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Daily Newsletter, Thursday, 07/25/2002

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The Option Investor Newsletter                Thursday 07-25-2002
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)
************************************************************ 
      07-25-2002           High     Low     Volume Advance/Decline
DJIA     8186.31 -  5.00  8309.39  7945.95 2.82 bln   1819/1368
NASDAQ   1240.08 - 50.20  1289.72  1220.93 2.32 bln   1550/1910
S&P 100   417.30 -  2.68   425.62   405.99   Totals   3369/3278
S&P 500   838.68 -  4.75   853.83   816.11 
RUS 2000  378.11 -  0.45   385.22   371.27 
DJ TRANS 2236.58 + 52.70  2250.16  2730.32   
VIX        44.65 -  0.64    47.88    43.11   
VXN        69.48 +  3.89    69.92    65.53 
Total Vol   5,501.0M
Total UpVol 1,499.4M
Total DnVol 3,735.9M
52wk Highs   31
52wk Lows   557
TRIN        1.63
PUT/CALL     .76
*************************************************************  

Volatility Reigns!

The Dow and Nasdaq headed in different directions early but despite
the Nasdaq anchor the Dow managed to post a very strong day. The Dow
opened with a -126 point drop followed by a wild ride of +210, -131,
+157, -364, +287 point swings. Those point swings look more like a
week of trading instead of a single day. The Nasdaq headed south at
the open and never looked back until some short covering at the 
close. At one point the NDX futures were limit down with a -5% loss
after Taiwan Semiconductor lowered estimates for the third quarter.

Chart of the Dow


 
Chart of the Nasdaq


 


The markets started off weak after Durable Goods Orders dropped 
an unexpected -3.8% when the consensus was for a gain of +0.4%. 
This wipes out all the gains made to date in 2002. Suddenly there 
was real evidence of a cutback in spending and a possibility of 
weaker times ahead. Computers and related equipment fell -7.1% 
and communications equipment fell a whopping -12.9%. Nondefense 
capital goods dropped -8.5%. If all this was not bad enough the
positive +0.9% gain for May was revised down to +0.6%. The problem 
is being worsened by the stock market crash and the shutdown of
the credit markets. This is limiting the amount of money available
for companies to upgrade additional equipment and ramp up for new
products. This is a lagging indicator because these numbers are 
for June and we are already deep into July and conditions are
worsening. 

The markets also reacted to an unexpected drop in existing home 
sales. The -11.7% drop pushed home sales to an eight month low 
and wiped out the +6.7% gains made last April. The much talked
about housing bubble may be far from over for new homes but it
is clear existing home owners are deciding not to sell or are
having a much harder time finding buyers. The inventory levels
are currently at a 4.9 month supply. Contrasting this drop in
existing home sales was a slight increase in sales of new homes.
The annual rate increased by 21,000 units over the consensus but
definitely showed a slowing pattern over the +65,000 unit increase
last month. These sales are being fueled by record low mortgage
rates but if existing homes can no longer be sold then the pace
of new home sales will slow as well.

Further indications of the slowing economic conditions was a 
warning from Taiwan Semiconductor this morning. They posted 
weaker than expected profits and surprised investors by saying
things would get worse in the July-September quarter. TSM is
the largest contract chip maker in the world and has the largest
capital expenditure budget behind Intel. They are cutting capex
spending by -$600 million. Their T$.49 earnings missed analyst's
estimates of T$.56 cents. They said 3Q shipments would drop 
substantially and average selling prices by -5% due to competition.
The CEO said he believed the recovery was coming but that the
3Q would show a pause until consumer confidence returned and 
capital markets loosened. 

This warning hit the Nasdaq semiconductor and PC sectors very 
hard. Stocks that rallied strongly yesterday were down several 
dollars today. KLAC for instance was down to $36.55 intraday 
from yesterday's close of $42.30. The SOX dropped over -10% to 
a new 52-week low before short covering and some bargain hunting
appeared at the close. This drastic drop by the semis dragged 
the Nasdaq futures to a limit down condition in early afternoon 
after an initial -5% drop. The Nasdaq finished down -50 points 
for the day but well off its -70 lows. Still this expanding 
worry over the future of tech stocks could continue to weigh 
on the tech sector.

The 800lb tech gorilla, MSFT, held an analyst meeting on Thursday
and admitted they had made some expensive mistakes. They are 
planning to increase the size of their work force by 10% (5,000)
and increase their R&D budget nearly +$1 billion to $5.2 billion
in this fiscal year. Analysts and investors were not excited by
the lackluster business summary and outlook. The stock traded
down -3.41 on the day to $42.85. 

The biggest impact to the markets during the day was a repeat of
a news story that the SEC was investigating Citigroup and JPM. The
key point appeared to be that there was a "clear attempt to mislead
investors" and several analysts say the companies could be subject
to severe civil and criminal penalties. Moody's downgraded their
outlook on JPM to negative from stable saying their reputation
and credibility could sustain serious damage. This type of downgrade
is normally a prelude to a major cut on a companies debt ratings.
The companies fought back in the afternoon saying that this was
old news and they did nothing wrong and the stocks recovered 
slightly.

After the close today QCOM beat estimates and raised guidance saying
orders were picking up for its CDMA technology. This bullishness was
surprising after Telecom Italia dropped plans to implement the 3G
technology in Europe. QCOM was trading up +1.63 in after hours. 

JDSU also announced a loss of nearly $1 billion and said the meltdown
in the communication sector was continuing and the outlook had
dimmed for its fiber optic components. They said economic conditions 
continued to impact the sector and business was not going to improve
and sales would continue to drop in the current quarter.  

