Option Investor

Daily Newsletter, Thursday, 08/22/2002

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The Option Investor Newsletter                Thursday 08-22-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Capitulation
Index Trader Wrap: IT'S GOT LEGS
Market Sentiment: Turning the Corner
Weekly Manager Microscope: Robert N. Gensler: T. Rowe Price Media 
& Telecom (PRMTX)
Index Trader Gameplans: THE SECTOR BEAT - 8/22

Updated on the site tonight:
Swing Trader Game Plan: I Give Up, Almost

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      08-22-2002           High     Low     Volume Advance/Decline
DJIA     9053.64 + 96.40  9077.01  8926.92 1.71 bln   2042/1136
NASDAQ   1422.95 + 13.70  1426.76  1398.83 1.82 bln   1978/1442
S&P 100   485.95 +  5.91   487.42   478.73   Totals   4020/2578
S&P 500   962.70 + 13.34   965.00   946.43 
RUS 2000  409.67 +  2.88   410.92   404.86 
DJ TRANS 2463.96 + 31.80  2469.91  2412.64   
VIX        30.96 -  0.67    32.54    30.44   
VXN        45.00 -  1.11    47.70    58.70 
Total Vol   3,726M
Total UpVol 2,705M
Total DnVol   909M
52wk Highs   92
52wk Lows   137
TRIN        0.51
PUT/CALL     .55


Bears are being converted daily and I am so close I can feel
the horns starting to grow. This is probably a leading indicator
of the next market crash. Bears are turning bullish and bulls
are positively giddy with exuberance. The media is bubbling 
with excitement about the new bull market and yet another round 
of cautious comments about banks and techs failed to crash the

Dow Chart


Chart of the Nasdaq


The morning started off with continued concerns about Moody's
possible downgrade of JPM's credit rating. They are worried 
about current and prospective profitability and potential
liabilities. With the capital markets screeching to a halt
and Enron discovery heating up again Moody's was concerned
about their $42 billion in debt. Last week S&P placed JPM, 
LEH and MWD on credit watch with negative implications due to
the deteriorating profitability of the investment banking
community. Merrill Lynch also lowered profit estimates on GS,
LEH and MWD due to difficult credit markets. Despite this
action the Financial Index (NF.x) closed with a gain of +5 
points. Go figure. 

Merrill Lynch also issued comments that the tech recovery 
may not occur until 2004 or 2005. Whoa! That was the longest
date I have heard yet. If this tunnel gets any longer we will
lose sight of the light. It did not seem to hamper the Nasdaq
as it added +14 points. The semiconductor index fell only -4
points despite some negative news.

I reported on Tuesday that the book-to-bill number was not 
really 1.16 as reported but was probably below .95 due to
the reporting method. The semiconductor group only reports 
the number as a three month average which distorts the current
environment. VLSI, an independent research firm, reported today
that the real global number was only .77 for July on orders of 
$1.85 billion. Of course the market ignored this obvious sign 
of a serious problem brewing. VLSI claims any hopes for a 4Q
recovery or spike in demand, as most earnings estimates are 
built on, are looking very slim. They feel the earliest hope 
for any recovery to begin is mid-2003.

After the bell ADCT reported earnings that fell -60% and 
warned that the timing and rate of the recovery remains 
uncertain. The said they would cut more workers and attempt
to reduce costs even further in an effort to hit breakeven
in the current economy. They posted a -$629 million loss on
revenues of only $235 million. Definitely something wrong 
with that picture. They expected 4Q revenue to fall to only
$200 million.

The monthly mass layoffs continued to climb with 2,041 for 
July as reported today. The number of new workers laid off in
July was 245,457. The manufacturing sector was still the hardest
hit as demand continues to drop. This was 83,000 higher than
the 161,928 employees laid off in June. More bad news for the
market ignored.

I reported yesterday in the Swing Trade wrap about the comments
from three Fed presidents that were clear indications that the
Fed was not going to cut rates any time soon. That message has
filtered through the futures markets and the Fed fund futures
are now factoring in only a 32% chance of a cut at the Sept-24th
meeting compared to the over 80% chance just last week. 

Let's see if I have this right. Merrill says no tech recovery
until 2004-2005. The global book-to-bill has fallen to .77 and 
nearly a quarter of a million workers lost their jobs in mass
layoffs in July. The Fed is not going to cut rates as expected
and companies are continuing to guide lower for the current 
quarter. The markets digested this information and the Dow gained
nearly +100 points at the close. What is wrong with this picture?

Nothing. When markets bottom investors are barraged with bad news
and the bottoming process is the discounting of all this news. 
Once investors decide the news is priced in any more news is simply
ignored. This is the stage we are in now. Everyone thinks the
bottom is behind us and therefore nothing matters but buying
stocks for the new bull market. CNBC was touting all afternoon
the +20% gain by the S&P off the July lows as evidence we have 
exited the bear and entered a new bull market. (Obviously a
prime contrarian indicator) 

I have no trouble buying into the concept as long as everyone
remembers that September and October are known for setting market
lows as earnings warnings for the weak 3Q appear. Go long, set stops
and be prepared to go long again on any bottom. Sound investment
principle as long as you adhere to it. My only challenge today
is the +20% gain off the July lows. It is begging for another 
bout of selling as those institutions with 20% profits and a
fear of the coming calendar take those profits off the table. 
Until that profit taking appears I am seen as a bear crying wolf. 
After losing a sizeable amount of money over the last week betting 
on every dip being the "big one" I have decided to switch sides 
for the next week. Obviously this is a clear contrarian top 
indicator and a warning to traders already long. 

A last word of caution. August of 2000 was an identical copy of
this August. Traders ignored bearish news and threw money at the
market thinking the bottom was behind them in July. 

Dow Chart August 2000

When earnings warning season heated up and everyone finally 
realized that estimates were too high they started selling 
those stocks. With the current environment no different it
would probably help to see what September looked like as well.

Dow Chart Sept 2000


While comparisons to Sept-2001 are impossible, investors 
have probably forgotten that the Dow had sold off nearly
-950 points between 8/27 and 9/10.  

Dow chart Aug/Sept 2001


I am not going to promise that this year will be a duplicate
of prior years but September has been the worst month for the
Dow and S&P for the last 51 years according to the Stock Traders
Almanac. I will leave you with this quote from the almanac:

   August is a good month to go on vacation
   Trading stocks likely will lead to frustration

   September is when leaves and stocks tend to fall
   For blue chips it is the worst month of all

Enter Very Passively, Exit Very Aggressively!

Jim Brown


By Leigh Stevens


The Market that is as the Dow powered through 9,000 and appears 
headed for my next target around 9200.  The S&P 500 (SPX), the 
index which I consider to be even more key to understanding where 
we are in this market, broke out above 960, a key technical 

Strength in Microsoft, a key Nasdaq and Dow biggie was a big 
influence - I've been highlighting the stock as a "reason" to be 
bullish on Nasdaq overall - Airlines, trying some more "radical" 
measures to turn around their losses and dismal outlook, had 
upside follow through again today, along with biotech and the oil 
service sectors.  

Technically - backing up to SPX 960 - why this is a key level 
involved the one potentially bearish chart pattern still in 
question as to its resolution - per my weekly commentary at the 
beginning of the week and updated in the chart below and by my 
comments to a subscriber today on our Market Monitor and which I 
also repeat here.   

Doesn't the Oct 1998 and the Jul 2001 pattern of a Head and 
Shoulder's top portend a further drop of large proportions in the 
SPX? It seems most of OIN is Extremely Bullish? Am I Wrong?  

I have been bullish up to a point - that "point" is around 9000 - 
possibly 9200 - in the Dow and 955-960 in SPX. However, closes 
over these levels would suggest an even more major turnaround 
than I see currently. 

In terms of OEX, there is a bullish case for an upside target to 
490-495, maybe 500.  However, the reason I focus on 960 in the 
S&P 500 (SPX) is that a decisive upside penetration of this level 
would negate the bearish rising wedge on SPX that has been traced 
out since its bottom. 

This pattern would still present a potentially bearish picture IF 
there was a rally failure around 960 AND, at some point a close 
under 930. (I know I said lower than this on one point, but you 
have to look at the rising support trendline where it is each day 
and it's a fairly steep one currently.) Based on the rising wedge 
pattern, such a break would suggest a rally "failure" and the 
start of another correction down into a possible Sept/Oct. low. 

On the other hand, an SPX close takes the index above the upper 
trendline of the wedge and "negates" the bearish interpretation 
that would have been had SPX been deflected in this area. A close 
below the lower rising trendline of the wedge then might have 
confirmed a downside reversal and an end to the current rally.  



Oh, and the breakout above, and ability to hold above its 50-day 
moving average was another bullish omen.  

Now, what we appear to have is a consensus forming that there is 
no hurry to buy this market as - of course - there will be a 
second test or another substantial downswing into a "typical" 
seasonal low in the September-Oct. period.  THAT is the point to 
buy.  If you want to be ABOVE average in trading, it seems to be 
necessary to not have the average majority opinion but to think, 
WHAT IF - what if, this is hogwash!  

What if, the market does not fall apart and you start watching 
the market climb, like many watched it decline and decline and 
then decline some more after the 2000 top, assuming always that 
it would come back at some point - most likely at a point LESS 
than a loss of 75% in Nasdaq for example. So, to every complacent 
lazy view of the market expressed by the media talking, what if 
this viewpoint was NOT true.  

Back to my response to the Viewer question - 
I think what you're seeing on OIN is a recognition that this 
rally has been pretty strong and benefit of the doubt given to 
the upside - until and unless key support levels are taken out 
and we stop having the pattern of higher highs and higher 
reaction lows. 

The point about the possibility of a multiyear Head & Shoulder's 
(H&S) pattern in SPX is that it is a multiyear formation, and the 
H&S normally develops over a 1-3 month period - this way, the 
Head is in "relationship" to the shoulders. 

What we have in the big rounding multiyear top pattern you're 
looking at, is an "elephant" size head on "human size" shoulders 
- given this, a downside measurement of the Head to neckline (for 
possible deduction from a neckline break) that gives a target way 
lower than recent lows, is probably not valid. 

