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Daily Newsletter, Tuesday, 08/13/2002

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The Option Investor Newsletter                 Tuesday 08-13-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Okay, Now What?
Index Trader Wrap: Fed Bust
Market Sentiment: Now What?
Weekly Fund Screen: Special Situation and Recovery Funds
Index Trader Game Plan: THE SECTOR BEAT - 8/13
Swing Trade Game Plan: Okay, Now What?

Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      08-13-2002           High     Low     Volume Advance/Decline
DJIA     8482.46 -206.40  8745.52  8473.32 1.52 bln   1014/2184
NASDAQ   1269.28 - 37.60  1324.43  1268.99 1.45 bln   1101/2294
S&P 100   445.30 - 10.85   460.13   444.89   Totals   2115/4478
S&P 500   884.21 - 19.59   911.71   883.62
RUS 2000  377.76 - 10.80   389.57   377.75
DJ TRANS 2264.23 - 44.40  2326.27  2261.59
VIX        39.80 -  0.66    41.35    37.94
VXN        57.68 +  1.39    58.61    54.72
Total UpVol   464M
Total DnVol 2,757M
52wk Highs    65
52wk Lows    353
TRIN        2.06
PUT/CALL     .71
*************************************************************

Okay, Now What?

The Fed has come and gone leaving disaster in their wake and
the corporate certification day has arrived. 344 companies due
tomorrow have not yet certified their statements and traders
left with an empty feeling from the Fed are now wondering if
there is another shoe about to drop.

Chart of the Dow



Chart of the Nasdaq




Today was ugly. It was like watching a train wreck in slow
motion. Standing on a mountain top (OIN) you see the washed
out bridge ahead (Fed announcement) of the speeding train (the
bullish market bounce). You grab the person next to you and
point, shout, wave and scream but the market keeps moving
toward the abyss, ignoring your warnings. Sure enough the Fed
does not cut, just like OIN predicted, and the market plunges
off the cliff. Surprise, surprise! The media is all-aghast
over the unexplained drop and spends hours of valuable air
time trying to explain it away. Why, traders got what they
wanted, right? Wrong!

Traders were jerked out of their dismal outlook back on
August 6th when three brokers went public on the same day
with a call for the Fed to cut rates by as much as 50 basis
points at this meeting. Here Alan, here boy, cut rates, cut
rates, nice Alan. Anybody with half a brain knows Alan Greenspan
is nobody's lap dog and several people have said he would go
against anyone to prove it.

Still the markets rallied out of the depths of despair and
analysts were calling market bottoms at record rates. Suddenly
this week many were retracting those bottom calls and warning
of new weakness ahead. Bulls ignored them and rallied the
markets right back to resistance again while waiting for Alan's
blessing. The blessing turned into a curse and shorts popped
champagne and piled back into the markets in droves. The
problem it appears is that according to the Fed the "risks to
the economy remain weighted to weakness due to weakness in
the financial markets and fears over corporate governance."
Yes, the Fed feels the economy could be headed back into a
second recession but did nothing about it. Ouch!

The Fed did adopt an easing bias but in the carefully worded
Fed speak but the key words were missing. Those words were
"closely monitor economic and financial conditions". These
words are required to indicate they are considering or open
to an inter-meeting rate cut. Also, wording of the statement
contained the kiss of death clause. "The current accommodative
stance of monetary policy, coupled with still-robust underlying
growth in productivity, ""should"" be sufficient to foster an
improving business climate over time." In English, "we already
cut eleven times and we are not cutting again anytime soon."
Put that in your rally and smoke it. Yes, Alan, thank you sir.

There is no doubt the Fed is worried. Not about the current
conditions but about the possibility of more severe problems
in the future. They know Brazil is going to meltdown eventually.
They probably know more about which companies are really in
financial trouble than anyone. They know there could be another
terrorist attack at any time. They know they are at risk of
a war with Iraq soon. They have to keep their remaining options
open and conserve as much ammo as possible. They tried to throw
a bone to the markets in the bias change but traders had already
blown their rate cut hopes out of proportion. This chapter of
the Fed story is now complete and there has already been a
reduction in the odds of a rate cut in September according to
the futures. Bond traders see the writing on the wall and are
already moving to erase that option.

Stock traders are sitting around tonight wondering what hit them.
We wanted a cut, the brokers said so! We got a bias change, which
the media said we wanted but it was really a warning in disguise.
Now what?

Earnings and guidance is what really matters in the end and AMAT
joined the ranks of beat and warn tonight. They beat the street
by two cents but then lowered industry projections only three
months after raising them. "It is now apparent that the economic
environment from last quarter has moderated" said their CFO.
Customers are becoming more cautious and we now expect overall
capital expenditures to decline by -25% instead of the -20% we
first projected. Orders are expected to decline -5% to -15%
sequentially. AMAT traded down in after hours.

An even more telling piece of evidence for the current economic
decline was the announcement by IBM that they were laying off
-15,613 workers due to over capacity and lack of sales. This
news came from an SEC filing made public today. IBM tried to
defer criticism saying they had mentioned previously in the 2Q
they were going to layoff these people. Kings X! They refused to
give any details in their past comments. There is a difference
in saying we will cut some workers and we will cut 15,613
workers! Add this to the 7,000 workers American Airlines is
laying off and they will create their own wave of unemployment.

Goldman Sachs and CSFB both went on record today as saying IT
spending estimates for 2003 were too high. Goldman said software
would probably not grow more than +3% to +5%. CSFB said 2002
estimates were now for zero growth in the chip sector and the
12% growth estimates for 2003 were too high. Finally somebody
is catching on to the facts.

With 344 companies still uncertified with a deadline of tomorrow
there is a good chance there will be some more surprises. There
were three today. Suddenly IPG, CBUK and ADRX "found" some
accounting irregularities today, one day before certification,
and have asked for extensions. How many more we will have
tomorrow is anybody's guess. IPG "found" $68.5 million in missed
costs and is going to restate earnings all the way back to 1997.
Seems they "overlooked" these expenses and accidentally overstated
earnings but they have taken steps to prevent it from happening
again.

Without beating a dead horse, the economy still has challenges
ahead. Rate cut hopes are dead and we are left to focus on stock
news during the two worst months of the year. The bulls are not
dead and they will probably try to buy this dip but the underlying
bid from the last week was pulled this afternoon. Without that
bid the next week will be significantly different. I am not
predicting a crash or rally but the volatility will definitely
be back. 466 of the 500 stocks in the S&P have posted earnings
for last quarter which leaves us with very little positive
motivation. Dell will be the big earnings news this week when
they post on Thursday after the close. They have already pre-
announced so there should be no surprises. The only worry is
their guidance going forward.

The rest of this week could be very choppy as bulls and bears
battle for control. I would be really cautious about opening
any large positions unless you are very confident of the
prevailing trend.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

FED BUST
By Leigh Stevens

TRADING ACTIVITY AND OUTLOOK -
The Fed decided not to lower so the market lowered prices
instead! The Fed did just as expected, indicating a bias now
toward "ease" later due to an expressed concern about a weak
economy.  Bonds rallied sharply however on this signal that rates
will be coming down - from low to lower.

Never failing to amaze us, the market sold off on the news - the
shorts having lost their fear to sell and those with some recent
gains, cashing in. Day traders had something to do again!

Airlines fell again as UAL took it on the chin again - this time
the stocks had company, as aerospace/defense stocks like Boeing
were weak. Someone figured out that if they can't fill all their
planes, there are not going to be as many new ones ordered.

WalMart reported and turned in its usual good results, but
biotech tumbled - traders looked around and saw they could cash
in on some gains other than in Dow stocks.

Guess what folks? - while we may be in a bottoming process,
SIDEWAYS is a big part of this process. We have to get past
September-October and it has turned out that we're still in
August, as much as we may want to have Thanksgiving already.

And, of course, lets not forget the CEO's and the accounting
certifications are largely delayed until the final day - that
would be tomorrow.

I have worked with some top executives and whenever their necks
are on the line that involves money and numbers, they have a
tendency to have their people check and RECHECK the figures.

Hey, these people didn't get to where they are by being reckless,
but by being smart. So, no surprises here in terms of why most of
these reports are going to come in AT the deadline.

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




The 460 area was the stopper in the S&P 100 - 3 strikes and it
was out!  The OEX hit this same resistance zone again and from
there, with a little help from the Fed, it was finally down
toward the support again.  440 looms as a key level again, this
time as potential support - below here, we're looking at the 420
area again.

