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Daily Newsletter, Thursday, 09/12/2002

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The Option Investor Newsletter                Thursday 09-12-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Bullish Sentiment Suffocating
Index Trader Wrap: A little air was let out of the balloon
Market Sentiment: Still On the Sidelines
Weekly Manager Microscope: Eric Kobren: Kobren Growth (KOGRX)


Updated on the site tonight:
Swing Trader Game Plan: Chips, Ships, VIPS, Dips


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      09-12-2002           High     Low     Volume Advance/Decline
DJIA     8379.41 – 201.76  8574.94  8359.09  1.18 bln   885/2332
NASDAQ   1305.72 – 35.77   1305.72  1279.09  1.17 bln   1034/2112
S&P 100  443.23  - 12.18   454.80   442.06     Totals   1919/4444
S&P 500   886.91 – 22.54   909.45   884.84 
RUS 2000  386.27 – 7.10    393.37   386.19 
DJ TRANS 2253.27 – 44.05  2298.86  2245.57   
VIX        40.72 +  9.37    41.07    39.09   
VXN        56.44 +  2.44    56.85    54.05
Total Vol    2,2357
Total UpVol   298
Total DnVol  2015
52wk Highs     61
52wk Lows     155
TRIN         2.85
PUT/CALL     0.23
************************************************************


Bullish Sentiment Suffocating
By John Seckinger 

During trading on Wednesday, the Dow appeared intent on breaking 
above 8800 and closing above its 50 DMA, currently at 8744.  Just
one day later, sentiment takes a turn for the worse as selling 
pressure intensifies and bulls run to the sidelines.

It all started on Thursday with a troubling Initial Claims report 
for the week of September 7th, rising 17,000 to 426,000 and placing 
this highly-watched indicator at its highest weekly reading since 
April 20th.  This is the third week above 400k and a continued rise 
could begin to seriously affect the labor market going forward.  
The shortened Labor Day holiday work week could have been 
responsible for volatility within Thursday's report; however, the 
more reliable four-week moving average rose and diluted any 
possibility for a bullish spin. This labor report seemed to be the 
catalyst for traders rushing into US Treasuries and selling equity 
positions in order to raise cash.  

It wasn’t much longer when equity holders had to deal with more bad 
news.  This time it was a report on the current account, rising a
staggering 15.6% in the 2Q to a record 129.96 billion.  As the 
report was read, fixed income traders began selling the US dollar 
and seeking bonds as a safe haven.  Analysts commented later in 
the day that the deficit is unsustainable and poses a risk to the 
U.S. and global economic outlook.  Analysts made it clear that 
negative implications if such a deficit continues include the 
dollar plunging.  

What else did bullish traders have to contend with on Thursday?  
Former CEO of Tyco, Dennis Kozlowski, and others likely to face 
criminal charges due to millions received in unauthorized 
compensation.  Shares of TYC fell fractionally, closing at 17.79 
and still above both its 22 and 50 DMA’s.  The saving grace may 
have been JPM organ upgrading the company to “buy” before the 
day’s session got underway.  

More impacting news included Lehman cutting their 2003 forecast for 
revenue growth in the Semiconductor Equipment industry to 10-15 
percent from their previous forecast of 27 percent.  Also significant
was shares of AOL falling 6 percent and closing under its 22 DMA, 
following Goldman Sachs cutting their EBITA estimates on the company
due to unresolved issues.  AOL is in the process of creating a less 
top-heavy management structure, as well as dismantling its business 
affairs unit.  AOL’s business affairs unit is currently getting 
Federal attention due to opaque accounting practices by the division.  

Possibly as early as Friday morning, AOL might make the headlines 
of the Wall Street Journal.  This will most likely be a headline 
the company would rather not see.  Expected in the story are the 
aforementioned issues as well as AOL’s cash flow expected to 
increase by only 2 percent instead of the 5-9 percent forecast by 
the company.  

Continuing the theme of bellwether companies, shares of McDonalds 
(MCD) fell almost five percent on Thursday following cautious 
comments from Goldman Sachs.  Inside the comments was skepticism 
over the company’s quality and service initiatives; most likely
reducing earnings growth in the near term.  How does McDonald’s 
five-percent loss and new multi-year low rank with other issues 
inside the Dow Jones?  The company gets a bronze medal for worst 
session.  See chart below.  



Disclaimers:  I do not like rumors, especially when it has to do 
with a company such as IBM.  Nevertheless, shares did fall 3 
percent to 71.87 and was recently a successful put play for the 
OI team (which includes myself).  Therefore, to the rumor we go:  
Speculation that the company will lower their guidance for the 
near future.  Defending the company was Soundview, noting that 
IBM has no way of knowing this early if the quarter will fall 
short of expectations.  Also explained by Soundview was that both 
the CFO and head of Investor Relations are out of the country.  
Sound convincing?  

Squarely on traders’ minds as the trading session took hold was 
both President Bush’s speech to the UN General Assembly and Alan 
Greenspan’s talk before the House Budget Committee.  President 
Bush said that “action will be unavoidable” against Iraq unless 
the U.N. takes a hard line forcing Baghdad to disarm.  Overall, 
the speech appeared to be uninspiring to equity holders and the 
current selling pressure continued.  Fed Chairman Alan Greenspan 
made it clear before the House Budget Committee that Congress 
needs to be more vigilant with fiscal discipline.  His speech was 
focused almost entirely on the budget outlook and need to reenact 
spending restraint measures enacted back in 1990.  These measures 
expire on September 30th.  

