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Daily Newsletter, Monday, 03/11/2002

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The Option Investor Newsletter                   Monday 03-11-2002
Copyright 2001, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
      03-11-2002          High     Low     Volume Advance/Decline
DJIA    10611.24 + 38.75 10647.09 10526.00  1.20 bln   1612/1535
NASDAQ   1929.49 -  0.18  1946.23  1905.93  1.80 bln   1920/1683
S&P 100   591.73 +  1.89   594.37   587.69   Totals    3532/3218
S&P 500  1168.26 +  3.95  1159.58  1159.58             
RUS 2000  500.75 +  0.90   502.06   496.17
DJ TRANS 3017.06 +  6.82  3033.07  2970.48
VIX        22.37 +  0.76    23.13    21.90
VXN        42.05 +  0.43    43.70    41.67
TRIN        0.64 
PUT/CALL    0.55
******************************************************************

Can't Get the Lead Out
By Buzz Lynn
buzz@OptionInvestor.com

The markets in general were packing some serious dead weight 
today.  Just why is anyone's' guess, but the press playing up the 
six-month anniversary of the Attack on America may have had some 
psychological affect on traders.  In fact, some were absent in the 
early going as they attended commemorations of the September 11 
events.  "Rarely forgive, never forget", said Mayor Ed Koch many 
years ago, though he never could have foretold the events that 
would bring down icons of the U.S. Skyline.  

Personally, I'm glad attention is paid to the seriousness of the 
event though I could live without having to dredge up the awful 
feelings and memories of that day once every six months.  Seems 
that many Americans have forgotten or at least put behind them 
those tragic events.  Conspicuously absent are the American flags 
that once flew in our neighbors' front yards and the smaller ones 
that adorned our cars.  I no longer see many of either, but I 
still fly mine.  It has become a habit that I plan to carry on 
through the rest of my life.

Anyway, that seemed to keep the mood on the Street a bit demure 
today.  No clear conviction either way for bulls or bears.  
Fortunately, I was able to shake it off when a joke arrived from a 
friend in San Diego.  Internet and e-mail old-timers will 
recognize this format, and maybe even the joke, but you have to 
read it all the way to the end for the updated punch line. . .

Subject:  How to Teach Math 

Teaching Math in 1950:
A logger sells a truckload of lumber for $100.
His cost of production is 4/5 of the price. 
What is his profit?

Teaching Math in 1960: 
A logger sells a truckload of lumber for $100.
His cost of production is 4/5 of the price, or $80.
What is his profit?

Teaching Math in 1970: 
A logger exchanges a set "L" of lumber for a set "M" of money. 
The cardinality of set "M" is 100.
Each element is worth one dollar. 
Make 100 dots representing the elements of the set "M." 
The set "C", production costs, contain 20 fewer points than set "M."
Represent the set "C" as a subset of set "M" and answer the following 
question: What is the cardinality of the set "P" of profits?


Teaching Math in 1980: 
A logger sells a truckload of lumber for $100.
His cost of production is $80 and his profit is $20.
Your assignment: Underline the number 20.

Teaching Math in 1990: 
By cutting down beautiful forest trees, the logger makes $20. 
What do you think of this way of making a living?
Topic for class participation after answering the question:
How did the forest birds and squirrels feel as the logger cut
down the trees? 
There are no wrong answers.

Teaching Math in 2000: 
A logger sells a truckload of lumber for $100.
His cost of production is $120. 
How does Arthur Andersen determine that his profit margin is $60?

Laugh it off!  That's the spirit!  The last line might also help explain 
why that in today's news, Arthur Anderson is offering itself for sale to 
Deloitte and Touch.  Fundamentals Guy take: Buy the customers; leave the 
name out of it.  Clients will migrate away from AA anyway.  AA is a 
tough brand to market.  Deloitte is not.  A barrel of sewage with a 
teaspoon of wine is sewage.  A barrel of wine with a teaspoon of sewage 
is still sewage.