Judging by the relative position of the daily stochastic, OEX has
to either go down substantially or go sideways for a few days to
see this market get oversold again.  It will probably be a
combination of both sideways and lower - 440 in fact, seems
unlikely to contain the decline now that the "fear of the fed" is
gone. The question may be - will a move back to 420 or about a
one half (50%) give back, be enough correction to find willing
buyers a again - stay tuned!

One other technical note is about "divergence" - I talked about
this in my Trader's Corner article on oscillators. Bearish
price/oscillator divergence is where a stock or index goes to a
new high OR goes sideways, but the oscillator does not and makes
a LOWER low. (The reverse is true in a bullish divergence -
prices go to a new low, but not the oscillator.)

Divergences like this are usually best seen with the RSI, but
sometimes it's seen on the stochastic indicator as it is above
and all the others indices, including QQQ.  Today's price action
made it apparent.  Something for the future for when you see this
divergent pattern set up.

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




The 855 prior hourly low looks a downside target on the S&P 500
now that its hourly trendline has been pierced decisively. Below
here a next lower potential support area is the 833 downswing
bottom.

Key resistance is at 493-495 and this would be an area to sell if
there was a bounce tomorrow - don't hold your breath waiting for
this happen however - looks like its back to two-sided trading
swings and they usually slide faster and easier than they glide.

DJ Industrial Index (1/100 of INDU) - $DJX - Daily/Hourly charts:




86 is near resistance, 84 is near support.  Sell at resistance,
but hold off trying to catch any falling knives.

Looks to me that the 82 area is a possible target now, maybe back
to Dow 8000 again. Whatever the ultimate target, I look for
downside follow through tomorrow.

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




I was looking to short QQQ in the 24.7 area at the prior price
peak. I also figured that we had no "confirmed" up trend until
this level was cleared. Now it looks like the Q's are heading
toward 22 again, maybe to the 21.5 area.

A trendline through the first two hourly highs - a minimum two
points to draw a trendline - defined the final reversal point for
this rally at 23.9.  A higher high accompanied by a lower low in
the 21-hour stochastic model - a "classic" divergent sell signal.
However, it also should be noted that this is only clear cut
AFTER the fact usually.

Someone asked me about a bullish rising "wedge" on the intraday
QQQ chart and this person was quite right in that assessment,
although I wasn't certain that the pattern was a wedge. But, it
fulfilled the conditions - there was this pie-shaped formation
outlined by higher highs and higher lows that NARROWED as you got
closed to the "apex" or narrowest point.

What the wedge is showing is what I call "compression" - this is
where buyers and sellers get more and more in balance or in
equilibrium. When there is a break, the buyers who were
purchasing on a scale up basis at higher and higher prices (as
the price dips were slight), BAIL out in a hurry.  They realize
that they have bought high instead of buying LOW - as in "buy
low, sell high!"

There was another divergence that shaped up in QQQ - my answer to
those who say why don't I just follow the Nas 100 Index itself
and not the "derivative"; i.e., the QQQ tracking stock.  Well,
one reason is that you have daily volume information with the
Q's.

Perhaps if I had made more of the DECLINING volume trend - a
definite NON-confirmation of the last rally - I might have
suggested selling at 23.70 as a starter to get in on the short
side - with the intent to sell more if 24.70 was reached.  So it
goes on the Street of Dreams.

Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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

Now What?
by Steve Price

Day umpteen of the Fed watch is finally over.  Now we can begin
the countdown to September 24, when the FOMC next gets together
for tea and crumpets.  The Fed did exactly as OI predicted and
kept rates steady, while issuing an easing bias.  Also, as OI
predicted, we experienced a major sell off.  Makes one wonder why
they don't invite the OI staff to their meetings. The FOMC
finished their meeting by issuing a statement that they still saw
economic weakness as the greatest risk.  This basically means
that there is still a danger of recession, but that they are
holding on to their ammunition, as  there is only so much further
that they can lower rates.  With a 1.75% Fed Funds rate, they may
need several more decreases to deal with a faltering economy, and
the specter of a September 11 anniversary attack still looms.
Historically speaking, we have now been warned about the
possibility of a surprise cut between now and the next meeting.

The Airline industry got more bad news just two days after U.S.
Airways filed bankruptcy.  American Airlines revealed its plans
to cut 7,000 jobs, or 6% of its workforce.  They will also reduce
their fleet and defer current aircraft deliveries.  In total
American will cut capacity by 9% in an attempt to save about $1.1
billion per year.  The resulting sell off in the airlines also
bled into the aerospace and defense stocks.

The tech sector, which has been reeling from lack of IT spending
got more bad news, as well.  IBM announced that they are in the
process of cutting over 15,000 jobs, due to a recent decline in
corporate spending on tech services.  They reported cutting about
14,000 workers from their Global Services Unit, and another 1400
from the Microelectronics division.

Consumer spending appeared to show a healthy trend this morning,
as retail giant Wal-Mart reported a 26% gain in net profit and
raised guidance for next quarter, igniting a rally during the
early part of the day. The Commerce Department reported that
retail sales were up 1.2% for the month of July, although most of
the spending was focused on new cars and trucks, as consumers
took advantage of low financing offers.  This rally  was tempered
in the afternoon by the Fed's comments about dangers to the
economy.

Now that the anticipation of a rate cut is over, we can expect to
give back more of the Dow's recent gains.  Now trading at
8482.39, the possibility of re-testing the 8000 level seems
realistic.  With a break back under 1300 in the Nasdaq Composite,
which finished the day at 1269.28, we will be looking toward
support at 1200 to see if it can hold once again. Bulls can focus
on the Fed's easing bias as an indication that rates will be
lowered in the near future.  Investors eyeing September 11 will
most likely want to avoid holding long positions toward the end
of this month.  A surprise rate cut just before the anniversary
is not out of the question, as a preliminary strike toward
preventing an anticipatory nosedive in the markets.  Short of
that, there is a slew of economic data due at the end of this
week.  On Wednesday, we will see business inventories.  Thursday
brings initial unemployment claims, industrial production and the
Philadelphia Fed.  Friday is CPI, housing starts and preliminary
consumer sentiment.  Although the big number may be behind us
temporarily, there are a lot of rungs to climb this week.  Watch
for continued volatility in the market, as the market Volatility
Index (VIX)  maintained itself over 40, in spite of the rate news
fading in the rear view mirror.

Tomorrow, August 14, is the day that hundreds of companies are
required to certify their accounting results.  We could be in for
some surprises, as we find out who signs off and who does not.
Not all companies are required to report tomorrow, but keep an
eye on the ones that are, and the ones that have their dates
coming up.  For those that don't report on time, remember that
puts serve a purpose.


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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7702
Current     :  8482

Moving Averages:
(Simple)

 10-dma: 8495
 50-dma: 8918
200-dma: 9740



S&P 500 ($SPX)

52-week High: 1226
52-week Low :  797
Current     :  884

Moving Averages:
(Simple)

 10-dma:  883
 50-dma:  940
200-dma: 1075



Nasdaq-100 ($NDX)

52-week High: 1782
52-week Low :  892
Current     :  907

Moving Averages:
(Simple)

 10-dma:  917
 50-dma: 1013
200-dma: 1350



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


The Semiconductor Index (SOX.X):  The Semiconductor Index returns
to Market Sentiment on a sour note.  The index had staged a
valiant rally above 300, but has lost its footing and fallen back
below this key support level.  IBM announced they are cutting
over 15,000 jobs, as a result of a slowdown in IT spending.  This
does not bode well for the stocks in this sector.  The index has
rolled over once again at its downward sloping trend line,
beginning in the middle of June.  The next level to look out for
is the 282.75 support level from August 5th, just before the
sector began its failed rebound.  A break below this level will
demonstrate the lack of a new floor, and a move down to 250 would
not be out of the question.

52-week High: 657
52-week Low : 282
Current     : 298

Moving Averages:
(Simple)

 10-dma: 308
 50-dma: 372
200-dma: 500

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

Market Volatility

In spite of the FOMC announcement on interest rates being behind
us, the VIX has maintained itself over 40.  This foreshadows
continuing volatility as the market searches out a bottom after
today's 206-point drop.  We may see the Dow approach 8000 once
again, which would probably translate into a VIX level back near
50 again.

