Downgrade?! Downgrade This!

So there a number of
“downgrades” this morning, as there are a lot of mornings,
but today’s frosts my cherries. JDS Uniphase
(
JDSU |
Quote |
Chart |
News |
PowerRating), a stock we have made
markets in for a couple of years and has had its roller-coaster chug to $130+
and swoosh down to $5, is now resting closer to the station (zero). And these
“pros” (Soundview, CIBC World Markets) want you to get off the ride.
They charge money dishing this telling information?

I don’t mention this (publicly) very often because after
the decade of pump and dump, I figured it was just the dirty little secret that
all of the “players” accepted. But then when I saw the Uniphase call
this morning, I just had to vent. When will these folks become accountable? We
plan to start beating the drums.

Technical Levels Beckon

First we had the disconnect between the Dow Jones
Industrial Average and the Nasdaq pushed to extremes, and then the entire market
rolled over and collapsed. The semiconductor sector — the focus of much
speculative buying recently — is showing signs of weakness and is nearing
technical support.

At this point, I think it would be wise to examine the
important technical levels of some of the major indices in order to prepare us
for what promises to be an interesting day. Plug these into your machine so that
they can be monitored.

DJI

The DJI is clearly the strongest index at the moment.
After penetrating 10,000 on the back of what can only be called panic
“flight to quality” buying, the DJI collapsed and closed on the lows.

Support Levels

• 9704 — 50% retracement level of the May to September
  sell-off and last week’s low.
• 9529 — low of the current sell-off.
• 9445 — 38.2% retracement of the September to January
  rally.

Resistance Levels

• 10029 — yesterday’s high.
• 10052 — last week’s high.
• 10056 — 200-day moving average.

S&P (Cash)

The S&Ps have been crisscrossing an important
confluence of technical levels this week, as they did two weeks ago. The last
time these levels held. This time, maybe not.

Support Levels

• 1075-1080 — lows established in early February and
  Wednesday’s reversal rally.
• 1060 — 50% retracement of the September to January
  rally.
• 1053 — late October lows.

Resistance Levels

• 1086-1088 — I don’t know if one can consider these
  levels resistance levels at this moment, but they are clearly important as
  the index has been battling back and forth over them. The 38.2% retracement
  level of the May to September ’01 sell-off is 1086. The 38.2% retracement of
  the September to January rally is 1088. They are right on top of each other.
• 1114 — old support level (now resistance) marking
  December’s low, penetrated late January.
• 1124 — last week’s high.

Nasdaq Composite (COMP)

This sector has been getting pummeled as fund managers
panic out of tech stocks and into cyclical, industrial, retail and
“comfort” sectors.

Support Levels

• 1659 — 61.8% retracement of the September to January
  rally.
• 1619 — last April’s low — for you head and shoulders
  fans.
• 1387 — September lows.

Resistance Levels

QQQ

This “index” (QQQ is really the NDX divided by
40) has been the whipping post and is quickly closing in on significant support
that, if penetrated, could take us back to the September lows. We have already
taken out last April’s lows (yesterday by a hair).

Support Levels

• 33.33 — 61.8% retracement of the September to January
  rally.
• 32.00 — October lows.
• 27.20 — September lows.

Resistance Levels

• 35.22 — 50% retracement level of the September to
  December rally.
• 36.54 — 38.2% retracement of the May to September
  sell-off.
• 37.11 — 38.2% retracement of the September to January
  rally.

SOX

The SOX has been hanging in there pretty well relatively
speaking, but broke down hard yesterday. Any further follow through to the
downside could cause technical damage.

Support Levels

• 506.43 — 38.2% retracement of the September to January
  rally.
• 500 — late January double bottom.
• 484.07 — 38.2% retracement of the May to September
  sell-off.

Resistance Levels

• 527.35 — 50% retracement of the May to September
  sell-off.
• 549.08 — 200-day moving average.
• 570.64 — 61.8% retracement of the May to September
  sell-off.

Things look very grim right now, but we are approaching
key support levels in many indices. Also, many divergences are beginning to
appear in the stochastic and RSI readings in the indices (COMP, S&P, QQQ).
Be sure to lock in partial profits on your shorts as we approach key support
levels. There could be a short-covering blast at any time!

Volatility

The VIX spent the majority of the day on the downside, but
reversed to close higher when the blue chips gave it up late in the day. The VIX
closed at 25.82, and the 200-day moving average comes in at 27.09. Monitor
this level!

The VXN had an outside reversal up day, closing at 48.08,
still light years away from its 200-day moving average (54.66).

The QQV closed up at 42.18. Its 200-day moving average
comes in at 46.71.

Again, we are looking for some sort of climactic sell-off
accompanied by screaming volatility to indicate that the coast is clear. I
continue to believe that it will happen sometime in March, dovetailing with the
end of the Japanese fiscal year and our first quarter. However, it could happen
ANY TIME!

Updates

(
BA |
Quote |
Chart |
News |
PowerRating) — Yesterday we sold the Jan. 35/40 call spread at
$3.50. Today, successfully rolling the Jan. 35/May 45 call spread (long 50% at
$4.75) into the Jan. 40/May 45 call spread at an effective cost of $1.25. (We
sold the other 50% at $9.00 last week.)

(
QQQ |
Quote |
Chart |
News |
PowerRating) — Looking to buy puts on strength — first stop
is 34.97 again.

(
SMH |
Quote |
Chart |
News |
PowerRating) — Sold 25% of the SMH March 42.50 puts at $3.20
yesterday, waiting to see if it closes below the 40.60 level again. If it does,
we will hold the remaining 75% of the position. If it does not, we will
liquidate another 25% of the position.