What else?  Oh yes, a re-arranging of the deck chairs took place over 
this morning on the U.S.S K-Mart.  That is to say, Charles Conaway, the 
former CEO "resigned" since he had apparently lost the confidence of the 
investment community (you don't say?).  James Adamson, a long-time board 
member and recent appointee as Chairman, replaced him.  While Adamson 
has an enviable track record of helping turn around Denny's and Revco 
drug stores, making K-mart competitive again with Target (TGT) and Wal-
Mart (WMT) will likely be as difficult as raising the Titanic.  I wish 
him well.

In economic news, inventories fell again for the eighth month in a row 
while sales were up.  All this suggests that fundamentally there is an 
argument for a lift in production.  However, producers are likely to 
exercise caution in increasing output.  They have fallen prey to that 
before only to see demand remain flat.  Add this to the many little 
signs of economic improvement, but don't be your prized and pointy horns 
on a return of 1999 action.  In fact, technicals suggest the may be in 
for some wilting shortly.  Why?  In a word, "technicals", which is 
really all that matters to us as traders.  

Shall we take a peek starting with the Dow first?

Dow Industrials chart - INDU (weekly/daily/60)


 


For the Dow, a new recent closing high.  But that should not 
inspire confidence.  Stochastic values are topping out, resistance 
is at 10,650, and there is a bear flag forming at the upper 
Bollinger band, which also happens to be the 78% retracement off 
last May's highs to September's lows.  All this makes a tough 
barrier of resistance to higher moves.  The weekly chart is 
perhaps topping out too.  The 60-min chart is similar with the 
formation of a bear flag at same said resistance.

NASDAQ Composite - COMPX (weekly/daily/60)


 


NASDAQ too is butting up against resistance on the daily chart, 
which looks stochastically poised to fall.  Bollinger band also 
suggests that downside is in store in the not so distant future.  
However, the weekly chart stochastic is in bull mode.  If the 
index is to fall a bit, there could be some support at the 200-
dma, 1900 roughly.  The 50-dma isn't far below that at 1895.  
Careful.  It may not last.  One negative day could roll the daily 
stochastic downward and a negative week would reverse the course 
of the weekly stochastic too.  I'm surprised to be writing this, 
but pullbacks to support as the stochastic cycle to overbought 
could produce a bullish entry.

S&P 500 - SPX (weekly/daily


 


SPX is also topping out on both the daily and weekly charts.  I 
would not be a call buyer here!  In fact, the SPX has all the 
signs of a rollover in store for us - resistance at 1172-1174, 
butting up against the Bollinger band, and hitting the 68% 
retracement bracket from May's highs to September's lows.  

Plus, are those formations on the 60-min chart bearish wedges or 
bull flags?  We don't know.  The first and the third looked like 
bearish wedges but acted like bull flags.  The middle one did what 
it was supposed to do.  Still, the topped out stochastics spell 
possible downward action ahead, though trading for scalps could 
still be productive.

VIX at 22.37 means little now though it is at the lower side of 
"normal" and that too suggests back month OTM put-buying may pay 
off sooner or later.  But don't read much into it or make your 
trading decisions based on it. 

So what for tomorrow?  Very tough to tell by today's actions.  My 
greatest attention always gets back to risk and reward.  In short, 
upside reward is far less than downside risk at these levels since 
the oscillators are now, for the most part, overbought and ready 
to roll at consistent points of resistance.  With the exception of 
the COMPX where I would be a call buyer on a full roll of the 
daily stochastics to oversold, I am leaning toward puts at this 
point in the technical cycle.  I would buy puts on any strength 
and set my stops just on the high side of resistance in case I'm 
wrong.

All that said, the triple witching week ought to show us more 
volume than we saw today and will likely produce a day or two of 
super volatility for us intraday traders.  No telling if it's up 
or down.  Just trust your instruments

See you at the bell!