CBOE Market Volatility Index (VIX) = 40.09 –0.37
Nasdaq-100 Volatility Index  (VXN) = 57.68  1.39

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.71        616,365       436,169
Equity Only    0.52        496,394       257,843
OEX            1.23         32,207        39,752
QQQ            0.25        121,082        30,186

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

Bullish Percent Data

           Current   Change   Status
NYSE          33      + 1     Bull Confirmed
NASDAQ-100    29      + 1     Bull Correction
DOW           40      + 3     Bull Confirmed
S&P 500       35      + 2     Bull Alert
S&P 100       36      + 2     Bull Alert

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  1.23
10-Day Arms Index  1.41
21-Day Arms Index  1.32
55-Day Arms Index  1.40

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        808          1939
NASDAQ     1054          2222

        New Highs      New Lows
NYSE         19              97
NASDAQ       30             146

        Volume (in millions)
NYSE     1,493
NASDAQ   1,560

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


Commitments Of Traders Report: 08/06/02

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

The commercials reduced their short contracts position by 4,000,
while increasing their long contracts slightly. Small traders,
increased their long contracts by nearly 6,000, while leaving
their short positions virtually unchanged.


Commercials   Long      Short      Net     % Of OI
07/16/02      388,943   464,162   (75,219)   (8.8%)
07/23/02      405,969   471,704   (65,735)   (7.5%)
07/30/02      430,833   482,957   (52,124)   (5.7%)
08/06/02      431,590   478,879   (47,289)   (5.2%)

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
07/16/02      157,370    67,247    90,123     40.1%
07/23/02      166,713    73,778    92,935     38.6%
07/30/02      153,858    67,451    86,407     39.0%
08/06/02      159,561    67,434    92,127     40.5%

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 increased both long and short contract positions
equally, by just less than 3,000 contracts on each side.  Small
traders reduced both positions, taking 1600 contracts from the
long side, and 450 from their shorts.


Commercials   Long      Short      Net     % of OI
07/16/02       33,152     39,866    (6,714) ( 9.2%)
07/23/02       37,204     43,601    (6,397) ( 8.0%)
07/30/02       38,163     47,343    (9,180) (10.7%)
08/06/02       41,014     50,025    (9,011) ( 9.9%)

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
07/16/02       12,816    10,774     2,042     8.7%
07/23/02       12,756    11,152     1,604     6.7%
07/30/02       13,159     9,237     3,922    17.5%
08/06/02       11,547     8,782     2,765    13.6%

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 added to both long and short contract totals.  They
added 1,000 long contracts and about 1400 shorts.  Small Traders
also added to both sides, increasing their long contracts by
1200, while adding 250 to the short side.


Commercials   Long      Short      Net     % of OI
07/16/02       20,357    14,074    6,283      18.2%
07/23/02       22,369    14,745    7,624      20.5%
07/30/02       22,429    12,811    9,618      27.3%
08/06/02       23,491    14,290    9,201      24.4%

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
07/16/02        8,524    10,133    (1,609)   (8.62%)
07/23/02        9,101    12,604    (3,503)   (16.1%)
07/30/02        6,778     8,999    (2,221)   (14.1%)
08/06/02        7,981     9,258    (1,277)   ( 7.4%)

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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******************
WEEKLY FUND SCREEN
******************

Special Situation and Recovery Funds

This week, we use Standard & Poor's online power search tool to
isolate the best special situation and recovery funds.  The S&P
power search tool we will use allows you to screen and evaluate
funds using factors you believe are most important in measuring
and analyzing fund performance.  S&P's fund website, located at
www.funds-sp.com, touts a comprehensive mutual fund database of
more than 50,000 funds.

S&P's power search tool is unique from other screen tools we've
seen in that it classifies mutual funds by their main sector or
category, their specialist sector, their general sector and the
geographic area in which they invest.  Considering the state of
the economy and financial markets, I thought it would make some
sense to revisit the specialty category known by S&P as special
situation and recovery funds.

Special situation stocks are defined as undervalued stocks that
should soon rise in value because of an imminent favorable turn
of events.  A special situation stock may be about to introduce
an exciting new product or service, or may be undergoing needed
management change.  Many security analysts focus on looking for
and analyzing special situations.  Stocks that fluctuate widely
in daily trading because of a particular news development, such
as the announcement of a takeover bid, would also be considered
special situation.

In our comparison and evaluation process, we may use other fund
ratings (Lipper, Morningstar, etc.) to validate the S&P results.
By the end of this exercise, we hope to isolate one or two good
funds in this specialized category.  Because of their specialty
nature, they should represent the explore portion, not the core
portion, of an equity portfolio.

Screen and Evaluation Process

S&P's power search tool utilizes their proprietary database of
over 50,000 funds worldwide.  To get to their database of "USA
Mutuals" you need to select that database from the list of all
databases on the main page (www.funds-sp.com).  Once you enter
the USA Mutuals database, you can click the "Power Search" tab
and that will take you to the S&P advanced fund screener.

We skipped to the Classification section, and then clicked the
button next to the "Specialist Categories" field to reveal all
the different investment niches.  We highlighted the specialty
category we want "Special Situations and Recovery" and clicked
the Go Search button at the bottom of the screen.  That simple
all-inclusive screen returned 17 results.  Some of the results
are load funds with more than one share class, thus in reality
there are only 10 funds in this specialized category using the
Standard and Poor's USA Mutuals database.

Next, we identified which funds on the list had S&P ratings of
three stars or above (with 5 stars highest, and 1 star lowest).
That yielded six special situation and recovery funds rated at
least three stars by Standard & Poor's as follows:

 Credit Suisse Global Post Venture (CPVAX, CPVBX, CPVCX)
 Excelsior Value and Restructuring (UMBIX)
 Janus Special Situations (JASSX)
 Legg Mason Special Investment Trust (LMASX)
 Midas Special Equities (MISEX)
 Value Special Situations (VALSX)

The Standard & Poor's power search results can be viewed based
upon different criteria.  We clicked the "Quantitative" tab to
view each fund's quantitative risk measures in relation to all
funds in its general sector peer group.  Below is a summary of
the quantitative measures for the six funds against the General
Sector Peer Group (over 4 years and up to August 2, 2002).

 Credit Suisse Global Post Venture:
 R Squared: 0.88
 Beta: 1.50
 Alpha: -0.06

 Excelsior Value and Restructuring:
 R Squared: 0.80
 Beta: 1.28
 Alpha: 0.52

 Janus Special Situations:
 R Squared: 0.83
 Beta: 1.09
 Alpha: 0.25

 Legg Mason Special Investment Trust
 R Squared: 0.69
 Beta: 1.07
 Alpha: 0.65

 Midas Special Equities:
 R Squared: 0.65
 Beta: 0.93
 Alpha: -0.48

 Value Line Special Situations:
 R Squared: 0.95
 Beta: 0.85
 Alpha: 0.35

Of the six funds on the list, Value Line Special Situations has
the highest correlation to the market (0.95) as measured by the
S&P 500 index.  It is also the least volatile fund relative to
the market as measured by its beta coefficient (0.85).  A 1.00
would be equal to the market (S&P 500 index).  Two of the fund
offerings have negative alpha scores, indicating they have not
been successful in "adding value" relative to the market index
considering their risk (beta) level.

Next, we compared the six special situation and recovery funds
using Morningstar's Fund Compare tool (at www.morningstar.com).
That exercise resulted in the elimination of the Credit Suisse
Global Post Venture Capital Fund, since it lacks assets and is
not rated by Morningstar nor does it match the profile of fund
where looking for this week.

Of the five remaining funds, two fall into the large-cap blend
style box, two land in the mid-cap blend style box, and one is
classified as having a mid-cap growth style.  We make a mental
note of the funds' investment style and look to other decision
criteria, such as expenses.  There, we find that one fund, the
Midas Special Equities Fund, has a 3.80% current expense ratio
and it is effectively removed from consideration.

That leaves four funds with three mid-cap investment styles as
follows:

 Excelsior Value and Restructuring (UMBIX) Mid-Cap Value
 Janus Special Situations (JASSX) Mid-Cap Blend
 Legg Mason Special Investment Trust (LMASX) Mid-Cap Blend
 Value Line Special Situations (VALSX) Mid-Cap Growth

In terms of assets, Legg Mason's Special Investment Trust has
been the group's most successful retail fund, with current net
assets of $2.6 billion today.  Excelsior Value & Restructuring
has $1.8 billion in net assets today according to Morningstar.
Janus Special Situations is third with assets of $679 million,
while Value Line's Special Situations Fund has assets of $234
million.

