AIQ   Opening BellM o n t h l y

VOL. 9       ISSUE 6 JUNE 2000IN THIS ISSUE

®

F e a t u r e

Stock's Price ActivityDetermines Correct Timeto Buy .................................. 1

S e c t i o n s

S&P 500 Changes .............. 4

Buying Puts and Calls ...... 5

Data Maintenance ............. 7

Market Review .................... 7

Parabolic SAR -- NewTradingExpert Indicator ... 8

The Opening Bell Monthlyis a publication ofAIQ SystemsDavid Vomund, Chief AnalystP.O. Box 7530Incline Village, Nevada 89452

Interview continued on page 2

AIQ USER INTERVIEW

PRICE PATTERN ANALYSIS PAYS OFF FOR

PROFESSIONAL TRADER DAN ZANGER

T his month we are pleased to presentan interview with Daniel Zanger.Dan has been an AIQ user since

1992 and publishes Chartpattern.com, anonline newsletter. His newsletter, which hasa margin portfolio, increased an amazing1833% from January 1999 to mid-May2000. Dan will be a guest speaker at AIQ�sLake Tahoe seminar in October. He can bereached at Dan@Chartpattern.com.

OBM: Please tell me about yourbackground. How did you get started instock trading?

Zanger: When I was about 20 yearsold, I watched the Business Channel inLos Angeles. It had a similar format tothat of today�s CNBC except many of theguests talked about stocks from atechnical perspective rather than from afundamental perspective.

By watching the ticker tape I sawwhich stocks were moving up andwhich were moving down and I noticeda direct correlation with volume. At thattime, I purchased my first stock at $1.00and sold it seven weeks later for $4.00.The stock was a spin-off from RockwellCorp. This was back in the mid-70s.

OBM: How much experimentingdid you do before you came up withyour current stock selection system?

Zanger: I did a tremendous amountof experimenting, which cost me a lot ofmoney in losses. I had to constantly goback to the drawing board and figureout where I went wrong. I found that Iwas buying stocks that were below theirdescending trendlines or that had justbroken down below their supporttrendlines. I spent over 10 years andprobably 20 to 30 hours a week con-stantly plotting my mistakes on a chart.I was buying based on emotion. Overtime, I learned how to buy stocks at thecorrect time rather than relying onemotions.

OBM: Your most important buycriteria is price pattern analysis. Canyou give us some examples of thepatterns you look for?

Zanger: Many years ago, one of thebest bullish patterns was a Cup-and-Handle formation. These days, the Cup-and-Handle is so well known that thestock runs away before the pattern iscompleted. One of the best bullishpatterns today occurs when a strongrelative strength/high growth stockcorrects by 20% or so.

2 JUNE 2000

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INTERVIEW continued . . .

PLEASE SEND CORRESPONDENCE TO:

Opening Bell MonthlyG.R. Barbor, EditorP.O. Box 7530Incline Village, NV 89452

AIQ Opening Bell Monthly does not intendto make trading recommendations, nor dowe publish, keep or claim any trackrecords. It is designed as a serious tool toaid investors in their trading decisionsthrough the use of AIQ software and anincreased familiarity with technicalindicators and trading strategies. AIQreserves the right to use or edit submis-sions.

For subscription information, phone1-800-332-2999 or 1-775-831-2999.

© 1992-2000 , AIQ Systems

More often than not, a descendingtrendline will be in place as a result ofthis downside action. A break abovethe descending triangle signals someof the biggest gains in the stock markettoday. This is known as a continua-tion pattern.

One of these continuation patternsis the Flag pattern. After a big quickprice advance, a bullish flag is charac-terized by lower tops and lowerbottoms. A good example of a Flagpattern that we acted on is Ask JeevesInc. (ASKJ) in Figure 1. During thepattern, volume dried up. Once theupper trendline is broken the stocktypically takes off, especially if thebreak comes on heavy volume.