********************
INDEX TRADER SUMMARY
********************

Slow Pace

My "two-day" trip from Denver, CO to Corning, NY took an extra day 
to complete. Each time my vehicle gained momentum, another patch 
of winter weather bogged it down. Numerous cars & trucks across 
several states sat stranded in the highway spinning their wheels 
or worse, stranded in the median unable to move.

Towards the end of this 30-hour drive I felt like stepping out of 
the car, lighting it on fire and walking the rest of my way. That 
aptly describes the indexes these past two sessions where big 
gains (or losses) from before are now stalling out towards the 
end. Another "doji" day where indecision reins in the indexes.

(60-Min Chart: Dow)


 

On a macro basis we see where the Dow (and other indexes) has 
tracked higher within this somewhat defined ascending channel. It 
has trended higher via intraday consolidations that break to the 
upside and post higher lows. However, resistance continues to hold 
just above, especially at the 10,600 level the past week. Those 
who can hit entries on a intraday basis are able to capture slight 
gains before the rally attempts failed the past two sessions, but 
we see a leveling off in the old economy issues for now.


(60/30 Min Chart: SPX)


 

Both S&P indexes (OEX and SPX) have also chugged higher from 
consolidation patterns, but each have remained within a somewhat 
defined range the past week. Again, intraday traders have the 
difficult opportunity to catch moves between trough and peak but 
just as likely to buy high & stop out low on calls or the reverse 
for puts in this type of action.

Right now we see a bullish triangle forming with higher lows and 
flat-top of resistance. Most of the time price action breaks to 
the upside in this type of setup. I would look for that to happen 
after one more touch of the lower ascending trendline of this 
triangle as both stochastic values turn bullish reversals to 
signal another run up to retest recent resistance.

(60/30-Min Charts: SMH)


 

I realize most traders focus on the QQQ due to an affinity for 
technology, but SMH HOLDR depicted here is my personal favorite 
tech basket to trade. This little speed queen will really tack on 
the gains when SOX is moving without other sector baggage weighing 
it down as suffers the QQQ at times.

Currently trading within channels and covering two or three index 
points per session, the SMH looks poised to break higher and run 
away if resistance gives in the next two sessions as well.

Summation
I expect a real pivotal day to emerge here of the next two. We 
will likely see a massive rally explode or significant pullback to 
lower levels of support, which seems the more likely scenario. I 
will play intraday chart patterns & oscillators to keep on the 
right side of market action as it unfolds. We do know this: weekly 
chart stochastic values (not shown) continue rising toward or 
within overbought extreme zones across the indexes as price action 
now moves sideways, a clear sign of topping weakness. The VIX 
hovers near or below its 22 level as well. These signs put 
together are an omen to watch the downside for next significant 
move if further rally attempts stall out like the most recent two.

Tuesday we'll have a closer look at specific sector charts, which 
remain out of my reach tonight. Watch for big intraday moves and 
shorting rally attempts that fail near or fall back thru current 
resistance levels may be the next big move ahead.

Best Trading Wishes,
Austin P


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**************
Traders Corner
**************

More on the Topic of Market Breadth
By Mark Phillips
mphillips@OptionInvestor.com

It has been a couple of weeks now since I began ruminating on the
Advance-Decline volume indicators found in Qcharts.  While I
haven't come to any concrete conclusions yet, what I have seen is
enough to convince me that the indicators deserve further
attention.  I initially introduced the topic 2 weeks ago in the
article Interesting Observations and then followed it up last
week, with Observations With Greater Clarity.  Buzz Lynn did us
all a great favor in his February 28 Trader's Corner article on
Qcharts, Milking Q-Charts, Part VIII, An Owner's Manual, where he
described the process of finding many of these "hidden" little
gems through use of the Qcharts symbol list Import feature.

If you've missed any of the previous information, click on over
to any of those articles, where you'll find what came before our
discussion here today.  Several readers have written with
questions, ideas and suggestions to be applied to this particular
area of study, but by far the most prolific writer (and
industrious student) is a relatively new reader here in our
little neck of the woods.  His first question really got me
thinking, so I'll share it with you (abbreviated for space) as I
first encountered it.