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


As I said two days ago before being out for a day, "pivotal 
technical resistance is 960 - as long as SPX doesn't 
climb above this level, look to short rallies or just come out of 

I was early in suggesting that, of course, a market this 
overbought would have to correct over a period of 1-day.  WRONG! 
WHAT IF ......?, the bulls jumped on the dip and continued to 
squeeze the shorts, while investor interest and volume is 
relatively low? That would have been the unexpected outcome. The 
market confounds us often.  

Key technical support is now up to 925 tomorrow, at the low end 
of the hourly uptrend channel.  Of course the market is oversold, 
but again, per my weekly chart review on 8/18, not really on an 
intermediate-term basis. Buying new call positions has some risk 
however given some unexpected bad news. 

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


The OEX still has the potential of reaching its implied daily 
chart flag objective around 495-500, especially if the lower end 
of its uptrend channel is not penetrated - that lower support 
trendline intersects around 468-470 now. 

Would repeat that risk to reward on new long positions is not 
favorable if in fact the further upside potential on the S&P 100 
is 495-500, but downside risk is to 470.   

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


DJX has broken out about the triangle formation on the daily 
chart - sometimes a triangle pattern will form at a bottom and 
"act as" a reversal set up.  Most often this kind of pattern is 
seen in the middle of a trend and is a "continuation" pattern - 
more on triangles in my Trader's Corner column of today.

Near support is 88.3, then 87, at the lower end of the uptrend 

I figure that next upside target is next to around 92 in the DJX 
index. As with the S&P 500, the move through and above the 50-day 
moving average was bullish.  

However, it should also be noted that this latest high was NOT 
"confirmed" by a similar new high in my longer hourly stochastic, 
so I remained alert for a rally failure after the new high above 
widely perceived resistance at Dow 9000. 

WHAT IF this latest move was a bull trap? Of course the cautious 
mood that is keeping traders on the sidelines is part of the 
dynamic that pushes the market higher in a way - but, on balance, 
I'm out when a rally gets this "extended". Let someone else fight 
it out for the last 200 points.   

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

The daily volume trend continues to decline, while prices go up - 
not the kind of rally that I want to buy into.  Of course, being 
early on short position at 25.25, was no great shakes either - 
I'm out on a revised 25.7 stop.

Near support is 24.8-25; then, in the 24 area, at the low end of 
the hourly up trend channel.     

Microsoft has been the driving force with an accelerated move 
today on an upside chart gap after an analyst upgrade.  Cisco, 
has managed to close slightly above its prior $15 high on two 
days running - not by much, but it helped to. This is a key Nas 
100 stock I continue to watch also.  

Leigh Stevens
Chief Market Strategist

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Turning the Corner
by Steven Price

Hand me the road map, because it certainly appears the we will be 
going forward.  The Dow took out resistance at 9000 today, and 
appears to be ratcheting its way up the Fibonacci retracement 
brackets. Today's rally of 96.41 points seems to have us headed 
up to at least the next level of 38.2%, or 9143.79.  This 
retracement is based on the Dow's high of 11,750.28 in January 
2000, and low of 7532.66 on the morning of July 24, 2002.  The 
series of higher highs and higher lows makes the middle of July, 
when we were in the midst of a precipitous fall, seem like years 
ago.  News flash - Saturday  marks only one month since that 
recent low.  

In spite of disappointing unemployment data, which showed a weak 
recovery, the bulls were again out in force today.  The labor 
Department reported a drop in jobless claims for the week ending 
August 17, of 2,000, which is 4,000 less than expected.  In 
addition, the claims for the previous week were revised upward.  
The four-week moving average reached its highest level of 
unemployment in a month. The total number of unemployed workers 
collecting from the states was 3.25 million in the week that 
ended August 10.  There was also new data showing a 40% increase, 
since last September 11, in the time it takes unemployed workers 
to find a new job.

The one weak spot showing red in today's sea of green was the 
semiconductor sector.  This is one major sector that has been 
unable to follow the leader in crossing over and holding its 50-
day moving average.  On Monday, the Dow, Nasdaq, NDX and S&P 500 
all crossed the 50-dma mark for the first time in months.  These 
groups continued their rise following this crossover, much like 
the Dow did in leading us out of the 1998 Asian crisis.  The 
Semiconductor Sector Index finally held its 50-dma at the end of 
Wednesday's close, but gave in today, falling below that level 
once again.  Salomon Smith Barney cut its growth forecasts for 
the sector for 2002 from +4% to +0.5% and for 2003 from 21% to 
12%. The danger is that this sector will continue to act as an 
anchor for the broader markets. This danger seemed remote this 
morning as Microsoft received an upgrade from Salomon Smith 
Barney.  While this upgrade helped lift the Nasdaq and Dow, we 
might have seen much larger gains if not for the semis.

The Retail Index (RLX.X) has continued to claw its way upward, in 
spite of repeated warnings about a lack of back to school sales.  
This is one sector to keep a close watch on, as it reflects 
consumer spending, which makes up 2/3 of all GDP.  This index 
also managed to break through its 50-dma this week, and has held 
on to these gains.

Now that the Dow has broken 9000, the Nasdaq has broken 1400, the 
NDX has broken 1000 and the S&P 500 has broken 950, we will have 
to dial up our expectations.  Instead of looking for failure 
levels, we may need to start looking for new levels of 
achievement.  To begin with, if the Dow can cross the 38.2% 
retracement level referenced above, then 9641.47 would be the 
next target.  This would signal the Dow retracing a full 50% of 
its losses since its high of January 2000.  The similar 50% 
retracement level would be 1164.27 in the S&P 500.  The Nasdaq 
Composite and NDX have quite a ways to go before making up their 
losses from highs of almost 5000 in March of 2000.  But we've got 
to start somewhere.


Market Averages


52-week High: 10679
52-week Low :  7702
Current     :  9053

Moving Averages:

 10-dma: 8812
 50-dma: 8813
200-dma: 9726

S&P 500 ($SPX)

52-week High: 1226
52-week Low :  797
Current     :  962

Moving Averages:

 10-dma:  927
 50-dma:  928
200-dma: 1070

Nasdaq-100 ($NDX)

52-week High: 1782
52-week Low :  892
Current     : 1049

Moving Averages:

 10-dma:  984
 50-dma:  993
200-dma: 1336


The Semiconductor Index (SOX.X): The semiconductor sector was 
downgraded this morning by Salomon Smith Barney. They reduced 
growth estimates for 2002 from 4% to 0.5%, and reduced 2003 
estimates from 21% to 12%.  They project 17% for 2004.  The index 
finally managed to hold above its 50-dma on Wednesday, only to 
give it back today following the downgrade.  The fact that the 
sector was down, on a day when a Microsoft upgrade helped rally 
the Nasdaq, seems bearish and makes the index look overextended 
after a rally of almost 80 points in two weeks.

52-week High: 657
52-week Low : 282
Current     : 357

Moving Averages:

 10-dma: 335
 50-dma: 358
200-dma: 495


Market Volatility

The VIX held above 30 once again today.  This is far above normal 
summer volatility levels, especially considering the recent 
upward climb of the Dow and S&P 500.  Bears are eyeing the 
September 11th anniversary and stepping in to buy at this level.  
Even with no attack, there may be a sell-off, and premium at a 30 
implied volatility might still be cheap if we have a significant 
drop in the next couple of weeks.  Considering we saw levels soar 
past 50 on the recent drop, buying here may turn out to be a 

CBOE Market Volatility Index (VIX) = 30.96 -0.67
Nasdaq-100 Volatility Index  (VXN) = 45.00 –1.11


          Put/Call Ratio  Call Volume   Put Volume

Total          0.55        671,021       372,085
Equity Only    0.41        572,710       235,765
OEX            1.40         14,983        20,922
QQQ            0.09         98,759         8,474


Bullish Percent Data

           Current   Change   Status
NYSE          44      + 3     Bull Confirmed
NASDAQ-100    59      + 3     Bull Confirmed
DOW           60      + 10    Bull Confirmed
S&P 500       58      + 5     Bull Alert
S&P 100       58      + 5     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  0.86
10-Day Arms Index  1.00
21-Day Arms Index  1.13
55-Day Arms Index  1.29

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 they do, they can signal significant market turning 


Market Internals

        Advancers     Decliners
NYSE       1793          1698
NASDAQ     1901          1369

        New Highs      New Lows
NYSE         31              69
NASDAQ       27              60

        Volume (in millions)
NYSE     1,651
NASDAQ   1,828


Commitments Of Traders Report: 08/13/02

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 have reduced positions on both sides of the coin, 
resulting in a net change of 700 short contracts.  Small Traders 
have reduced long positions by 3700 more contracts than shorts.

Commercials   Long      Short      Net     % Of OI 
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%)
08/13/02      427,618   475,536   (47,918)   (5.3%)

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
07/23/02      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%
08/13/02      155,040    66,546    88,494     39.9%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 114,510 - 3/26/02

Commercials have added to long positions by 1300 contracts, while 
short contracts increased slightly.  Small traders also added to 
long contracts, increasing positions by 1200 contracts, while 
leaving shorts virtually unchanged.

Commercials   Long      Short      Net     % of OI 
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%)
08/13/02       42,303     50,354    (8,051) ( 8.7%)

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
07/23/02       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%
08/13/02       12,797     8,933     3,864    17.8%

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:   8,460  -  3/13/02


Commercials have maintained the status quo, subtracting 600 
contracts from the long side and 400 from their shorts.  Small 
traders got decidedly shorter, dumping almost 3,000 long 
contracts and only 900 shorts.

Commercials   Long      Short      Net     % of OI
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%
08/13/02       22,837    13,833    9,004      24.6%
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
07/23/02        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%)
08/13/02        5,050     8,349    (3,299)   (24.6%)

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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Robert N. Gensler: T. Rowe Price Media & Telecom (PRMTX) 

This telecommunications sector fund, managed by Robert Gensler at 
T. Rowe Price Associates since January of 2000, has done well on 
a relative basis compared to other telecom funds through the bear 
market of 2000-2002.  Part of the T. Rowe Price Funds family, the 
no-load Media & Telecommunications Fund (PRMTX) has total assets 
under management today of $425 million, using Morningstar's data, 
down from $675 million at the end of 2001.