Another powerful continuationpattern is the Ascending Triangle.Ascending Triangles are generallyconsidered bullish and are mostreliable when found in an up-trend.The top part of the triangle appearsflat, while the bottom part of thetriangle has an upward slant. Buyersenter the stock, but each time the stockhits its old highs sellers emerge andthe stock retreats. Buying at that timeresurfaces but each sell-off is less thanthe previous sell-off.

Prices eventually break above theold highs and are propelled higher asnew buyers emerge. A good exampleis shown in Figure 2. Human Ge-

nome Science (HGSI) signaled its buyon 08/02/99.

Another triangle pattern is theSymmetrical Triangle. With thispattern each new top and bottombecomes moreshallow thanthe last, takingon the shape ofa sidewaystriangle. It�sinteresting tonote that thereis a tendencyfor volume todiminishduring thisperiod. Even-tually, this indecision is met withresolve and the stock usually explodesout of this formation, often on heavyvolume. A good example is VISX Inc.(VISX) shown in Figure 3.

There are several other powerfulpatterns that are covered on my website at www.chartpattern.com

OBM: How do you find the stockswith these patterns?

Zanger: Using the AIQ Tag Listfeature, I insert about 400 stocks that Ibelieve have the best potential in the

market today. Every single day,including Sunday, I scroll through myTag List searching for the patterns.On many days, I�ll even scroll throughthe Tag List two times.

OBM: Doyou usetechnicalindicators inyour analysisand, if so,which ones?

Zanger: Iuse almost notechnicalindicators inmy analysis.

Once in a while I may use the MACD,but that would be the only one. Thetrend of a stock is determined bysupply and demand and the strugglebetween supply and demand can bestbe seen and interpreted by simplylooking at a stock�s price activity.

OBM: You recommend a lot ofstocks in your newsletter. How doyou filter out the ones that are actuallypurchased in your newsletter portfolioor your hedge fund?

Zanger: It is hard to explain how Igo about picking my stocks for pur-

Figure 1

�The trend of a stock isdetermined by supply anddemand and the struggle

between supply and demandcan best be seen and inter-

preted by simply looking at astock�s price activity.�

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INTERVIEW continued . . .

Interview continued on page 4

Figure 2chase for the fund. Basically, I let themarket dictate to me during markethours which stocks are acting best. Ibecome �friends� with my stocks andget to know their personalities duringmarket hours. I know when they arefeeling good by the way they act, and Iknow when they are feeling bad. I geta feel for their personality changesfrom good to bad or bad to good.

I use this personality test on eachstock almost like a psychological test.This, combined with the patterns thatthese stocks have made over a three tofive week chart span, helps meidentify bullish situations. If the stockis feeling good and the chart is sayingit is time to buy based on variousformations, then I will definitely stepin and buy at that point

OBM: Many of the stocks yourecommend have a price history of lessthan a year. Is there any significanceto this?

Zanger: Basically, many of thenew issues come from hot new areasof our economy. We currently see atechnological revolution in internetstocks, ready to fill the public�sappetite. These stocks are very trendyand sexy right now and these compa-

nies offer many new technologies thatare in great demand. These stockshave a tendency to greatly outperformthe market, mainly due to the fact thatthey have little or no institutionalownership.

This was the case with the cellularphone stocks and the early network-

ing stocks in the mid-80�s. In the early90�s, the HMO stocks went public.These stocks soared in price veryrapidly. Institutions eventuallypurchase the stocks, which pushesprices up.

OBM: Last year, most of yourrecommended stocks were lesserknown Nasdaq issues. Is that typi-cally the case?

Zanger: It is typically true that Irecommend Nasdaq stocks that arerelatively new and have large in-creases in revenue growth, most at arate of 40% per quarter. In fact, manyof these stocks have revenue growth of200-400% per quarter.

OBM: The Nasdaq market isnotoriously unkind in trade execu-tions. Do you run into problems whenyou execute Nasdaq trades for yourhedge fund? Are limit orders neces-sary?

Zanger: Yes, I run into tradeexecution problems all the time. Wehave a machine that tracks each tradewith a time stamp attached to eachtrade. We clearly know when we havebeen taken for a ride or not. We canpresent our case to the market makers

Figure 3

4 JUNE 2000

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INTERVIEW continued . . .

and more often than not they will goback and rectify the problem.

