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Daily Newsletter, Tuesday, 07/16/2002

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The Option Investor Newsletter                 Tuesday 07-16-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      07-16-2002           High     Low     Volume Advance/Decline
DJIA     8473.11 -166.10  8635.66  8406.45 2.11 bln   1211/1881
NASDAQ   1375.26 -  7.40  1407.59  1364.88 2.37 bln   1699/1766
S&P 100   448.81 -  8.36   457.90   446.70   Totals   2910/3647
S&P 500   900.94 - 16.99   918.65   897.13 
RUS 2000  407.27 -  1.81   413.48   404.74 
DJ TRANS 2434.10 +   .30  2643.15  2652.64   
VIX        42.05 +  2.75    42.85    39.95   
VXN        67.94 +  0.09    69.38    66.57
Total UpVol 1,659.3M
Total DnVol 3,011.8M
52wk Highs   65
52wk Lows   407
TRIN        1.10
PUT/CALL     .76
*************************************************************  

Intel Misses Estimates But Nobody Cares!

The king of the chip sector, Dow component and Nasdaq big cap
missed estimates by two cents and announced they were cutting 
another -4,000 jobs due to lowered expectations. INTC traded 
UP in after hours. Traders stood around the office in shock as
we watched the time and sales roll across the screen. Simply 
amazing! The master spin-doctor of all time appeared to be 
CEO Craig Barrett. He spun the tale of a tough quarter and tough
times ahead into a story about reducing costs and gaining market 
share despite a weak economy. Investors bought it and the market
dodged a bullet.

Chart of the Dow


 
Chart of the Nasdaq


 
Chart of the S&P


 


The markets started the day off with economic numbers that were 
better than expected with Industrial Production soaring to +0.8%
and Capacity Utilization growing slightly to 76.1%. Excellent 
numbers on the surface but the markets had something else on 
their mind. Greenspan took center stage at 10:AM with his state
of the economy testimony. Traders were taking no chances for 
more bad news and the Dow sold off more than -200 points before
the speech started. Greenspan made numerous references to an
expanding economy despite the apparent slowness. This helped
put traders more at ease and the markets came back to positive
territory by midday. 

It was not to be however and they sold off again on worries of
more corporate accounting problems and fear of Intel earnings.
That fear obviously priced in significant bad news. When the 
bad news was announced there was no frantic sell off. Intel
countered that they did not miss and instead hit their own
lowered estimates. (spin) The -4,000 job cuts, drop in capex
spending and reduced margins were just adjustments to help the
company run smoother. Isn't that always the case? CFO Andy
Bryant was cornered on CNBC and forced to admit that he "had
no idea when/if a recovery would come in the PC sector". His
answer was "we will keep reducing costs and protecting capacity
until a recovery appears". He also admitted the estimates going
forward depended on some recovery to prior sales levels. Don't
hold your breath Andy! 

Motorola also announced after the close and posted the largest 
net loss ever. Their loss including charges for the 2Q was -$2.3
billion or -$1.02 a share. Excluding the charges which included
everything but the company dog the company made a profit of two
cents compared with an expected loss of four cents. Granted this
is a bogus number since they can't write off a couple billion 
every quarter. The company posted sales losses in almost every
division of -25% to -47% but managed to generate positive cash
flow of about $520 million. Good job if they can keep it up!
The chip unit posted a net loss of -$1.3 billion. 

PC news was flowing after the bell with Apple Computer posting
earnings inline with their lowered guidance but they warned 
again for the current quarter. The company said consumer demand 
in the current back to school quarter was weak and demand in 
Europe and Japan was especially weak. Surely this weakness 
has not ignored Intel or IBM either. Remember, Andy Grove at
Intel said their 3Q estimates were based on a possible uptick in 
sales for the back to school quarter. 

Maybe I am just too bearish but am I the only one that sees the
indicators of a bad 3Q around every corner? Even the non-tech
sectors are complaining. Caterpillar warned this morning that 
earnings for the second half would be less than expected due to
a weaker than expected economic rebound that failed to boost capital
spending. They said field agents continued to quote prices but
nobody wanted to commit any money until the economy recovered
and their own business picked up. 

Whirlpool said that its quarterly earnings rose about 20% but 
that full year estimates might be below analyst estimates for
the full year. The problem is falling housing starts and they
expect second half sales to be flat to +2%. Maytag also lowered
guidance for the 2H on Monday with lowered sales expectations.
Home product supplier Home Depot affirmed estimates this week
but also said there was pressure on sales in May/June. We picked 
their competitor Lowes as a put play tonight due to falling 
sales in the sector and rumors about decreasing sales. One
analyst in the office was in Home Depot over the weekend and
was talking to an employee about the lack of customers. The
employee said sales had fallen off -25% in the last month and
there were simply no customers. When I was in HD two weeks
ago there were clerks standing around everywhere in groups
just waiting for somebody to ask for help. While this is pure
speculation since I have no seasonal trend basis to compare
this with it just seems like retail is grinding to a halt. 
Seasonal trends like back to school computer sales at the
wholesale level confirm this and Maytag and Whirpool may
be the leading indicators for the home sector. Housing starts
for June are due out tomorrow morning.

Several pension funds have filed suite against several banks
including JP Morgan Chase to recover $318 million they lost
in WCOM bonds in the weeks before the company disclosed 
the accounting fraud. This is the first of many such actions
which will be taken by WCOM creditors hoping to find some
deep pockets. JPM fought off liquidity rumors this morning
to regain ground at midday but ended down -1.58 at the close.
While I expect they have disclaimers three feet thick when
selling corporate bonds this should point out that we are
a long way from out of the WCOM woods. There will be losses
surfacing on corporate balance sheets for months to come.

Trading tomorrow is going to be exciting. Exciting in that 
we have no clue what traders are thinking but it appears they
are ignoring bad news. You can't tell that by the -166 point
Dow drop to 8472 but you can by the only -7 point Nasdaq loss.
If everybody thought Intel would warn then why has the Nasdaq
been the strongest index for a week? You can't tell me we all
expected Intel to miss by two cents. Still the stock finished
higher in after hours. I guess you would call it a relief that
they did not paint a picture of gloom and doom like many of
the current analysts. In my mind it was a good case of spin
control but maybe retail investors have not thought this out.
Also, according to Greenspan the biggest problem facing the
markets is the accounting scandals still to come. If the ones
we have seen recently are not bad enough then what is in 
front of us? The market dropped before his speech because they
were afraid of what he was going to say. I don't know what they
feared but his "irrational exuberance" speech still ranks up in 
the top five of all time and it was given when the Dow was at 
6300. If they expected an "irrational pessimism" speech today
they were disappointed. He agreed things were bad in the market
but improving slightly in the economy. It was not the cheerleader
speech many had hoped for.