AOL fell to a low of 8.63 intraday after reporting results that
disappointed analysts and investors. This is a five year low and
was prompted by news that the SEC was investigating numerous
factors relating to their accounting. Many examples were given
today but AOL and their accountants defended them all. Essentially
they booked large volumes of special items as ad revenue when they
were really other types of gains. AOL wanted to pump ad revenue to
support their business model and shifted one time events into ad
sales to inflate these numbers according to news reports. It is
almost certain that AOL will now be spun off from Time-Warner as
the fortunes of AOL continue to decline. Ironic how quickly things
change.

Thursday was the fifth day in a row that the NYSE has traded over
two billion shares. Volume was very strong at 2.82B on the NYSE and
2.32B on the Nasdaq but the advance/decline was flat with an even
mix of advancers to decliners. While this may sound good on the
surface the down volume was 3.7B to only 1.49B of up volume. There
was a lot of stock traded but despite the remarkable rebound by 
the Dow it was still a negative day. Many have remarked that 
Wednesday was a capitulation day. Sorry but that does not compute.
One yardstick for a capitulation is strong advance/decline imbalances
at the bottom followed by strong imbalances in the opposite direction
on the way back up. The advance/decline ratio yesterday was only 4:3
in favor of the advances. Far from a strong imbalance! The new lows
yesterday were a very high 1746 but today's action also produced
573 more new lows. If we had seen a bottom yesterday those lows 
would have been minimal.

Despite the previous paragraph I saw some bullish signs today. The
rumor that Tyco was going to file bankruptcy had no impact on the
market. The dip on the Citigroup/JPM/SEC news was met with strong
buying and C finished positive on the day. The TSM warning tanked 
the semi sector but buyers appeared at days end. The AOL news impacted
the Internet sector but was largely ignored other than the drop in
AOL stock. The Durable Goods and Existing Home Sales both dropped
much more than expected.  Even after all these negatives the Dow
rebounded +287 points off its low to close flat and retain nearly 
all the monster gains from yesterday. This is very bullish. The 
bears were unable to sell off the end of day rally and there were
several strong buy programs instead. Is this a sign we have seen
the bottom? I doubt it but it is a sign that there are still buyers
with money on the sidelines. 

The Wednesday bounce and the intraday recovery on Thursday may only
be a strong trading rally but it is a definite change in the trend.
This leads me to expect a positive open on Friday and possibly only
a minor sell off around lunchtime on profit taking. The wild card
here is the Consumer Sentiment number due out at 9:45. This will
be the second update for July and with the huge market drop over
the last two weeks I expect it to fall again. The magnitude of
this fall will determine our direction tomorrow. 

The bottom line? About the only thing we can guarantee is that
volatility will continue to reign and there is a great possibility
of another triple digit move. Fortunately the Sentiment Report is
early and that could give us the directional signal for the day.
Earnings are beginning to dwindle and despite the bullish signs
I pointed out above there is still no overwhelming reason to buy
and hold stocks. Until there is any rally is doomed to fail. 

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

WIDE-RANGING DAY 
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 

The Media "talking Heads" were talking about all the volatility 
there was today - they meant that the S&P indices and the Dow
Industrials had wide-ranging days in terms of their price range. 

However, the CBOB Volatility Index ($VIX.X) at 46.6 on the close, 
was still coming down off its "spike" high of yesterday (Wed.) -
this pattern is an approximate repeat of how it went with a
subsiding VIX and subsequent rising market during late-September
last year.  

There were a number of cross currents of course, especially a 
much lower than expected Durable Goods orders report at down 3.8% 
- this raised fears, not voiced much lately, of a "double dip" 
recession.  Bears seized on this, as if to say, "AH-HA! - I TOLD 
YOU SO!" - those bearish looking charts are "because" the market 
is so good at "predicting" economic downturns. 

Nasdaq was rattled by plunges in "heavyweight" stocks like Intel, 
Microsoft, Cisco Systems, Sun Micro, Applied Materials and 
Qualcomm. And in general by the plunge in the Semiconductor Index 
(SOX) - off 10%.  

Deutsche Bank had cautious words on the CHIP stocks, saying to 
its clients that any rally in the semiconductor equipment sector 
would be unsustainable as fundamentals are deteriorating and the 
outlook remains unclear.

Biotech stocks, on the other hand, got a major boost when 
bellwether Amgen (AMGN) rallied over 13% after a better-than-
expected Q2 profit. The company also raised guidance on expected 
earnings for the year. AMGN was upgraded by Bank of America 
Securities and Morgan Stanley. 

WHAT NEXT? - 
The BIG question on all investor and trader's minds - those who 
still care that is!

I was impressed with the action and ability to snap back after a 
sell off in the early afternoon - this being the case with the 
S&P and the Dow.  

Even the Nasdaq, which closed down on day had some bullish 
"favorables" in my estimation, such as the fact that the indices 
held support ABOVE yesterday's lows and the fact that the rest of 
the Nasdaq did not totally fall apart given the free fall 
weakness in the Semiconductor stocks. This was not the way it 
would have gone earlier in this cycle - SOX ruled! so to speak.   

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


 

OEX has broken out above the steeper (green) down trendline and 
looks poised to rally further, advancing up toward the old top of 
its broader downtrend channel (dashed lines).  I'm a buyer in the 
400-405 area, a seller at 445.   

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


 

Chart is mildly bullish in its pattern - normal type 
consolidation in what looks to around midpoint in a counter-trend 
move up. Support is 817-820. Resistance: 895 area, where I would 
be shorting/buying puts.

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


  
 
Reaction low today rebounded from its "touch" to the previously 
broken down trendline. Looks higher in DJX, with 85/86 as a next 
objective.  8000 proved to be support on the Dow today, an 
important test. 

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


 

Resistance is pretty clear at 24, then 25 in the Q's. Move above 
24 would be a minor breakout. Support at 21.5-22. 
Buy/sell this range.  
 

Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 



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

Hanging On, So Far
By Steven Price

Follow the bouncing ball, if you can.  A negative outlook from 
Taiwan Semiconductor (TSM), the world’s largest chip foundry, 
pushed the chip stocks downhill.  The company said it was 
slashing its capital spending budget by more than $500 million 
for the rest of the year.  There is talk that the sector may be 
cutting additional jobs to help control costs. The sector, as 
measured by the Semiconductor Index ($SOX.X) had rallied with the 
rest of the broader market yesterday.  A look today’s chart now 
shows the image of a cliff diver.  The SOX gave up 10% today to 
finish down to $318.05, a new 52 week low.  This close dropped 
the index out of a descending channel it had been in since March.

This was in contrast to the image presented this morning by the 
broader markets, which looked to continue yesterday’s near record 
rally.  The Dow was up 118 points at its high point today, 
lending credence to Wednesday’s 488-point rally.  The day started 
with a slew of economic data, which looked promising.  Initial 
weekly unemployment claims were down 21,000 to 362,000, well 
below the estimate of 385,000.  This was the lowest level in 17 
months, with the bulk of these employees apparently hired by the 
SEC investigations department, which continued their busy ways 
with a probe into AOL/Time Warner’s accounting, announced after 
Wednesday’s closing bell.   Durable goods orders fell 3.8%, which 
was widespread across most industries.  Aircraft orders were hit 
the hardest, with a 47% drop.  Analysts were expecting a 0.5% 
rise in orders, so this number was disappointing.  New home sales 
were up 0.5%, while existing home sales were down 11.7%

The Dow then dropped 364 points to bottom at 7945.95, before 
rallying all the way back to 8186.31, for only a 4.98-point loss 
on the day.  Part of this intraday drop may be attributed to 
rumors that the SEC was investigating J.P. Morgan and Citigroup, 
for their involvement in Enron.  These rumors may or may not be 
true, however just the hint of investigation can send stocks 
tumbling. After the rumors passed, both stocks rebounded from 
their lows for the day to finish close to unchanged. Citigroup’s 
CEO Sanford Weill addressed this issue on the company’s website, 
assuring investors that its activities were legal and stating 
that he was ready to certify his company’s financial statements.  
The SEC will require CEOs to certify their company’s financial 
statements beginning August 14.  

Tyco spent the day denying rumors of bankruptcy, stating they had 
enough cash to meet obligations through November of 2003 without 
refinancing, and had begun to buy back debt in the open market.  

Bill Gates, speaking at a Microsoft meeting, was said to have 
given one of his least enthusiastic speeches, with nothing to 
rally the troops.  The troops apparently read into this and 
hammered the stock, which finished down $3.41 to $42.82.  
Microsoft, in combination with the semiconductors, led the Nasdaq 
Composite lower by 50 points, giving back most of Wednesday’s 61 
point game.  Microsoft did announce plans to add 5,000 new jobs 
and increase spending on research and development.

How’s the economy doing?  Although it doesn’t feel like it, 
Treasury secretary Paul O’Neill seems convinced that its 
fundamentals remain strong.  He stated, “In our history we have 
seen times when there is a disconnect between the stock market 
and the fundamental productive power of our economy... this is such 
a time...” This may actually be true, as the market seems to be 
searching for a bottom.  The accounting dominos seem to keep 
falling, however, and until the CEO certification process is 
over, it is hard to tell just how many more surprises are out 
there.  

Bullish percentages continue to fall across the board, even after 
yesterday’s rally.  Today’s rebound from the market bottom is 
promising, but with the semiconductors setting new relative lows, 
it is hard to see which sector can lead the market back up.  
Tomorrow’s consumer sentiment numbers will be very interesting 
after the Dow rally.  They should give us a barometer as to how 
the public has reacted to a plethora of news this week.  This 
will be followed by consumer confidence next Tuesday.

The ratio of advancing versus declining issues was slightly 
positive for the NYSE, but slightly negative for the Nasdaq. The 
bad news, however, was that there were only 16 52-week highs on 
the NYSE, versus 326 52-week lows.  The Nasdaq had similar 
numbers with 46 highs, versus 325 lows.  

After hours earnings from Starbucks and Qualcomm beat estimates, 
while JDS Uniphase missed.  

Where are we headed?  A very good question after a wild week.  We 
may see some profit taking tomorrow afternoon if the Dow can 
build on its gains of Wednesday.  We may also see buying by those 
who don’t want to be left behind if we really have found a 
bottom.  The market has taken such a substantial hit this month 
that it will take a sustained rally to believe in a bottom.  A 
500-point rally, which holds the next day, is very positive, but 
it still amounts to less than a third of this months losses.   
Sideways movement is a possibility for a while, until we get 
beyond the certification process.  Respect your stops, the 
movement is getting much harder to predict. 


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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7702
Current     :  8186

Moving Averages:
(Simple)

 10-dma: 8263
 50-dma: 9329
200-dma: 9792



S&P 500 ($SPX)

52-week High: 1226
52-week Low :  797
Current     :  839

Moving Averages:
(Simple)

 10-dma:  868
 50-dma:  992
200-dma: 1089



Nasdaq-100 ($NDX)

52-week High: 1782
52-week Low :  896
Current     :  894

Moving Averages:
(Simple)

 10-dma:  970
 50-dma: 1099
200-dma: 1379



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


Semiconductor Index ($SOX.X)

The Semiconductor Index saw its lowest closing level since 
December 1998.  Taiwan Semiconductor (TSM), the world's largest 
semiconductor foundry, announced this morning that they were 
cutting their budget for the rest of 2002, possibly by more than 
$500 million.  The S&P 500 and Dow  managed to hold most of 
Wednesday's large gains, in spite of the semis. This group, along 
with Microsoft, led the Nasdaq lower, giving back most of 
Wednesday's 61-point rally.  This sector's problems are bound to 
have an effect on the broader markets if the IT spending 
environment does not pick up. 