Since becoming the fund's lead portfolio manager in January 2000, 
Gensler has been faced with the difficult task of salvaging fund 
investments rocked by the many blowups in the telecommunications 
sector the last two years.  This fund posted a 93% annual return 
for investors in 1999, ranking in the top quartile of the sector 
fund group.  But, would this fund under Gensler give it all back 
and more like some other communications funds wound up doing?

The short answer is no.  While not impervious to losses, Gensler 
has avoided some of the carnage seen in the industry sector.  In 
2000, the fund lost 25.1% versus a loss of 31.5% for the average 
communications fund per Morningstar, ranking in the top quartile 
of the communications fund group.  In 2001, Gensler limited fund 
losses to just 6.9% compared with a 35.1% decline by the average 
communications fund, ranking in the category's top 3 percent for 

On a year-to-date basis as of August 21, 2002, the fund is down 
32.4%, versus a 41.3% YTD decline by the average communications 
fund, ranking in the top 13% of the communications sector group.  

Long-term investors looking for exposure to the battered teleco 
sector may find this offering managed by Gensler and team to be 
appropriate for their investment goal.  Although getting dinged 
somewhat, Gensler has done a better-than-average job of holding 
losses versus his peers through a very difficult period for the 
sector overall.  Being a sector portfolio manager in such times 
is no small task.    

Because this fund was able to capture its fair share of returns 
during the bull market and limit its losses relative to similar 
funds through the bear market, its trailing 5-year numbers rank 
among the category's elite (top 1%), per Morningstar.  For that 
reason, we take a closer look this week at Mr. Gensler and team 
at T. Rowe Price Associates.  

Additional Background

The manager start date for Robert Gensler is January 14, 2000, 
per Morningstar's fund report.  Gensler is vice president and 
portfolio manager at Baltimore-based T. Rowe Price Associates, 
which has served as adviser since the fund's launch on October 
14, 1993.  Note that the fund was originally incorporated as a 
closed-end fund, the T. Rowe Price New Age Media Fund, and was 
converted to an open-end fund in 1997 along with a name change.

Gensler joined T. Rowe Price's equity research division in 1993 
as an investment analyst, a role he still plays today.  So even 
though Gensler's portfolio manager tenure is somewhat brief, he 
has been actively involved behind the scenes (doing "investment 
analysis") for many years, almost a decade in fact.

Gensler has a B.S. degree from the University of Pennsylvania, 
Wharton School, and his M.B.A. degree from Stanford University.

Note that T. Rowe Price Media & Telecommunications Fund has an 
Investment Advisory Committee made up of nine members in which 
Gensler serves as committee chair.  Per the fund's prospectus, 
the Committee Chair has day-to-day responsibility for managing 
the portfolio, and works with the Committee in developing and 
executing the fund's investment program.  It is a process I'm 
familiar with, having served a similar role in a past life as 
director of pension investments, reporting to and working with 
our company's investment committee.

General oversight of the T. Rowe Price Media & Telecommunications 
Funds is governed by a Board of Directors that meets regularly to 
review the fund's investments, performance, expenses and other 
affairs.  The majority of board members are independent of the T. 
Rowe Price Group.

Investment Style/Strategy
The fund prospectus states that fund managers (Gensler) have 
considerable leeway in choosing investment strategies and in 
selecting securities they believe will help achieve the fund 
objective.  This flexibility may help to explain in part why 
Gensler has managed to limit losses compared to his category 
peers since 2000.

The fund seeks to provide long-term capital appreciation by 
investing at least 80% of net assets in the common stock of 
companies engaged in the media and communications industries 
including publishing, movies, cable TV, telephone, cellular 
services, and technology and equipment.  Generally, Gensler 
invests in the stocks of established large and medium-sized 
companies.  Using Morningstar data as of July 31, 2002, the 
portfolio's average market capitalization was $21.5 billion 
(large-cap) with 70% of assets in the giant/large-cap range.

There is no limit on fund investments in foreign securities.  
According to Morningstar, the foreign component was 21.5% at 
March 31, 2002, giving this fund somewhat of a global flair.

In terms of style, at least as Morningstar defines it, this 
offering moved from the "large-cap growth" style box to the 
"large-cap value" style box in 2000, where it remains today.  
Investment valuations for the industry sector and this fund 
currently are very low.  Morningstar's report shows average 
price/book was just 2.0x at July 31, 2002 (0.4 vs. S&P 500).  
Average P/E information was not available.

Investment Performance

For the 3-year period through August 21, 2002, T. Rowe Price 
Media & Telecommunications Funds had an average total return 
(loss) of 10.2% per Morningstar, 0.6% more than the market's 
decline as measured by the S&P 500 index.  The fund's 3-year 
performance ranked in the 10th percentile of the communications 
fund category.  So on a relative performance basis, Gensler's 
performance was strong, ranking in the category's top decile.     

For the five years ended August 21, 2002, the fund posted an 
average annualized gain of 7.0%, beating the market (S&P 500 
index) by 5.1% a year on average over the same period.  This 
fund's trailing 5-year numbers rank in the top 1% within the 
communications fund category.  Since 1995, the fund's annual 
returns have ranked in the category's last quartile only once.  


Shifting our attention to recent performance, you can see from 
the chart above that the fund's net asset value (NAV) has gone 
from nearly $11 a few weeks ago to around $14 today.  Over the 
past month, the fund's value has risen 17.1%, 4.4% better than 
market (S&P 500 index) and ranking in the category's top decile 
for performance.  So, if you are wondering what Gensler may be 
capable of doing in an up market, you got a glimpse right here.

This fund has the potential to outperform its category peers in 
both up and down market conditions, with much of the credit due 
to Robert Gensler's investment analysis and seasoned judgment.

In relation to other specialty-communications funds, Morningstar 
rates fund return as above average over the past three years and 
high over the past five years (and overall).  Morningstar grades 
the fund's risk as above average relative to its category peers.  
Overall, Morningstar awards the fund 4 stars for "above average" 
risk-adjusted performance in comparison to its category peers.  

T. Rowe Price Media & Telecommunications Fund is also recognized 
by Lipper Analytical Services as a "Lipper Leader" for consistent 
return.  Lipper defines a Lipper Leader for consistent return as 
a fund that has generated superior consistency and risk-adjusted 
returns when compared to a group of similar funds.  These funds, 
they say, may be good fits for investors who value a fund's year-
to-year consistency versus comparable funds.

But, as we know, if the category itself is volatile, like the 
telecommunications sector has been, then even a Lipper Leader 
fund may not be well suited to shorter-term goals or investors 
who are less risk-tolerant.


Sector funds like the T. Rowe Price Media & Telecommunications 
Fund seek long-term, maximum capital appreciation by investing 
principally in stocks of companies within a specific industry 
sector.  Because of their non-diversified status, sector funds 
are suitable for aggressive investors who are willing to assume 
significant risk in exchange for higher appreciation potential.

Investors wishing to bottom fish the telecommunications sector 
may want to look deeper into the T. Rowe Price Media & Telecom 
Fund, led by Robert Gensler since 2000.  He's been part of the 
equity research division at T. Rowe Price since 1993, and over 
the years his investment analysis has contributed to the track 
record of the Morningstar 4-star rated fund.

Since assuming the lead portfolio management role in 2000, Mr. 
Gensler has kept the fund's performance in the category's top 
quartile.  With T. Rowe Price's vast resources to support him, 
Gensler has done a nice job of limiting losses during the bear 
market and given us a glimpse over the past month of what he's 
capable of delivering in an up market cycle.  More information 
may be obtained at the T. Rowe Price site, www.troweprice.com.

Steve Wagner
Editor, Mutual Investor


by Leigh Stevens

UP on Thursday -


DOWN on Thursday - 


"DFI" is the Defense index. 


Continuing in moderate to strong technical rebounds or uptrends 
were Biotech (BTK), Banks (BKX), Airlines (XAL), Cyclicals (CYC), 
Financials (NF), Home builders (DJUSHB), Healthcare (HMO), Health 
Providers (RXH), Internet (INX), Natural Gas (XNG), the Oil Index 
(OIX), Pharmaceuticals (DRG), Networking (NWX), Oil Services 
(OSX), Software (GSO), Broker-dealers (XBD), the (Dow) 
Transportation (TRAN) and the Utility sector index (UTY).       

An analyst upgrade of Microsoft generated a strong continued 
rally in the stock and helped rally the entire Software group. 
The Networking group also benefited from aggressive buying while 
Semiconductors sat out the bull party as it lagged the market,  

The financial group ended with gains, even after a decline in 
J.P. Morgan Chase (JPM) after Moody's placed the company's long-
term rating on review for possible downgrade.

The dominant theme is that "growth" stocks are outperforming the 
blue chips unlike the more defensive period ending in July when 
every rally was led by the blue chips. 

Standard & Poor, in its weekly research piece, was of the opinion 
that "Investors, after enduring a long string of failed rallies 
since March 2000, understandably are nervous. Slower economic 
growth is a restraint. So is the possibility of war on Iraq, 
which could have unexpected consequences." 

CS First Boston reduced its equity weighting and increasing its 
cash position on belief that two-thirds of the "capitulation 
rally" is over. On a sector basis, CSFB also over-weighted non-
cyclical growth sectors like pharmaceuticals and defense and also 
favors "defensive" areas such as utilities and tobacco. The 
brokerage cut its weightings in cyclicals, including technology.



Long SMH at 27.90 
(Semiconductor HOLDR)
Sell stop: 26.90 





Leigh Stevens
Chief Market Strategist

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The Option Investor Newsletter                 Thursday 08-22-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: TEVA, ATK
Dropped Puts: BAX
Daily Results
Call Play Updates: PII, IBM, ADBE, EDS
New Calls Plays: ERTS, CHIR
Put Play Updates: BCC, POT, GS, MXIM
New Put Plays: PIXR, 


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.