"Mark, I have something to share with you.  Hope you find it
useful.  I have a page in QCharts set up with TRIN and TICK and
now ADVDECV of both indices.  5 minute timeframe.  I had used
TICK/TRIN off and on with little interest until recently, and I
was taught to use the 5 minute timeframe.  Also have TICK/TRIN
in line graph format.  But Eric's profiling of the TRIN each week
and your new ADVDECV indicator made me begin watching it.  Today,
I was watching the ADVDECV and TRIN to notice any correlation.
One thing I noticed is that the TRIN seems to lead the ADVDECV.
I don't know what this means, yet.  More watching to do, Sean"

Well, Sean's observations got me thinking and looking at the TRIN
as well.  While I don't see a consistent lead or lag of the TRIN
relative to the ADVDECV indicators, it does provide a nice
confirmation.  I think the most important part of Sean's email
was that last little sentence, "More watching to do".  This is
the behavior of a student of the markets, where we notice
something interesting and rather than jump right in to trade it,
we begin to monitor what we observed through the filter of time
and market oscillation.

I've been watching the TRIN along with the ADVDECV indicators
over the past week or so, and I'm starting to see the same sort
of behavior there that I see in the ADVDECV indicators.  While
today's action was certainly tight and hard to game for intraday
gains, looking at price action on the DJIA along with the
ADVDECV.NY and the TRIN gives us a picture that I think can be
used profitably in the future.

Let's start by looking at a 10/5-minute chart of the DJ
Industrials today.  Unless you are masochist, those charts (along
with their oscillators) looked nothing short of painful until
after the lunchtime lull, with quick whipsaw moves both
directions that produced a whole lot of nothing.  But then,
shortly before 2pm ET, the DJIA got started on its only
directional move of the day.  To be sure, it wasn't much when
compared to some of the large-range days we have seen recently. 
But in the final week of the March expiration cycle, nimble
day-traders could have made a buck or two.  Rest assured that I
wasn't one of them.  We're using this strictly as an educational
example.



 

We can see that around 1:30pm ET, the bulls appeared to be
starting another run at resistance, at least based on the
short-term charts.  Stochastics were turning up and price was
moving through intraday resistance.  A lukewarm entry signal to
be sure, but that's where our confirming signals come in.
Waiting for that confirmation will cost us a bit in terms of
entry point (so we won't capture as much of the move), but will
likely improve our win ratio, eliminating many poor trades.  So
let's go look at our first point of confirmation, the ADVDECV.NY
indicator.



 

See how the breakout of the DJIA over their intraday highs is
confirmed by the ADVDECV indicator pushing through its own
intraday highs?  That tells us that there is solid breadth
underlying the price move.  Alright, that is all old territory,
so let's now turn our attention to the new piece of the puzzle,
the TRIN.  Like my reader mentioned above, I have always found
the TRIN to be a bit puzzling on the longer-term view, but I am
finding it rather compelling as a confirming indicator on the
intraday charts.



 

To be entirely forthright, I don't know the exact construction
of the TRIN, but I like what it showed me in the chart above. 
Keep in mind that the TRIN moves in the opposite direction to
price and the ADVDECV indicators.  As price moves up and
breadth improves, the TRIN will decline.  And that's exactly
what we got today.  At the same time that the ADVDECV is pushing
through its intraday highs, the TRIN is dropping below its
intraday lows, confirming that the move is for real.  Note that
the moves in both of these breadth indicators came AFTER the
move in price that was telegraphed by the bullish moves in the
intraday oscillators.  But waiting that additional 20 minutes or
so for the confirmation keeps us from getting caught in a
head-fake move with no conviction.

The bullish move I highlighted here today is a rather small and
somewhat questionable day-trade, and one that we would have
wanted to be exiting when price once again failed to penetrate
the 10,650 resistance area.  But for day-trader's in expiration
week, it definitely would have made for a profitable move, with
higher odds of success due to our confirming indicators
ADVDECV.NY and the TRIN.