52-week High: 657
52-week Low : 318
Current     : 318

Moving Averages:
(Simple)

 10-dma: 364
 50-dma: 423
200-dma: 508


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

Market Volatility

In the past, the VIX topping out over 50 has foreshadowed a run-
up in the broader markets, as the index falls back.  The index 
reached a recent high of 56.74 Wednesday morning, before 
beginning its descent down below 45, where it ended today.  This 
was a result of Wednesday's huge rally, followed by the S&P 100 
holding most of its gains today. The next week will be very 
interesting to watch. If the market reaches a higher level, or 
travels sideways, we could see the VIX back into the 30s.

CBOE Market Volatility Index (VIX) = 44.65 –0.64
Nasdaq-100 Volatility Index  (VXN) = 69.48 +3.89

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.76        767,306       582,779
Equity Only    0.63        619,800       393,349
OEX            0.71         33,985        24,144
QQQ            0.27         79,786        21,363

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

Bullish Percent Data

           Current   Change   Status
NYSE          25      - 2     Bull Correction
NASDAQ-100    28      + 0     Bull Correction
DOW            3      - 4     Bear Confirmed
S&P 500       13      - 1     Bear Confirmed
S&P 100       10      - 1     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  1.27
10-Day Arms Index  1.32
21-Day Arms Index  1.35
55-Day Arms Index  1.35

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       1760          1366
NASDAQ     1519          1850

        New Highs      New Lows
NYSE        17            167
NASDAQ      63            330

        Volume (in millions)
NYSE     2,825
NASDAQ   2,141

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

Commitments Of Traders Report: 07/16/02

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 increased their short positions by 25% as the markets 
fell in the last period, while the small traders added almost 
17,000 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%)
07/16/02      388,943   464,162   (75,219)   (8.8%)

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%
07/16/02      157,370    67,247    90,123     40.1%

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 reduced their short positions by over 20% as the NDX 
held its own against the other market indices.  Small traders 
reduced their overall long position by adding 2,000 short 
contracts.


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%)
07/16/02       33,152     39,866    (6,714) ( 9.2%)

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%
07/16/02       12,816    10,774     2,042      8.7%

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

Commercials remained virtually unchanged, while the small traders 
shifted from a small long position to a decidedly short position. 


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%
07/16/02       20,357    14,074    6,283     18.2%

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%
07/16/02        8,524    10,133    (1,609)   (8.62%)

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 - 7/25
by Leigh Stevens

A wide-ranging day in the Market, which was also reflected in the 
sector indices. Having a continued strong move were some of the 
most "oversold" sectors, especially the Utilities, Drugs and 
Transports.  

UP on Wednesday - 


 
 

DOWN on Wednesday - 





UPSIDE REVERSAL PATTERNS - "part 2" 

I highlighted last night several sectors that looked the most 
like they had had upside reversals of significance.  In this kind 
of market - at the end of a long bear trend - it is important to 
look at the reversal candidates over the next 1-2 days to see if 
there was follow through, whether the sector index holds "steady" 
after the initial run up, or falls apart. 

Of the sectors I discussed yesterday (Wed.), the sectors that 
continue to show bullish promise are, as of "day 2", the 
following:  

The Bank Index (BTK), the Amex Composite (small cap), Biotech, 
the PC "Boxmakers" (BMX), the Cyclical sector (CYC), the (NYSE) 
Financial Index (NF), Defense (DFI), Forest & Paper Products 
(FPP), Healthcare (HMO), Oils (OIX), Drugs (DRG), Retail (RLX), 
the Russell 2000 (small caps) (RUT), and the Dow Transports 
(TRAN).

The above listed sectors are the ones that I suggest playing - my 
strategy is to select the HOLDR's or iShares (or, options) for 
the sectors that continue to hold promise after one further day 
(Friday) of price action and will list recommendations on THOSE 
tomorrow.  

I took OFF the list, the Broker-Dealers (XBD) and Software (GSO) 
sectors  - their follow through was not consistent with a 
possible tradable bottom. 

NOTE: The initial criteria for an "upside reversal" is a move to 
new low, or under prior support, followed by a sharp rebound to 
above the previous close or (an even stronger "signal") to above 
the previous day's high

  
SECTOR TRADE RECOMMENDATIONS & REVIEW -

NEW/OPEN TRADE RECOMMENDATIONS -

NONE - 
CHECK FRIDAY 

OPEN POSITIONS - 

NONE

 
TRADE LIQUIDATIONS -

NONE


SECTOR HIGHLIGHT -

Biotechnology Index ($BTK.X)
STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA; 
ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM; 
MYGN; PDLI; TARO; TEVA; VRTX; XOMA


 

The Biotech index (BTK) has continued to rally from the last 
"touch" to its downtrend channel line.  This time it may be the 
rally that leads to a move to the upper end of the downtrend 
channel on the daily charts. In the Index, areas where resistance 
may develop, is the 355 area at the 50-day moving average, then 
at top end of the channel, at 392 - 90 in BBH, the Biotech HOLDR.
UPDATE: 7/25

Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                 Thursday 07-25-2002
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:
*****

None


PUTS:
*****

BBBY $30.08 -1.31 (+0.83) Retail stocks posted their best day
in months yesterday, with the Retail index (RLX.X) posting a
7.75% gain on the day.  That sector strength helped to boost
shares of BBBY to their best closing level since July 15th, but
still below our $32.50 stop.  With the jockeying going on in the
broad market today, we would have expected to see more weakness,
but BBBY resisted the bears' advances by continuing to find
support near the $30 level.  It appears that the stock is trying
to put in a bottom here, and the bearish case has become far
less compelling.  Rather than buck what looks like it could be
a trend change, we are dropping the play tonight.  Use any
weakness in the morning to exit open positions.