After all of that, should any trader in their right mind be bullish?
As losers outnumbered winners by a ratio of roughly 3:1 on the 
NYSE, the 201.76 point loss to 8379.41 might just be a sign of 
exhaustive selling.  Therefore, Friday could be a victory for 
the bulls.  Volume came in at a light 1.1 billion for both the 
Big Board and Nasdaq.  Speaking of other indices, the tech-laden 
Nasdaq lost 35.77 points, or 2.72 percent, to 1279.68, the S&P 500 
shed 22.54 points, or 2.48 percent, to 886.91, and the Nasdaq-100 
(QQQ) fell 2.72 percent to close at 22.81.  

Chart of Dow Jones Industrial Average Index, Daily



As the chart shows, price action on Friday might have some serious 
implications for traders wanting to remain bullish.  Primarily, 
the blue trend line which was drawn on September 5th needs to hold.  
A move under 8330 should confirm a break in trend.  Support 
underneath could be found at 8215, but then the double-bottom 
would become a triple-bottom and dilute its strength.  If responsive 
buying does take place on Friday, the Dow is expected to test the 
22 DMA (currently at 8589) once again.  The bearish red trend line 
is currently at 8669.  Of course, as Steve and Jim pointed out, the 
Dow might be in the process of forming a Head & Shoulders formation; 
projecting an objective (calculated by myself) of near 7300.  

Without getting into the Intermarket Relationships to much, one 
concern today was the Dollar’s failure to settle above its 50 DMA, 
currently at 107.45.  Closing down 0.41 percent at 107.18, there 
is now a good chance (based on recent history) that the Dollar 
will weaken further towards its 22 DMA, currently at 106.92.  A 
weaker dollar is good for gold and bad for stocks, in theory.  
Speaking of Gold, the 4.29 percent rise to 76.09 places the index 
that much closer to my 80.90 intermediate objective.  

Oil, Utilities, and bonds all traded with a bearish slant towards 
equities.  It is the significant drop in yields within the 30-year 
bond that might also be of concern for equity holders.  The TYX.X 
index saw yields lower by 1.25 percent and, like the Dow, rests on 
a substantial area of support.  It is my opinion that the Dow will 
lead all indices during trading on Friday.  

Getting back to the major equity indices, a chart of the Nasdaq 
shows the possibility that the tech-laden index will go down and 
test the relative low of 1192 set during the week of July 21st.  
If this happens, there will be a good change that low will end 
up failing bullish traders and becoming resistance down the road.

Chart of the Nasdaq Combined Composite Index, Weekly 



What could be the catalyst during trading on Friday?  Well, the 
Producer Price Index (8:30 a.m.) should take a backseat to both 
the Retail Sales report (8:30 a.m.) and Michigan Consumer sentiment 
figure (9:45 a.m.).  The August Retail Sales report is expected to 
show a rise of 0.8 percent, adding to July’s 1.2 percent upswing.  
This key report on consumer spending should rise based on recent 
incentives by auto manufactures and buying of back to school 
accessories.  The Michigan Consumer Sentiment report is expected 
to rise fractionally to 88 from 87.6, buoyed by higher growth 
expectations and hope business investment will turn around.  
Risks include possible war, recession, weak labor market, lower 
stock prices, and 10 percent fall in the index over last three 
months.  Clearly there are more cons than pros.

With the potential for more downgrades, accounting concerns, 
terrorist threats, war, and weak economic reports looming large, 
deteroriating bullish sentiment can still be salvaged.  In fact, if 
the major indices find support and further establish the 
established bullish trend line, it might actually be the bears 
hibernating early this winter.

John Seckinger



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

A little air was let out of the balloon

A little air was let out of the balloon as it relates to the 
major indexes today as the Dow Industrials fell 201 points (-
2.35%) to close at 8,379, while the S&P 500 Index (SPX.X) fell 22 
points (-2.47%) to 887 and the NASDAQ Composite (COMPX) lost 35 
points (-2.71%) to close at 1,279.

The narrow based indexes had the S&P 100 (OEX.X) falling 12 
points (-2.67%) to 443 and the NASDAQ-100 Index (NDX.X) declining 
31 points (-3.3%) to 915.

After a day like today, a writer/analyst for a newsletter runs 
out of verbs to describe downside action without sounding like he 
is repeating himself.

Market breadth was decidedly negative today.  Just starting with 
the Dow Industrials, which comprises just 30 stocks, breadth had 
29 of the 30 all showing losses.  Only Forest/Paper Products 
(FPP.X) 294 -1.58% component International Paper (NYSE:IP) $37.33 
+1.16% managed a gain.  Meanwhile shares of Dow components Intel 
(NASDAQ:INTC) 15.74 -5.29%, Hewlett Packard (NYSE:HPQ) $13.60 
-5.29%, McDonald's (NYSE:MCD) $20.31 -4.82%, Alcoa (NYSE:AA) 
$22.77 -4.6% and Walt Disney (NYSE:DIS) $15.50 -4.2% all posted 
losses greater than 4%.

I wouldn't describe today's volume as "impressive" as both the 
NYSE and NASDAQ traded just over 1 billion shares each.  On a 
broader scale, breadth was negative at both the big board and the 
NASDAQ, with decliners outnumbering advancers by a 3 to 1 margin 
at the NYSE, while breadth at the NASDAQ found 2 stocks declining 
for every stock advancing.