TEVA $66.96 -0.76 (-1.43) After its nearly vertical rise to the
$68 level, TEVA spent nearly 2 weeks battling with resistance
near $69.  Even with the Biotechnology index (BTK.X) breaking to
a new recovery high on Thursday, TEVA just couldn't find any
buying interest, drifting to its third consecutive loss.  Our $66
stop hasn't been broken yet, but the bullish love is definitely
gone.  Rather than wait for a more severe drop, we're pulling the
plug on the play tonight.


ATK $66.80 -1.20 (-0.57 for the week) Alliance has not shown 
enough strength as the possibility of war with Iraq continues to 
dominate the news.  President Bush's remarks yesterday that Iraq 
had not been discussed during his meeting on strategic defense 
initiatives, combined with reluctance from U.S. allies to 
participate in an Iraqi invasion, seemed to have taken some of 
the luster off of the defense stocks. The Defense Index ($DFI.X), 
trading 562.42, has entered a period of consolidation and has 
been forming a flag for the past week now.  While investors are 
making up their minds on the sector, we would rather not watch 
our option premium decay further.  Therefore, we will close the 
play and look for other opportunities.


BAX $36.50 +0.51 (-1.43) Despite the recent technical breakdown
under $35, BAX just refused to go lower.  There is definitely an
underlying bid in this market, and rather than buck that trend,
we're going to pull the plug on our BAX play tonight.  Even
though the bears tried, they couldn't quite manage to keep it
under our $36.50 stop at the close on Thursday.  With the loss
of bearish momentum and a violated stop, we've lost interest
in the play.  Use weakness in the morning to exit open positions.


Please view this in COURIER 10 font for alignment

CALLS              Mon    Tue    Wed   Thu   Week

ADBE     20.77    0.79  -0.72   0.18  0.43  Still Strong
ATK      66.80    0.98  -1.35   1.00 –1.20  Drop, no action
CHIR     41.98   -0.04   0.90   1.30  0.92  New, 200 dma break
EDS      43.75    1.80  -0.96   2.06  1.90  Ascending channel
ERTS     67.47    3.18  -0.68   0.99  1.78  New, all-time high
IBM      81.99    3.14  -1.22  -0.27  0.99  gearing up for run
PII      74.31    1.00   0.85  -0.08  1.59  17 straight EPS wins
TEVA     66.96    0.89  -0.61  -0.43 –0.76  Drop, rolled over


BAX      36.50    1.19  -0.27   1.12  0.51  Drop, misbehaving
BCC      27.80    1.05  -0.28   0.32  0.23  Poor relative strength
GS       79.91    0.97  -0.99  -0.63  0.03  Sector Downgrade
MXIM     61.62    0.90  -1.91   1.71  0.57  Can't overcome resistance
PIXR     50.10    1.99   1.26  -0.09 –0.81  New, overextended
POT      37.41    1.06  -1.95   1.02 –0.30  200-dma resistance

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PII  $74.31 +1.59 (+3.31 for the week) Polaris continues to steam 
ahead. A look at the point and figure chart shows PII extending 
its bullish vertical count with each $1 plateau.  The current 
count is $92 after today's trade of $74.  Seventeen straight 
earnings increases has proven this company's resilience, even in 
tough economic times. A look at the PnF also shows that PII has 
broken out of a bullish flag pattern formed throughout the end of 
July and beginning of August.  The daily chart confirms this 
pattern as well.  The current breakout has occurred following the 
stock's trade above $70 and we will raise our stop loss to this 
level in order to protect the current trend.  PII's recent rise 
has been very steep and the stock is likely to pause for a 
breath.  WE don't want to be stopped out on a mild pullback, 
however.  As the broader markets continue to show strength, PII 
should continue its ascent.  If the company was able to make a 
healthy profit when we were in recession last year, they should 
find even more buyers of their toys for big kids as the economy 
improves, and consumers' brokerage accounts increase in value.  


IBM $81.99 +0.99 (+2.64 for the week) Big Blue has paused to take 
a breath since its recent breakout. However, the consolidation 
above $80 appears to be laying a new foundation. A series of 
inside days, a typical consolidation pattern, following the rally 
to a high of $82.85, demonstrates this principle.  The hold above 
$80 gives us a new level of support, and we will raise our stop 
loss to $80 to capture profits in case of a breakdown. With 
Microsoft's upgrade rallying the tech sector, things are starting 
to look better for the sector. The recent semiconductor rally has 
also demonstrated an exhaustion of sellers.  Now that the Dow has 
taken out resistance at 9000, as well as held above its 50-dma, 
the market looks to be readying itself for another run. IBM, 
which has recently trimmed staff in a cost cutting move, should 
lead the parade on another rally.  On Wednesday, IBM and Hewlett 
Packard announced a new agreement aimed at sharing data storage 
technology.  This is viewed as a stepping stone toward a new 
standard of storage called Bluefin and the common information 
model (CIM).  IBM will also be building a new emergency response 
system for the Washington D.C. area, which will be funded by 
Congress.  The system will cover police and fire departments, as 
well as the FBI and Capitol Police.  This alliance could 
foreshadow additional nationwide contracts of a similar nature. 
Today's march back over $82, which was the minimum measuring 
objective based on the recent rectangle breakout, reinforces our 
bullish outlook for Big Blue. We will continue to look at the 
bullish vertical PnF count of $85 as our next target.


ADBE $20.77 +0.43 (+0.63) Two steps forward and one step back
seems to be the pattern for shares of ADBE this week.  But in the
end, the stock is still making upward progress.  The dip over the
past couple days gave us an opportunity to enter the play when
ADBE rebounded from the $20 level, and here we are back near the
recent highs.  Traders looking to get long on a breakout still
need to wait for the stock to clear the $21.25 level before
pulling the trigger.  But things are still looking good, with the
DOW closing over 9000, and the Software index (GSO.X) tacking on
another 3% gain on Thursday.  Note that the stock is now finding
support at its 20-dma ($19.90) and that should provide a floor
over the near term.  ADBE is looking like it wants to bust out
above resistance again, but we need to wait for the breakout or
else target a renewed dip near $20 before playing.  Keep stops
set at $19.


EDS $43.75 +1.90 (+4.83) The gift that keeps on giving, EDS
continues to power up the charts.  After breaking out above the
$37 level last week, there has been a steady stream of buying
volume to propel the stock ever higher.  The mild dip on Tuesday
turned out to be the only dip available to buy this week as the
stock continues to open at the lows and close at the highs.  That
pattern may be nearing an end over the near term, as EDS is
approaching what is likely to be significant resistance in the
$44-45 area.  This is the bottom of the gap from late July, and
there could be a fresh wave of eager sellers looking to get back
to even.  We would recommend taking at least partial profits near
this level and then look for a fresh entry, either on a pullback
and rebound from the $42 level (the site of mild intraday
support), or a breakout over $45.  That breakout would likely
take the stock to the $47 area in fairly short order, where EDS
will once again find firm resistance at the top of the gap.
Clearly that would present another attractive opportunity to
harvest gains.  Note that we have raised our stop to $40 tonight,
as any drop below there would indicate that this rally has run
out of steam.  Until then though, we can buy the dips, so long
as our stop isn't violated.


ERTS - Electronic Arts - $67.47 +1.78 (+5.27 for the week)  

Company Summary:
Electronic Arts, headquartered in Redwood City, Calif., is the 
world's leading interactive entertainment software company. 
Founded in 1982, Electronic Arts posted revenues of more than 
$1.7 billion for fiscal 2002. The company develops, publishes and 
distributes software worldwide for video game systems, personal 
computers and the Internet. Electronic Arts markets its products 
under four brand names: EA SPORTS(TM), EA GAMES(TM), EA SPORTS 

Why We Like It:
ERTS has experienced an extended rise, however recent 
consolidation activity prevents it from looking overextended.  
The stock had a meteoric rise from $55, pausing to test its 200-
dma just below $60.  ERTS found support at that level, and took 
off to $65.  It consolidated once again, finding support at this 
level, and then took off on its latest run.  Today's move of 
$1.78, up to $67.47, cleared the stock of prior resistance just 
under $67, which had been in place since late June.  This 
resistance level also came into play in December of 2001.  The 
stock has not only set a 52-week high, but an all time high as 
well.  Therefore resistance levels are hard to determine from 
daily charts. A look at the point and figure chart shows a 
powerful bullish triangle breakout on its seventh column.  The 
current bullish vertical count is $86, however ERTS is still 
adding to it with each $1 move higher.  A trade of $68 would 
place this count at $89, whereas a three-box reversal would 
cement the count at the current level.

On August 19, new retail sales data showed video game sales 
remained strong and the industry is on pace for record growth 
this year.  Apparently with a slow economy, and higher than 
expected unemployment, consumers are staying in and entertaining 
themselves with a little "Madden 2002."  With the holiday season 
approaching, video game makers are preparing another strong 
selling season, as new games will be released at that time.  
According to Thomas Weisel Partners analyst Matt Finnick, channel 
checks at more than 30 stores indicated that ERTS's college and 
professional football games were on pace for a 20% increase over 
current sales expectations. He stated that there may be some 
upside to current earnings estimates.

More conservative investors may want to wait for a pullback and 
retest of $65 support to initiate new entries.  OI will use the 
current level as a long play entry.  We will place our stop loss 
at $64, as this would be evidence of a break in support.