UPS $62.21 +0.37 (-4.79) Wednesday's impressive broad market
rally off the lows, helped to propel shares of UPS to within a
fraction of our $62 stop loss, and we held the play on
anticipation of some significant give back in today's session.
Despite the fact that the DOW was down by more than 200 points
intraday, UPS refused to drop back under the critical $60 support
level and at the end of the day just managed to close above our
stop.  While there could be more volatility as we head into the
weekend, the stock's resilience today along with our violated
stop has us moving to the sidelines.  For any remaining open
positions, use price weakness as an opportunity to exit the play.


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

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

For Best Alignment view in Courier Ten Font
*******************************************

CALLS              Mon    Tue    Wed    Thu

JNJ      48.70    0.68   1.55   3.62   1.00  Rolling Along
EFX      20.82   -1.67  -0.38   0.80   0.72  Improving Credit
BAX      35.89   -0.92   0.73   2.85   1.24  Healing Well


PUTS               

BBBY     30.08   -0.35   0.04   2.44  -1.31  Drop, Slow Go
EBAY     53.36   -3.64  -2.89   2.59  -2.39  Vanishing Bids
GDW      59.00   -0.31  -1.93   1.45  -0.60  Banks have problems
LOW      35.08   -1.11  -0.70   3.28  -2.42  Empty Aisles
UPS      62.21   -3.89  -2.81   1.54   0.37  Drop, Take profit
MHK      44.68   -0.32  -1.48   2.20  -1.02  Rug Burn
EXPE     45.12   -1.12  -5.89   6.77  -3.21  Traveling backward


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

JNJ $48.70 +1.00 (+6.17 for the week) Johnson and Johnson has 
continued its strong rally into the end of the week.  The stock 
has closed its gap from last week, which had occurred when the 
bears overreacted to news of manufacturing irregularities at the 
plant that produces Eprex.  In the current market climate, news 
of any investigation in the market has led to a major sell-off of 
the issue, and this was certainly the case with JNJ. This is not 
a case of Enron-itis, however, as the investigation had nothing 
to do with accounting. The Pharmaceutical Index ($DRG.X) followed 
the biotech sector higher today, however, JNJ has been on the 
rise all week. The stock traded within $0.05 of our $50 target, 
and conservative investors may want to take profits in this area.  
We have raised our stop loss on this play to $48.00, well above 
the $41.85 initiation level.  Don't let your profits evaporate if 
the markets and JNJ start to fall again.  Use stops!


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

BAX – Baxter International $35.89 +1.24 (+4.14 last week)

Baxter engages in the worldwide development, manufacture and
distribution of a diversified line of products, systems and
services used primarily in the healthcare field.  BAX's products
are used by hospitals, clinical and medical research laboratories,
blood and blood dialysis centers, rehabilitation centers, nursing
homes, doctor's offices and by patients at home, under physician
supervision.  The company manufactures products in over 28
countries and sells them in over 100 countries.

Relative strength is still the name of the game in this market,
and it is interesting to note that a few stocks actually bottomed
and began showing bullish signs before yesterday's amazing
recovery.  Dueling analysts provided plenty of volatility in
shares of BAX last Thursday after the company reported an
earnings shortfall.  Merrill Lynch downgraded the stock and it
quickly fell to the $30 level.  But UBS went against the grain,
upgrading to Strong Buy.  That seemed to be the catalyst necessary
for a near-term bottom and by Tuesday, BAX was starting to show
some bullish divergence from the overall market by posting a gain
for the day and dragging the daily Stochastics into a bullish
reversal.  Yesterday's morning dip hardly caused a ripple in the
stock and it then proceeded to rally strongly with the remainder
of the market, gaining nearly 10% on the day.  Flexing its
relative strength muscles again on Thursday, the stock opened at
its low and closed at its high, largely ignoring the broad market
instability enroute to tacking on more than a 3.5% gain.  Based
on the intraday action, a dip and bounce from the $34 level would
make for a solid entry into the play, as would trading a breakout
over the $36 level.  The first major obstacle is $38.75, the
bottom of the gap from last Thursday.  Should BAX reach that level
in the near-term, it would be advisable to harvest some near-term
gains, as a brief pullback will likely follow.  We are initially
setting our stop at $32, as a close below that level would
indicate that the fledgling rally had failed.

BUY CALL AUG-35*BAX-HG OI=3459 at $3.00 SL=1.50
BUY CALL AUG-40 BAX-HH OI=2297 at $0.95 SL=0.50
BUY CALL SEP-35 BAX-IG OI= 100 at $3.90 SL=2.50
BUY CALL SEP-40 BAX-IH OI=  99 at $1.80 SL=1.00

Average Daily Volume = 3.76 mln


---

EFX – Equifax, Inc. $20.82 +0.72 (-1.16 this week)

Equifax is a source of consumer and commercial credit information
throughout North America, Europe and Latin America.  The company
provides, to a wide range of customers, information management,
consumer credit information, marketing, business information and
identity verification services to enable credit and business
decisions.  Through its Consumer Direct business, EFX provides
credit reporting and identity theft monitoring services directly
to consumers, enabling them to proactively manage their credit
health and safeguard against identity theft.

With credit concerns for both consumers and businesses on the
rise, there are actually companies in a position to benefit from
this trend.  Reporting earnings in line with estimates and
reaffirming forward guidance with its report seems to have been
the necessary catalyst to get investors to take another look at
EFX.  One of the primary consumer and commercial credit agencies,
the company has seen very little deterioration in its revenue and
earnings throughout this very nasty downturn.  In addition to the
economic insensitivity of the business it is engaged in, EFX gave
us a very interesting chart pattern on Wednesday, when it
rebounded right from the $19 level, creating a nice double bottom
formation with the lows from last September.  While yesterday's
rebound was nice, the follow-through today was really encouraging,
as the stock gapped higher, filled that gap and then went out very
near the high of the day.  Following the sharp post-earnings drop
from the $24 level, EFX has some room to move to the upside before
hitting strong resistance again.  The $20 level looks to be
shaping up as intraday support and a dip and bounce from that
level would make for a good entry into the play.  Alternatively,
we can target a breakout move over the $21 level for new entries.
There is mild resistance at $22 and then strong resistance at $24.
We are initiating coverage with our stop set at $18.90, just
below Wednesday's intraday lows.