The average person can get unfairfills and there is not much you can doabout it other than ask for a timestamp on the fill. If you are going tobuy a stock at $80.00 and then five toten weeks later the stock is at $100.00,much of that is forgotten. Paying anextra quarter for a stock that is goingto run $100-$200 is completelymeaningless.

I almost never put limit orders inunless I am trying to work a largeorder and the stock is in an areaof good support. It is importantto know the market. If you are ina fast market to the downside,then don�t use limits.

OBM: You have used AIQsoftware for a number of years.Why do you like TradingExpert?

Zanger: I have used AIQ softwarefor about 10 years and I find it veryuser friendly. I don�t get fancy withthe software because chart patternsare all that I find necessary. I plotprice and volume and browse throughcharts, looking for patterns. Lookingthrough the charts in rapid successionwith a click of a button is the best wayto learn chart pattern recognition.

OBM: Let�s talk about risk control.How do you know when you should

sell a stock?

Zanger: Selling securities is by farthe hardest thing to do in the stockmarket. You can sell too early andmiss a $40-$50 move in a matter ofweeks, or you can sell too late andmiss $30 to $40 points of profit.Knowing when to sell took me longerto learn than anything else in themarket. An important thing I havelearned is that if I sell a stock too earlyI may miss a $30-$50 advance. Yet,there is always another of my stocks

close by that may advance $30-$50.

When I�m in a stock, I look at itssupport trendline in order to knowwhen to sell. When the break occurs, Iam a seller. No questions asked. Ihave lost too much money by notobeying my trendlines and I won�t letit happen again. If the stock turnsaround and revalidates itself, I canalways buy it back.

OBM: Market timing plays intoyour analysis. How do you determinewhen the market is bullish and whenthe market is bearish?

Zanger: I find the market isbullish when I can�t easily buy a stockand I find the market is bearish when Ican�t give my stocks away at theircurrent market prices. This probablyis the easiest way to know what kindof market you are in. When stockstake a dip and buyers don�t emerge,then sellers must take an additionaldiscount to find buyers. That�s when Iknow that I�m in a bearish situation.Conversely, if the stock runs up $15 inprice and I am having trouble filling10,000 shares, then I know there arefew sellers. That is basically how Idetermine if the market is bullish orbearish.

Market timing is key to makinglarge returns in the stock market.Buying stocks when the market is nearthe top after a lengthy run will costyou dearly, say 50% or so of yourportfolio, if you don�t implement a 7-10% selling rule.

Typically, after the Nasdaq hascorrected 12 to 18%, stocks are at theircheapest and their basing patternshave been built for a significantduration of time. During the decline,fear is prevalent everywhere and

buyers sit on the sidelines withlarge sums of cash ready to buyonce the market begins to moveup. There is a tremendousamount of buying pressure aftera corrective phase. People realizethey are missing a good run inthe stock market so they put theirsideline cash to work.

OBM: Thanks for sharingyour thoughts with us. We lookforward to your presentation at AIQ�sOctober seminar. n

�When the break occurs, I ama seller. No questions asked. Ihave lost too much money by

not obeying my trendlines and Iwon�t let it happen again.�

AIQ 2000Lake Tahoe Seminar

Hyatt Regency HotelIncline Village, Nevada

Thursday thru SaturdayOctober 5, 6, 7

Keynote Speakers:Marc ChaikinLinda Bradford Raschke

Guest Speakers:Jay KaeppelChris ManningDavid SchultzDaniel Zanger

All-day Options Session onWednesday, October 4 (optional)featuring Lawrence McMillanand David Schultz.

For reservations or moreinformation, call 800-332-2999

S&P 500 Changes

The following are changes tothe S&P 500 Index andIndustry Groups:

American Power Conversion(APCC) replaces Mirage Resorts(MIR). APCC is added to theElectrical Equipment(ELECTRIE) group.