This means tomorrow the markets will be left to chew on the
Intel spin and the prospect that IBM will make a bigger splash
after the close. Fortunately for my sanity I see that the 
futures are dropping at 8:30 so maybe I am not the only one
that saw a cockroach disguised as a butterfly. It was a major 
earnings miss and lowered guidance! Deal with it! I suspect 
also that the overseas markets will see our -166 point Dow
drop and the Intel miss and not be bashful about selling off
overnight. Of course that is just one traders opinion!

Enter Very Passively, Exit Aggressively!

Jim Brown
Editor


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

NEW RHYTHM 

TRADING ACTIVITY AND OUTLOOK - 

The volatility goes up, up, up and the market comes down, down, 
down. Well, per the chart at bottom, volatility is one of the 
strong trends around. If VIX was a stock I would buy it! See the 
VIX/VXN charts below. Also, see at bottom an example of how the 
Moving Average Envelopes Study can yield some dandy back and forth 
trading opportunities in "bellwether" stocks (e.g., ORCL), 
particularly with combined with the same "length" stochastic 
study. Love these market swings - so many trading opportunities, 
so little time! 

The market today traded about as I would have expected, 
technically, with the S&P and Dow going back down to support – 
making more of a "round trip" move, whereas Nasdaq gave back a 
percentage of its last run up - retracements were between 50 and 
62%. 

With Intel reporting after the close tonight and being shy by 2 
cents in earnings (9 vs. 11), we can assume that Nasdaq may well 
resume its weakness, maybe starting again to trade more in line 
with the S&P and Dow. The initial after-hours trade saw the stock 
stay fairly steady - no big sell off - but tomorrow is a new day! 
You know when a market is fully oversold - it stops trading 
sharply DOWN on disappointing or "bad" news. 

Art Cashin (my old PaineWebber colleague) on CNBC keeps talking 
about the how every rally "fails" (reverses) at the down 
trendlines. I talk about that too - only I draw my trendlines in 
TradeStation and Q-Charts, not on the back of cocktail napkins. 
Actually, using matchbooks (folded out for a "straight edge'), a 
pen, and drawing on a cocktail napkin works reasonably well! 

S&P 100 (OEX) Index - Daily/Hourly charts: 

Hope I'm not confusing you with TOO MANY trendlines, but what else 
does a technical trader have to do! The latest minor (down) 
trendline on the OEX hourly chart, turned or "deflected" the rally 
today at 458. Notice how these channels keep getting narrower and 
point down at a greater declining angle? 

Easy to see the "breakout" points here: 458, then 466 at the prior 
swing highs. Above these points, the first upper trendline (green 
one) comes in around 470 - that's a likely resistance too. 




Support can be assumed to be at the prior 436 low - until proven 
otherwise that is! I would gauge the support zone as 435-439. 
Then, if exceeded, at the low end of the steeper channel that I 
have been working with - which intersects in the 433 to 430 areas, 
over the trading day tomorrow; i.e., as the day goes on the 
intersection is at a progressively lower level. 

When these potential support areas are tested, unsuccessfully or 
not - and when BOTH stochastic studies are showing oversold 
extremes again, there will likely be another trade on the long 
side to buy calls. 

Trading the call side is trickier in this market - sometimes you 
need to "assume" support or that a turnaround will develop at the 
lower channel lines or on dips under them. You have to buy low – 
nothing new there! But you have to buy REALLY low. 

Shorting and buying index puts is not as "challenging" so to 
speak, as the ever-declining market has been eventually pumping up 
your puts even if you miss the highs by a bit. 

S&P 500 (SPX) Index - Hourly chart: 



Resistance levels - at the stair step recent (up) swing highs – 
are 919, then 934, extending to around 337. 

Support developed today in the 900 area, but with the current 
downside momentum SPX may well retest the recent intraday low in 
the 876 area. 868 is the current intersection of the lower channel 
line and is a next downside target to 870-868. 

If holding SPX puts, only a move above 913 tomorrow morning – 
would suggest a possible upside reversal. Absent that, the short 
side is staying with the trend. 

Dow Index (1/100: $DJX.X) - Daily/Hourly charts: 



The Dow looks header right down again. Only a move above 86 would 
suggest a possible upside reversal. 82.5 becomes a downside 
target, at the prior low. The pattern of moves to ever lower lows 
has become the "norm". Sometimes DJX will surprise us with the 
same or a higher relative low, making it important to watch prior 
bottoms. 

The 82.5-82.00 area is my next lower target if 82.5 gives way. I 
thought perhaps we had put in a "V" bottom, with the recent steep 
upside reversal. 

Given the weak action of today in the Dow sector, I now think that 
the "best case" scenario is for a sideways trend, with DJX holding 
above 82.5. The more bearish case - is there any other outlook in 
this market! - DJIA will retest its Sept low which is now not that 
far under the low for this current move. 8062 in the Dow, 80.6 in 
DJX, is the post 9/11 weekly low. 

Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: 



There may be an emerging uptrend developing here - so far, there 
is only scant evidence of that, but it's a possibility that I 
highlight in the QQQ hourly chart above. This bullish possibility 
seems doubtful with the downside reversal in the Q's after the 
stock reached its "pivotal" 21-day moving average. 

A move back below 24.5 would suggest that the recent rally was too 
much to soon, as tech earnings look like they will continue to be 
disappointing ahead. Intel reported that they saw NO, repeat NADA, 
pickup in orders. In this climate it appears that 
traders/investors will not come back in a major way UNTIL they see 
the "whites of their eyes" - the chip buyers that is! 

The other factor in the limited upside potential for QQQ is that 
ALL the key "bellwether" Nasdaq stocks - INTC, CSCO, MSFT, QCOM, 
and ORCL turned down from technical resistance levels. There were 
not break out moves. MSFT, reporting after the Thursday close, may 
be the best "hope" for a bullish surprise, but that's a guess. If 
we keep heading south (lower), the Nasdaq indices will again be 
oversold by then at least. 

We have a slight disconnect in our daily and hourly stochastic 
models, with the Daily trending higher and the hourly models, 
moving lower. Well, the daily is slow to react. I gauge a close 
over 21-day moving average at 26, as being bullish - trade under 
26 as indicating no change in the bearish trend. 

GENERAL MARKET INDICATORS - VOLATILITY INDICES 

If these two were "stocks" would you rather buy it or sell it? 
Looks like pretty strong uptrends! So, if volatility is on an 
increasing or upward trend, it may be that we are not at a bottom 
yet. The prior (intraday) peak in VIX in this time frame was at 57 
post 9/11. The prior intraday peak in VXN was 92. Will one more 
"extreme" move, put us at the "capitulation" bottom? Or, are we 
near it already and maybe VIX/VXN won't reach the same extreme 
again? Stay tuned! VIX was at a new closing high tonight. 