I still haven't formulated an exact plan for trading based on
these breadth indicators, but I think you can see the benefits
that they provide, giving us the ability to confirm our trades
before putting our hard-earned capital at risk.  Put these tools
to the test under live market conditions and see if you find any
merit to their application.  And by all means, if you stumble
across any valuable tid-bits of wisdom that I've missed, please
feel free to drop me a line.  I'm sure everyone would benefit
from adding it to the group discussion.

Barring any new revelations, I think I've said enough about
this topic and next week we'll venture into new and uncharted
educational territory.

Have a great week!

Mark


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***********************
INDEX TRADER GAME PLANS
***********************

Index Trader Swing-Trade Game Plan: Monday 3/11/2002 
Sideways Days


News & Notes: 
------------
Intraday traders able to duck in & out of fast action have enjoyed 
the opportunity for decent gains within the past two sessions. 
However, each open has closed roughly par and trades held over or 
bought wrong have lost ground more rapidly than gains accrued.


Featured Markets: 
----------------

[60/30-Min Chart: OEX]  
N/A

[60/30-Min Chart: SPX]  
N/A

[60/30-Min Chart: QQQ]  
N/A

Summation: 
----------
Technical challenges tonight preclude us from posting charts, but 
intraday depictions of the indexes are found in tonight's Index 
Wrap. We will point out breaking action as it occurs within Market 
Monitor the balance of this week and resume full coverage and 
charts within this section Tuesday night.


Trade Management: 
----------------  

Option traders may choose listed In-The-Money (ITM) or Out-The- Money 
(OTM) contracts by personal preference. They are selected based on volume, 
open interest and "Delta" values in that order. Our preference is usually 
OTM contracts except for the last few days of expiration when ATM or ITM 
contracts are preferred. 

Entry triggers are points where plays are tracked when price action breaks 
above for calls or below for puts. Stops are the exact opposite of that. 
Sell targets are points to exit based on index levels or %gain on option 
contract price as noted. 

*No entry targets listed mean the models are idle at that time. 


New Play Targets:
----------------


         QQQ                          DJX
Mar Calls: 38 (QQQ-CL)            Mar Calls: 106 (DJV-CB)  
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop: Break Below                 Stop: Break Below 
                                

Mar Puts: 37 (QQQ-OK)             Mar Puts: 105 (DJV-OA) 
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break above 

----------

         OEX                         SPX
Mar Calls: 600 (OEY-CT)           Mar Calls: 1175 (SPT-CO)
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop: Break Below                 Stop: Break Below 


Mar Puts: 590 (OEB-OR)            Mar Puts: 1150 (SPT-OJ)
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break Above 


Open Plays:
-----------
None


Index Trader Sector-Trade Game Plan: Monday 03/11/2002 
--------------------------------------------
Coiling For Action


News & Notes: 
------------
Another volatile session intraday that went nowhere in particular. 
Markets are setting up for the next significant run in either direction, 
most likely to begin within the next two sessions.


Featured Plays: 
--------------
None 


Summation: 
----------
No new entries listed for tonight.


Trade Management: 
----------------
Entry triggers are points where plays are tracked when price action 
breaks above for calls or below for puts. Stops are the exact opposite 
of that. Sell targets are points to exit based on index levels or %gain 
on share price as noted. 
No entry targets listed mean the model is idle at that time. 