Each of the funds is considered to have high risk compared to
their relative category peer group, except for the Value Line
Special Situations Fund, considered to have less than average
risk relative to other mid-cap growth funds.  Only one of the
funds is 5-star rated, Morningstar's highest rating.  That is
Excelsior Value and Restructuring Fund (UMBIX).  Value Line's
Special Situations Fund is 4-star rated by Morningstar.  Legg
Mason Special Investment Fund is 3-star rated while the Janus
Special Situations Fund is only 2-star rated by Morningstar.

Considering Legg Mason's long-term track record in this area,
Legg Mason Special Investment Trust may have the better risk-
reward profile in the mid-cap blend style box (versus Janus).

That leaves three special situation and recovery funds, with
three different mid-cap equity styles.  Each fund is further
discussed in the following sections.

Excelsior Value and Restructuring (UMBIX)

This high risk-high return fund may be our favorite of the three
special situation funds.  It seeks long-term growth of capital by
normally investing at least 65% of assets in common and preferred
stock, and convertibles issued by companies management expects to
benefit from restructuring or redeployment of assets.  These may
include companies involved in mergers, consolidations, spin-offs,
liquidations, financial restructurings and reorganizations.  The
fund may also invest in investment-grade debt, although it tends
to remain fully invested in equity securities.

Historical returns haven't always been consistent but they have
been strong relative to the market (S&P 500 index) and category
peers over the past five years.  According to Morningstar, this
fund has a 5.8% annualized total return for the trailing 5-year
period through August 12, 4.9% better than the market (S&P 500)
and ranking it in the top 3% of the mid-cap value category, per
Morningstar.

David Williams, a senior vice president and department manager
with U.S. Trust Company of New York, has managed the Excelsior
Value and Restructuring Fund since December 31, 1992 (10 years
almost).  Previously, he served as a senior investment officer
with Horizon Trust Co. and as a portfolio manager with T. Rowe
Price Associates.

The Excelsior Value and Restructuring Fund has a below average
expense ratio of 0.94% and a no-load cost structure, adding to
its appeal.  The fund's minimum initial investment requirement
stands at only $500 for regular accounts ($250 for IRAs).  For
more information or a prospectus, you can call Excelsior Funds
(800-446-1012) or logon to www.excelsiorfunds.com.

Legg Mason Special Investment Trust (LMASX)

Legg Mason Special Investment Trust pursues capital growth by
investing mainly in equity securities issued by companies with
market capitalizations of below $2.5 billion.  It buys equity
securities that appear to be undervalued in relation to their
long-term earning power or asset values.  The fund also seeks
firms involved in special situations that may prompt a price
increase in their securities.  It may invest up to 20% of net
assets in companies that are involved in actual or anticipated
reorganizations or restructurings.

According to Morningstar, LMASX has a 5-year annualized total
return of 5.5% through August 12, 4.7% better than the market
(using the S&P 500 index as the market proxy) and ranking the
fund in the top 27% of the mid-cap blend category (almost top
quartile).  Over the trailing 5-year period, the fund has had
high risk and above average returns relative to its category.

Portfolio manager Lisa Rapuano is relatively new, starting on
January 1, 2000, but her tenure with Legg Mason dates back to
1994.  Before joining Legg Mason, Rapuano was an analyst with
Franklin Street Partners.

Cautious investors may want to wait until Rapuano has 3 years
investment history to compare and evaluate.  Considering this
fund's long-term track record and Legg Mason's reputation, it
shouldn't be ruled out.  For more information or a prospectus,
call the Legg Mason Funds at 800-577-8589.

Value Line Special Situations (VALSX)

Value Line Special Situations Fund seeks long-term growth of
capital by investing mostly in equity securities, putting at
least 80% of assets in special situations (again, companies
involved in reorganizations, mergers, technological advances,
liquidations, or distributions of cash.  This fund relies on
Value Line's ranking system for timeliness in its investment
decisions.

According to Morningstar, the fund's trailing 5-year/10-year
annual average returns rank in the top decile of the mid-cap
growth category.  Its 5-year average return of 8.8% was 7.9%
better than the S&P 500 index and good enough to rank in the
category's 5th percentile.  The fund's 10-year return of 1.9%
(annualized basis) lagged the S&P 500 index considerably, but
ranked it in the category's 7th percentile for performance.

This may have been the first mutual fund to invest in special
situations.  It began operations on May 30, 1956 and today is
managed by a team of Value Line investment professionals.  If
experience is important to you, then you may want to consider
Value Line's approach to special situation investing.  In the
last decade, the fund has generated "high" return with "below
average" risk, per Morningstar, in comparison to its category
peer group (i.e. mid-cap growth).  For more information, call
Value Line Mutual Funds at 800-223-0818.

Summary

This week, we identified three special situation and recovery
funds that offer investors long-term capital growth potential.
All three invest primarily in the mid-cap sector, or multiple
capital sectors as the Excelsior Value and Restructuring Fund
does (Morningstar calls it mid-cap value, while Lipper says it
has a multi-cap value style).

Depending on your equity style orientation, we have shown one
fund with a value style bias, one fund with a pro-growth tilt,
and one that blends value and growth characteristics.  You may
find that one style suits you better than another may.


Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

THE SECTOR BEAT - 8/13
by Leigh Stevens

Lots of red ink today - many sectors looked like they could
extend their recent rallies - WRONG!  How quickly they turn - on
a dime!

The Airline sector (XAL) was not off more than 2%, but this is
another loss tacked on to many and to a very steep decline in
recent weeks - this group was in the news again as United
Airlines (UAL) fell again the day after US Air filed for
bankruptcy protection.

Selling also spread to the defense/aerospace sectors, with Dow
stocks Boeing and United Technologies (UTX) getting hit with
selling.  American (AMR) was up however, after announcing a major
restructuring.

Biotech (BTK) got hit on profit taking after a strong run in
recent days.

Financial stocks like the Banks (BKX), Brokers (XBD) and the
financially sensitive Utilities (UTIL) sector fell under their
recent consolidation patterns after the Fed did not ease the key
Fed funds rate and on a bout of profit-taking selling.

The Defense sector (DFI) index reversed its recent uptrend, as
did the Healthcare (HMO) and Pharmaceuticals (DRG) sectors.

Technology and the Internet stocks (INX) were weak across the
board.

Only Gold & Silver stocks (XAU) and the Retail sector (RLX)
bucked the downtrend today. Retail got a boost from Wal-Mart's
positive earnings report. XAU looks like it can work it's way
back up toward 70.

UP on Tuesday -





DOWN on Tuesday -





SECTOR TRADE RECOMMENDATIONS -

NEW/OPEN TRADE RECOMMENDATIONS -

Short BBH on break of 83.00
(Biotech HOLDR's)
Stop: 84.70
Objective: ** See Sector Highlight below - **


TRADE LIQUIDATIONS -

NONE


SECTOR HIGHLIGHT(S) -

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 is close to breaking below its recent uptrend
and giving back a portion of its recent gains after rallying up
to resistance implied by its May low - prior support (once
broken) "becomes" resistance.

If BTK gave back half of its recent run up by retracing 50% of
the recent advance - a very "normal" correction - it could drop
back to the 330 area.

In the case of the Biotech HOLDR's (BBH), a 50% retracement would
be to 77, but believe that a downside objective in BBH may be to
the 73 area, or back to its recent upside chart gap - this would
a bit more than a 62% retracement.


Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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***********************
SWING TRADER GAME PLANS
***********************

Okay, Now What?

The Fed gave traders some good news if you believe what the media
is saying. Is it good that the economy is shrinking and the
"futures risks  are weighted toward weakness"? I don't think so!
Sure there may be another Fed rate cut in our future but that is
like saying "I hope I am sick so I can get another shot from my
Doctor."  This is not something I expect most traders are looking
forward to.


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The Option Investor Newsletter                  Tuesday 08-13-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: ABGX, AMGN, CHIR, IDPH
Dropped Puts: QCOM
Daily Results
Call Play Updates:
New Calls Plays:
Put Play Updates:
New Put Plays:

****************
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:
*****

ABGX $9.16 -1.05 (-0.88) Biotechnology stocks began cracking around
the edges at the open on Tuesday, as investors looked to take
profits on the recent run ahead of the Fed's decision on interest
rates.  ABGX slid at the open, but managed to find some support
near the $8.75 level.  That came to an end after the FOMC results
were announced, as the broad markets tumbled and the BTK index
shed more than 5.5%.  That brings the bullish run to an end, at
least for now.  While our stop hasn't been violated yet, we want
to get out now, as it looks like the trend in the sector has
turned.  Use any sort of oversold bounce tomorrow morning to exit
gain a more favorable exit from open positions.