------------------------------------------------------------------

MINI-TRADER'S CORNER - 

QUESTION - Where do you have information on how to set up Q- 
charts with your moving average envelopes? 


------------------------------------------------------------------

MOVING AVERAGE ENVELOPE SET UP AND METHOD -- 
In a Q-charts chart window with a chart displayed, right click 
will bring up "Studies" and from there select "Envelopes". Once 
the "envelopes" window is up, as long as study parameters are 
highlighted, "edit" will of course allow you choose the LENGTH of 
your moving average -- set to 21 -- and the Percent figure to 
whatever. I start with 3-4 percent and work up depending on what 
percent value will "touch" near the highs or lows most often on 
the back and forth Index price swings over the preceding 
weeks/months. 

As long as you have V4.2 of Q-charts I think it is, you can set 
one envelope percentage for the upper envelope line and a 
different value for the lower envelope line. However, even you can 
set only ONE (percentage) value there is an adjustment you can 
make. Explanation: On the Indexes sometimes the volatility on the 
upside is greater than at the last decline or vice-versa. So, even 
if only one percent value can be set for BOTH envelopes, above and 
below the "centered moving average", I simply adjust the envelope 
percent value depending on whether the index is above or below the 
moving average. 

Remember, in most applications, you don't "see" the moving average 
line when you apply the "moving average envelopes" study – 
however, you can also "insert" or apply a simple moving average at 
the same "length" you have in set in moving average envelope Study 
- then, you also see the centered line. When an index or stock is 
below the line, it might be necessary to INCREASE the percent 
value in a downtrend and DECREASE the percent value slightly in an 
uptrend in a bear trend in order to best capture the point are 
area where prices are at an "extreme" (relative to the moving 
average you're using). 

I've started experimenting with using envelope lines on individual 
"bellwether" stocks, such as ORCL within Nasdaq, that tend to 
trade in line with the indexes - result: I find some good trading 
opportunities using the Moving Average Envelope Study (centered 
moving average: 21) on hourly charts, for periodic short-term in 
and out trades, especially when combined with the longer 
stochastic study. 




Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com 


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****************
MARKET SENTIMENT
****************

You Had Me, Then You Lost Me
By Steve Price
 
   This is certainly how the markets responded to Alan Greenspan's 
testimony today.  A weak open turned into rally, albeit still in 
negative territory, but alas, it only lasted a short while before 
the bears took over.  Today was the seventh straight drop for the 
Dow Jones, which came within a few points of its September 
closing lows yesterday, only to stage a furious rally.  Today, 
however, was a different story.  The Dow dropped 166.08 points 
to 8,473.11, while the Nasdaq held firmer, but still lost 7.36 
points to 1375.26, and the S&P 500 matched the Dow's 1.9% drop 
to 900.94.
 
   Just before the open the Federal Reserve released figures, 
which showed a 0.8 percent rise in industrial production last 
month and a 0.5 percent increase in capacity utilization from 
a revised 75.6 percent in May, to 76.1 percent in June.  In 
his testimony, Greenspan blamed corporate misdeeds for 
undermining public confidence, and endorsed strong measures 
to police and punish corporate fraud.  The Fed Chairman 
attempted to pump us up by stating the fundamentals were in 
place for a return to sustained growth. Unfortunately, the only 
things that grew during the day were doubts, as the market 
awaited results from Intel. The Semiconductor Index ($SOX.X) 
was off only marginally as it maintained its holding pattern 
ahead of the earnings release.
 
  Better than expected earnings from GM, which beat estimates 
by a penny, and Johnson and Johnson, which came out 2 cents 
ahead of expectations did little to prop up the market.  After 
the close, Intel released earnings, which missed estimates by 
two cents per share, however was only punished momentarily before 
trading up 0.26 to $18.62, Their announcement that they would be 
cutting 4,000 jobs seem to temper comments that guided 
expectations downward in the next quarter due to shrinking margins.  
It still doesn't sound very positive.  With IBM set to release 
earnings tomorrow, it should be interesting to see whether similar 
bad news pushes the market south, or whether investors are as 
forgiving as they seem to be with Intel.  
 
   This willingness to forgive bad news in the tech sector is 
interesting, given the current difference in bullish percent between 
the Nasdaq 100($BPNDX), which is in full bull confirmed status, and 
the S&P 500 ($BPSPX), which is still in bear confirmed status.  The 
S&P Bullish Percent of 22 is in fact approaching similar risk to 
post September 11th levels of 16, while the OEX Bullish Percent is 
beyond the September 11th levels of 16, having reached 14.  The 
Nasdaq, however, returned from its low of 8 percent all the way 
up to 28 percent and is approaching the 30 level, beyond where it 
will no longer be considered oversold.  This combined with the fact 
hat the QQQ has just reached its bearish vertical count on the point 
and figure chart demonstrates a crucial point in the market.  Is the 
fact that investors are forgiving the bad news in the tech sector a 
sign of bullishness to come?  Or is it likely that investors 
ignoring good news from the S&P stocks and driving the market lower 
signals a change in which sector will drive the market in the future?


-----------------------------------------------------------------
 
Market Averages
 
DJIA ($INDU)
 
52-week High: 11350
52-week Low :  8062
Current     :  8473
 
Moving Averages:
(Simple)
 
 10-dma: 8922
 50-dma: 9595
200-dma: 9823
 


S&P 500 ($SPX)
 
52-week High: 1316
52-week Low :  900
Current     :  900
 
Moving Averages:
(Simple)
 
 10-dma:  940
 50-dma: 1023
200-dma: 1096
 


Nasdaq-100 ($NDX)
 
52-week High: 2071
52-week Low :  946
Current     : 1011
 
Moving Averages:
(Simple)
 
 10-dma: 1001
 50-dma: 1137
200-dma: 1388
 
 

Semiconductor Index ($SOX.X)
 
The semiconductor index has been in a holding pattern since 
the beginning of the month.  The big announcements are here, 
though, and it should be an interesting week, beginning with 
Intel missing their earnings after today's close.
 
52-week High: dna
52-week Low : dna
Current     : 386.41
 
Moving Averages:
(Simple)
 
 10-dma: 372
 50-dma: 443
200-dma: 509
 
 
 
-----------------------------------------------------------------
 
Market Volatility
 
The VIX has closed over 40 for the first time since last 
September.  Today it closed at 42.05, after reaching a high 
of 42.85.  Don't expect to see the VIX drop very far until 
some of the uncertainty of this week's earnings is behind 
us.  The markets continue to flirt with big down moves, 
and after Monday's 400+ point swing, volatility should remain 
elevated until we find a new range in the broader markets.
 