New highs versus new lows was somewhat negative today at the NYSE 
with 51 stocks hitting new lows versus 45 stocks achieving new 
highs.  Today's notable new 52-week low on the big board comes 
from fast food giant McDonalds (MCD) after analysts began 
expressing near-term concern regarding the company's new menu and 
service initiatives.  Nice warning from analysts after the stock 
has fallen from the $30 level since mid-May.  

Not wanting to just focus on the negative and let traders know 
some bullish still exists, shares of Jo-Ann Stores (NYSE:JAS.A) 
$33.75 +1.04% hit a new 52-week high for the fourth consecutive 
session, while defense contractor TRW Inc. (NYSE:TRW) $58.50 
-0.06% also traded a new 52-week high before fading lower into 
the close.

Precious metals stocks as depicted by the Gold/Silver Index 
(XAU.X) 76.08 +4.29% was the only major index that traded in the 
green today (aside from bonds).  At the end of last night's wrap, 
I mentioned the DIVERGENCE found in yesterday afternoon's trading 
when the broader markets faded into the close and gold stocks bid 
and that follow through on both sides continued today.  A move 
much above Monday's highs of 77 in the XAU.X combined with 
confirming break higher in the commodity as depicted by December 
Gold futures contract (gc02z) $320.40 +0.72% could see 
bullishness build markedly to the XAU.X 81.00 level should sector 
shorts rush to cover positions.  Gold stocks are not for the 
faint of heart as the stocks move up and down well ahead of the 
commodity itself.

Onto the indexes.  Due to overwhelming reply's to last night's 
request for me to show and interpret the S&P 100 Index (OEX.X) 
443 -2.67% chart each night.  Lets do that now.  Again... very 
similar technicals to the S&P 500 (SPX.X), but some slightly 
different numbered levels to me looking at as far as support and 
resistance.

S&P 100 Index Chart - Today's action



Ooops! Wrong chart.  However, note how the "blimp" lost some air 
today, but only half of it appears to be damaged.  It's still off 
the ground, but some "external" damage has been done.  Bears 
shouldn't be complacent.  Here's why.

S&P 100 Index Chart - Daily Interval



I like to try and stay consistent with my "levels" from 
retracement.  Just as I anchored the SPX from this spring's highs 
to its relative low close of July 23rd (the market thought that 
was an important level for whatever reason, maybe just to 
undercut nice round number of 400?) I want to stay with that 
retracement range with the similar larger 100 stocks in the OEX.  
Note how upward trend is also "identical" to last night's SPX 
analysis.  Bears have some work to do yet to get trend broken and 
looks for a close below the 434 level (19.1%) retracement, which 
is most likely a shorter-term trader's goal to get a further 
decline to the 419 level, where I'd expect some type of short-
covering (if achieved) by some bears that were active above the 
470 level.  The oscillators depict that of a lower trade still 
and I've attempted to "envision" how the OEX might trade the 419 
level when stochastics reach the "oversold level.  Under such a 
circumstance, then we might expect a little short-covering rally 
back into the 434-450 range with another potential entry point.

Now, I want to take a moment and briefly discuss my "views" on 
oscillators, specifically stochastics.  I gotten a lot of e-mail 
from subscriber over the years discussing their views on why 
certain bullish or bearish trades shouldn't be taken simply 
because the stochastics are "overbought" or "oversold."  In 
brief, it's been my experience that stochastics have kept me out 
of some very good trades (short/long) when I first started trying 
to use the tool.  Stocks that were headed south (down) and were 
buried in "oversold" on the daily and 60-minute timeframes 
sometimes ended up at the South Pole days later simply because 
investors wanted out of the stock(s) so badly that they didn't 
seem to care what the oscillators were doing.  Just the opposite 
can be true to the upside when a visit to Santa at the North Pole 
despite "overbought" conditions were found.  As such, I'll place 
a "weighting" on the indicator simply as a partial tool to see if 
it sways my decision on a trade.  

I actually do put "more weight" in the MACD and how it is 
trending when trying to use stochastics.  I think of the MACD 
zero level as a waterline.  You know, kind of a "mid-point."   
For example, in the OEX chart above, see how MACD was trending 
higher in late July?  While stochastics were "overbought" near 
the 459 level, stochastics may have been useful by a bull to take 
some short-term gains if lucky enough to have picked a bottom in 
the OEX, but may not have necessarily indicated a real good 
short/put entry point for a swing-trader looking to hold a 
position for more than a week.  In essence, the trending higher 
MACD kind of "overrode" stochastics for a swing-trader type 
trade.

Now, one can perhaps see in the OEX how a break below the 472.85 
level of retracement, combined with a rolling MACD above zero and 
"overbought" stochastics was the "ideal" short/put entry point 
with a swing-trader's target of 435 from that entry.

Do you see where I'm going with this?  You got it.  There's going 
to most likely be some disciplined market participants looking to 
take some profits should the 435 level be tested.  I say this so 
that any bears in the OEX.X are "freaking out" if they took a 1/2 
bearish position at the open today.  

Now, neither you nor I can really get inside the minds of all 
market participants, but a bear in the OEX is liking what he/she 
sees currently, and if a bear gets the break of upward trend at 
its current first test, and a convincing close below the 434 
level of retracement, then we should see MACD make a more 
noticeable move lower and really get some bulls jittery.