---

AMGN $45.64 -2.34 (-2.09) Big or small, Biotech stocks were among
the favorites on the sell side on Tuesday and that selling picked
up after the Fed's announcement that interest rates would remain
unchanged.  With the BTK index sliding back under the center line
of its ascending channel, the trend in this sector appears to have
shifted back in favor of the bears.  AMGN did better than the BTK
index, but still shed 4.87%, settling below $46 for the first time
since last Wednesday.  Even though our $45 stop hasn't yet been
violated, it appears the prudent course of action is to close any
open positions before our stop is triggered.  With an apparent
change in the trend (daily Stochastics rolling down out of
overbought), use any morning strength as an opportunity to
liquidate open positions.

---

CHIR $37.18 -1.71 (-0.72) Despite its relative strength over the
past week, CHIR couldn't dodge the meltdown in the Biotechnology
sector (BTK.X) on Tuesday.  While the weakness was fairly mild in
the morning, it gathered momentum to the downside after the Fed's
announcement on interest rates.  Up until that time, CHIR had
been holding near the unchanged level.  But the bulls couldn't
hold up in the face of the heavy selling that came in during the
final 2 hours of the day.  By the closing bell, CHIR had given up
more than 4% -- outperforming the BTK index, but still notably
weak.  Rather than wait for our stop to be triggered, we want to
close the play here, using any strength tomorrow as a selling
opportunity.

---

IDPH $43.89 -2.39 (-1.89) Variations on a theme, IDPH got
caught in the Biotech downdraft that intensified in the wake of
the Fed's decision to leave interest rates unchanged.  After
meandering around the $46 level early in the day, the stock
tumbled through support at $45 before coming to rest just below
$44.  That slide amounted to nearly a 5% loss on the day, and the
acute loss of relative strength is prompting us to close the play
before stop is triggered.  The tide in the Biotech sector appears
to be turning in favor of the bears.  Use an oversold bounce to
exit open positions tomorrow before the decline continues.


PUTS:
*****

QCOM   $26.32 +0.50  (+0.40 for the week)  QCOM has experienced a
bounce since trading down to $23.36 the day after OI initiated
the Put Play.  After being turned back from the $26 level several
times, the stock experienced a breakout today, trading as high as
$27.35.  Our stop was violated intraday, but more importantly,
QCOM has broken its short-term downtrend from the middle of July.
While the stock was turned back below our end of day stop loss
once again, we are closing this play and will look for better
opportunities.


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

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

CALLS              Mon    Tue

ABGX      9.16    0.37  -1.05  Drop, broke formation
AMGN     45.64    0.97  -2.33  Drop, biotech pullback
CHIR     37.18    1.03  -1.7   Drop, profit taking
IDPH     43.89    0.86  -2.39  Drop, gift horse
JNJ      53.37    0.68  -1.21  new support still there
NOC     111.56   -2.21  -2.55  Pullback, look for support
TEVA     68.55    1.47   0.64  New, taking off on down day


PUTS

AIG      62.31   -0.49  -3.20  New, Run done
AZO      66.15   -1.35   0.90  Money spent in wrong place
BA       37.23    0.35  -3.27  New, Fewer planes, fewer dollars
DIA      84.95    0.61  -2.04  Suspense over, crutch gone
HD       26.49   -0.32  -0.21  Technical breakdown
NKE      43.00   -0.63   0.23  Running in place
PHTN     18.85   -1.83  -1.02  New, Off the cliff
QCOM     26.32    0.58   0.50  Drop, going nowhere
QLGC     32.14    0.05  -3.15  New, Look out below
TMX      27.65    0.05  -0.40  Government is a tough foe


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

NOC $111.56 -2.55 (-5.01 for the week) Northrop Grumman pulled
back below our original target for new entries around $113.  The
stock dropped with the rest of the market this afternoon, after
disappointment from the FOMC's rate decision set in.  The key
level to watch, however, is our stop loss of $110.  NOC's 200-dma
of 109.31 should provide a level of support from which the stock
could experience a big bounce. A look at the chart shows NOC
repeating its pattern from the end of July, when it dropped from
$110 to $103, before beginning its rise back up to $115.  The
rising channel from the end of July remains in tact, as a high
priced stock will experience high dollar swings within this
channel.  The bottom of the channel coincides with the stop loss
of $110, so today's drop was not so great as to change our stance
on NOC.  The trade of $112 created a 3-box reversal on the PnF
chart, however most rising stocks experience several of these on
the way up.  In addition to finding support from the 200-dma,
there is also PnF support at $110.  We will continue to hold our
long position in NOC, as the PnF bullish objective remains $150.
Tomorrow's action following the rate disappointment sell-off
could test support.  A bounce should indicate a good point for
new long entries.  Our target remains $130, just below recent
resistance from the middle of June.

---

JNJ  $53.37 +1.37 (-1.14 for the week) JNJ has continued to test
new support above $53 the last few days.  It has rebounded each
time from approximately the same area, around $53.40.  The
stock's sideways movement is further evidence of consolidation at
a higher level than the last.  There is currently support at the
10-dma of $52.73 and 50-dma of $52.82, just below the
aforementioned $53.  On a day the market plummeted as a result of
disappointment in the FOMC's reluctance to lower interest rates,
JNJ held up well.  This stock has had quite a run, and today's
drop shook out many stocks that had risen on air.  JNJ, however,
held its ground.  The pipeline of new products, several of which
are scheduled to be reviewed before the FDA in the next couple of
months, has kept the sellers at bay, as the prospects look
promising for JNJ.  JNJ remains on a PnF buy signal with a
bullish price objective of $65. We are maintaining our long
position with a target of $60.


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

TEVA – Teva Pharmaceutical Inds. $68.55 +0.64 (+1.82 this week)

Company Summary:
Producing drugs in all major therapeutic categories, TEVA is a
fully integrated global pharmaceutical company.  In the area of
proprietary drugs, TEVA has focused on products for the central
nervous system disorders, primarily the development of Copaxone,
a treatment for relapsing-remitting multiple sclerosis.  Through
its U.S.-based subsidiary, the company manufactures 137 generic
products in 210 generic forms, which are distributed and sold in
the United States.  TEVA also manufactures over 270 generic
products, which are sold primarily in the Netherlands, the
United Kingdom and Hungary.

Why We Like It:
The Biotechnology sector (BTK.X) has been one of the strongest
performers in recent weeks, marching steadily upwards in its
ascending channel.  That strength ran into a serious roadblock
on Tuesday, as profit taking intensified in the wake of the
Fed's announcement on interest rates.  Unlike virtually every
other stock in the sector, shares of TEVA bucked the trend and
advanced 6th consecutive day.  While today's gain was only
fractional, it is important for two reasons.  First the stock is
clearly outperforming the BTK index, and secondly, TEVA is now
on the cusp of completing a breakout over resistance dating back
to last October.  TEVA has tested the $68 resistance level several
times over the past few months, and today's close above that level
(the first since last October) in the face of sector-wide
profit-taking is quite encouraging.  Breaking above the $65 level
a couple weeks ago generated a fresh double-top Buy signal on the
PnF chart, with a very bullish price target of $89.  After pulling
back to post a double-bottom near $58 on July 24th, TEVA has been
working higher along an aggressive ascending trendline, currently
at $67.75.  Along with resistance near the $68 level, this
ascending trendline describes an ascending wedge, and TEVA is
tantalizingly close to completing a bullish breakout from that
pattern.  A near-term pullback to support near $68 or even $67
would make for a solid entry into the play.  With the weakness in
the BTK today, we want to keep TEVA on a short leash, hence our
tight stop at $66.  Momentum traders can consider new positions
on a volume-backed move through the $69 level, but only if the
BTK is pushing higher again.

BUY CALL SEP-65 TVQ-IM OI=1534 at $5.00 SL=3.00
BUY CALL SEP-70*TVQ-IN OI=2733 at $2.00 SL=1.00
BUY CALL DEC-70 TVQ-LN OI=1062 at $4.90 SL=3.00
BUY CALL DEC-75 TVQ-LO OI= 698 at $2.75 SL=1.25

Average Daily Volume = 964 K



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

HD $26.49 -0.21 (-1.80 for the week)  Home Depot got a bit of a
boost today when Wal-Mart raised guidance for the third quarter,
and the broader markets staged a rally leading up to the Fed's
interest rate announcement.  The stock staged a mild rebound,
reaching a high of $28.08.  After the FOMC announcement left
rates unchanged, HD fell back into its previous descending trend
line.  Yesterday's trade of $27 established a triple bottom
breakdown for HD on the PnF chart, which is a very bearish
formation.  Additionally HD appears to have been forming a
bearish flag on the PnF, from which it has now broken down.