 
CBOE Market Volatility Index (VIX) - 42.05 +2.75
Nasdaq-100 Volatility Index  (VXN) - 67.06 -0.79
 
-----------------------------------------------------------------
 
          Put/Call Ratio  Call Volume   Put Volume
Total          0.76        835,931       636,130
Equity Only    0.67        621,786       418,884
OEX            0.54         69,790        37,799
QQQ            0.53        105,139        55,847
 
-----------------------------------------------------------------
 
Bullish Percent Data
 
           Current   Change   Status
NYSE          37      - 4     Bull Correction
NASDAQ-100    29      + 8     Bull Confirmed
DOW           10      - 13    Bear Confirmed
S&P 500       22      - 4     Bear Confirmed
S&P 100       14      - 9     Bear Confirmed
 
Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.
 
Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend
 
-----------------------------------------------------------------
 
 5-Day Arms Index  1.12
10-Day Arms Index  1.29
21-Day Arms Index  1.39
55-Day Arms Index  1.37
 
Extreme readings above 1.5 are bullish, and readings below .85 
are bearish.  These signals don't occur often and tend be early, 
but when the do, they can signal significant market turning 
points.
 
-----------------------------------------------------------------
 
Market Internals
 
        Advancers     Decliners
NYSE       1259          1881
NASDAQ     1667          1695
 
        New Highs      New Lows
NYSE        31            216
NASDAQ      71            178
 
        Volume (in millions)
NYSE     2,133
NASDAQ   1,978
 
-----------------------------------------------------------------
 
Commitments Of Traders Report: 06/25/02
 
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.
 
Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  
 
S&P 500
 
Commercials gave back only 700 of their net long contracts, a 
small percentage change, maintaining a bearish position.  
Small Traders added back a couple of thousand contracts to 
their long position.
 
Commercials   Long      Short      Net     % Of OI 
06/18/02      437,530   487,956   (50,426)   (5.4%)
06/25/02      378,214   438,775   (60,561)   (7.4%)
07/09/02      396,321   456,164   (59,843)   (7.0%)
 
Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year: ( 36,481) - 10/16/01
 
Small Traders Long      Short      Net     % of OI
06/18/02      181,178    88,517    92,661     34.3%
06/25/02      134,380    62,792    71,588     36.3%
07/09/02      145,017    71,402    73,615     34.0%
 
Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 114,510 - 3/26/02
 
NASDAQ-100
 
 
Commercials added only slightly to their short position, 
maintaining the status quo. Small Traders reduced their 
long position by over 40%.
 
Commercials   Long      Short      Net     % of OI 
06/18/02       54,816     49,169     5,647    5.4%
06/25/02       27,238     35,926    (8,688) (13.8%)
07/09/02       31,227     39,592    (8,725) (12.3%)
 
Most bearish reading of the year: (15,521) -  3/13/02
Most bullish reading of the year:   9,068  - 06/11/02
 
Small Traders  Long     Short      Net     % of OI
06/18/02       20,883    29,153    (8,270)   (16.5%)
06/25/02       14,749     7,570     7,179     32.2%
07/09/02       12,520     8,348     4,175     20.0%
 
Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:   8,460  -  3/13/02
 
DOW JONES INDUSTRIAL
 
Dow Commercials brought their long positions back up to 
their previous levels, adding almost 2,000 contracts. 
Small Traders maintained their previous bullish levels. 
 
Commercials   Long      Short      Net     % of OI
06/18/02       25,995    19,115    6,880     15.1%
06/25/02       18,016    13,255    4,761     15.2%
07/09/02       20,761    14,122    6,639     19.0%
 
Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01
 
Small Traders  Long      Short     Net     % of OI
06/18/02        5,379    11,813    (6,434)   (37.2%)
06/25/02        6,414     6,597       183     1.40% 
07/09/02        6,831     6,623       208     1.50%
 
Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   1,909  -  1/16/01
 
-----------------------------------------------------------------


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

THE SECTOR BEAT - 7/16 

The Airlines ($XAL.X) may be putting in a double bottom low – 
heaven help us when the only sector we can find to play is 
Airlines! Biotech ($BTK.X) was higher on the day, but did stop 
after moving up into resistance - stay tuned. The Biotech HOLDR's 
seemed to lag the index. Fiber Optics ($FOP.X) may have finished 
its "dead cat" bounce. Disk Drive makershave been improving until 
today when DDX reversed at 70 resistance. 

UP THE MOST on Tuesday - 



DOWN THE MOST on Tuesday - 



Home builders continue to correct off their "over-inflated" (my 
opinion) highs - looks like a rounding top on the chart 
($DJUSHB.X) - with Defense, Gold, Oils, Health Providers and Small 
Caps no longer going up, is there no place to "hide" - to bury 
some paper with pictures of dead presidents on them!? 

Networking sector stocks ($NWX.X) also may have completed its 
bounce as it hits resistance at its upper channel line. Drug 
stocks ($DRG.X), unimpressed with the latest merger news with 
Pfizer and Pharmacia, is at least at the low end of its steep 
downtrend channel and could have a dead cat bounce any day now – 
maybe the shorts will all decide to take their profits at once! 

Retail stocks ($RLX.X) turned down again today - maybe consumer 
confidence will wane enough to cause consumers to leave their 
plastic at home. The best recent sector rebound was in the 
Semiconductor sector index ($SOX.X), but as the chart below 
suggests - its tough going from here! 

SECTOR TRADE RECOMMENDATIONS & REVIEW - 

NEW TRADE RECOMMENDATION(S) - 

NONE 

OPEN TRADE REC(S) - 

NONE 


------------------------------------------------------------------

OPEN POSITIONS - 

Long HHH at 21.50 
(Internet HOLDR's)
RIASE STOP to 21.2, from 20.00 

Long SMH at 28.30 
(Semiconductor HOLDR's) 
RAISE STOP to: 28.7, from 27.00 


------------------------------------------------------------------

TRADE LIQUIDATIONS - 

NONE 


------------------------------------------------------------------

SECTOR HIGHLIGHT(S) - 

Semiconductor Sector Index ($SOX.X)
STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; 
MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX 



We're still in need of a close above 405 to suggest a bullish 
break out more of a substantial rebound in the SOX. We appear to 
have significant resistance in the 405 and a bit above - today's 
high was 407.6 - and support in the area of prior lows in the 344 
area - if the SOX continues to stay above this level, there is a 
double bottom in place, relative to the September low. 