Agilent Technologies Inc. (A)replaces NACCO Ind. (NC).Agilent is added to the Electron-ics-Instrumentation (ELCTRONI)group.

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AIQ Opening Bell

OPTION TRADING

Option Trading continued on page 6

In the January 2000 Opening Bellwe reviewed how options workand explained their terminology.

We are now ready toexplore the simplest formof option trading � buyingputs and calls. While it isthe easiest strategy tounderstand, it is also oneof the most speculative.

AIQ�s OptionExpertcan be used to value eitherindex or equity options.Index options were intro-duced in 1983 and have becomeincreasingly popular. They giveinvestors the right to buy a �basket� ofstocks that make up an index, such asthe Standard & Poor�s 100 index(OEX). Although index options are

based on a basket of stocks, cash, notstock, is delivered upon exercise.

While an equity option traderneeds to consider the outlook for themarket as a whole as well as theoutlook of a particular stock, an index

option trader need only consider thedirection of the overall market. If youhave been right about the market butwrong on the stock, you can appreci-ate this feature. Index options are alsomore liquid than equity options. Theincreased liquidity of index options,

especially OEX options, provides formore trading opportunities with lessslippage (loss due to the difference inthe bid/ask spreads).

On the other hand, if you�re askilled stock picker, equity optionscan produce higher returns than indexoptions. While call option buyers lost

money on the market inApril, traders holding calloptions on ChampionInternational (CHA) orReebok Int�l (RBK) sawimpressive results.

Since stocks have theirown personalities, equityoption players can find agood trade when an indexoption trader is forced to

sit on the sideline. If the market ismidway though a strong advance, it islikely that it is too late to buy indexcall options. An equity option inves-tor can scan stocks to see which stockshave not yet participated in the marketmove.

Let�s study the OEX June 770 calloptions as of the close on May 8. Theoption premium was $25 ¾ and theOEX was at 763.6. Assuming nothingchanges but the OEX index itself, yourbreak-even point at expiration requiresthe OEX to move to 795.75, a 32.15point increase from the current level.This is calculated by taking thedifference between the option�s strikeprice and the current OEX value (770 �763.6 = 6.40). Add to this the price ofthe options (6.4 + 25.75 = 32.15).

A graphical representation of thisanalysis is displayed in Figure 4. Ifthe index is below the strike price of770, the option expires worthless. Asthe OEX rises in value above the strikeprice, the option increases in value.Notice how the profit line passesthrough zero at approximately 796,just as we calculated above. The profit

EXPLORING SIMPLEST FORM OF OPTION

TRADING � BUYING PUTS AND CALLSBy David Vomund

�AIQ�s OptionExpert can be used to valueeither index or equity options...while an

equity option trader needs to consider theoutlook for the overall market as well asa particular stock, an index option trader

need only consider the overall market.�

Figure 4

DAVID VOMUND

6 JUNE 2000

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OPTION TRADING continued . . .

curve increases as the OEX rises above796 but losses are seen if the OEX failsto rise above that level.

As you can see, call and putoptions have unlimited profit poten-tial with a limited loss. A limited losssounds comforting until you considerthat it means that you lost your entireoption investment. Figure 4 can bereproduced for time periods betweenthe current date and the expirationdate by simply changing the AnalysisDate in OptionExpert�s PositionAnalysis window.

Proper input in the Situation Databox in the Position Analysis windowis the key to successful option valua-tion. The three most important inputsare Analysis Date, Indicated Value, andVolatility.

The Indicated Value is the valuethat you think the underlying securitywill move to during the time periodthat you hold the option. To determineindicated value, OptionExpert uses amathematical formula based on recentprice action. This value should not betaken as gospel however. Users maywant to change the value to reflecttheir own idea of where the securitywill move. For call options, theindicated value should representthe minimum value that you expectthe security to reach in the short-term.

Now that we have decided howfar the security will likely move, weneed to specify when it will reach ourexpected level. The Analysis Date fieldin the Situation Data box shows thenearest option expiration date, unlessthe current month�s options are veryclose to expiration. This is usuallysufficient unless your typical optionholding period is significantly differ-ent from the default date.