BUY CALL AUG-20 EFX-HD OI=11 at $1.75 SL=1.00
BUY CALL AUG-22*EFX-HX OI= 1 at $0.60 SL=0.25
BUY CALL SEP-20 EFX-ID OI= 0 at $2.20 SL=1.00
BUY CALL SEP-22 EFX-IX OI=95 at $1.05 SL=0.50

Average Daily Volume = 438 K



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

GDW $59.00 -0.60 (-1.47) The movement in Banking stocks continues
to be incredibly volatile, with the rumors and stories swirling
around C and JPM.  Despite some more intraday weakness, our GDW
play managed to solidify on Thursday above the $58 intraday
support level.  But just because it didn't fall apart today,
don't mistake the stock's behavior for strength.  Throughout the
day, the intraday highs moved lower, and this very short-term
triangle looks like it is going to break to the downside.  Due to
this consolidation pattern, we can reduce our risk as well, by
lowering our stop to $60.  If the Banking sector moves lower
tomorrow, it will likely result in GDW breaking below the $58
level.  Look to initiate new plays on a volume-backed drop below
this level or on another failed rally near $60.  Keep in mind
that the daily Stochastics have now turned bullish, tilting the
bias a bit to the bullish side.  The other side of the coin is
that there is still likely to be a fair amount of market
volatility, which could produce one more drop near the $56.50
lows from Wednesday.  The conservative approach would be to use
any price weakness as an opportunity to lock in recent gains.

---

LOW $35.08 –2.42 (-0.95 for the week) Lowe’s fell back to earth 
today after riding the Dow up over 3 points Wednesday.  The chart 
for LOW mirrors that of the Retail Index ($RLX.X), which made 
back some gains but was unable to break out to the upside. While 
stocks such as WalMart (WMT) and Target (TGT) were able to hold 
onto much of Wednesday’s gains, LOW joined Home Depot (HD) in 
giving back most of the gift.  Originally picked at $37.60, the 
stock traded as low as $32.70 on Wednesday morning.  Profit 
taking heading into the weekend could weigh on the broader 
markets after Wednesday’s big gain.  The RLX has fallen through 
support levels like a glass floor, and was unable to rally back 
over the 280 point mark today, falling back to 272.15.  Debt 
ratings were affirmed on LOW earlier in the week and the stock 
dropped the same day.  This was not bad news and yet the stock 
remained weak.  Look for the retailers to fall back if consumer 
sentiment numbers miss expectations.  Conversely, if the consumer 
sentiment report is positive then LOW could shoot higher again.  
We'd advise caution on any new positions and conservative traders 
may want to adjust their stops before the open. The rally in LOW 
on Wednesday led to a 3 box reversal on the PnF chart, however it 
is a long way off from a buy signal.  We continue to see support 
at $32.50, and then at $30.50, which is our target on this stock.  

---

MHK $44.68 -1.02 (-1.22 for the week) MHK experienced a rally on 
Wednesday, along with the rest of the market, however it did not 
make it beyond our stop loss of $46.50, and was unable to surpass 
its high from the previous day.  MHK has been unable to close its 
gap of July 16th, but was able to hold on to some Wednesday's 
gains.  We continue to see signs of weakness in the stock that 
was unable to hold its rally, despite good earnings from the 
homebuilders. Housing numbers came out this morning, which showed 
a small increase of 0.5% in new home sales, however, sales of 
existing homes were down over 11%.  Considering the current fears 
of a looming housing bubble about to burst, the negative existing 
homes number might continue to deflate those stocks connected to 
home building and furnishings.  Our new entry point of below $45 
has been reached and this is considered an entry point to go 
short.  Our stop loss of $46.50 remains in effect, just below 
Monday's high. 

---

EBAY $53.60 -2.39 (-6.09 for the week)  EBAY continued its 
downward slide today after experiencing a "sympathy bounce" with 
the 500-point run-up in the Dow and 60-point rally in the Nasdaq 
on Wednesday.  The stock has continued to fall throughout the week 
(with the exception of Wednesday), after fund managers finished 
adding it to their positions ahead of its addition to the S&P 500 
last Friday.  The stock opened down a dollar this morning, and 
although it made an effort to rally early, it was unable to hold 
momentum, and closed near its lows for the session. Concerns 
remain about growth potential and a very high P/E ratio.  The 
stock traded down to $51.05 on Wednesday before the market rally, 
and we will look to take profits and officially close the play on 
the OI newsletter if the stock trades 
$50. 


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

EXPE – Expedia, Inc. $45.12 -3.21 (-10.64 last week)

Expedia is a provider of online travel services for leisure and
small business travelers, offering one-stop shopping and
reservation services with real-time access to schedules, pricing
and availability.  The company's global travel marketplace
includes direct-to-consumer Websites offering travel-planning
services at Expedia.com, Expedia.co.uk, Expedia.de, Expedia.nl
and Expedia.it.  In addition, the company provides
travel-planning services through its telephone call centers and
through private label travel Websites through its WWTE business.
WWTE is a division of Travelscape, Inc., one of EXPE's wholly
owned subsidiaries.

