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A bit "defensive"

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As the final hour of trading approaches, the major market averages remain within a rather tight trading range, but precious metals stocks as depicted by the Gold/Silver Index (XAU.X) 77.31 +1.85% along with the Amex Defense Index (DFI.X) 592.50 +3.09% and Philadelphia Defense Index (DFX.X) $185 +2.08% take sector leadership, hinting that market participants become further concerned with potential conflict building between a U.S.-lead attack on Iraq.

Helping build a more "defensive" outlook was this weekend's concession by Saudi Arabia to allow the U.S. use of its airfields for a potential strike against Iraq, which many feel may have removed a hurdle to an attack on Iraq, which was seen as a major tactical necessity for a military strike.

Key technicals near-term have both the DFI.X and DFX.X breaking above their 200-day simple moving averages with the DFX.X threatening a trade at $186, which would further confirm bullishness from this index and a recent break of bearish resistance trend at $184, combined with a triple-top "buy signal" at $184 on this chart's $2 box scale.

PHLX Defense Index (DFX.X) - $2 box scale

Equity/Option call traders trading bullish in OI's L3- Communications (NYSE:LLL) $57.91 +1.63% like the action they are seeing in the stock as it looks to be a technical "leader" in the defense sector. Shares of LLL broke above its 200-day SMA on September 6th. Currently, LLL bulls would like to see the DFX further "confirm" the move higher on the point and figure chart of the DFX, which recently broke above downward trend and gave a triple-top buy signal. Sector bulls look for the DFX to have firm support above the 172 level and may be targeting the 220 level in the DFX longer-term.

Jeff Bailey
Senior Market Technician
Option Investor

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