BUY CALL SEP-65*EZQ-IM OI=4435 at $4.40 SL=2.20
BUY CALL SEP-70 EZQ-IN OI=3029 at $1.50 SL=0.75
BUY CALL OCT-65*EZQ-JM OI=  87 at $6.10 SL=3.20
BUY CALL OCT-70 EZQ-JN OI= 215 at $3.40 SL=2.00

Average Daily Volume = 4.36 mln


CHIR – Chiron Corporation $41.98 +0.92 (+3.33 this week)

Company Summary:
Chiron Corporation is a global pharmaceutical company that is
focus on developing products for cancer and infectious disease.
The company continues to build upon its cancer franchise, which
has three dimensions; immune system modulators, monoclonal
antibodies and novel anti-cancer agents.  In the infectious
disease area, the CHIR has a broad range of products.  The
company commercializes its products through three business units,
which include biopharmaceuticals, vaccines and blood testing.
The Vaccines unit offers more than 30 vaccines for adults and

Why We Like It:
The Biotechs are back!  After running up to resistance in the
$383-385 area last week, the Biotechnology index (BTK.X) needed
to take a breather to work off its near-term overbought
condition.  While the profit-taking dropped the BTK briefly below
the center of its ascending channel, the sharp rebound over the
past 2 days is perhaps telling us of the internal strength in the
group.  Not only did the BTK blast up into the upper half of its
channel over the past 2 days, but today saw the BTK moving
through its near-term resistance, closing at its highest level
since late May.  A couple weeks ago, we featured CHIR on our call
list on its stellar run following the breakout over the $34 level.
Well, once again, the stock appears to be leading the BTK higher,
surging through the $40 level yesterday and then today clearing
its 200-dma at $40.91.  Not only does this extend the stock's
line of X's on the PnF chart (increasing the eventual bullish
target into the stratosphere to $73), but it gave us a breakout
above the bearish resistance line of $41.  Looks like full bull
ahead, don't you think?  While we don't expect this rise to
continue without brief profit-taking pullbacks, this trend
certainly looks like it has some room to run.  Take notice of the
fact that CHIR has been using its 10-dma (currently $39.22) as
support on each pullback.  As long as that behavior doesn't
change, we can use this pattern to our advantage by placing our
stop at $39.  The stock's rise on Thursday came to a halt just
below the top of the April gap and that could be presaging a bit
of a pullback and consolidation before continuing higher.  Use a
dip and bounce back at either the 200-dma or the $39-40 level
(the site of the most recent breakout) to initiate new positions.
Given the sharp rise in the stock over the past 2 days, we don't
recommend taking new momentum-based entries until the stock is
able to push through the $43.50 resistance level.

BUY CALL SEP-40 CIQ-IH OI=476 at $3.60 SL=1.75
BUY CALL SEP-42*CIQ-IV OI= 82 at $2.10 SL=1.00
BUY CALL SEP-45 CIQ-II OI= 75 at $1.10 SL=0.50
BUY CALL OCT-42 CIQ-JV OI=572 at $3.00 SL=1.50
BUY CALL OCT-45 CIQ-JI OI=621 at $1.85 SL=1.00

Average Daily Volume = 2.75 mln

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BCC $27.80 +0.23 (+1.33 for the week) Three words describe this 
stock - poor relative strength. Boise Cascade has attempted to 
pick itself off the floor, as the Dow continues to set new 
relative highs.  During a week when all major indices nave 
crossed their 50-day moving averages and taken out significant 
resistance levels, BCC has managed a gain of $1.33 in four days.  
This relative weakness underscores our bearish sentiment on this 
stock. The graph of Forest and paper Product Index (FPP.X) looks 
very similar to the graph of BCC. The FPP also squeezed out a 
mild gain today, closing at 314.48.  However, there is 
significant resistance for the index at 320.  BCC also has poor 
relative strength when compared to the rest of this already weak 
index.  The stock tried to get over the $28.00 mark today, but 
was turned away, in spite of the late rally in the broader 
markets. In spite of this week's mild gain in the stock, it 
remains on a double bottom breakdown sell signal on the point and 
figure chart.  However, even a three box reversal up to $29 would 
simply aid in the formation of a bearish flag, and would require 
a trade all the way up to $31 to negate the bearish vertical 
count of $16.  We will continue to hold our short position in BCC 
and watch for a pullback in the broader markets.


POT $61.62 +0.57 (+0.71 for the week)  Potash attempted a rebound 
with the rest of the market today, but found resistance at the 
200 day moving average of $61.73.  This mark has turned the stock 
back on 4 occasions in the last week, including today's failure.  
While the Dow, S&P 500 and Nasdaq continue to set new relative 
highs, POT was unable to muster enough buyers to get over this 
critical level.  It traded up to $61.74, before being turned back 
to close at $61.62.  This lack of relative strength leaves us 
bearish on POT.  The recent rally seems to have run out of steam 
as the buyers are exhausted and have been unable to move sellers 
off the 200-dma. The fact that the point and figure bearish 
resistance line lies just above the 200-dma, at $63, provides an 
added degree of resistance should the stock be able to break the 
average.  The stock broke down below $60 the last two days, but 
was bailed out by a strong overall market.  The fact that this 
level has been broken demonstrates a lack of support at the round 
number.  On a market pullback, the next level of support may be 
the 50-dma of $59.03. However, below that level, $55 looks like a 
good possibility.


GS $79.91 +0.03 (+0.38) Those stubborn bulls just don't want
to let anything drop.  There is clearly an underlying bid in the
market for GS to trade as well as it has this week.  After its
rally from $68 to $82, Solly downgraded a fistful of the Brokers
on Wednesday due to valuation concerns and continued weak market
conditions.  Interestingly, the firm raised their price target
on GS from $82 to $88.  Despite weakness in the Brokerage sector
(XBD.X) this morning, both the XBD and GS battled back with the
rest of the broad market to close positive.  So what's a bear to
do?  GS still looks vulnerable to a downside correction to at
least the $77 level, and we're seeing the $80 level (prior
support) act as firm resistance.  But its going to be difficult
to post significant gains in the play, with the strong bid in
the broader market.  Fading another failed rally below the $82
level would make for a solid entry into the play, as risk is then
easy to manage with our stop set at $82.50, just below the
200-dma ($82.40).  Momentum traders will want to see a break
below $78.50 (the site of the 10-dma), preferably accompanied
by weakness in the XBD sector before entering the play.


MXIM $37.41 -0.30 (+0.22) Given the robust gains in the broad
market as the DOW blasted through (ok, it actually crawled) the
9000 level, the Semiconductor index (SOX.X) was notably absent
in its participation on Thursday.  Sure, the SOX did manage to
trace a slightly higher intraday high, but then fell back to
close under the 50-dma.  The fact that the SOX can't seem to hold
above its 50-dma is a noted divergence from the broader market
(particularly the NASDAQ), and could be a sign of internal
weakening.  Shares of MXIM are still trying to push through
overhead resistance in the $38-39 area, but without sector
participation, this resistance level is going to be a tough nut
to crack.  Recall, that $38 is the site of the months-long
descending trendline, and $39 is the bearish resistance line on
the PnF chart.  We want to continue fading rallies in this area,
entering as the stock rolls over.  Note that daily Stochastics
have flattened out in overbought territory, and now we're just
waiting for the rollover.  Traders more comfortable waiting for
confirmation before playing will want to see MXIM push back below
the $35.50 support level, with the added confirmation of SOX
weakness before entering the play.  We're keeping our stop set
at $39.


PIXR – Pixar $50.10 -0.81 (+1.69 this week)

Company Summary:
Pixar is a digital animation studio with the creative, technical
and productions capabilities to create a new generation of
animated feature films and related products.  The company's
objective is to create, develop and produce computer-animated
feature films with a 3-dimensional appearance.  Since its
inception, the company has created and produced four full-length
animated feature films; Toy Story, A Bug's Life, Toy Story 2 and
Monsters Inc., all of which were marketed and distributed by The
Walt Disney Company.

Why We Like It:
Media stocks haven't been a favorite among investors lately and
for good reason.  But there are a few companies in the sector
whose stocks have dramatically outperformed the group.  The
reason?  Earnings!  Shares of PIXR rocketed through resistance
at the $44 level last week following the companies upside
earnings surprise and increased guidance for the full year. That
was enough to send investors on a buying spree, propelling the
stock as high as $52 before this rocket ran out of fuel.  So why
is PIXR being added to the Put list, you ask?  Simple.  The stock
appears to have run too far, too fast.  And looking at a weekly
chart, we can see that there is strong resistance near the $51
level, dating back to 1999.  This is not a play where we are
looking for the bottom to fall out of the stock, but where we are
looking to pull out a few dollars of gain as PIXR falls back to
earth to gather some support before continuing higher.  Did we
mention that PIXR is one of those stocks with a high P/E multiple
(currently 58), so it could be due for a bit of multiple
compression in a broad market pullback.  Daily Stochastics are
just starting to tip over, and the next trip up to the $51 level
would make for an attractive entry point as the stock rolls over.
Of course, it helps that we can limit our risk with a tight stop
at $52.  The downside is likely limited to the $47 level, the
site of intraday support from the run up and the 38% retracement
of the recent rally.  For that reason, we need to be very careful
in trying to enter the play on a breakdown.  If that's your style
though, look to enter on a breakdown under $49, but only if volume
remains brisk.

