move to the May high at 29.65. If LSCC does break the 200 day MVA, possible support is at the June low of 20.88 or the July low at 20.28. Upside target: 29-30.
BUY POINT: Aggressive: 23, on continued strong volume. Watch for resistance at the 50 day MVA (23.41). Stop: 20.80
POSITION: Stock and/or December $20 calls to buy (LQT LD).

TRID (Trident Microsystems--$6.04; -0.06; no options): Specialized
http://biz.yahoo.com/p/t/trid.html
STATUS: In a cup with handle base of 7.5 months that is part of the stock's larger, year-long base. The pullback in the handle has been steeper than what is normally preferred, but the stock may have found a good place to turn around after testing the 50 day MVA (5.96) for the last three days. It tried again to hit the 18 day MVA Monday, but lower volume (81,900; avg. 104,409) pulled it back down to the 50 day MVA (5.96). We are looking for a strong move back up in a chip rally. The 200 day MVA is at 5.38, level of other price support from March and April. Target on a breakout from the base: 10
BUY POINT: Aggressive: 6.20, on rising volume. Stop: 5.40. Breakout: 7.88, on minimum breakout volume of 185,000. Stop: 5.50
POSITION: Stock only.

RFMD (Rf Micro--$22.31; +1.22; optionable): Integrated Circuits
http://biz.yahoo.com/p/r/rfmd.html
STATUS: After the bell last Monday the company revised guidance upward, and the stock was trading higher to 22.91 (just above the 200 day MVA, 22.70, and below the 10 day MVA at 23.62). In regular trading RFMD gapped higher, opening at 24.94 at the 50 day MVA (25.07) but then selling back down to the 200 day on stronger volume (selling) of 15.8 million (avg. 8.2 million). The after-hours bounce does not mean that RFMD will move up Monday, but we at least would like to see a hold at the 200 day MVA on this strong volume. Lower support on a break of that support is at the 20 range. Initial target: 32.50 (August high).
BUY POINT: Aggressive: Over 23 (intraday high it 3 times in the base) on continued rising volume. Stop: 18.50
POSITION: Stock and/or November $17.50 calls to buy (RFZ KQ).

SAGI (Sage--$15.35; -0.06; optionable): Integrated Circuits
http://biz.yahoo.com/p/s/sagi.html
STATUS: Formerly in a cup with handle. The stock sold off pretty hard below the 50 day MVA on Wednesday, fell to a low near 14 then bounced, and Friday on strong volume rallied back to the 50 day MVA (15.54). Monday SAGI held just under the resistance, showing a doji on lower volume of 215,500 (avg. 220,318). Market selling can push SAGI back down to the 14 range, but on a hold at that support we can look for a bounce back up if the chips can rally. Looking for more strength and a move over the 50 day MVA (15.53) for a trade up to the August high at 18.87. Good money flow.
BUY POINT: Aggressive: 16, on strong volume (350,000). Stop: 12.75
POSITION: Stock and/or October $15 calls to buy (UEJ JC).

SMTL (Semitool--$14.18; +0.43; optionable): Chip Equipment
http://biz.yahoo.com/p/s/smtl.html
STATUS: In a 7-month base that is inside of much larger base of 18 months, and has formed an ascending wedge in the upper right side of the smaller base (prior high 15).
SMTL moved up Monday from support (18 day MVA, 13.53) on continued strong but decreased volume of 62,300 (avg. 51,409). We will see if volume can kick back up and break the stock out starting with this nice bounce up in the ascending wedge pattern. If the lower volume signals a pullback, especially within the context of market selling this week, look for a move back down to the 18 day MVA or the 50 day MVA at 13. We will want to see a hold of support there. The 200 day MVA is at 11.45. Target: 17-18.
BUY POINT: 14.63, on minimum breakout volume of 73,000. Stop: 12.75. A buy on a breakout up to 15.36.
POSITION: Stock only.

End Part 2 of 3

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