The recent market decline has hammered most stocks down to
multi-year lows, making it harder to find attractive bearish
candidates, but there are a few stocks that appear to have
significant room to fall.  EXPE is one such stock, as it created
a fresh PnF sell signal earlier this week.  The double bottom
breakdown below the $52 level extended the column of O's resulting
in a bearish price target of $23, which just happens to be in the
vicinity of the September lows near $20.  Although short-covering
helped to raise EXPE yesterday with the rest of the market (likely
due to the company's strong earnings report Tuesday night), it is
interesting to note that once the gap was filled up at $48, the
sellers piled back in this morning, knocking more than 65% off
the stock's price on Thursday.  That selling came on volume well
above the ADV and it looks like the bears are back in control
after a very brief hiatus yesterday.  Another rebound up to the
$48 level would make for an ideal entry point on the rollover.
Due to the volatile nature of the broad market (and the price
action in EXPE), we want to give the stock room to move, and are
initiating the play with a wide stop at $52, the site of the
recent breakdown.  Of course, the bears could come out swinging
tomorrow, and we may have to settle for entering on renewed
weakness.  Tentative entries can be considered as EXPE falls
below intraday support near $44, although the prudent
momentum-based strategy will be to wait for a drop under
yesterday's intraday low at $41 before playing.  If playing the
breakdown, be watchful for a potential bounce from support at
$40 and then again at $37.

BUY PUT AUG-50 UED-TJ OI=1034 at $7.10 SL=5.00
BUY PUT SEP-45*UED-UI OI= 283 at $6.00 SL=4.00

Average Daily Volume = 2.68 mln



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offers contingent option orders based on the price of the 
option or stock
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offers fast option executions

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more; call 1-888-889-9178 or click for more information.

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**************************************************************


**********
DISCLAIMER
**********

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


**************************************************************
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or any Premier Investor Network newsletter please contact:

Contact Support
The Option Investor Newsletter                 Thursday 07-25-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.



*********************
PLAY OF THE DAY – PUT
*********************

EBAY $53.60 -2.39 (-6.09 for the week)  

eBay is the world's online marketplace(TM). Founded in 1995, eBay 
created a powerful platform for the sale of goods and services by 
a passionate community of individuals and businesses. On any 
given day, there are millions of items across thousands of 
categories for sale on eBay through auction or fixed price 
formats. eBay enables trade on a local, national and 
international basis with customized sites in markets around the 
world.

EBAY continued its downward slide today after experiencing a 
"sympathy bounce" with the 500-point run-up in the Dow and 60-
point rally in the Nasdaq on Wednesday.  The stock has continued 
to fall throughout the week (with the exception of Wednesday), 
after fund managers finished adding it to their positions ahead of 
its addition to the S&P 500 last Friday.  The stock opened down a 
dollar this morning, and although it made an effort to rally 
early, it was unable to hold momentum, and closed near its lows 
for the session. Concerns remain about growth potential and a very 
high P/E ratio.  The stock traded down to $51.05 on Wednesday 
before the market rally, and we will look to take profits and 
officially close the play on the OI newsletter if the stock trades 
$50. 

This stock is our Play of the Day due to its continuing weakness 
and inability to retain any of its gains from Wednesday. OI 
believes this stock was overvalued before the announcement that 
it was being added to the S&P, and it has behaved accordingly, 
now that the artificial crutch has been removed.

BUY PUT AUG-60 QXB-TL OI=5626 at $7.60 SL=4.00
BUY PUT AUG-55*QXB-TK OI=8740 at $4.10 SL=2.25 
BUY PUT OCT-50 QXB-VJ OI=2330 at $5.00 SL=3.00 

SELL CALL OCT-60 QXB-JL OI=3519 at $3.40 SL= 6.00
SELL CALL OCT-55 QXB-JK OI=1195 at $5.50 SL= 9.00


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

Oscillators - Part 1: Stochastics 
By Leigh Stevens
lstevens@OptionInvestor.com

Indicators or technical "studies" can be generally grouped into 
trend following type indicators like moving averages, or into 
indicators of a type called "oscillators".

The central idea or concept of stochastics - what it is 
attempting to measure - is that in an up or down market trend for 
any number of trading periods (e.g., 10 hours or 14 days), prices 
will at times move away from the lowest low made during that 10 
hours or 14-days, or the highest high, at an increasing rate – 
this "rate" or speed of price changes is what the (slow) 
stochastic oscillator is showing visually.  

An indicator which has a formula such that its scale is between 0 
and 100 only, like Stochastics or RSI, or, fluctuates in a 
familiar range like MACD, will tend to "oscillate" back and forth 
between the low and high end of this fixed scale. Hence this 
"class" of indicators or technical "studies" are called 
OSCILLATORS.   

Oscillators, such as the relative strength index (RSI), 
stochastics and MACD (moving average convergence-divergence, are 
of the most use for shorter-term traders, especially when prices 
are confined to a trading range – in such instances the various 
oscillator formulas can provide an indication as to whether the 
item in question is not only in a potential resistance area, but 
is also what’s called "overbought" – conversely, it's useful 
information to know when prices are in a potential support area 
AND are also considered "oversold" in terms of this formula.   

The concept of “overbought” and “oversold” is introduced here 
ahead of a full discussion of oscillators – overbought/oversold 
being normally only thought of as relating to these indicators.  

Overbought or oversold should always be thought of in relation to 
what time frame is being considered.  Traders are interested in 
short to intermediate-term reversal points and investors are 
primarily concerned about a situation where a market is at a 
possible overbought or oversold extreme on a long-term basis.  

Here is another important point.  Overbought or oversold relate 
to a potential vulnerability to a reversal – however, a market 
can stay oversold or overbought for a relatively long period.  It 
is also true that rapid and steep advances or declines are not 
sustainable for an unlimited period.  A market will correct at 
some point after a steep rise or fall, but when is an open 
question in a strong trend.  