Try changing the Analysis Date forseveral scenarios and see how theOptionExpert program will change theoption or option strategy it recom-mends.

Volatility is a critical input inoption valuation. The default value inthe Situation Data box is computed

from historical price informationdownloaded from your data servicevia the internet.

Many option players prefer to usea �market implied volatility� (MIV)

when evaluating option pricing. Thehistoric volatility that is found in theSituation Data box looks at howvolatile the security has been in thepast while MIV is an estimate of howvolatile the security will be in thefuture.

To determine MIV, you firstassume that options with relativelylarge trading volume are fairly priced.If this is the case, prices can beplugged into the Black-Scholes optionequation and the unknown variable,volatility, can then be solved for.

In other words, for each optionthat is traded on a security, impliedvolatility figures are computed so thateach option is fairly priced. An

average of the implied volatilities,weighted by volume traded, is com-puted to get the overall MIV of thesecurity. This volatility figure canthen be used to see which options are

expensive or cheap relative to theother options on the same security.

If this sounds complicated,have no fear � the computer willdo it for you. Near the bottom of theComputed Economic Analysis onthe Position Analysis window boxare the MIV figures for call options

and for put options. In Figure 5 wesee that the MIV for call options is 26and the MIV for put options is 28. Thehistorical volatility is 36, which isfound in the Situation Data box.

In general, if MIV is less thanhistorical volatility then the optionsare cheap. If MIV is greater thanhistoric volatility then the options areexpensive. By entering the MIV valueinto the volatility slot in the SituationData box you can see how the recom-mended positions change.

RecommendationsOnly buy options with money

that you hope to get rich with

Figure 5

�Proper input in the SituationData box in the Position

Analysis window is the key tosuccessful option valuation.�

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OPTION TRADING continued . . .

but can afford to lose.It is estimated that 80% of option

buyers lose money. If you can�tstomach a 50% loss in a day, optionbuying is not for you. Options shouldconstitute no more than 10% of yourportfolio.

Keep in mind -- you arelimited by the time element ofoptions.

Good investments often take time.Time premium is lost if the investmentdoesn�t quickly move in your favor.Unless your investment time horizonis less than a few days, only buyoptions with over a month remaininguntil expiration.

Set goals for yourself.A common mistake is not closing

a position if premiums fall, hopinginstead for an improvement beforeexpiration. This can often lead to a100% loss. It is best to exit a positionwhen you have a loss of between 30%to 50% on your initial investment.

Also, avoid riding a successfulposition too long, hoping for yet moreprofits before expiration. If youroption doubles, consider selling halfyour position, thereby giving you a�free trade� for the balance of theoptions.

Use limit orders for lowvolume options.

Be patient if your order is notinitially filled and resist the urge tochase the market (some brokers do notaccept limit orders). n

MARKET REVIEW

Stock Ticker Split/Div. Approx. Date

Hanover Compressor HC 2:1 06/14/00Nextlink Comm. NXLK 2:1 06/16/00Juniper Networks JNPR 2:1 06/16/00Inter Parfums IPAR 3:2 06/16/00Cyber Optics CYBE 3:2 06/16/00Dow Chemical DOW 3:1 06/19/00C&D Techs CHP 2:1 06/19/00Virata Corp VRTA 2:1 06/20/00Meade Inst. MEAD 2:1 06/20/00SCP Pool Corp. POOL 3:2 06/20/00SEI Investment SEIC 2:1 06/20/00Dollar Tree Stores DLTR 3:2 06/20/00

Stock Ticker Split/Div. Approx. Date

AES Corp AES 2:1 06/02/00AVX Corp AVX 2:1 06/02/00Kemet Corp. KEM 2:1 06/02/00Medimmune Inc. MEDI 3:1 06/05/00EMC Corp EMC 2:1 06/05/00Power One Inc. PWER 3:2 06/05/00Calpine Corp. CPN 2:1 06/09/00Anaren Microwave ANEN 3:2 06/12/00Vishay Intertech VSH 3:2 06/12/00Private Media PRVT 2:1 06/12/00Int�l Bancshares IBOC 5:4 06/13/00Robert Half RHI 2:1 06/13/00