Recent action is a minor 405 double top and a minor double bottom 
hourly low around 344. What likelihood of a breakout either way? 
Hard to tell - my best guess is that the SOX may trade sideways 
for a time, building a support "base", from which it could then 
launch a move higher. Stay tuned! - one thing we know for SURE is 
that this Index really moves when it gets going in a trend. 
UPDATE: 7/16 

Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                  Tuesday 07-16-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


****************
PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

INTU $46.59 +0.32 (-1.17) It’s been a volatile week for INTU
so far.  That volatility produced a breakdown below trend
during yesterday’s wild session, which has us concerned for
further weakness.  Look to exit open positions into any
strength during tomorrow’s session.


PUTS:
*****

LM $43.10 +0.54 (-0.15) It’s time to book our profits in
LM after the stock has shown some signs of bottoming in the
last two sessions.  Look for another rollover from the $43
level as a chance to take gains into weakness below current
levels.  Or look to set a tight stop above the $43.50
level to protect against a short squeeze.

---

RE $50.26 –0.64 (-1.10) RE has treated us very well since we
started the play.  The stock has shed another –1.10 so far
this week, which is enough to take to the bank.  Look for
further weakness in tomorrow’s session to exit into.  A
tight stop above the 10-dma should protect against the
upside in the stock.


***********************************************************
DAILY RESULTS
***********************************************************

Please view this in COURIER 10 font for alignment
*************************************************

CALLS              Mon    Tue    

INTU     46.59   -1.49   0.32  Dropped, technical damage done Mon.
NVDA     21.35    1.98  -0.54  Solidly above the $20 resistance
EMC       9.00    0.55  -0.10  Trending higher, new relative high
OMC      52.23   -1.01   0.80  Positive finish in a negative day
EMC       9.00    0.55  -0.10   Close play on Wed - Earnings Thurs
OMC      52.23   -1.01   0.80   Strong despite market weakness

PUTS               

XL       76.88   -0.65  -1.22  New relative low in standing trend
AMGN     32.87   -2.20   1.80  Bounced on merger news, entry point
LM       43.10   -0.69   0.54  Dropped, showing signs of basing
MRK      44.01    0.15  -1.69  Rolled over from the 10-dma again
RE       50.26   -0.46  -0.64  Dropped, taking gains off the table
PHCC     20.25   -0.36   1.10  Entry point after short covering
BJ       33.80   -0.53  -2.17  Broke down below long-term support
SBC      29.57   -0.13   0.06  Trending lower, entry near 10-dma
VZ       35.00   -0.15  -0.15  Boost from NXTL news, entry point?
INVN     27.07    2.72  -0.80  New, ready to rollover from 200-dma
CI       86.33   -0.95  -1.97  New, health care coming under fire
LOW      37.60    0.82  -3.40  Weak chart, weak retail sector


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********************
PLAY UPDATES - CALLS
********************

NVDA $21.35 –0.54 (+1.45) NVDA rocketed off of its curling
10-dma in yesterday’s session following the broad rebound in the
technology sector of the market led by the semiconductor group.
The stock finally broke decidedly above the $20 level and
continued higher into today’s session.  NVDA’s intraday high was
traced at the $23.35 level, which made it a solid move in the
last two days, one that could have possibly produced a good
short term trade for swing traders.  The stock did pullback
along with the broader market, but it’s now in a bullish
technical position in which dips can be bought.  Look for a
pullback down to and rebound from the $20 level which should
now serve as support on the way back down.  Look for clues to
the sentiment in the chip sector following INTC’s earnings
report tomorrow in the way that the SOX opens.  A contained
pullback should lead to a solid entry into new NVDA plays.

---

EMC $9.00 –0.10 (+0.45) EMC has continued its upward climb of the 
last week.  It touched $9.41 today, and may experience a bump 
tomorrow.  The market has refused to sell off (after hours) after 
Intel's earning's release, which missed estimates by 0.02, and 
announced plans to cut 4,000 jobs.  Goldman Sachs commented that 
it believes EMC should be able to beat estimates in the June and 
September quarters, and that it is still emerging as a leader in 
a more positive IT spending environment.  They also made positive 
comments about storage market pricing in June.  EMC has had a 
nice run from $6 up to $9 for a 50% increase in price.  Not all 
traders follow the 100-dma but we noticed shares have stopped 
dead right at this level of technical resistance.  Then again it 
happens to coincide pretty closely with the $9.00 level.  We will 
be closing this play tomorrow ahead of Thursday's earnings.  An 
intra-day rise in price would be a good opportunity to close out 
the position, however it should be closed by the end of the day 
tomorrow.  

---

OMC $52.23 +0.80 (-0.21) Omnicom has continued to hold its 
impressive gains from last week, in spite of two straight down 
days in the market.  While it dipped below $49 yesterday as the 
market sagged to its intraday lows, OMC recovered nicely and 
continued its upward move today in spite of the sell off.  OMC 
traded as high as $54.25, which exceeded last week's highs, 
before being brought back down as the Dow dropped today.  The 
stock remains in an upward trend, as it recovers from its 
oversold conditions due to accounting problems, which were 
addressed at the beginning of last week. OI adjusted our original 
stop up to $49.45, and this will remain in place (please remember 
that OI uses stops on the equity on a closing basis - not an 
intraday basis).  If the broader market overcomes news by Intel, 
as it appears to be doing, and heads upward, OMC should continue 
to seek out new recent highs.  Remember that short-term traders 
may want to seek exit points near the $55 level while OI will 
continue to aim for the $58 area.  We did note that the move over 
$54 today helped create a new higher column of X's on the PnF 
chart.  That's always a good sign for bulls.


**************
NEW CALL PLAYS
**************

None


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*******************
PLAY UPDATES - PUTS
*******************

XL $76.88 –1.22 (-1.87) XL fell lower in today’s session on
renewed selling in the broader market.  The stock actually
traced a new relative low in its long standing descending
trend.  That new low was hit at the $75.30 level in today’s
session on a large increase in declining trading volume.
The stock could have one or two more downside days this
week if it continues along its recent short term trend of
falling then rebounding on short covering.  Look for further
weakness below current levels in the coming sessions,
possibly down to the $73 or $74 levels for a potential exit
point to lock in some of the gains that we’ve captured in
this stock.  New entries should only be taken on a rollover
from resistance, which in the case of XL, comes into play
up near the 10-dma, which closed today at the $79.62 level.
The 10-dma should move lower in the next two sessions to
account for the most recent drop in price.  We’re lowering
the stop to $79.50, which will be above the 10-dma most
likely by tomorrow.