The lack of a rate cut also means a delay in further cuts to re-
financing rates, which may have helped Home Depot recover as
homeowners may have further financed home improvements with home
equity loans.  The stock is currently trading at a level not seen
since October 1998.  We will continue to hold our short position
with a target in the low 20s.  There may be some psychological
and round number support at $25, however there is no fundamental
or technical basis for that level.

---

AZO $66.15 +1.37 (-1.13 for the week) Autozone enjoyed a run-up
to start the day after retail sales numbers indicated a 1.2%
increase in July.  Wal-Mart also raised guidance, a further
indication of spending consumers.  However, a closer look at the
retail numbers indicates a not so rosy picture for AZO. Most of
the increase was due to people taking advantage of free financing
offers and other incentives to purchase new cars and trucks.
Excluding auto sales, retail sales were up only 0.2%.  When the
majority of money being spent in the economy is spent on new cars
and trucks, there is not much increase in the need for parts.
The do-it-yourselfers that AZO targets are being lured away with
financing plans that makes new automobile ownership more
accessible.  The stock finished up on the day, but well off its
high of $68.32.  The 200-dma of $70.47 still looms above, and
should serve as a cap on any more bounces.  More importantly, a
look at the daily chart shows the downward trend line since
August 7 to be in tact.  The stock has found some recent support
around $65 and new entries may want for a break below this level
to go short.  We are maintaining our short position in AZO from
this level with a price target of $60.

---

DIA  $84.95 -2.04 (-3.79 for the week) The market behaved pretty
much according to the OI plan, outlined on the Market Monitor and
in our original DIA play.  The FOMC held rates steady and changed
their bias to an easing stance, indicating that they could be
lowering rates in the near future.  The key wording in the Fed's
statement was that economic weakness was still the greatest risk.
This basically told the market that the Fed sees a risk of
recession, yet is not going to lower rates right now.  Huh?

With September 11 around the corner, the FOMC is hording its
bullets to deal with any market reaction from possible
anniversary terrorist attacks. The market Volatility Index
remained high, even after the Fed announcement, reflecting fear
of a continued drop tomorrow. There are also hundreds of
companies whose CEOs must sign off on their accounting statements
beginning tomorrow, August 14.  Expect daily reports on which
companies have missed their individual deadlines, and which
companies will be reporting any "irregularities" ahead of time.

In addition, we have a slew of economic data later this week.
Wednesday brings Business Inventories for June. On Thursday we
see Initial Unemployment Claims, Industrial Production, Capacity
Utilization and the Philadelphia Fed.  Friday is CPI for July, as
well as Building Permits and Housing Starts.  Friday also brings
preliminary Consumer Sentiment numbers for August. This week's
roller coaster may continue, and the big drop may not be over. We
are lowering our stop loss on this play to $86.50, in order to
lock in profits on a rebound.

---

NKE $43.00 +0.23 (-0.92) Positive earnings from WalMart this
morning gave a lift to the Retail sector (RLX.X) in the early
going, but that positive momentum was only able to push the index
up to the $277 level.  Investor optimism turned to disappointment
after the Fed left interest rates unchanged and the RLX fell back
to near the unchanged level by the closing bell.  The rise in the
RLX lent a bid to shares of NKE early in the day, allowing the
stock to rise to the $44.50 level before the bottom fell out in
the final 2 hours of trade.  Traders that took advantage of the
artificial rise got a great entry into the play as NKE rolled over
and are sitting on a decent gain tonight, with NKE primed to break
down under yesterday's low at $42.70.  Today's reversal from the
highs solidified resistance near $44.50-45.00, so we can continue
to fade rallies near that level.  If looking to initiate
momentum-based trades, use a breakdown under $42.50 to enter, but
watch out for a possible bounce from the $41 area, near the
September lows.  Keep stops set at $46.

---

TMX $27.65 -0.40 (-0.75) In typical volatile fashion ahead of an
FOMC announcement, the broad markets rose early in the day and
then went flat ahead of the 2:15pm ET announcement.  That action
helped lift shares of TMX to just below the $29 level (the site
of the 20-dma) by early afternoon.  That provided an attractive
entry point into the play as the stock began to drift lower ahead
of the FOMC statement.  Late-comers got another entry point off
the initial post-announcement lift, which began to roll over from
a slightly lower high.  The $29 level is solidifying as overhead
resistance, increasing our confidence in entering the play on
subsequent failed rallies below this level.  Alternatively, a
continued decline under the $27.80 level can be used for
momentum-based entries.  The next significant level of support
after that will be $26.50-27.00, the site of the lows from last
Monday.  For now, we're keeping our stop in place at $30.


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

BA - Boeing Company - $37.23 -3.27 (-3.77 for the week)

Company Summary:
The Boeing Company is the largest aerospace company in the world
and the United States' leading exporter. It is NASA's largest
contractor and the largest manufacturer of commercial jetliners
and military aircraft. The company's capabilities in aerospace
also include rotorcraft, electronic and defense systems,
missiles, rocket engines, launch vehicles, satellites, and
advanced information and communication systems. The company has
an extensive global reach with customers in 145 countries.

Why We Like It:
Bad news for Boeing.  A day after U.S. Airways filed for
bankruptcy, and a few days after Vanguard grounded itself,
American Airlines announced a streamlining of operations.
American will cut 7,000 jobs, which amounts to 6% of its
workforce, but more importantly to Boeing, the airline is
reducing its fleet and deferring aircraft deliveries as it copes
with the loss of full-fare customers in an industry wide
recession.  American says it will focus on efficiency and cost
cutting, rather than revenues.  This means fewer planes, not
more.  This is not good news coming from the world's largest
carrier.  Boeing's biggest client, United Airlines, is facing
enormous financial problems, losing $1 million per day, and faces
a debt payment of over $900 million in December. United is
currently up to date on payments to Boeing's financing group, but
any interruption in those payments could have a material adverse
effect on Boeing.  There has been talk of United following U.S.
Air into bankruptcy if they do not obtain a $1.8 billion bailout
loan from the government.  If the airline files bankruptcy, this
will affect its obligations to creditors, including Boeing.

The dominoes have begun to fall among major airlines, and with
the September 11 anniversary around the corner, a lack of
passengers may push more of the airlines over the Chapter 11
brink.  In addition to problems with its customers, Being now
faces problems from one of its biggest competitors. Total orders
for the first six months of 2002 were just over half of what they
were last year for Boeing and Airbus combined.  Boeing now claims
that Airbus is selling aircraft at cut rate prices in an attempt
to steal market share, relying on heavy subsidization from
European governments to make up the losses.

A look at Boeing's chart shows that today's low of $37.10 came
within a dime of creating a triple bottom breakdown on the PnF
chart, which is a very bearish formation.  The stock's current
bearish vertical count is $32, which will be our initial target
on this play.  In addition, today's low matched that of the
morning of July 24, before the Dow took off on its massive rally.
A trade below this $37.10 would be Boeing's lowest level since
December of last year, as it recovered from the post September 11
drop.  OI sees the current price level as a short entry, with a
stop loss of $40, just above today's high.

BUY PUT SEP-40.OO*BA-UH OI= 508 at $4.10 SL=2.50
BUY PUT SEP-37.50 BA-UU OI= 233 at $2.70 SL=1.35

Average Daily Volume = 3.34 mil


---

AIG – American International Grp. $62.31 -3.20 (-4.64 this week)

Company Summary:
Engaged in a broad range of insurance and insurance-related
activities through its subsidiaries, AIG's primary focus is on
its general and life insurance businesses.  Additionally, the
company is growing its presence in financial services and asset
management.  Other operations include auto insurance, mortgage
guaranty, annuities, and aircraft leasing.  With operations in
130 countries, AIG generates more than half of its revenues
outside the United States.