Also, lets remove any thought that "shorting" makes a stock or 
index trade lower.  This simply isn't the case.  After all, it 
takes an "up tick" to get short a stock, only a bull's selling at 
the bid creates the supply to have a stock, then index trading 
lower.

Now, you're going to get a full dose of OEX tonight.  Here's 
something I hadn't seen that a long-time subscriber pointed out 
that she thought she saw in the OEX as well as the SPX.  I found 
it interesting and got a somewhat correlative bearish target with 
the point and figure chart of the OEX.  

Let's clean up the chart of the OEX and get rid of all our levels 
and look at a less conventional, yet potential head and shoulders 
top that could be forming in the OEX.  Here we see a trending 
higher neckline, and if the neckline were broken, then a 
potential downside target of 380 would be a pattern objective.

OEX Chart #2 - Daily Interval



One thing I've always loved about point and figure charts was the 
ability to calculate both bullish and bearish vertical counts to 
help me assess risk reward in a trade.  A bar chartist will look 
for head and shoulder tops to try and establish some type of 
"ultimate" downside objective, should the neckline be broken to 
the downside.  I see the trending higher neckline I think one of 
our OEX index traders has identified, but funny how we once again 
see an "upward trend" in play.  If that neckline is broken, 
especially on a closing basis, then bears may indeed be targeting 
and OEX low near 380.

S&P 100 Chart (OEX) - $5 box scale



We get some correlation between a bearish objective from the 
potential head/shoulders top that we get from calculating a 
bearish vertical count in the OEX.  Most institutions view the 
OEX on a $5 box scale, and this is what I set my box size/scale 
to in the above p/f chart.  It would currently take a trade at 
465 for the OEX to generate a "buy signal," in order to negate 
the current bearish vertical count of 390.  As such, a trader 
using the p/f chart of the OEX is perhaps beginning to assess a 
bearish trades as .... risking a stop to 465 ($20 risk) to 
potentially reach a downside target of $390 ($55 reward).  That's 
a little better than 2:1 reward/risk.

Perhaps a bar chartist that likes to trade head and shoulders 
patterns and consults the p/f charts establishes a longer-term 
target range of $380-$390.  Lots of work, but I like the 
correlation between downside targets.  All we have to do is 
monitor things going forward.

Again.... according to www.stockcharts.com, the OEX Bullish % 
($BPOEX) is currently in "bear confirmed" status, so a more 
defensive or bearish posture toward the OEX is warranted.

OK ... enough OEX for one night, but I think we're caught up.  
Try some of this stuff on your own with the other indexes/sectors 
you might be trading.

There's an interesting development taking place in the Dow 
Diamonds (DIA) $84.14 -1.79% that will make for some interesting 
trading tomorrow.  I think it is a bit "silly" to show the bar 
chart of the DIA again today, but suffice it to say, the DIA 
closed right on upward trend we had on last night's chart.  So, 
lets take a look at the DIA and its p/f chart.  Aha!  Another 
upward trend is nearby.  Though some air was let out of the 
balloon today, bears shouldn't be complacent and not trying to 
OVERLEVERAGE with their downside trades.  Things aren't looking 
good for the bulls, but I like to take things slowly and rather 
methodical.

Dow Diamonds (DIA) - $2 and $1 box



Just like the bar chart, we find the Dow Diamonds (DIA) trading 
right at a bullish trend which could serve as support.  As such, 
bears don't want to be OVERLEVERAGING in short/put positions or 
overly complacent.  One thing I like about p/f charts is that I 
can "back test" some other vertical counts to see if they have 
much "credence."  The current bearish vertical count from the p/f 
chart is to $74 and it would take a trade at $88 to negate this 
bearish vertical count.  As such, a p/f chartist is currently 
assessing bear's risk as ... risk to $88 ($4) with potential 
reward to $74 ($10).  That's better that 2:1 reward risk.  I can 
back test a prior bearish count that came ABOVE trend, which had 
the DIA signaling some potential downside risk to $84, when the 
DIA gave a sell signal at $97 and completed its bearish vertical 
count column.  

Check your own risk/reward profile, but looks bearish right now 
for at least 1/4 or 1/2 position.  A break of bullish support 
trend would be helpful.

And DIA bears might have gotten somewhat of a break late tonight 
after Dow component Honeywell Intl. (NYSE:HON) $28.34 -0.63% 
warned on upcoming Q3 earnings, saying it sees EPS in the range 
of $0.50-$0.52 versus consensus estimates for EPS of $0.60.  Over 
Instinet, HON fell another $1.49 to $26.85 and may help let a 
little more air out of the Dow's balloon.

Tech trader's may have been watching for Adobe Systems' 
(NASDAQ:ADBE) $18.45 -3.8% earnings tonight.  The company beat 
lowered analysts estimates of $0.19 per share by 3-cents and said 
it saw Q4 EPS in the range of $0.21-$0.25, which would have 
analysts' estimates of $0.22 EPS in the middle of the range.  In 
after hours trading, shares of ADBE jumped $1.76 from its close.  
For QQQ traders, ADBE represents a 0.64% weighting in the QQQ, so 
not a big deal, but did see some partial bidding in other 
software names.