BUY PUT SEP-50*PQJ-UJ OI=269 at $2.10 SL=1.00
BUY PUT SEP-45 PQJ-UI OI=138 at $0.80 SL=0.25

Average Daily Volume = 374 K

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The Option Investor Newsletter                 Thursday 08-22-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three: 

Play of the Day: Call - CHIR
Traders Corner: Pattern recognition - Continuation patterns: 
Triangles & Rectangles
Additional Traders Corner: Does The End Justify The Means?
Additional Traders Corner: Before Canada Does Soccer
Options 101: Catchin' a Bid


CHIR – Chiron Corporation $41.98 +0.92 (+3.33 this week)

Company Summary:
Chiron Corporation is a global pharmaceutical company that is
focus on developing products for cancer and infectious disease.
The company continues to build upon its cancer franchise, which
has three dimensions; immune system modulators, monoclonal
antibodies and novel anti-cancer agents.  In the infectious
disease area, the CHIR has a broad range of products.  The
company commercializes its products through three business units,
which include biopharmaceuticals, vaccines and blood testing.
The Vaccines unit offers more than 30 vaccines for adults and

Why We Like It:
The Biotechs are back!  After running up to resistance in the
$383-385 area last week, the Biotechnology index (BTK.X) needed
to take a breather to work off its near-term overbought
condition.  While the profit-taking dropped the BTK briefly below
the center of its ascending channel, the sharp rebound over the
past 2 days is perhaps telling us of the internal strength in the
group.  Not only did the BTK blast up into the upper half of its
channel over the past 2 days, but today saw the BTK moving
through its near-term resistance, closing at its highest level
since late May.  A couple weeks ago, we featured CHIR on our call
list on its stellar run following the breakout over the $34 level.
Well, once again, the stock appears to be leading the BTK higher,
surging through the $40 level yesterday and then today clearing
its 200-dma at $40.91.  Not only does this extend the stock's
line of X's on the PnF chart (increasing the eventual bullish
target into the stratosphere to $73), but it gave us a breakout
above the bearish resistance line of $41.  Looks like full bull
ahead, don't you think?  While we don't expect this rise to
continue without brief profit-taking pullbacks, this trend
certainly looks like it has some room to run.  Take notice of the
fact that CHIR has been using its 10-dma (currently $39.22) as
support on each pullback.  As long as that behavior doesn't
change, we can use this pattern to our advantage by placing our
stop at $39.  The stock's rise on Thursday came to a halt just
below the top of the April gap and that could be presaging a bit
of a pullback and consolidation before continuing higher.  Use a
dip and bounce back at either the 200-dma or the $39-40 level
(the site of the most recent breakout) to initiate new positions.
Given the sharp rise in the stock over the past 2 days, we don't
recommend taking new momentum-based entries until the stock is
able to push through the $43.50 resistance level.

BUY CALL SEP-40 CIQ-IH OI=476 at $3.60 SL=1.75
BUY CALL SEP-42*CIQ-IV OI= 82 at $2.10 SL=1.00
BUY CALL SEP-45 CIQ-II OI= 75 at $1.10 SL=0.50
BUY CALL OCT-42 CIQ-JV OI=572 at $3.00 SL=1.50
BUY CALL OCT-45 CIQ-JI OI=621 at $1.85 SL=1.00

Average Daily Volume = 2.75 mln

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Pattern recognition - Continuation patterns: Triangles & 
By Leigh Stevens

The word continuation comes of course from the verb "to continue" 
– in technical analysis, continuation patterns "consolidate" the 
prior movement within the dominant price trend. After an initial 
strong move up or down, there is typically a countertrend or 
sideways price movement before the trend renews itself and 
continues in the same direction as before the consolidation.   

After buying interest or selling interest has been satisfied, 
some participants with profits exit part or all their positions. 
Hence the idea of "profit-taking" that the financial press likes 
to say is something that goes on all the time - we wish there was 
as many profits taken as they say there is! 

The investors and traders on the losing side, who bought high and 
sold low, are trying to also help themselves – but in their case 
it’s to reduce their losses.  For example, in a decline, those 
long have decided to get out if they can sell on a rally at a 
higher price than the recent lows and will use future rallies to 
exit. In an advancing trend, those short will use price pullbacks 
or dips to exit or cover their short positions.   

This back and forth movement, after the initial strong surge of a 
trend, is what creates a consolidation pattern. The common types 
of consolidations are:
- flags
- triangles
- rectangles 

In this second series on continuation patterns, I discuss rectangle and 
triangle formations, flags having been covered in my first article on 
continuation patterns.  

A rectangle formation is a pause in the trend and should form 2-3 
(or more) upswing highs at around the same level, as well as 2-3 
or more downswing lows also around the same price area, as buying 
and selling propel prices up and down but within a limited price 
range.  The top and bottoms are each at a similar price level – 
enough so as to be able to draw horizontal lines through the upper 
and lower ends of the trading range that has developed.  

As time goes on and the formation “broadens” out, the overall 
shape of it takes on a definite rectangular form as you imagine or 
draw the necessary lines.  Dow called the same type of pattern a 
"line" formation.  No doubt he was looking at it from the point of 
view of the major trend and usually a sideways trading range that 
is part of a secondary trend is not much more than a narrow line 
across a multiyear chart.  

We have the good fortune to be able to zero in on this pattern 
online or with present day charting applications on our PC and we 
can "zoom in" on the time duration so as to better see the 
rectangular nature of this pattern I’m describing.  

Eventually one side - bulls or those bearish on the stock or index 
do another round of buying or selling that causes a breakout above 
or below the rectangular trading range.  A next price leg then 
carries on in the same direction as the prior trend.  If the trend 
was up, the most common next leg is up, after the rectangle 

If the trend was down, the most common next price swing is also 
down and the breakout (below the lower line) is to the downside.  
Sometimes the rectangle goes on for weeks, months and even years, 
as can be seen in the first two charts. 


Of course, the same pattern could be seen on a 15-min, 30-min, 
hourly or daily chart.  The price distance traveled will be in 
proportion to the time frame being looked at is all.   

Another example of a weekly chart - you may be able to see why 
some technicians are tempted to use a rough rule of thumb 
regarding the width of the pattern equaling the potential distance 
UP the vertical price scale (especially if the price and time 
scales are close to a 1:1 relationship in scaling) after such a 
broad and solid base provided by the long sideways trend. 


The time spent in the lateral sideways movement or trading range 
suggests good balance in buying and selling – when this changes it 
often swings to another extreme.   As Dow noted, the market swings 
from one extreme to the other every few years or so – a pendulum 
is the perfect metaphor.  

Moving to an opposite extreme, buying interest was dominant for a 
lengthily period after the upside breakout as seen in the chart 

The next chart, of Cisco Systems (CSCO) provides an example of a 
rectangle on a daily chart that is a pause or consolidation in a 


The implication of a breakout from the rectangle is twofold.  Look 
for follow through when prices pierce either the top or bottom of 
the rectangle.  The extent of the next price swing that follows 
should at least be equal to the height of the formation added or 
subtracted to the breakout point.  

This idea brings in the concept of a measured move, where a next 
price swing travels at least as far as the first. This is a 
minimum objective and sets up an initial target only.   

Finally, last but not least - rectangles on a smaller scale -


You generally don't have to look too far to find examples of this 
type of consolidation that forms a rectangular shape.          

A frequent continuation (trend continues after it completes) 
pattern is the triangle: formations that are generally bullish in 
an uptrend and bearish in a downtrend. Because of this tendency we 
assume, unless or until contrary price action develops, that a 
breakout from a triangle will take prices in the same direction as 
the prior trend.    

The triangle forms most often as a pause in an up or down move and 
when prices start going sideways.  A series of minor upswings and 
minor downswings trace out two trendlines the angles of which form 
a triangular pattern and these lines come together or converge 
over time.  

Each of the two opposing sides of the triangle should consist of 
at least 2-3 points made by highs and lows, the same as for any 
valid trendline.  The shape of the trendline can vary but common 
to all types is that after prices get close (within 20-30%) of 
where the lines would touch, prices make a move or breakout above 
or below the top most of bottom most line.

The third "side" of the triangle is assumed as the vertical 
distance between the initial high and low AFTER which the sloping 
trendlines begin to form from the various highs and lows.  This 
3rd. line, closing the triangle, is imagined but not drawn. 

There are variations in the SHAPES of the triangles, within the 
context of all being 3-sided figures of course.  A "symmetrical" 
pattern, where the two opposing angles have approximately the same 
slope, is the most the commonly seen triangle shape – 


Sometimes, there is a  sideways movement or a countertrend 
movement after a breakout of the triangle (in the expected 
direction of the prior trend) but the eventual outcome is still 
the same - 


You'll note that the trendlines are examples of "internal" 
trendlines - the line is sometimes "cut through" or bisected by 
some extreme lows or highs. An internal trendline connects the 
MOST number of points or what I sometimes also call a "best fit" 

I learned the term and technique from technical analyst and author 
Jack Schwager who used to say about trendlines, that he didn't use 
"trendlines, but used internal trendlines, which do 'work' in 
defining support & resistance". 

Often prices are unable to even return to the trendline that was 
pierced  – 


The triangle is often a first pause after the initial segment of a 
trend – often, what follows is an even stronger move in that same 

In an uptrend, potential buyers become more confident that the 
emerging trend will not be aborted.  Sellers are already a little 
nervous as prices have risen – another wave of buying coming in 
will push them out of the way pretty quickly as the trend 

The reverse situation occurs in a decline – the buyers are not at 
their most confident from the trend turning against them – as 
sellers see that buyers are not able to take prices back up much, 
they gain more conviction that they can take them down more.  
If the series of 2-3 or more tops occur in the same area and the 
downswing lows are rising, this is generally called an ascending 
triangle – 


What is ascending are the subsequent rally starting points, 
suggesting scale up buying interest.  An ascending triangle is 
generally considered to be bullish as the minor upswings are 
starting from progressively higher points – this suggests the 
buyers are willing to pay up for the item.  

If the trend preceding the ascending triangle was sideways, a good 
clue is supplied for a bullish move after completion.  Of course, 
the ultimate determinant is the direction of a price breakout or 
the direction of any thrust "out of" the triangle – if an up 
direction would be in the direction of the trend and the move is 
down instead this as a rarer instance of the triangle acting as a 
top and reversal pattern.  

If 2-3 or more minor upswing highs have tops that are declining 
and the downswing lows are occurring in the same area making a 
flat line on the bottom, this is generally called a descending 
triangle – 


What is descending are the minor rally peaks as each succeeding 
upswing tops out a bit lower suggesting declining momentum within 
that movement.  

The descending triangle is sometimes thought to be bearish in its 
typical outcome, whether it forms after a significant uptrend or 
not - probably because selling strength and waning buying interest 
is such that each succeeding rally tops out at a lower high.  

If the trend preceding the formation of the descending triangle is 
sideways, the descending type triangle is a clue to anticipate a 
downside breakout. If the prior trend was down, seeing the 
ascending triangle type developing as a (trend) consolidation is 
consistent with the idea that the breakout move will be in that 
direction also.  

I assume, until the market shows me otherwise, that the resolution 
of the ascending triangle may also be in the SAME direction as the 
secondary trend – you’ll note that the descending triangle shown 
above preceded an upside breakout. The dominant trend asserted the 
dominant influence. 