Why We Like It:
Insurance stocks have been under consistent selling pressure for
the past several months, so it came as a relief that they managed
to participate in the broad market rebound that commenced on July
24th.  Not because we want to buy them, but because we needed a
bit of a lift to give us an attractive entry point.  Shares of AIG
have been mired in a persistent downtrend since topping out near
$86 last October.  That selling reached a climax in the last week
of July, with the stock trading briefly below the $48 level.
Since then, AIG has rebounded nearly $20, topping out last Friday
near $67.  Helping to put the near-term top in the stock was the
news that broke over the weekend, high-lighting the exposure of
insurance firms (including AIG) to failed or failing companies
like Enron, Worldcom and Global Crossing.  With all eyes on the
FOMC meeting today, the negative impact of that news was somewhat
muted yesterday, but the sellers got a boost of confidence when
the Fed left rates unchanged.  Even after the company claimed that
it had already taken the Enron and Worldcom writeoffs and
announced that it will begin expensing stock options in 2003,
the sellers really smacked the stock on Tuesday.  AIG dropped at
the open and declined all day, with the drop accelerating after
the Fed announcement.  Not only has this dragged the daily
Stochastics into decline, but it is presenting us with an even
more bearish setup, that of bearish Stochastics divergence, which
is created when higher price highs fail to be confirmed by higher
Stochastic highs.  With the still unsettled market, this is still
an aggressive play, so we're going to set a fairly tight stop at
$65.50, just above the bottom of this morning's negative gap.  A
failed rally below this level can be used to initiate new
positions, ideally in the $64.50-65.00 area.  Alternatively,
consider momentum-based entries as AIG falls under the $61.50
level on its way to closing the July 29th gap down near the $57
level.

BUY PUT SEP-65 AIG-UM OI=4702 at $5.00 SL=3.00
BUY PUT SEP-60*AIG-UL OI=8275 at $2.75 SL=1.25

Average Daily Volume = 7.42 mln


---

PHTN – Photon Dynamics, Inc. $18.85 -1.02 (-3.59 this week)

Company Summary:
Photon Dynamics is a provider of yield management solutions to
the flat panel display industry.  The company also offers yield
management solutions for the printed circuit board assembly,
advanced semiconductor packaging and cathode ray tube (CRT)
industries.  The company's test, repair and inspection systems
are used by manufacturers to collect data, analyze product
quality and identify and repair product defects at critical
steps in the manufacturing process.

Why We Like It:
The realization that there isn't going to be any near-term
recovery in the PC sector is starting to take hold, as
demonstrated by the heavy selling that has been hitting companies
involved in the manufacture of flat panel displays.  GNSS (a
supplier to the flat panel industry) was one of the few remaining
high-flyers in the Technology arena through the end of 2001, but
since then the stock has lost more than 90% of its value.  That's
quite a comeuppance, and now we're starting to see the selling
pressure intensify in other stocks involved in the industry.  A
quick look at a chart of our new play, PHTN, shows that there
isn't much interest in the stock (at least to the long side), as
selling volume has been on the rise again this week.  In just the
past 2 days, PHTN has slid more than 16%, and Tuesday's drop broke
the $20 support level that had been holding for more than a year.
There's no question that the stock is getting oversold in the
near-term, but that doesn't mean it can't become more so,
especially with the weak fundamentals, and the extreme weakness
still being exhibited in the Semiconductor space.  While the
Semiconductor index (SOX.X) managed to rebound off its recent lows
last week, the index rolled over again at another lower high over
the past two days and appears to be headed back to test those lows
in the near term.  That sector weakness is just going to
exacerbate the weakness in shares of PHTN, which are already
reeling from the lack of demand for its products and services.
After the sharp drop of the past 2 days, it would be natural to
expect a bit of an oversold bounce.  Take advantage of that bounce
(if it develops) to enter new positions on the next rollover
below our $22 stop, ideally in the vicinity of intraday resistance
near $21.  Failing that, look to enter the play as the stock falls
under the $18.50 level, just below today's intraday low.

BUY PUT SEP-20 PDU-UD OI=33 at $2.90 SL=1.50
BUY PUT SEP-17*PDU-UT OI=40 at $1.60 SL=0.75

Average Daily Volume = 761 K


---

QLGC – QLogic Corporation $32.14 -3.15 (-3.76 this week)

Company Summary:
Somebody has to make the equipment that lets your computer talk
to all its peripheral equipment, and QLGC does it well.  A
leading designer and supplier of semiconductor and board-level
input/output (I/O) management products, QLGC has been providing
SCSI-based connectivity solutions to this market sector for over
12 years.  QLGC's I/O products provide a high performance
interface between computer systems and their attached data
storage peripherals, such as hard disk and tape drives,
removable disk drives and RAID (redundant array of independent
disks) subsystems.  The company is also the market share leader
in Fibre Channel host bus adapters, a market segment that is
receiving tremendous attention from investors.

Why We Like It:
In the wake of Emulex's severe warning last Thursday night,
shares of Storage stocks have been under heavy selling pressure.
Hope for an interest rate cut from the Federal reserve seemed to
keep stocks in this sector afloat over the past couple days, but
that artificial prop was brutally removed on Tuesday.  Shares of
QLGC have stubbornly refused to undergo the valuation compression
that has been seen in the likes of ELX and BRCD in recent months,
with even the broad market decline that culminated on July 24th
failing to take the stock to new yearly lows.  But it seems that
the combined effect of the ELX warning and a lack of a rate cut is
going to get the job done this time.  QLGC shed nearly 9% on
Tuesday on volume 75% above the ADV.  That decline pushed the
stock below the 62% retracement of the fall rally, resulting in
its lowest close since October 11th.  With a fresh double-bottom
breakdown on the PnF chart and a bearish price target of $27,
there is clearly still some room to fall for this storage stock.
The $35 level had been providing strong support over the past
couple months and now that it has been broken, it should act as
resistance.  An oversold bounce would likely set us up for an
entry on the failure of that bounce, so long as it fails below
$35, the level of our stop.  Momentum traders will want to
initiate new positions on a continued volume-backed decline
below the $31.75 level, the site of Tuesday's low.

BUY PUT SEP-35 QLC-UG OI=1553 at $5.30 SL=3.25
BUY PUT SEP-30*QLC-UF OI=1437 at $2.80 SL=1.50

Average Daily Volume = 12.4 mln



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The Option Investor Newsletter                  Tuesday 08-13-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: PUT - BA
Traders Corner: From b to P

*********************
PLAY OF THE DAY - PUT
*********************

BA - Boeing Company - $37.23 -3.27 (-3.77 for the week)

Company Summary:
The Boeing Company is the largest aerospace company in the world
and the United States' leading exporter. It is NASA's largest
contractor and the largest manufacturer of commercial jetliners
and military aircraft. The company's capabilities in aerospace
also include rotorcraft, electronic and defense systems,
missiles, rocket engines, launch vehicles, satellites, and
advanced information and communication systems. The company has
an extensive global reach with customers in 145 countries.

Why We Like It:
Bad news for Boeing.  A day after U.S. Airways filed for
bankruptcy, and a few days after Vanguard grounded itself,
American Airlines announced a streamlining of operations.
American will cut 7,000 jobs, which amounts to 6% of its
workforce, but more importantly to Boeing, the airline is
reducing its fleet and deferring aircraft deliveries as it copes
with the loss of full-fare customers in an industry wide
recession.  American says it will focus on efficiency and cost
cutting, rather than revenues.  This means fewer planes, not
more.  This is not good news coming from the world's largest
carrier.  Boeing's biggest client, United Airlines, is facing
enormous financial problems, losing $1 million per day, and faces
a debt payment of over $900 million in December. United is
currently up to date on payments to Boeing's financing group, but
any interruption in those payments could have a material adverse
effect on Boeing.  There has been talk of United following U.S.
Air into bankruptcy if they do not obtain a $1.8 billion bailout
loan from the government.  If the airline files bankruptcy, this
will affect its obligations to creditors, including Boeing.

The dominoes have begun to fall among major airlines, and with
the September 11 anniversary around the corner, a lack of
passengers may push more of the airlines over the Chapter 11
brink.  In addition to problems with its customers, Being now
faces problems from one of its biggest competitors. Total orders
for the first six months of 2002 were just over half of what they
were last year for Boeing and Airbus combined.  Boeing now claims
that Airbus is selling aircraft at cut rate prices in an attempt
to steal market share, relying on heavy subsidization from
European governments to make up the losses.

A look at Boeing's chart shows that today's low of $37.10 came
within a dime of creating a triple bottom breakdown on the PnF
chart, which is a very bearish formation.  The stock's current
bearish vertical count is $32, which will be our initial target
on this play.  In addition, today's low matched that of the
morning of July 24, before the Dow took off on its massive rally.
A trade below this $37.10 would be Boeing's lowest level since
December of last year, as it recovered from the post September 11
drop.  OI sees the current price level as a short entry, with a
stop loss of $40, just above today's high.