The most heavily weighted QQQ stock is fellow software maker 
Microsoft (NASDAQ:MSFT) $47.19 -2.86%, which gained $0.21 in 
after-hours trading.  Just like we see in the Dow Diamonds (DIA) 
p/f chart, MSFT also traded right down to its bullish support 
trend today and would take a trade at $45 to get the stock back 
on a sell signal and a break of bullish support.

I don't have much to add regarding last night's comments in the 
QQQ and bearish thoughts there.  A skittish bear that shorted the 
open could follow a stop lower just above yesterday's high of 
$24.35, but that's about it.

Money poured back into Treasuries for the second straight 
session, so I'm not thinking that there's going to be a lot of 
capital in place to give stocks much of a bid.  

There's a lot of economic data due out before the opening bell, 
but we'll have to see what those numbers look like to get a 
better feel on tomorrow's action.

For now, the MARKET looks jittery regarding a potential attack on 
Iraq, and this morning's jobless claims number appeared to be 
just enough reason for bulls to pull the plug instead of waiting 
to see if upward trends hold.

Key number tomorrow morning related to the economy is going to be 
August Retail Sales, which economists expect to show a 0.3% gain 
and a 0.2% gain excluding autos.

Jeff Bailey



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

Still On the Sidelines
by Steven Price

If getting 9/11 out of the way isn't going to rally the markets 
by bringing buyers in from the sidelines, it appears it will be a 
while before the Dow tests 9000 once again. Yesterday's failure 
at the 50-dma looked bearish and today's drop has only furthered 
that sentiment.  

Alan Greenspan testified before the Congressional Budget 
Committee today, but focused on reducing deficit spending in the 
long-term, rather than talking about the economy.  He said our 
discipline has faded in the past year as we've increased military 
spending, cut taxes and spent on various emergencies.  He favored 
linking tax cuts and spending to budget forecasts, so that we 
don't undo years of hard work in reigning in the budget deficit.  
Regarding interest rates, he said, "The economy appears to have 
withstood this set of blows well, although the depressing effects 
still linger."  This sounds an awful lot like the last FOMC 
announcement, which left rates unchanged, but shifted to an 
easing bias due to economic risks.  My guess is that the 
September 24th FOMC meeting will yield a similar statement.  

President Bush spoke to the U.N., essentially making his argument 
for a change of regime in Iraq.  While he used tough rhetoric, it 
sounded as though he was giving the U.N. time to fix the problem 
before the U.S. took military action.  The oil markets seemed to 
agree, as Crude Oil futures fell 0.92  to  28.85.  After holding 
over $29/barrell since September 6, this move is significant, as 
it foreshadows some time lag before U.S. action is taken.  

This morning's jobs report showed more bad news for the economy.  
Layoffs have surged, raising the four-week moving average by 
8,750 to 409,500, which is a three-month high.  First time claims 
rose 17,000 to 426,000, which is the highest level since April 
20.

A look at the Dow shows what appears to be the formation of a 
head and shoulders formation, with the right shoulder being 
formed by yesterday's failure at the 50-dma and today's 201.76 
drop. You can see a chart of this formation in Wednesday's Market 
Wrap, minus today's drop.  The neckline violation, a very bearish 
sign, does not actually come for another 150 points or so to the 
downside, but if we break through that level, we could see a 
retest of July's lows.  A similar formation can be seen in the 
S&P 500,  NDX and the Nasdaq Composite.  They all failed the 50-
dmas yesterday and will most likely dive in concert if we see a 
joint neckline break.  

After the bell, software maker Adobe Systems (ADBE) released 
earnings that beat the street by 0.03 and traded up over $2.50 
from a close of  $18.45 to $21.10.  This could spur a tech rally 
tomorrow, as it is the first good news in some time.  Adobe 
forecast growth in the current quarter, which is something we 
haven't heard from the tech sector .

On the other hand, Honeywell (HON) lowered estimates for the 
third quarter and full year 2002, stating that the economic
 recovery is not materializing.

From a technical standpoint, things look bleak, but not as bleak 
as they will if the head and shoulders neckline is broken is the 
major indices.  The news from Adobe could be the catalyst for a 
rally that prevents that breakdown, however.  Look for a rally in 
the techs tomorrow, and then watch the 50-dma above for signs of 
failure.


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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7702
Current     :  8379

Moving Averages:
(Simple)

 10-dma: 8466
 50-dma: 8601
200-dma: 9643



S&P 500 ($SPX)

52-week High: 1226
52-week Low :  797
Current     :  886

Moving Averages:
(Simple)

 10-dma:  898
 50-dma:  903
200-dma: 1054



Nasdaq-100 ($NDX)

52-week High: 1782
52-week Low :  892
Current     :  915

Moving Averages:
(Simple)

 10-dma:  927
 50-dma:  960
200-dma: 1293




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


The Semiconductor Index (SOX.X): The SOX just can't seem to hold 
its support.  After teasing us with a hold over 300, it was right 
back down to 283.50.  We're not piling on short just yet, as we 
will look for a re-test of support at 275.  "Support" in this 
case is a tenuous term as we are really just referring to the 
recent 52-week low from which the failed rebound took place.  
Adobe's news after the bell should be good for the Software 
Sector, and in turn may lift the other techs as well.  If 
forecasting growth and beating earnings doesn't get the engine 
rolling, then look for the SOX to test 275 sooner rather than 
later.