This is important because there is a tendency to think that the 
first time or two that an oscillator reaches an extreme reading, 
whether using an hourly, daily or a longer-term weekly chart, it 
is time to exit that stock or other item – however, we see many 
instances where the trend takes prices significantly higher or 
lower before there is a correction – moreover, a “correction” may 
just turn out to be a sideways consolidation period, before there 
is yet another push in the same direction as before. 

Oscillators “work” well in terms of timing trend trades contrary 
to the most recent trend – buying dips in a downswing and selling 
rallies in an upswing -- in markets that are experiencing two-
sided price swings rather than trending strongly in one 
direction.  


THE STOCHASTICS OSCILLATOR
The Stochastics study attempts to highlight "momentum" strength 
and, in terms of momentum strength, areas where a market tends to 
reach high or low extremes. The "stochastics process" (its first 
name) study was popularized by Mr. George Lane who was involved 
in the futures markets.  

If I select Stochastics as a "Study" on Q-charts, I can "edit" 
"length" "smoothing" of %K and "smoothing" of something called 
"%D" - "length" is the one you want to vary. You can set 
"smoothing" % K to "1" so there is NO smoothing of this number and 
leave "default" setting for smoothing "%D" at 3 - this is the one 
that "smoothes" out %K and that is the way this Study was designed 
to be used.

The most common "length" used - that is, the period (# of hours, 
days or weeks) that the stochastics formula will "reference, 
similar to the RSI, tends to be either 9 or 14-periods or "bars" 
and its right hand price "scale" is “normalized” or made such 
that the readings are always read on a scale between 0 and 100.  

The stochastics "default" oversold and overbought levels are 
typically pegged at readings at or below 20 and at or above 80. 
The stochastics tend to have wide-ranging fluctuations between 0 
and 100; e.g., a low at 5 or 10, a high at 90. 

The stochastics indicator is composed of two lines – a slower 
line called the percent D (%D) line is a simple moving average of 
the faster %K line.  As with the MACD, the two lines of varying 
speeds lead to crossovers that generate buy and sell “signals” – 



 


THE FORMULA - 
The Stochastic study looks at the current price in relation to 
the highest high or lowest low in the period being measured.  
Stochastics plots the current close in relation to the price 
range over the length set for this indicator and gives this a 
percentage value.  

The initial calculations for a stochastic of 14-days are twofold, 
establishing a “fast” and “slow” line.  The fast line or “%K” 
formula is 100 – (the close minus the 14-day low) divided by (the 
14-day high – the 14-day low; i.e., the price range).  The slow 
line or “%D” (here called “FastD”) is equal to a 3-day average of  
“%K”.  This first formula is referred to as the “fast stochastic” 
model.  The fast stochastic lines react so quickly to price 
changes that it is mostly appropriate for very short-term traders 
– in fact, its popularity was established in the major 
commodities bull markets of the 1970’s.  

The “slow stochastics” variation of the basic stochastics formula 
is simply to take the “FastD” figure and apply a “smoothing” 
calculation yet again, which results in another line which we can 
call “SlowD”, to differentiate the two versions of “%D”.  The 
important thing to remember is not this “alphabet soup”, but the 
fact that the slow version of the stochastics oscillator (slow 
stochastics) is the version that is in most common use and is 
most likely what you will be using if you choose the stochastics 
indicator to apply to a price chart.  Use of slow stochastics is 
the most appropriate for all around use.  



 

If the upside or down acceleration is especially strong, the two 
stochastic lines may reach a reading of 20 or below, or 80 and 
above, on its percentage scale – 20 and 80 begin a level 
generally defined as oversold and overbought, respectively.  In 
the overbought area at and above 80, the rate of price increase 
is thought to be too steep to be sustainable at the same rate of 
increase – this extreme suggests that there is some likelihood 
that the market in question will correct; e.g., by a sideways 
consolidation or a downward reaction.  

At and below a reading of 20 in the slow stochastic indicator, 
the rate of decline is relatively steep and is also considered to 
be unsustainable – the assumption and much experience then 
suggests that the market in question faces a significant 
likelihood of a correction; e.g., a sideways consolidation or 
upward reaction.  

Buy and sell crossover signals are considered to be optimal if 
they occur in or near the overbought and oversold zones, 
respectively.  There will be instances of crossovers that occur 
in the middle of these ranges and these should not be utilized 
unless there is compelling other technical considerations that 
are guiding you – for example, a break out above or below an 
important trendline –



 


The most frequent use made of the stochastics indicator is to 
serve as a model to show price momentum visually and as an 
overbought/oversold indicator.  Stochastics, as well as the RSI 
and MACD – think of these as the “big 3” of technical indicators, 
certainly of the oscillator type – are also worth their weight in 
gold for the occasional divergent buy or sell signal which is 
when the indicator does not “confirm” a new high or low along 
with price. 

I tend to use stochastics somewhat less on weekly charts.  I do 
suggest monitoring stocks or other financial items of interest 
such as bonds, futures and FX markets, with at least one of the 3 
major oscillators on a weekly, and monthly basis.  I tend to use 
RSI and MACD with longer-term charts by habit and keep such a 
long-term chart selection “open” in my charting application so 
that I am reminded regularly of the longer-term momentum trend 
and if the oscillator in question is at an extreme or possibly 
flashing a buy or sell “signal” – the RSI would tend to do this 
by climbing above or below the overbought or oversold levels, 
then reversing direction.  

Whether seen by use of Stochastics, RSI or MACD, once price 
action registers overbought or oversold extremes, there is simply 
a greater probability of a correction or trend reversal within a 
relatively short upcoming time frame - there being exceptions of 
course. In strong up or downtrends, the important consideration 
for trade entry are trend following indicators (e.g., moving 
averages). 

Stochastics are very useful indicators, but their "best" use is 
in markets that are trending back and forth in a well-defined 
price range. That range can be a "horizontal" one, like this 



    


Or trending lower or higher within a wide-ranging down or uptrend 
channel like this one - 



 


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