** Asterisk means symbol has listed options as well 


New Play Targets (Short):
------------------------
XLE **
Short: 28.00
Stop:  30.00

IXC
Short: 52.75
Stop:  55.00

IJJ
Short:  97.00
Stop:  101.00


Open Long Plays:
---------------
XLE             
Long: 26.75     
Stop: 28.00     
           
BDH             
Long: 12.75     
Stop: 14.50     
                

Open Short Plays
----------------
XLB **          XLP **          
Short: 23.75    Short: 26.00    
Stop:  25.00    Stop:  28.00    

XLV **          XLY **          
Short: 29.00    Short: 29.90    
Stop:  31.00    Stop:  32.00    

IYD             IYK             
Short: 45.25    Short: 45.90    
Stop:  48.00    Stop:  48.00    

IYR             UTH **          
Short: 84.75    Short: 93.25    
Stop:  88.00    Stop:  98.00    

RTH **          PPH **          
Short: 98.00    Short: 98.75    
Stop: 102.00    Stop: 102.25    

DIA **[DJX]     IYM
Short: 105.90   Short: 42.00 
Stop:  110.00   Stop:  44.50

OIH **
Short: 66.50
Stop:  68.00

IYE
Short:  49.70
Stop:   52.00


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The Option Investor Newsletter                   Monday 03-11-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.



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*****************
STOP-LOSS UPDATES
*****************

BA - call
Adjust from $47.50 up to $48.75

BAC - call
Adjust from $64.75 up to $65.75

ETN - call
Adjust from $80.25 up to $81.25

HON - call
Adjust from $35 up to $37


*************
DROPPED CALLS
*************

None


************
DROPPED PUTS
************

None


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**********************
PLAY OF THE DAY - CALL
**********************

BA – Boeing $50.88 +1.48 (+1.48 this week)

One of the world's major aerospace firms, BA operates in three
principal segments: commercial airplanes, military aircraft and
missiles, and space and communications.  Commercial airplanes
operations involves the development, production and marketing
of commercial jet aircraft, principally to the commercial
airline industry.  The Military Aircraft and Missiles division
is involved in the research, development, production,
modification and support of military aircraft, including
transport and attack aircraft.  The Space and Communications
segment is involved in the research, development, production,
modification and support of space systems, rocket engines and
battle management systems.

Most Recent Write-Up

Buyers and sellers of BA have fought to a standstill near the
$49 level over the past several days, and that should come as
no surprise, as that is the 50% retracement level of the stock's
decline between May and September of last year.  Driving the
action on Friday were two different news developments, one good
and one bad.  The good news came out Thursday night after the
close, as it was announced that the U.S. Army had chosen a
contractor team of BA and SAIC to lead development of a 16-month
$154 million weapons development project.  Keeping the bears
hungry though, was Friday's announcement that the company will
be taking a $1.9 billion charge due to new accounting rules.
Thursday's news gave the stock an early gain, but those gains
were capped near the $49.75 level throughout the day due to the
accounting-related news.  While it looks like the stock may be
close to topping out over the near term, there is no denying that
the uptrend is still intact and there could still be some bullish
gas in the tank.  Entry points are the same as on Thursday.
Dip-buyers will want to target new entries on a renewed bounce
from the $47.50-48.00 area, while momentum traders will want to
see the stock power through the $50 resistance level before
taking a position.  Our stop remains at $47.50.

Comments

Continuing to soar higher, BA left the $50 resistance level
behind on Monday, chalking up another 3% gain, while the rest
of the broad market languished around the unchanged level for
most of the day.  The midday announcement of personnel changes
at the company had little effect, as investors continue to focus
on the fact that spending in both the Airline industry and the
Defense industry are likely to have a positive impact on BA's
bottom line.  Monday's rally had conviction too, as volume soared
above the ADV by a solid 25%.  A retest of the $49-50 level as
support would be expected over the next couple days, and we would
look at a bounce near there as an attractive entry point for the
next leg higher.  While there is some mild historical resistance
near $52.75, look for the next serious level of resistance to be
near $54, with the 62% retracement sitting at $53.96.  We are
raising our stops to $48.75 tonight.

BUY CALL APR-50*BA-DJ OI=3806 at $2.75 SL=1.25
BUY CALL APR-55 BA-DK OI= 191 at $0.70 SL=0.25
BUY CALL MAY-50 BA-EJ OI=5955 at $3.20 SL=1.50
BUY CALL MAY-55 BA-EK OI=3105 at $1.20 SL=0.50

Average Daily Volume = 3.54 mln



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