52-week High: 657
52-week Low : 275
Current     : 283

Moving Averages:
(Simple)

 10-dma: 291
 50-dma: 331
200-dma: 480


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

Market Volatility

Here we are back over 40.  Today's drop, after Alan Greenspan's 
testimony and a bleak jobs report, reminded everyone of the 
downside potential still lurking below 8200 in the Dow.  A trip 
below 8200 looks like it could land us back at 7500, and the last 
time that happened the VIX was almost 50% higher, near 60.  It 
will be hard to get through a September/October cycle without the 
VIX remaining high, judging by past years. The next time we see 
the 20s could be November.

CBOE Market Volatility Index (VIX) = 40.72 +3.49
Nasdaq-100 Volatility Index  (VXN) = 56.44 +2.44

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.91        483,086       440,097
Equity Only    0.67        379,687       252,771
OEX            1.46         25,439        37,308
QQQ            0.45         90,859        40,433

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

Bullish Percent Data

           Current   Change   Status
NYSE          43      + 0     Bull Confirmed
NASDAQ-100    42      + 8     Bull Correction
DOW           52      + 2     Bull Correction
S&P 500       52      + 1     Bear Confirmed
S&P 100       48      + 2     Bear Confirmed

Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

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

 5-Day Arms Index  1.16
10-Day Arms Index  1.39
21-Day Arms Index  1.28
55-Day Arms Index  1.31

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 
points.

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

Market Internals

        Advancers     Decliners
NYSE        681          2054
NASDAQ     1035          2111

        New Highs      New Lows
NYSE         21              14
NASDAQ       45              89

        Volume (in millions)
NYSE     1,372
NASDAQ   1,186


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

Commitments Of Traders Report: 09/03/02

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 added 6,000 contracts to the long side, while 
reducing shorts by only 500, in what appears to be a stockpiling 
in anticipation of extreme movement next week. Small traders 
increased both long contracts and short, adding 5,000 to the long 
side and 8,000 to the short side.


Commercials   Long      Short      Net     % Of OI 
08/13/02      427,618   475,536   (47,918)   (5.3%)
08/20/02      422,100   469,556   (47,456)   (5.3%)
08/27/02      425,982   469,087   (43,105)   (4.8%)
09/03/02      431,755   468,529   (36,774)   (4.1%)

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
08/13/02      155,040    66,546    88,494     39.9%
08/20/02      156,974    69,071    87,903     38.9%
08/27/02      153,152    72,408    80,744     35.8%
09/03/02      158,262    80,130    78,132     32.8%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 114,510 - 3/26/02
 
NASDAQ-100

Commercials added 2600 short contracts and only 1400 longs, while 
small traders got longer, adding 1,000 longs and reducing short 
positions by 300.


Commercials   Long      Short      Net     % of OI 
08/13/02       42,303     50,354    (8,051) ( 8.7%)
08/20/02       41,876     49,461    (7,585) ( 8.3%)
08/27/02       45,354     50,634    (5,280) ( 5.5%)
09/03/02       46,712     53,287    (6,575) ( 6.6%)

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
08/13/02       12,797     8,933     3,864    17.8%
08/20/02       11,321     7,980     3,341    17.3%
08/27/02       10,156     8,040     2,116    11.6%
09/03/02       11,150     7,720     3,430    18.2%

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

DOW JONES INDUSTRIAL

Commercials reduced short positions slightly, reducing risk 
heading into next week, while small traders reduced both sides by 
about 500 contracts. 


Commercials   Long      Short      Net     % of OI
08/13/02       22,837    13,833    9,004      24.6%
08/20/02       21,160    15,349    5,811      15.9%
08/27/02       21,023    14,328    6,695      18.9%
09/03/02       21,161    13,792    7,369      21.1%

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
08/13/02        5,050     8,349    (3,299)   (24.6%)
08/20/02        6,216     8,163    (1,947)   (13.5%)
08/27/02        6,825     8,438    (1,613)   (10.6%)
09/03/02        6,395     7,966    (1,571)   (10.9%)

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   1,909  -  1/16/01

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


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*************************
WEEKLY MANAGER MICROSCOPE
*************************

Eric Kobren: Kobren Growth (KOGRX)

Anyone who has ever read Fidelity Insight, a monthly investment 
report on Fidelity's 170+ mutual funds, may already be familiar 
with Eric Kobren's mutual fund research and insight.  But, most 
people are not aware that Kobren started his own mutual fund in 
December 1996 called Kobren Growth Fund (KOGRX), which seeks to 
provide long-term appreciation by holding a portfolio of around 
10-12 other mutual funds.  

Over the turbulent past year and on average over the past three 
years, Kobren's return performance has been top decile or close 
to it within the large-cap blend category, per Morningstar.  In 
comparison to the average large-cap blend fund, Kobren has over 
the last five years and overall delivered above average returns 
with below average risk relative to his large-blend competition.

In 1997 and 1998, the fund's first two full years of operation, 
Kobren's relative performance was weak.  In 1999, he produced a 
30% return for the year, ranking in the category's top quintile.  

In 2000, 2001 and so far in 2002, Kobren has kept losses to the 
single-digits.  The fund lost 9.8% in 2000, slightly worse than 
S&P 500 index's 9.1% decline.  In 2001, Kobren lost 7.3%, while 
the S&P 500 index slid 11.9%.  On a YTD basis thru September 11, 
the Kobren Growth Fund is down 9.8%, less than half of the U.S. 
market's decline, as measured by the S&P 500 index (YTD -20.0%).

