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"News" on war front brings a little volatility

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The major indexes have been seeing seesaw action this morning, as have bonds as news that the U.S. has sent two dozen long-range bombers to Guam, which would put U.S. fire power within striking distance of North Korea sent early jitters into the markets and has had the weaker Dow Industrials (INDU) 7,735 +0.39% falling to a session low of 7,662.

President Bush has maintained that escalating tensions with North Korea can be eased through diplomacy but he was quoted in comments released by the White House as saying that if such efforts are unsuccessful, "they'll have to work militarily."

North Korea restarted a nuclear reactor recently and, over the weekend, four of the country's MIG fighter planes tailed a U.S. spy plane over the Sea of Japan.

Stocks then rebounding off their lows, sending the Dow to a session high of 7,763 ahead of chief weapons inceptor Hans Blix's final judgment on Iraq's compliance with international mandate to disarm.

While stock traders have shown some "jitters" and have been responding to today's news events (focus on geopolitical news, not economic) bond traders have shown some "jitters" too as the 10-year YIELD ($TNX.X) fell to a multi-month low of 3.614%, only to have reversed on selling in the bond to a session high of 3.68%, and now edging back to unchanged levels, with YIELD standing at 3.649%.

Sector action has been mixed for the bulk of the morning session, with no real standouts up or down. A sharp decline in the Dow Jones U.S. Home Construction Index (DJUSHB) 293.79 -1.63% is getting some downside follow through today, as is the PHLY Housing Index (HGX.X) 207.44 -0.55% after yesterday's comments from Fed Chairman Alan Greenspan saying he thought refinancing activity would most likely slow in 2003. Sector bears are saying Greenspan's comments might hint that the Fed looks to start raising interest rates by year's end.

Sectors seeing some upside action at this hour have the Semiconductor Index (SOX.X) 288.25 +1.53%, which has been holding above the unchanged level during the bulk of the morning showing some strength. Tomorrow evening, Intel (NASDAQ:INTC) $16.90 +1.68% is scheduled to give its mid-quarter update. Semi- equipment stocks such as Applied Materials (NASDAQ:AMAT) $12.16 -0.73%, KLA-Tencor (NASDAQ:KLAC) $33.83 -1.1% and Novellus (NASDAQ:NVLS) $27.47 -0.90% are lagging the sector bullishness, most likely on concerns that Intel may say something about further capex cuts as they did in their recent quarterly earnings announcement.

In this morning's 11:00 EST Update, we discussed the bearish breakdown at 7,700 in the Dow Industrials, which gives some sign of further downside risk to 7,500. I also wanted to remind traders and ESPECIALLY investors that a decline to 7,500 would have the Dow Diamonds (AMEX:DIA) $77.42 +0.2% vulnerable near- term to $75.00, which is the bearish vertical count for this security. In October, the DIA exceeded its bearish vertical count by $1.00 on the point and figure chart, before a powerful reversal to the upside was seen.

Dow Diamonds Chart - Daily Interval

Here's a longer-term type of look at the Dow Diamonds. Subscribers will note that the Dow Industrials Bullish % ($BPINDU), which rose to 72% in late December, has now fallen to 13.3% and more oversold.

Not only does the DIA's p/f chart have a bearish vertical count of $75, but a "head and shoulders top" formation that bears were willing to trade to the downside hints at a bearish objective of $74. This should have a BEARISH trader's attention, as well as a bullish trader's attention.

In today's market monitor, I'm looking to "leg into" a partial position in the Dow Diamonds (DIA) from the bullish side on a longer-term basis with a September $80 call (DAVIB) $4.70. The $4.70 risk ($470.00) is just about the amount of risk that a bullish trader would be taking in the underlying DIA itself, with a stop under the head/shoulder top bearish objective of $74 and $73. The reason I like the OPTION at $4.70, is it allows me, as a VERY EARLY BULL in the Dow, to claim a partial position here.

As mentioned in recent weeks. MARKET CONDITIONS are very uncertain right now, and have been very "news driven" and can be difficult to forecast. For this reason, I've been suggesting some partial positions (bullish and bearish) and even straddle and strangle option trades in the indexes (neutral trades where a break of a range and sharp move from the range provides profit potential, with minimal capital at risk).

Jeff Bailey

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