The actual breakout, with or against the direction of the prior 
trend, is the defining event and any contrary expectations are 
then unimportant.  
Regardless of the specific shape of the triangle, all have the 
same measuring implication related to a minimum upside or downside 
objective after a triangle breakout – a minimum or initial 
objective is for a move equal to the height of the triangle at its 
widest point added to the upper breakout point, or subtracted from 
the lower breakout point – 



When I discuss "reversal" type patterns in a subsequent Trader's 
Corner article, I will also be noting that rectangles can 
sometimes act as a sign that a top is forming after a advancing 
trend or that a bottom is forming after a decline; that is, in 
some instances, the rectangle pattern can ALSO act as an 
indication of a reversal of the prior trend - NOT as a trading 
pause (consolidation) prior to a next up or down "leg" or further 
substantial move in the same trend direction existing prior to the 

Formation of a triangle will, and this tends to be more rare, 
sometimes precede an upside or downside trend reversal and I will 
cover this type variation of the triangle.  In the foregoing 
article the discussion of the PREDOMINATE outcome of the triangle 
and rectangle formations. 


Does The End Justify The Means?

At the Couch Potato Trading Institute, we encourage our students
to, as they embark on the never-ending journey in the search for 
profits, prepare for the worst.  We know, however, it can be a 
difficult adjustment.  So, today we examine the situation of one 
of our students who is searching for that “pound of cure” that is 
needed when he didn’t use that “ounce of prevention.”  

I am new to your site and like your strategies.  I did something 
somewhat different from what you do, but in reality it's the same 
but in a different direction.  I shorted a stock and then, as it 
seemed to stabilize at a lower price, in order to gain additional 
income I sold covered puts.  As the stock went south I sold 
additional lower strike puts all for August.  I made a very nice 
profit with the short stock portion and have made a significant 
loss in the short put options.  

I could easily await assignment and make a profit but I have 
significant losses in the rest of my portfolio, especially on my 
long stocks, and am now considering whether to go through 
assignment and be happy with a profit or whether to roll the 
position to potentially recapture the loss at a later time. Is it 
better to take the profit through assignment and reinvest this 
money or roll the position as an investment aiming to capture the 
profits in the future.  Lately I have been shorting stock and 
when I find attractive options, I sell them as covered puts.  
Ordinarily I have a hard time deciding when to sell and selling 
covered calls and covered puts makes the discipline or 
commitment.  How do I decide whether to go through assignment or 
roll?  Is it better to roll when the assignment price is near the 
sold option or is it better to roll when the assignment price is 
one or more strikes away from the sold option strike?

This is what I did:
I sold 5000 shares of NVDA at 18.25; sold 9 Aug. 17.50 put at 
1.50; sold 10 Aug. 17.50 put at 1.00;  sold 5 Aug. 12.50 put at 
1.00;  sold 10 Aug. 12.50 put at .75; and sold 6 Aug. 10 put at 

If I expect NVDA to trade no lower than 4.5 to 5.5 over the next 
3 months as there is almost one year of support at this level and 
if in one year I expect NVDA to trade over 10 again: Would you 
buy back all the options and sell later month contracts, and 
maybe double, triple or quadruple up on a much lower strike 
option?  Or what other rolling options come to mind?  I guess 
rolling is best when it reaches an area of support for puts and 
resistance for calls?

1.  It’s unfortunate that you experienced “significant” losses on 
the rest of your portfolio, but you are an official member of the 
Legion of Unhedged Masses.  I’ll take a wild guess that you 
didn’t hedge your long stock positions with puts just as, in your 
current trade, you didn’t hedge your short stock position with 
calls.  If you’re trying to fly like an eagle, don’t expect to 
drop like a sparrow.

2.  Why do you feel you have to make up all the money in this 
trade and with this stock? You're not married to it.  Divorce 
yourself from it.  At least consider it as a trial separation.  
You can always reconcile later.  There are 10,000 other stocks 
you can trade.   OI columnists provide you with dozens of 
excellent possibilities every week.  It’s OK to play the field.  
Pretend you live in Utah.

Other losses in your portfolio should have absolutely no bearing 
on how you handle the NVDA trade. Your NVDA trade should be dealt 
with independently of any other trade or circumstance. 

3. A practical choice would be to wait until expiration and let 
nature take its course. The benefit of leaving things alone until 
expiration is that you will save what time value is left in all 
the positions plus commissions.

4.  What you did is establish an upside down covered call, or a 
covered put, which is a good strategy in a bear market (with a 
collar, of course).  However, instead of selling the puts all at 
once, you laddered them (40 of the 40 contracts) as the stock 
went down.  In the process, you collected $4,200 in premium.  
5.  After the money is safely in your pocket, you can take a 
fresh look at NVDA.  If you feel strongly that it’s going to move 
in one direction or the other, put on an appropriate position.  
I’m not smart enough to pick a direction, so I lean toward non-
directional trades like straddles, strangles, condors, etc.

If you want to roll your positions from one month to the next or 
from one strike to another, it’s important that you continually 
(daily) re-evaluate the position.  Would you enter that newly 
rolled position if you weren’t already involved with the stock?  
If so, fine.  Go for it.  If not, don’t be “less than logical.”  
Remember, the object is to try to keep the percentages in your 

Rolling out is ideally done close to expiration when the short 
option has little, if any, time value left.  Why pay for time 
value in a short option when it will disappear?  If an option 
gets too far in the money too soon, you weren’t paying attention.  
The position normally would be closed, or adjusted, when the 
delta of the short option catches up with the delta of the long 
option.  If it is not, you risk having the option exercised or a 
stock assignment.

At August expiration, NVDA ended at $10.69.  Based on some quick 
calculations, and assuming you closed out the position on Friday, 
you made roughly $22,100.  Add the $4,200 of premium you took in 
and you have a profit of $26,300.

But don’t pat yourself on the back too soon.  That profit may 
have been the worst thing that could happen to you.  Why?  When 
traders make a hefty profit (or, for that matter, any profit) – 
especially if it’s by taking unlimited risks -- the success can 
be misinterpreted as skill.  The fortunate trader is likely to 
continue taking these risks – until the inevitable catastrophe.  
Skill may have been a part of it, but to become a consistent 
successful trader, you have to hone those “skills” and add a dose 
of insurance – just in case you’re wrong.  

That’s what was going on for the entire bull market.  Brokers 
recommended and people invested blindly, without insurance, and 
lost – lost BIG!  Money was lost.  Countless jobs were lost in 
all industries, including brokerages. How do you get a financial 
planner off your porch?  Pay him for the pizza.  Give him five 
shares of the Lucent stock you’re still holding at $1.48.  If he 
wants a tip, remind him of his buy and hold strategy.  When the 
stock goes up, he’ll have his tip. 

You made a nice profit in NVDA.  Take your wife or your 
girlfriend, or both, out to dinner.  Celebrate with champagne – 
domestic, of course, because unless you hedge your trades, your 
profits can disappear faster than your dinner’s appetizer.

In trading, the end doesn’t justify the means.  If you don’t 
protect your end, it can get messy.  

Your questions and comments are always welcome.  


Before Canada Does Soccer 
By John Seckinger

This self-created mnemonic can be used for remembering the hierarchy
of Intermarket Relationships:  Bonds, Commodities, Dollar, and 

Before we begin, credit has to be given to John J. Murphy, author 
of Intermarket Technical Analysis: Trading Strategies for the Global 
Stock, Bond, Commodity, and Currency Markets.  Mr. Murphy did an 
outstanding job highlighting certain caveats traders must be aware 
of (i.e. lag time(s) between one market to the next), as well as 
giving utmost respect for the bond market and its implications.  
One other important caveat was the discussion of “program trading” 
purely being a scapegoat to mask real Intermarket developments 
domestically or world wide.  In fact, in 1987 before the crash, 
the dollar was dropping sharply, commodity prices were rallying, 
and bond prices were in a free-fall.  However, stocks kept rallying 
for months and then blamed “program trading” for October’s fall. 

Spending endless hours at the Chicago Board of Trade (CBOT), one 
of the most important tools I gathered was learning the relationship 
between bonds, commodities, U.S. Dollar, and equities.  With the 
Grain Room adjacent to the financial floor, there was a nice, 
steady flow of information concerning both commodities and fixed 
income securities.  One of my primary goals of a trader at the 
CBOT was to determine which market was leading and which was 
lagging.  If the dollar rose and bonds immediately followed, I 
would pull up a chart of the dollar and use that as my primary 
trading focus for the session.  In fact, I would then keep a 
chart of the dollar up at all times until the correlation faded.  

Would it then make sense to follow Soybean Meal as it relates to 
the dollar/yen spread?  Well, I do encourage all readers to 
experiment with as many possible correlations as possible; however, 
it has been my experience that “keeping things simple” works well 
at the beginning.  The Soybean Meal to dollar/yen spread reminds 
me of the "Butterfly Effect", stating that the flapping of a
butterfly's wings in China could cause tiny atmospheric changes which
over a period of time could affect weather patterns in New York.  

General Guidelines:

1.	Bond Prices lead Equities (most important rule)
2.	Bond and Commodity prices (CRB Index) have inverse relationship
3.	Dollar leads Equities (can be significant lag)
4.	Dollar and Gold have inverse relationship
5.	No Direct Relationship between Dollar and Bonds 

Therefore, higher bond prices, a stronger dollar, and lower 
commodity prices should be good for equities.  Note:  Bonds have 
more weight than both the Dollar and Commodity movement.  Falling 
interest rates diminish the attractiveness of a domestic currency 
by lowering yields on interest-bearing investments denominated in 
that currency.  

What about the futures market?  Definitely important to track; 
however, in my opinion there are better charts for the cash 
markets.  Mr. Murphy’s main emphasis is on the futures market.  

Futures Quotes:  

September 30-year Bond:  USU2  
October Gold: GCV2 (I still prefer XAU.X Index)

November Commodity Index:  CRX2 (I prefer CRX.X)

September Dow Jones: DJU2 

Looking at an illustration from October 31st 2001 to March 26th 
2002 (100 trading sessions), one can see how Treasury bond 
prices moved lower until the end of 2001.  This weakness in the 
bond pits did prove noteworthy, as equity prices did eventually 
weaken roughly the same percentage.  Also noteworthy was bonds 
and commodity prices trading opposite one another; signaling that 
a “normal” Intermarket relationship is taking form.  