Current Recommendations

Continue to attack from the shortside in the QQQs. Early
leans:

• 34.97 — Feb. 8 low, yesterday’s high.
• 35.22 — 50% retracement level of the September to
  December rally.
• 35.64 — Gap from Friday.
• 36.00 — Market Profile generated level.
• 36.54 — 38.2% retracement level of the May to
  September sell-off.
• 37.11 — 38.2% retracement level of the September to
  December rally.

See the Disney
(
DIS |
Quote |
Chart |
News |
PowerRating) “roll” suggestion
below.

Rolls/Adjustments:

Boeing (BA) — Investors long the proxy buy-writes (long
the Jan. ’03 calls/short the May 45 calls at $4.75; long the Jan. ’03 40
calls/short the May 45 calls at $2.75), consider taking partial profits here. We
recommend three different methods:

1. Simply sell out half of the position.
2. If you have the Jan. ’03 35 call/May 45 call, sell the
   Jan. ’03 35/40 call spread at $3.50. This reduces your investment to $1.25,
   but leaves you in the game.
3. If you have the Jan. ’03 40 call/May 45 call, sell the
   Jan. ’03 40/45 call spread at $2.75. This reduces your investment to $0.00,
   but leaves you in the game.

Disney (DIS) — Investors long the April 22.5/25 reverse
collar (long the April 25 calls, short the April 22.5 puts) at $1.15 credit
(75%) may want to consider the following roll:

Buy the Disney April 22.5 put/April 27.5 collar (buy the
April 22.5 puts, sell the April 27.5 calls) for zero. This will “roll”
you into the DIS April 25/27.5 bull call spread at a $1.15 credit.

A Short Guide To Some Tonyisms…

I realize that we have many new readers (and some older
ones) that have a difficult time understanding what I am talking about due to my
use of trader lingo and terminology of the business. In order to facilitate your
understanding, I will give a brief rundown here and a more comprehensive
glossary will be coming soon to our website.

Credit — means that you have
received money for something.

Example: We bought the
(
DIS |
Quote |
Chart |
News |
PowerRating) April 22.5/25 reverse
collar for a $1.15 credit.

Debit — means that you paid
money for something.

Example: We bought the
(
QCOM |
Quote |
Chart |
News |
PowerRating) April 40/50 call
spread for a $2.50 debit.

Leaning — refers to the act
of using a support or resistance level as a point to initiate a trade.

Example: We are leaning against 34.97 in the QQQs as a
put buying level.

Legging — putting on a
spread position one side at a time by timing the market — strongly discouraged!

Example: I legged into the
(
WMT |
Quote |
Chart |
News |
PowerRating) straddle today by
buying calls in the morning and buying puts in the afternoon.

Scaling — the act of buying
or selling in increments in order to raise or lower the average cost of a
position.

Example: We are scale buyers of QQQ puts on strength.

25%, 50%, 75%, 100%, 200%, etc.
— this refers to the sizing of positions.

Example: You have $100,000 of risk capital*, and you
decide you only wish to allocate 2.5% ($2500) to any one trade. This means
that a 100% position would use up the entire $2500, a 25% position would use
$625, a 50% position $1250, etc.

We usually use percentage allocations when scaling into
(and out of) positions. A 200% position means you are using TWO trades worth of
capital.

*Risk capital is defined as money that if lost, would not
affect your lifestyle.

Recap of open trades

Long-term

Reverse Collars

(
DIS |
Quote |
Chart |
News |
PowerRating) — April 25/22.5 reverse collar (long the April
25 calls, short the April 22.5 puts) at $1.15 credit (75%).

Buy-writes

(
HAL |
Quote |
Chart |
News |
PowerRating) — long the July 20 buy-write at $15.00 (50%).

Proxy buy-writes

(
BA |
Quote |
Chart |
News |
PowerRating) Jan. ’03 35/May 45 call calendar — liquidated 50%
at $9.00 on 2/15/02. Rolled remaining 50% on 2/21/02 by selling the Jan. 35/40
call spread at $3.50.

BA Jan. ’03 40/May 45 call calendar @ $2.75 (100%).

Complex Strategies

(
WMT |
Quote |
Chart |
News |
PowerRating) — Long the March 60 straddle at $3.30 (100%).

Short-term

Call Positions

None.

Call Spread Positions

(
DYN |
Quote |
Chart |
News |
PowerRating) — Long the March 30/40 1:2 call ratio spread @
$1.50.

(
SLB |
Quote |
Chart |
News |
PowerRating) — Long the May 55/60 call spread at $1.50
(50%).

(
QCOM |
Quote |
Chart |
News |
PowerRating) — Long the April 40/50 call spread at $2.50
(100%).

(
TLAB |
Quote |
Chart |
News |
PowerRating) — Long the March 17.5/22.5 call spread at
$.80 credit average (50%). Settled at $.15. Note: This spread is a result
of a reverse collar roll.

Put Positions

(
SMH |
Quote |
Chart |
News |
PowerRating) — Long the March 42.5 puts at $1.91 (75%) —
sold 25% at $3.20 on 2/21/02.

(
QQQ |
Quote |
Chart |
News |
PowerRating) — Flat — looking to scale-up buy (see above).

Put Spread Positions

(
AZO |
Quote |
Chart |
News |
PowerRating) — Long the March 55/65 put spread @ 2.125
(100%).

STOPS

None.