As a result of Kobren's strong capital preservation skills, the 
Kobren Growth Fund's trailing 5-year performance now ranks near 
top quartile (27th percentile) within the large-cap blend group, 
per Morningstar.  So, despite a rocky start, Kobren's style and 
strategy have paid off for investors.  We'll take a closer look 
at Kobren's investment approach in this report and see how fund 
holdings are derived.

The Kobren Growth Fund is a no-load mutual fund, with a current 
expense ratio of 0.96%.  That is a little high for a fund which 
invests in other mutual funds, but still below average compared 
with the average stock fund.  The minimum initial investment is 
$2,500 for regular accounts and $2,000 for IRAs, and the Kobren 
Growth Fund is offered through a number of leading NTF networks, 
including the Fidelity Retail FundsNetwork-NTF and TD Waterhouse 
NTF programs.
 
Manager Background

Eric Kobren is president and portfolio manager of Kobren Insight 
Management, located in Wellesley Hills, Massachusetts outside of 
Boston.  Before founding his own investment firm in 1987, Kobren 
was an executive with Fidelity Investments and a business analyst 
with Merrill Lynch.

In 1985, two years before starting his own investment operations, 
Kobren founded the Mutual Fund Investors Association.  Today, it 
publishes two mutual fund newsletters - for over 100,000 members.  

Kobren holds a M.B.A. degree from Columbia University.  He began 
his career as a marketing analyst with Merrill Lynch in New York 
and was vice president of research and trading with Boston-based 
Delphi Management, an institutional money manager.  He spent two 
years with Fidelity Investments as a senior marketing executive.

The Kobren website (www.kobren.com) says that Kobren's years at 
Fidelity made him well qualified to found the MFIA (Mutual Fund 
Investors Association) in 1985.  His goal in 1985 was to assist 
Fidelity investors maximize their mutual fund investments.  His 
Fidelity Insight newsletter was born shortly thereafter.  While 
Kobren was making a name for himself by observing fund industry 
giant Fidelity, he increased staff and expanded their base, the 
website goes on.

The Kobren Insight Group now includes Kobren Insight Management, 
the firm's investment arm and adviser to the Kobren Growth Fund.  
Kobren Insight Management has managed money for private clients 
since 1990 and today has $145 million in assets under management.

In 1994, Kobren's MFIA started publishing FundsNet Insight, a 
monthly newsletter covering the funds available on the mutual 
fund networks such as Fidelity, Charles Schwab and Jack White. 

The latest addition to the Kobren Insight Group is the Kobren 
Insight family of funds.  Originally, there were three funds: 
Kobren Growth (1996), Kobren Moderate Growth (1996) and Delphi 
Value (1998).  Kobren Moderate Growth, however, has since been 
merged with Kobren Growth Fund.  Delphi Value Fund (KDVRX) is 
sub-advised by Scott Black with Delphi Management.  The Delphi 
Value Fund is not part of our discussion herein.

Investment Overview

Kobren seeks to achieve the fund's long-term growth of capital 
objective by normally investing at least 65% of assets in open-
end and closed-end U.S. and international equity mutual funds.  
Under the fund's policy, Kobren may put up to 35% of assets in 
fixed-income funds, or he may invest directly in stocks, bonds, 
money market instruments, options, futures contracts and other 
types of securities. 

Utilizing an active allocation strategy, Kobren seeks a target 
volatility level approximating the S&P 500 index.  This target 
volatility varies depending on market conditions.   

Kobren's firm relies heavily of its own research and analytical 
capabilities, which includes the tracking over 300 mutual funds 
against leading industry benchmarks as well as their customized 
benchmarks.  Kobren's team of 45+ full time professionals today 
employs certain analytical techniques to refine their search to 
isolate high quality investment advisors and the most promising 
mutual funds.

Analysts at Kobren Insight also meet and speak to fund managers 
daily to monitor manager activity, and performance.  Additional 
information about Kobren's research process is provided online.

Morningstar's report says that Kobren and team eschew ("avoid") 
momentum plays and big asset allocation bets.  Instead, Kobren 
focuses his team's research on the track records of individual 
managers at high-quality investment companies.  For the equity 
allocation (usually at least 65% of assets), Kobren emphasizes 
veteran stock pickers such as Bill Nygren, Oakmark (OAKMX), O. 
Mason Hawkins, Longleaf Partners Small Cap (LLSCX) and Richard 
Pell, Julius Bear International Equity (JIEIX).

Kobren employs a similar approach with the fixed income assets, 
investing heavily in two PIMCO bond mutual funds.  Bill Gross, 
PIMCO's bond guru leads an all-star portfolio management team.

According to Morningstar's report, Kobren Growth Fund had 73.6% 
of assets in stocks (stock funds) at July 31, 2002, with nearly 
15% of that amount in foreign stocks (stock funds).  Cash funds 
and bond funds represented 24.0% of portfolio assets, with 2.4% 
categorized as other.  

This near 75% equity stake is greater than the average balanced 
fund, but considerably lower than the average stock mutual fund.  
Accordingly, the fund's "below average" Morningstar risk rating 
stems more from Kobren's asset mix decision than anything else.  
Aggressive balanced might be a suitable label for Kobren's fund 
management approach at least through the recent market downturn.