---

MRK $44.01 –1.89 (-1.54) MRK’s trip up through its 10-dma
during yesterday’s recovery in the broader market proved to
be a short lived move on what was most likely short covering
in the drug sector as others in the group moved higher as
well.  But MRK was unable to hold onto its gains for the
day and gave back more during today’s session when it
followed the Dow measurably lower.  From here we’re looking
for a retest of the recent lows down around the $42 level
which could come in the next session or two if the selling
continues in the drug space.  Look for a breakdown below
today’s intraday low at the $43.75 level for a possible
entry point into further weakness.  Additionally, future
rollovers from the 10-dma should produce solid entry points
into new put plays.  The 10-dma finished the day’s session
at the $46 level.

---

PHCC $20.25 +1.10 (+0.75) PHCC continued slightly higher
in today’s session.  But the one thing that was missing from
the upward movement was volume.  The stock traded only 532
K shares during today’s session, which is far below the one
million plus share days that we have witnessed in the last
few sessions.  The light volume and higher price suggest
that today’s strength was most likely a result of short
covering.  The strength in other health care areas such as
the biotech sector most likely helped the short covering
along in PHCC, but that most likely set up another good
entry into put plays as the stock is now near short term
resistance.  Look for a rollover from current levels in
tomorrow’s session, with confirmation coming on a break
back below the $20 level.

---

BJ $33.80 –2.17 (-2.70) BJ fell further in today’s session
on renewed selling in the broader retail space.  The stock
appears to have entered a full fledged breakdown below all
short term support and it appears that BJ has entered into
a new short term declining trend.  The stock doesn’t have
any longer term support to speak of immediately below
current levels until the $30 mark where it bounced from
during last fall’s sell off.  The stock could quickly make
its way down to that level with the 200-week moving average
now solidly broken to the downside.  Look for momentum
entries on a break below the $33 level on the way to the
$30 longer term support.  We have lowered the stop to just
above resistance at the $36.05 level.  Rollovers from $35
would also offer good entries into new put plays.

---

AMGN $32.87 +1.80 (-1.43) Anyone who doubts we are currently
experiencing jittery, volatile markets only needs to look at
the trading in AMGN over the past 2 days.  Yesterday's late-day
slide on the news that the company had completed its acquisition
of IMNX was promptly reversed this morning.  In a pre-market
note, Merrill stated that AMGN might have a marketing opportunity
to promote its Arenesp treatment against JNJ's Eprex due to a
change in Eprex's mode of delivery.  That gave the bulls a shot
of adrenaline that helped them to propel AMGN up near the $34.50
level before the sellers re-emerged in the afternoon, knocking
the stock back under $33 at the close.  Sure enough, rallies are
nothing more than entry points to the downside.  What is
particularly impressive about AMGN's slide is the fact that it
happened in the face of the Biotechnology index (BTK.X) continuing
to rally from the level of last week's lows.  Use failed rallies
near the $34.50-35.00 resistance level to initiate new positions,
keeping in mind that a close above $34.50 will stop us out of the
play.  Earnings are scheduled for release next Wednesday, so
there is a one-week fuse on the play.

---

SBC $29.57 +0.06 (-0.07) There's one thing that can be said about
our SBC play.  It has gone nowhere fast!  The past 2 days have
seen the stock gap lower and then recover in the afternoon, but
the daily range has been really tight.  Rallies are being capped
just above the $30 level, while buyers are supporting the stock
whenever it dips much below the $28.75 level.  The closest thing
we've seen to an entry point into the play was today's rollover
from the $30 level in the final 90 minutes of the day.  Keep in
mind that this isn't so much a technical trade as it is a play on
the expectation that the company could be a winner in the bid for
either Worldcom or Qwest.  Either acquisition would come riddled
with debt and a host of financial problems to deal with and that
news would likely send SBC sharply lower.  Continue to use failed
rallies near the $30 level to initiate new positions or else wait
for a decline under the $28 level before playing.  Our stop
remains at $31.25.


*************
NEW PUT PLAYS
*************

CI - CIGNA Corporation $86.33 -1.97 (-2.92 this week)

CIGNA is an employee benefits organization in the United States.
The company and its subsidiaries are major providers of employee
benefits offered through the workplace, including healthcare
products and services, group life, accident and disability
insurance, retirement products and services and investment
management.  

My, how the mighty have fallen.  It wasn't that long ago that
the OIN Call list was well-populated by Health Care related
stocks, but the past month has been rough on this recently
high-flying sector.  Since the middle of June, the Health Care
Payor index (HMO.X) has retraced fully 62% of its parabolic rise
from the March lows.  A quick look at the daily Stochastics shows
just how weak this area of the market is, as it hasn't been able
to get into overbought since the second week of June.  Shares of
CI have been faring even worse, as they have more than retraced
the entire March-June rally and closed Tuesday's session having
retraced 62% of the rally off of the September lows.  Will the
stock completely retrace that rally like so many other stocks
have?  Its hard to say, but the action this week certainly points
in that direction.  The $88 level had been holding as support
ever since last December, but that level is now just another
failed support level, which is likely to act as resistance in the
future.  Buyers attempted to prop the stock up on Tuesday after
Monday's late-afternoon ramp, but to no avail.  Sellers once
again prevailed, adding yet another data point that tells us
rallies in this stock are simply attractive entry opportunities
for puts.  We are hoping to get another oversold bounce to allow
us to enter the trade before the bottom falls out again.  Look
for a failed rally near the $88 level or a more robust rally to
the $90-91 area.  We're setting a rather wide stop at $91.50 to
prevent being shaken out in what promises to be a wild expiration
week.  Momentum traders will want to see the $85 level fail as
support before playing.  Our initial profit target will be the
$82 level, although it is entirely possible to see a decline down
to the $75-77 area if the HMO sector continues to languish.
Earnings are slated for release on August 2nd, so we have a good
2 weeks top play the downside ahead of the announcement.

BUY PUT AUG-90 CI-TR OI=112 at $6.30 SL=4.25
BUY PUT AUG-85*CI-TQ OI=207 at $3.50 SL=1.75

Average Daily Volume = 803K


---

INVN – InVision Technologies $27.07 -0.08 (+2.69 this week)

InVision Technologies is a provider of FAA-certified explosives
detection systems (EDSs) used at airports for screening checked
passenger baggage.  The company's EDS products are based on
advanced computed tomography (CT), which is the only technology
for explosives detection that has met the FAA certification
standards.  INVN was the first manufacturer and is one of only
two whose EDS products have been certified by the FAA for
screening baggage.  Through the end of 2001, the company had
shipped 18 EDS units for installation at United States airports
and 103 units for installation in airports outside of the United
States.