How can a trader trade “the right side of the chart”?  As noted 
earlier, first and foremost is to watch the activity in the bond 
market.  I would imagine a move above the December consolidation 
(higher bond Prices) should have commodities experiencing weakness 
and equities finding a bid in the near (not immediately, but soon 
thereafter).  There isn’t a direct relationship between the dollar 
and bonds, but if the dollar weakens I expect more pressure on 
equities.  If the dollar gets stronger, I would expect equities to 
not sell-off as dramatically; primarily depending on the move in 
bonds.  This is theory.  Let’s see if it holds or if we have to 
look for other correlations.


Extending the chart out to June 7th, 2002, bond prices did rally 
during April as Commodity prices fell significantly.  The dollar 
ended its consolidation and began a strong downward channel.  
Equities certainly took its guidance from the dollar instead of 
bonds; nevertheless, there is a lag between bonds and equity 
prices.  As a trader, I would now pay more attention to the 
dollar while continuing to follow the lead time bonds have over 
equities.  Because the market is so dynamic, it makes sense
to “adjust” one’s viewpoint if the correlation is extremely 
obvious.  The correlation between the dollar and equities has 
piqued my Interest and it would no sense to discard such price 

Notes:  It was interesting to see commodities recover with 
Treasuries during May.  Moreover, See how close bond prices and 
equities are getting on a percentage basis?  I would expect the 
two to reach -5% and then move quickly from that point.  


Illustrating the correlation between Bonds, Commodities, the Dollar 
and the Dow up until August 16th, once again the Dollar controlled 
price action for equity holders.  Also interesting was Commodities 
and Bonds both trending significantly higher, opposite of expected 
correlation.  Applying technical analysis on the Bond movement, it 
is interesting how the -5% area acted as resistance and once 
penetrated it may was viewed as supportive to equities.  Nevertheless, 
it is my opinion that the Dollar will still be the leading 
indicator for equity holders.  The inverse relationship between 
Bonds and Commodities does not seem to be holding; however, a 
fundamental perspective makes is clear that inflation is not 
in the pipeline and should dilute the importance of higher 
commodity prices.  Is this reason enough to discard the 
relationship?  Absolutely not; therefore, it makes sense to put 
Bonds at a hierarchy to Commodities and give fixed-income price 
action greater weight.  With that said, I would expect weaker 
commodity prices before a softening bond.   


Looking at a detailed chart of both the Dollar and Equities, it 
is interesting that the Dollar bottomed on July 17th while the Dow 
set its relative low on July 24th.  The last relative high in the 
Dollar was on January 27th, while the Dow began its last downward 
trend during the week of March 17th.  Interesting enough, the 
September 30-year Bond formed its relative bottom on March 15th 
and seemed to put in a relative high on August 14th.  Since the 
Dow began its trend higher from July 24th, will the recovery rally 
last the same amount of time as it did for bonds, predicting the 
Dow will set a significant high on December 24th (OK, call it 

The intention of this article was to provide a new approach when 
looking at equities.  Obviously, I had hoped that every tick higher 
in bond prices would equal a point increase in the Dow; however, we
all know how dynamic markets can be and it was fascinating to notice 
the correlation with the dollar to equities.  This will be extremely 
helpful going forward.  Remember, the aforementioned General 
Guidelines are just that:  General, based off historical information.  
Going forward, I will continue to give more weight on the dollar 
than bonds; however, I will never forget the importance the bond 
market has on equities.  If equities do continue higher until 
Christmas, I can assure readers this article will be brought up once 

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Catchin' a Bid
Buzz Lynn

So. . .major indexes have reached back to the September lows while 
the stochastic is deep in overbought.  Time to short for all it's 
worth?  Not on your life!  I know.  It sounds weird that 
Fundamentals Guy has dawned horns over the last three weeks.  
Again, don't misunderstand.  I'm only cyclical bullish; not 
secular bullish.

So why the optimism?  Our outstanding editor, Steve Price, got his 
hooks deep in it last night in the Wrap noting yesterday's breaks 
of the major averages over their 50 dma's.  Let me carry that a 
step further tonight.  It all comes down to a simple premise:  
Oscillators oscillate and revert to their mean.  Let's drill down 
on the chart to see what all this might be about.  NASDAQ is the 
underdog in this case, and the Dow Industrial represents only 30 
stocks, which are assumed by most to represent "the market".  
However, the pros watch the S&P 500 for their lead.  So we'll do 
the same.

S&P 500 chart - SPX (daily from April 2000 to present):


The numbe
rs here are not immediately important.  What is important is to 
notice the pattern.  Here, we see a descending trend line with 
three distinct low points, each lower than the previous.  OK, 
secular bear market still intact.  But at each of those bounces, 
there was a pretty solid rebound that provided solid cyclical bull 
action.  But did you also notice the disparity between the wavy 
magenta and gray lines?  Those are the 50 and 200 dma's, 
respectively.  The candle rebounds following the major declines 
will eventually cause the 50 dma to bounce too in delayed action, 
which brings the disparity between it and the 200 dma much 

Casually observing, I note that when the 50-dma strays far enough 
from the 200 dma, it tends to return to it.  Yes, oscillators 
oscillate and return to their mean.

Here's another casual observance.  Once over the 50-dma the 
candles were only about midway through their journey.  Journey to 
where, you ask?  Though I have not drawn it on the above chart, 
there is a descending line of lower highs too, creating an almost 
perfect declining channel since April 2000.  But the candles have 
moved up through their 50 dma on their way to touch the upper part 
of the channel, as shown below.

S&P 500 chart - SPX (daily from April 2000 to present):


What is particularly interesting to me is that on each of these 
previous occasions when the candles moved through the 50-dma, and 
the 50 dma converged upward with the 200 dma, thus lessening the 
disparity with the 200 dma, the stochastic was already OVERBOUGHT.  
Yet the cyclical move still had legs.  Such too is the case with 
the current conditions as shown on the right side of the chart:  
above the 50-dma, big disparity between the 50 dma and 200 dma, 
and overbought stochastic.  I'm only guessing, but I'll bet the 50 
and 200 dma's are about to shrink their difference again.  

Should history repeat, as it often does, perhaps the upper channel 
line just under 1050 or the 200 dma, likely just under 1070 by 
then, would be the ultimate bullish target.  For those looking at 
the bullish target on the point and figure charts, the target is 
1095 (boy wouldn't that be nice!) on a current buy signal.  Again, 
what about overbought?  I'm willing to label that, 
"inconsequential" to the cyclical trend for now, but will 
certainly pay attention to it as a trader.

One more thing from the Twilight Zone - Anybody note that today's 
high at 965 was right on the money at September 11th's close at 
965?  Should we fear a rollover and instant death of the market 
under the "old support equals new resistance" rule?  If so, it 
would only be temporary in my mind.  Still, it was no accident 
that today's 965 high matched with September's 965 low.

Now to fine-tune the theory.  Back to the charts!

SPX daily chart (near term):


Nobody can reasonably hold the notion that the markets will rise 
forever in a straight line from here.  In fact, due to the 
overbought daily chart, traders can probably expect some pullback 
or consolidation from here.  So where does support lie if that 
happens?  Our best educated guess comes from noting the above 
daily chart, shrunk back to normal size from the two longer-term 
charts shown far above.  Anyway, support would likely come in at 
928-930 since that is where the 10 dma (blue wavy line), 50 dma 
(magenta), and the 38% retracement from the March 2002 high to 
July 2002 low.  A guaranty?  No, plus it may take a few days to 
get there.  But it's pretty solid footing for the trader.

But just to be sure, let's look at another daily chart.

SPX chart with ascending trend line:


Take a look at the above chart.  It's identical to the previous 
daily SPX chart except that we've dropped the 10 dma line and 
added the bullish wedge noted in last week's column.  By 
definition, a bullish wedge has a series of ascending lows with 
resistance at a consistent high before turning down again.  That 
wedge broke to the upside 5 trading days ago, though it was 
unconfirmed then.  Note that the stochastic was overbought then 
too, and it didn't matter.

Anyway, if we focus in on the chart, we see the most recent 
pattern of higher lows define a rising support line.  Again to 
make the case for support at 928, we can use that line.  It 
supplements our analysis done from the previous charts.

Ready to put it all together for the bulls?

1.  Secular bear; cyclical bull - see descending channel.

2.  Oscillators oscillate and revert to their mean.

3.  50 and 200 dma's converge from wide disparity.

4.  Candle move above the 50 dma.

5.  Bullish wedge breakout.

6.  History plus point and figure chart suggest bullish target 
north of 1050.

7.  Interim support from the 10 dma, 50 dma, and 38% retracement 
at 928.

8.  Series of ascending lows also at 928 lending support.

Putting this all together, if bears were going to take control 
today, they would have attempted major damage at the September low 
of 965 - not accidentally today's high.  They couldn't pull it 
off.  Selling pressure should have greater.  There isn't just an 
absence of weakness, but based on the above charts, pillars of 
strength on which the market can build on in coming weeks.

But please. . .don't take this to mean that we ought to buy 
everything in sight.  It's still a secular bear market until we 
see a successful probe of resistance then a break to the upside, 
which appears to be some time off.  Also, remember to look again 
at the long term chart above.  We are better than half way through 
this bullish cycle.  We are not at the beginning that happened 185 
SPX points ago.

We also have that pesky daily stochastic that looks like it may 
want to cycle down for a breather before daily candles go knocking 
on 965's door again.  But if the stars converge, we might see a 
few more weeks out of this cyclical bull market.  Bears appear 
currently sated after their most recent feast at the honey pot 
leaving bulls free to romp in the tall grass and enjoy the 
sunshine for now.  Keep your eyes on the daily support lines for 
signs of the bear.  For now markets are catching a bid at critical 

That's it for this week.  Trade smart and make a great weekend for 


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