Dow Jones 11016.31 +4.73 11:19 am PST, January 11, 2006  NASDAQ 2326.87 +6.55 For info, visit access.smallcapnetwork.com S & P 500 1291.83 +2.14 Change your subscription status here Russell 2000 707.62 -3.37 VOLUME 06: ISSUE 3  Feature: Nailing the NASDAQ. Profit Alerts. Understanding Share Structure. SmallCap Digest readers will recall that over 2005, we added significant value to our service by making focused market calls, primarily the NASDAQ COMP as a backdrop for our trading suggestions. Our last major call was December 8th when we saw the then market rising to 2315 from the low to mid 2200 level.  We nailed it. Tuesday, the NASDAQ capped off a stellar six trading sessions to close at 2321. As stated in our 2005 year-end piece, we intend to keep a close eye on the indices in 2006, so now that we've hit our target on the COMP, whither the NASDAQ? The monthly chart denotes a 3/8 retracement of the decline from 2000-2002. Between 2300-2400 the COMP should experience some heavy resistance, which favors the bears. The eventual pullback, however, will give the bulls ammo for some decent entry points. We're becoming more cautious after a long bull run and want to pick our spots both for individual stocks as well as sectors. As we approach what we think is a top, it would be prudent for investors to lock in profits and be focused on stock selection. Might be worth having a serious look at the QQQQ March 2006 42 Puts at 55-60 cents a contract as a way to play any short-term weakness or as portfolio insurance. If the market runs a bit higher and the Puts cheapen, groovy....  If the QQQQ drops to 41 relatively soon, the put price will likely double. As we've often said, option purchases are risky and only for aggressive, vigilant traders.  Here's the QQQQ options link; scroll to the expiry and strike that suits y'all. http://finance.yahoo.com/q/op?s=QQQQ&m=2006-03  When sentiment fades in the broad market, the smaller stocks tend to return to favor. Obviously, we will keep you in touch with the stocks and sectors that we feel will give you the best chance to make money.     Profit Alert(s) For those who followed us on December 14th into our Energy Select SPDR (AMEX: XLE) trade, where we suggested investors strap on the SPDR or the call options when the ETF hit 50--it actually dropped to $49.50 in mid December--the time to sell has come as the XLE approaches the old high of $54.76.  If you played the XLE March 50 call options--now $5 and change-- as we suggested once the SPDR hit $50, sell them, as you've made somewhere between 25-50 percent or more in a couple of weeks as opposed to roughly 10 percent on the ETF.  Nice start to the year. We'll keep an eye on the oil sector and report our thoughts over the coming weeks. For those who are playing our Elephant stocks call from December 17th, although the long-term picture remains intact, short-term option traders should close their long call positions given our NASDAQ view above. I would definitely sell the CSCO calls, now at over a 100 percent profit. The BMY options are up around 30 percent and the ORCL calls are flat to up slightly.  Take your call profits now, as options wait for no one when a pullback comes. Bristol Myers June 22.50 calls are now $1.35 after our call at just under $1. Cisco April 17.50 calls are now over $2 after our call at around $1. Oracle June 12 calls we called at $1.30. They are currently $1.35. Options aren't investments. They are participatory trading vehicles. They should be treated as such.     Measure twice, cut once. Assessing a company's share structure. As you can appreciate, we get approached by a number of companies for coverage. As I've oft-said, we pass on more than we actually cover. The other day, a company called and after an initial chatter, I asked how many shares were outstanding? Now, you have to understand, this is a company in its formative stages and revenues are a ways off. The technology however appears way cool and looks interesting so far. Anyway, the chap said that there were roughly 50 million shares outstanding. The shares currently trade for around $2 a piece. Being the math whiz I am, I stated: that's a market cap of $100 million, are you joking? Upon further conversation, the fellow noted that of that 50 million, almost 30 million were restricted from trading for a year or more, 2 million were as a result of a private placement at $2 and $2.40, and of the remaining 18 million, only about 7-8 million were free trading, the balance having various *Legends or restrictions on them. All of a sudden the $100 million market cap gets reduced to between $14 and $40 million--certainly more workable than upon first blush. A couple of simple questions or digging into filings can save investors a world of hurt. Establishing a realistic market cap number against the potential for the technology is critical to even the most rudimentary due diligence. As well, one has to keep an eye on liquidity and trading patterns. If a stock sits at $2 and trades by appointment, even a modest amount of stock coming in can whack the price, no matter how good the company/technology. Better to wait until a pattern emerges and not be the first casualty. There are always other opportunities. The SmallCap market holds enough risks without intentionally walking into a flamethrower.  *Definition: A Legend on a certificate refers to a certificate of equity ownership that carries a description, usually on its face or back, of the restrictions imposed upon the ability of the holder to sell or otherwise transfer its ownership. Most legend stock carries one section identifying the restrictions imposed by state law and another identifying those imposed by federal law. If the holder of the stock has entered into a shareholders agreement or agreed to some other restriction on his ability to own or resell his securities, these will also typically appear on his stock certificate.  Before we proceed with even considering coverage, I will scour the filings to ensure that what I was told by the company is indeed the case.  The point to this tome is simply that any investor, especially a smallcap investor should make darn sure of the share structure of a company to ensure that one isn't going to get bushwhacked by wholesale selling of a landslide of shares following a purchase. If so, move on. For the 20 minutes of your time at the Edgar site and/or a five minute phone call to the company, one can get those facts and be a much more informed investor. If you can't tell a book by its cover, then open the book. You save yourself an immense amount of grief and money in the future.     We Value Your Feedback Got comments, questions or suggestions? 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