Remember the peace dividend when the Soviet Union crumbled?
Well, the expected surge in defense and security system spending
in the wake of the terrorist attacks last September could
likewise be called the terrorism dividend.  Certainly it was a
disastrous development for all those touched by its impact, but
it provided the springboard for many stocks to go ballistic.
With its lock on the airport security explosives detection
equipment market, INVN launched from relative obscurity pre-9/11
to the $50 level by the middle of March.  Well, based on the
recent price action, it appears that investors aren't nearly as
enamored of the stock as they once were.  After selling off hard
in the spring, INVN finally found support near the $18 level 2
months ago and has been gradually clawing its way back.  In fact,
the stock broke out above the $25 resistance level yesterday on
news that the company had upped its earnings guidance.  Adding to
the bullish tone, INVN is being added to the Russell indices.  So
why is it on the Put list, you ask?  Simply put (pun intended), it
looks like all the bullish news has been factored into the stock
and we're looking for it to run out of steam.  The increased
guidance depends on funding actually coming through, and there is
a general worry about funding in the Defense sector that the money
that has been promised may not be as easy to get or as quick to
arrive as originally anticipated.  Note that the stock rallied
this morning, but gave it all back after impacting the top of the
late-April gap and the 200-dma near $27.40.  We're looking for the
stock to roll over near current levels and retest major support
near the $23 level ahead of its earnings report on July 23rd
(next Tuesday).  Initial stop is set at $30.  Any failed intraday
rally between the current price and our stop would make for an
attractive entry, although we would be content with a rollover
from current levels as well.  

BUY PUT AUG-30 FQQ-TF OI=129 at $4.90 SL=3.00
BUY PUT AUG-25*FQQ-TE OI=275 at $1.90 SL=1.00

Average Daily Volume = 1.69 mln


---

LOW – Lowe's Companies, Inc. $37.60 (-$3.40)

With 2001 sales of $22.1 billion, Lowe's Companies, Inc. (NYSE: 
LOW - News) is the world's second largest home improvement 
retailer. Headquartered in Wilkesboro, N.C., Lowe's is a Fortune 
100 company and the 14th largest retailer in the United States. 
Lowe's has 110,000 and more than 800 stores in 43 states. 
(Source: company release)

The retail sector has taken quite a beating lately, and Lowe's is 
no exception.  In spite of some positive comments about taking 
away market share from Home Depot, it's been bad news all around 
for Lowe's and the other retailers.  The Redbook Retail Sales 
Average, which represents same-store sales at discount, 
department and chain stores, declined 0.6 percent last week, and 
the UBS Warburg/BTM Weekly Index, also based on chain store 
sales, lost 0.3 percent.  Much like the Retail Index ($RLX), 
Lowe's has fallen through support, in spite of attempts to pick 
itself up along with the rest of the market during yesterday's 
afternoon rally. Lowe's opened down and did not experience much 
of a rebound with the rest of the market during Alan Greenspan's 
testimony today, as it opened down and continued onward 
throughout the day.  Lowe's had been in a slowly descending 
channel since the end of May, but fell completely out of that 
channel the last few days.  Lowe's has broken through prior 
resistance in the $38-$39 range from the middle of last year, 
which often serves as support on the way down.  After flirting 
with its 21 and 50 day moving averages since the middle of 
January, it is now below its 200, 50 and 21 day moving averages.  
Volume has increased on the way down, which is bearish, as 
today's volume was almost three times the 90-day average. The 
recent decline in the U.S. Home Construction Index ($DJUSHB) also 
does not bode well for Lowe's, which thrives on home improvement. 
As Wal-Mart, Home Depot and Sears also continue their heavy 
declines, Lowe's looks to have little support before the $32 
area.  OI feels $37.25 would trigger an entry point.  Any attempt 
Lowe's has made to fill its gap down last week from $43.15 to 
$40.25 has met resistance. Set stops at $40.60, just above 
today's high.

BUY PUT AUG-40*LOW-TH OI= 1528 at $4.20 SL=2.20
BUY PUT OCT-40 LOW-VH OI= 2785 at $5.20 SL=3.00

Average Daily Volume = 4.44 mln



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**********

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The Option Investor Newsletter                  Tuesday 07-16-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.



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

NVDA – NVIDIA $21.35 –0.54 (+1.45 this week)

NVIDIA Corporation designs, develops and markets graphics and
media communication processors and related software for
personal computers (PCs), workstations and digital
entertainment platforms. The Company provides an
architecturally compatible top-to-bottom family of
performance 3-D graphics processors and graphics processing
units (GPUs) that set the standard for performance, quality
and features for a broad range of desktop PCs. They range
from professional workstations to low-cost PCs and mobile
PCs, and from performance laptops to thin-and-light
notebooks. NVIDIA's 3-D graphics processors are used for a
wide variety of applications, including games, digital
image editing, business productivity, the Internet and
industrial design.

Most Recent Update

NVDA rocketed off of its curling 10-dma in yesterday’s session
following the broad rebound in the technology sector of the
market led by the semiconductor group.  The stock finally
broke decidedly above the $20 level and continued higher into
today’s session.  NVDA’s intraday high was traced at the
$23.35 level, which made it a solid move in the last two
days, one that could have possibly produced a good short term
trade for swing traders.  The stock did pullback along with
the broader market, but it’s now in a bullish technical
position in which dips can be bought.  Look for a pullback
down to and rebound from the $20 level which should now serve
as support on the way back down.  Look for clues to the
sentiment in the chip sector following INTC’s earnings
report tomorrow in the way that the SOX opens.  A contained
pullback should lead to a solid entry into new NVDA plays.

Comments

Judging by the after hours response to the INTC earnings
report, the chip sector may be ready to run higher.  The
group has led the tech sector so far.  NVDA is one of the
leaders in the chip sector and is showing strong technical
improvements coming off of its recent lows.  Look for a
pullback to the $20 level if the chip sector is under
pressure early tomorrow morning.  The stock should rebound
higher from that former resistance level and trace a new
high in its recent trend.

BUY CALL AUG-17 UVA-HW OI=2268 at $5.00 SL=3.50
BUY CALL AUG-20 UVA-HD OI=1678 at $2.05 SL=1.75
BUY CALL AUG-22 UVA-HE OI=2456 at $1.25 SL=0.75

Average Daily Volume = 11.2 mln



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**************
TRADERS CORNER
**************

MOCO - Phase I Complete
by Mark Phillips
mphillips@OptionInvestor.com

This crazy market is getting into a nasty habit of making me
change course as to my writing goals on a daily basis.  First
off, let me apologize for my absence in the Trader's Corner slot
last night.  Shortly after the closing bell, fate frowned on me
and crashed my computer.  After several hours of major surgery on
my workstation, I was open for business again, but too late to
finish the article in time for publication.  