The following table shows past and future stock splits and large dividends:

Trading Suspended:Cordant Technology (CDD), Fruit of the Loom (FTL), Johnson Industries (JII), Jostens Ind. (JOS),Newbridge Networks (NN), Reynolds Metals (RLM), TCBY Ent. (TCBY), U.S. Home Corp. (UH),uBid Inc. (UBID), United American Healthcare (UAH), Wicor Inc. (WIC)

Name/Ticker Changes:Armstrong World Inds. (ACK) to Armstrong Holdings Inc. (ACK)Borg Warner Auto (BWA) to Borg Warner Inc. (BWA)China.com Corp (CHINA) to Chinadotcom Corp (CHINA)MCI Worldcom Inc. (WCOM) to WorldCom Inc. (WCOM)United Healthcare Corp. (UNH) to UnitedHealth Group Inc. (UNH)

STOCK DATA MAINTENANCE

M ay was an active monthfor the market and for the AIQ

timing model. The model switched to asell mode early in the month. On May3, the model registered a confirmed100 sell signal. This signal was short-lived as the model gave a 98 buy onMay 5, a 97 buy on May 11, and a 98buy on May 12. These signals werenot confirmed until May 12 when thePhase indicator increased in value.

Mid-month the market remainedin a choppy trading range and thesystem registered a confirmed 99 sellsignal on May 19. The market fell nearmonth�s end and the timing modelregistered a series of buy signals. A 98buy signal on May 26 (confirmed onMay 30) was followed by a 100 buy onMay 30 and a 99 buy on May 31. n

8 JUNE 2000

AIQ Opening Bell

PARABOLIC SAR

A new indicator called theParabolic SAR has beenadded to AIQ�s

TradingExpert Pro. The �SAR� in thisindicator stands for �stop and re-verse.� That means that with thisindicator you are always in themarket. You simply reverse theposition when the stop level isreached. When you are on a buy modeand the stop is reached, then youswitch to a sell (or short) mode. If youare on a sell mode and the indicatorturns bullish, then you switch to a buymode.

To see the Parabolic SAR indicatorin the TradingExpert system, open astock chart and click the ParaSARindicator in the Control Panel. Sincethis indicator overlays the stock pricechart, it is found in the upper half ofthe Control Panel.

The Parabolic SAR indicator isshown in Figure 6. The indicator getsits name from the shape assumed bythe trailing stops that tend to curvelike a parabola. Dots below pricesindicate a long position while dotsabove the prices indicate a short

position. The dots represent the stopand reverse points.

As the prices move higher, therising dots below the price action tendto start out slow and then acceleratewith the trend. The slow start in theindicator allows a trend to take place.As the stock moves higher, there is an

accelera-tion factorand theindicatormovesfaster untilit catchesup to priceaction.The sameis true forstocks thatare falling.

This isa trendfollowingindicatorso itobviously

SHORT-TERM SWING TRADERS �THIS NEW TRADINGEXPERT INDICATOR IS FOR YOUBy David Vomund

works best on volatile stocks that arein trends. Even on trending stocks,there will be whipsaws. In Figure 6,the indicator kept traders inConexant�s early year rally and kepttraders out of the March and Maydrop. It only took small signs ofstrength in late March and early Aprilto get Parabolic SAR whipsaw signals.This indicator is designed for short-term traders.

It is important to apply theParabolic SAR to stocks with a lot ofvolatility and stocks that typicallymove in strong trends. The Conexantexample in Figure 6 is a case wherethe stock exhibited strong trends andthe indicator worked well. In Figure 7we see a more conservative trendlessstock. In this example, the indicator isineffective and simply gives whipsawsignals.

For short-term swing traders whodeal with volatile stocks such as thosefound on the Nasdaq, the ParabolicSAR indicator may help improve entryand exit points. n

Figure 6

Figure 7