BUY PUT SEP-40.OO*BA-UH OI= 508 at $4.10 SL=2.50
BUY PUT SEP-37.50 BA-UU OI= 233 at $2.70 SL=1.35

Average Daily Volume = 3.34 mil



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

From b to P	
By John Seckinger
jseckinger@OptionInvestor.com

Market dynamics consist of prices either trading in a horizontal
(range bound) or vertical (explosive) manner.  The former is
considered efficient, while the latter is the market violently
searching for that efficient area, or inefficient.  When used
together, traders can begin to recognize important market
patterns and improve the likelihood for successful trading.

These vertical and horizontal patterns first began with J. Peter
Steidlmayer, a Chicago trader/author who understood the idea of
looking for a “pivotal” or efficient area within the marketplace.
Mr. Steidlmayer first joined the Chicago Board of Trade in 1963
as an independent trader, serving on the Board of Directors from
1981 to 1983.  Getting back to the nomenclature, this word
“pivot” can be used synonymously with either “high volume area”,
“efficiency”, “apex”, or “horizontalness”, and is the widest part
of the “b” or “P” formation.  The lowercase “b” is considered
long liquidation, with “l” representing massive selling and the
lower part of the “b” (the hump) representing a lull in trading
as prices consolidate.  On the other hand, the capital letter (P)
is short covering, with traders all rushing to cover until a lull
takes over as demand begins to equal supply.

Before we look at an example, there are a few disclaimers that
must be made.  First, there are times when a trader will not be
able to find either the “b” or “P” pattern.  That is ok.  In
fact, these patterns do not happen all the time anyhow.  Trying
to force a “b” or “P” pattern is the same thing as forcing a
trade.  It doesn’t have to be done.  Secondly, once a trader
determines that a relative bottom in place (explained later), it
is important to give the market TIME to consolidate and produce
an apex.  Thirdly, do not be mad if the next vertical move is
missed, since there is usually a significant portion left to
capture.  Lastly, it is important to go back and judge exactly
where the pivot area was.  While the consolidation is in process,
we will make an educated guess on where the pivot is; however, we
may find out later we were a few points off.  Fortunately, the
market will make it clear where the pivot resides.

Ok, now it is time to look at an illustration.  Looking at a 60-
minute chart of the Dow, we will start with an “inefficient”
(explosive) move lower.  Note:  If the lack of price levels on
the right hand side becomes annoying, please look at the final
chart for the proper price levels.  However, both the “b” and “P”
patterns do not have exact price objectives anyhow.  As the
charts note, I wait until two green (or red) candles before
thinking about a relative low (or high), and it could be 20 or
500 points until finding such a level.  This is analogous to
“letting the profits ride.”





Looking at the chart above, I hope the “b” pattern looks somewhat
obvious.  If a trader was short before the inefficient (vertical)
move lower, it would make sense to either cover during the second
green candle (say, a few minutes before the candle ended so the
chances of it closing green is 99.9%) or wait until the pivot is
formed and then use a tight stop right on the other side of the
pivot.  A few important points to notice here:  The relative low
was not re-tested after the two green candles, allowing us to
begin thinking of a “b” formation.  If this low was taken out,
the pattern would then be nullified.  This is why TIME becomes
important.  Another important note:  It is fine if the pivot is
not easily recognized; letting the market tell you later where
the pivot was is an acceptable strategy.  The “perceived value”
(or pivot) is simply an “educated guess” on where the market
spent most of its time.  The horizontal line above was chosen
because it bisected three candles in the middle of their
open/close area.

Ok, we have our first pivot.  Now what?  Wait for a move and then
jump on board, OR put on a trade and then use a stop right on the
other side of the pivot.  As the second chart shows below, the
market did proceed to go lower (the bold P is the pivot level we
determined from our first chart).  Even if we missed recognizing
the pivot, there was plenty move to catch on the downside.  Ok,
what should traders be noting now?  Well, since the relative low
in our first example was taken out, is now has to be put deep in
the back of our minds with only the pivot on our minds.  Now that
we know the pivot, it is time to wait for another relative low to
take hold (2 green candles).  Once that happens, the cycle
continues:  a trader can either cover or wait until yet another
pivot takes form.  Looking at the chart below, this second “b”
formation isn’t very clean looking; however, it still has to be
considered a “b” since the relative low was not re-tested and
prices clearly went into a consolidation fashion.





So, let’s say that this time we hold on to our short.  Remember,
we still have a stop in just above the first pivot (which has not
been tested), and we could also put in a stop just above the
perceived pivot within the larger “b” formation.  So, what ended
up happening?  Well, the market did in fact go lower (see chart
below) and neither stop would have been hit.





Now we have two pivots that have not been re-tested.  The
thinking is, these pivots are where sizable shorts started, and
these short traders will defend their profits with authority.
Moreover, it would be psychologically harmful if demand brought
prices back through the pivot – changing sentiment and allowing
technicians to now look for prices to continue the upswing.  A
change in power, if you will.  Looking more at the chart above,
it is fine that there was not a “b” pattern at the bottom.  As
stated before, b’s and P’s will not always be present.

As seen on the right side of the chart, there is then an
explosive move higher (six out of seven green candles – next to
two arrows), followed by a consolidation, and then, not
surprisingly, another explosive move (far right side of chart).
This breakout began at 8244 in the Dow – changing our focus from
b’s to P’s.  What should we be looking at now?  The same as
before:  Will the old pivots be tested on the upside, and then
will this new P-pivot be tested on the downside?  Remember what
shorts are thinking; Sell the market as prices get close to the
pivot!!  The pivot(s) can not fail!!  Well, let’s see what
happened.









Prices did manage to rise above the second b-pivot, but not the
first!  Very important to recognize that at least one pivot held.
We will now give critical importance to that pivot.  As we can
see in the chart, prices consolidated between those two pivots;
however, they didn’t form a nice “P” formation.  Not a problem,
since we are now only worried about the first pivot holding.  As
time progressed, prices did dramatically fall, giving shorts even
more credibility going forward.

Looking at the far right side of the chart, prices are currently
at the first “P” pivot at 8244.  That could have been used as a
place to cover shorts during the free-fall (sure, you would have
missed a part of the move); nevertheless, 8244 now seems to be in
play.  What do we do at 8244?  Well, it seems as though another
“P” formation is taking shape, since we have two green candles in
a row acting explosive (vertical).  Also interesting is prices
coming back to test previous pivot.  Since it is a pivot, we will
use the definition of a pivot: if above, buy; if below, sell.
Therefore, it makes sense to take a long position at 8244 and
look for the “P” to form.  If the “P” doesn’t form and a trader
went long, make sure to put a stop underneath the new relative
low.  Ok, let’s see what happens.






Well, the market did in fact rise from 8244 (bottom blue line);
however, we didn’t get a nice “P” distribution with a clear cut
apex.  That is ok; our reasoning seemed to make sense going into
the trade because of a possible “P” pattern and we had our
support and stop.  As you probably already see, it was once again
amazing how prices rocketed to the very first pivot, just below
8800.  In fact, the reason I guessed the Dow at 8775 was based on
this type of research.  Of course, the Dow did close at 8745.
Not too far off.  So, now what?  Well, on Monday the pivot held
once again and shorts gained control.

During market hours, should all traders use only a 60-minute
chart?  Of course not, please use whatever works.  From a 5-
minute chart to a yearly illustration, traders should be able to
find either “b” or “P” with little problem.  For trading
purposes, which timeframe works better?  It is my opinion that a
shorter timeframe can work better than a longer one.   Why?  The
psychological aspect is more current; thus at times more powerful
and fresh in traders’ minds.  Fortunately, we can make note of
both.  When the market is closed, look at all timeframes, then
during market hours turn to the 60, 30, and 5-minute chart for
more practical purposes.

Remember, even if after this article you still find yourself
visualizing “wedges”, “consolidation patterns”, etc. instead of
the “b” or “P” formations – that is fine; please stick with what
works.  The “b” and “P” formation is a tool I use to help
understand when the market is “asleep” and when it is time to
jump on board.  Moreover, once the move is captured, I use these
patterns for finding a relative low (or high) and help maximize
profits.  For the rest of the week, please spend some time
looking for “b” and “P” patterns and send me an email on how
things turned out.  I am here to help.

John


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