It is truly frustrating when that happens, especially when I
think I've hit on a topic that is so timely.  So we juggled
priorities and decided to post the finished article tonight.  Ah,
but fate intervened again!  With the VIX spending so much time
over 40 and today finally closing over 42, I've had a flood of
emails asking loads of great questions about the fine points of
my MOCO strategy.  So yesterday's article is postponed yet again,
so that I can answer the more pressing questions.  Tomorrow
night, we'll finally run yesterday's intended article, which
deals with the topic of secular vs. cyclical markets.  I think
you'll find it worth the wait.

And now let's transition to the topic that seems to be on
everyone's mind, my much-ballyhooed MOCO trade.  The bulk of the
questions seem to center on the issue of what is deemed an
acceptable entry, at least into the first stage of the strategy.
Let's get it right from the horse's (reader's) mouth, ok?

"Mark,

I have been following your MOCO strategy, and before you initiated
your advance decline recommendation I would have said yesterday
when the Dow reversed on a VIX of about 43, was a perfect time to
initiate the 1st 10% play.  But the adv decline line did not
confirm in any way I could tell, so I did not initiate the play.
I fear that was a mistake and that we have seen the lows for the
DOW, but maybe not.  Have you opened a MOCO play yet?  If not can
you please tell me what you are looking for, and how us mere
mortals can detect a decent entry for a MOCO play?

Signed,
Confused"

Mere mortals, huh?  Careful, I'm liable to get an inflated ego!
(BIG GRIN) I'll cut right to the chase and tell you that we're
there.  Yesterday's rebound off the lows had all the earmarks I
was looking for in order to trigger my allocation of that first
10%.  At its worst, the DOW was down more than 400 points and
the rebound came right at the closing low from September.  Prior
to the bounce, the ADVDECV.NY indicator was showing more than 90%
of all the volume so far was on the sell side.  While we got a
nice reversal into the close, nearly moving the DOW back into
positive territory, we still ended the day with down volume
swamping up volume by nearly 800 million shares.  Still a very
negative day.  But at the point where I would have considered the
optimum entry, the VIX was recovering from an extreme near 44, a
strong buy program had kicked in and the ADVDECV.NY indicator was
seeing its first meaningful reversal of the day.  The chart below
should demonstrate what the picture looked like shortly before
3pm ET.

5-Minute Chart of the DOW vs. ADVDECV.NY for July 15th




 

But that's where the easy part ends.  Now we get into the mode
where we are looking to fill out the remainder of the trade.
"But wait a minute", say the advanced students.  In order to
satisfy the next entry target, the VIX needs to be higher (above
45).  Won't that mean price is lower?  Bingo!  I really like the
way another reader phrased the question, so let's take a look at
what he sent me earlier today.

"I really like the organized approach you have taken to the MOCO
trades coming up. I have a few questions though. If entering
phase 1, your last note said that not only must VIX be above 40,
but the market must turn up. This sounds contradictory to getting
into phases 2-5. If the market turns up, the probability could be
hi of never seeing the other phases entered, but if it keeps
going down, you'll never enter phase 1 - unless you actually
enter it at VIX level 45. Did I miss something here? Are you now
in phase 1?

Paul"

Paul has captured the essence of what MOCO is all about.  Let's
walk through the MOCO strategy step by step here and see if we
can't shed some light on the questions raised above.

Ideally, we would like to get a VIX reading of 58 or above with
the DOW at major support and then a light would go on telling us
that was the time to buy.  We could apply all of our capital
available for MOCO to buying distant month OTM calls and hang
on for the snap-back rally.  Unfortunately, the market isn't
nearly that cooperative.  The current decline will end in fits
and starts in an attempt to leave as many eager bulls on the
sidelines as possible as the next bear market rally gets
underway.

We don't know whether the VIX will top out at 42, 47, 51 or if
we'll get the whole enchilada, with the VIX running as high
(near 58) as it did in September.  If it does go that high, our
rubber band is going to be stretched fearfully tight and the
rally back from that level will likely be fierce and volatile.
At the same time, only the boldest of souls (or those with a
solid action plan in place in advance) will be able to pull the
trigger to go long.

But the market could begin the next rally at a VIX of 47.  If it
did that, we don't want to be left waiting on the sidelines,
waiting for a VIX of 50 before committing capital to the trade.
By the same token, we don't want to allocate all of our capital
the first time the VIX tops 40.  That would make for a long,
painful slide if the VIX then went over 55 before the final
reversal.

So here's how it works.  The VIX goes over 40 and we get a
decent rebound as shown above.  That's where we allocate the
first 10%.  Then we sit and wait until the next trigger
(VIX > 45) is triggered.  This will almost certainly occur at
a lower price level than where we allocated the first 10%.  But
when we get that VIX above 45, we allocate another 15%.  At that
point we have 25% of our MOCO capital invested in the trade.  On
one hand, we'd like to see the markets rally from that point,
but on the other hand we would like to be able to put more of
our cash to work.  

The difficult part of this trade is having the confidence that
if the VIX goes to 55 or higher, the market will snap back
strongly.  The greatest bang for our buck comes from the higher
levels of the VIX and that is precisely why the majority of our
capital (55%) is invested after the VIX moves above the 55 level.
But if you are going to pursue this strategy, you must be
prepared for the reality that money invested at VIX=40, VIX=45
and VIX=50 will be showing a loss at VIX=55.  This strategy must
be implemented with 100% risk capital, because stop losses are
not an option.

So let's recap where I'm at right now.  Phase 1 is complete and
I am patiently (well, sort of...) waiting for a VIX over 45 so
that I can implement Phase 2.  If the VIX stops rising at 47 and
the markets head off in rally mode, then I'll ride the recovery
with only 25% of my available capital committed to the trade.  In
that scenario, Phases 3-5 will never come to pass and I'll have
to settle for what I get.  If Phases 3-5 do come to fruition,
I'll be able to allocate all of the cash I have set aside for
the trade, but will have to grit my teeth as the market grinds
lower before finding that elusive bottom.

I know I didn't give a clean closed-form answer to each of the
answers raised by the many emails I received today, but hopefully
I managed to fill in enough of the blanks that the entire process
now makes sense.  If not, feel free to drop me a line and I'll do
what I can to elucidate.

As a final note, if any of this commentary seems completely
foreign to you, then that means you missed the earlier articles
on the topic.  For your convenience, here are the links to those
articles.  Happy reading!

http://www.OptionInvestor.com/traderscorner/062402_1.asp
http://members.OptionInvestor.com/options101/062602_1.asp
http://members.OptionInvestor.com/options101/071002_1.asp


Have a great week!

Mark


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