As of August 2002, the Kobren Growth Fund had an average market 
capitalization of $14.4 billion per Morningstar.  Note that the 
fund is large-cap by Morningstar's standards, but is classified 
by Lipper as "multi-cap."  Lipper's categorization is certainly 
appropriate, considering Kobren's 31.2% stake in mid-cap stocks 
(funds), and his 18.7% allocation to the small/micro-cap sector.

Morningstar and Lipper both agree that the fund's average price 
valuations put it in the blend or core style box.  In this fund, 
Kobren maintains style neutrality, resulting in a portfolio that 
combines value and growth characteristics, adding to its appeal.

Overall, the portfolio is diversified three ways.  First, stock 
and bond fund holdings are themselves diversified.  Second, the 
fund's assets are allocated between different asset classes, to 
diversify portfolio risk.  Third, within the investment classes, 
Kobren diversifies holdings across sub-asset classes, or styles.

Risk and Performance

According to Morningstar, the fund's risk level has been average 
compared with its large-cap blend fund peers over the past three 
years.  However, on average over the past five years, the fund's 
risk level was below average.  Since more weight is given to the 
fund's longer-term results, the fund's "overall" risk rating is 
below average within the large-cap blend category (450+ funds).

Kobren's trailing 1-year loss through September 10, 2002 of 7.5% 
shaved more than half off the market's 15.5% decline as measured 
by the S&P 500 index.  Although a negative return, Kobren ranked 
in the category's top decile (or 6th percentile) for performance.  
For comparative purposes, the average U.S. hybrid fund lost 6.2% 
over the past 12 months, while the average large-cap blend stock 
fund was 15.1% in the red.  So, you can see that Kobren's losses 
are closer to those of mixed equity funds than full equity funds.

The fund's trailing 3-year annualized loss of 4.7% was 6.5% less 
than the market's 11.2% annual-equivalent decline, using the S&P 
500 index.  Although negative, Kobren's lesser-than-average loss 
was strong enough on a relative basis to rank in the large-blend 
category's top 11% (near top decile).  Also, the fund's trailing 
5-year average annual total return of 1.7% was 0.4% greater than 
the S&P 500 index benchmark, near top quartile performance (27th 
percentile).

While it's true that the fund's 0.96% expense ratio could perhaps 
be lower, Kobren uses the fund's purchasing power to get into the 
institutional class of a fund, which come with low expense ratios 
relative to retail class expenses.

Conclusion

Kobren Growth Fund is suitable for long-term investors who want 
the simplicity of getting a professionally managed portfolio of 
mutual funds in a single investment.  This Kobren fund of funds 
relies heavily on the firm's research capabilities, and invests 
assets in funds with different yet proven styles and strategies.

The result is an aggressive balanced fund that has done well in 
relation to the average stock fund through the market downswing.  
How well Kobren will do in the next up market is unclear.  1997 
and 1998 weren't exactly strong performance years, but Kobren's 
performance since then has been respectable, and competitive in 
relation to other large-cap blend funds tracked by Morningstar.

For more information, log on to www.kobren.com

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

Chips, Ships, VIPS, Dips

The chip sector took another series of hits today with downgrades 
and earnings warnings. The Coast Guard, FBI, Customs Dept and Dept 
of Energy are still investigating the Liberian cargo ship believed 
to be carrying a nuclear device.  VIP's headlined the news with 
President Bush warning the world on Iraq, Greenspan warning the 
U.S. on deficits and New York authorities warning Tyco execs they 
were not done yet. Is it any wonder the Dow dipped over -200 
points?


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The Option Investor Newsletter                 Thursday 09-12-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: QQQ, DJX, SPW, IDPH
Dropped Puts: None
Daily Results
Call Play Updates: TRMS, MSFT, CVG, LLL, OMC
New Calls Plays: None
Put Play Updates: AA, AGN, EXC, TXU, 
New Put Plays: CTX, AET, CMA, GE, MTG, 

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

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


CALLS:
*****

QQQ $22.81 -0.64 (-0.04 for the week) We didn't get the post 9/11 
rally we were looking for.  After yesterday's Beige book report 
showed very little to get excited about, it appears the sideline 
investors stayed there.  The recent pullback in the broader 
markets looks bearish overall, and this morning's downgrade of 
several chip equipment makers didn't help the techs.  Rather than 
wait to get stopped out, we will cut our losses and close the 
play.

---

DJX $83.79 -2.02 (-0.48 for the week) The Dow looked poised for a 
post 9/11 rally, after those investors waiting for the 
anniversary to pass would be looking to re-invest.  However, the 
economy got some bad news in yesterday's Beige Book report, and 
today's testimony from Alan Greenspan indicated he would not be 
lowering interest rates.  Instead he said the Government should 
cut back on fiscal stimulus spending, in order to reduce the 
projected deficit.  The markets reacted negatively and bulls who 
bought ahead of a possible 9/11 rally will probably be heading 
for the exits now that it didn't happen.  Add to this the 
possible head and shoulders pattern forming in the Dow, and we 
are no longer bullish on this play.  The close stopped us out and 
did the work for us, as this play is now closed.

---

SPW $109.99 -2.00 (+0.54 for the week) SPX Corp was a prime 
candidate to participate in an overall market rally.  Its recent 
2 for 1 split announcement only fueled the possibilities for the 
stock.  The recent rollover down to 109.99 appears as though it 
could re-test the 50-dma of 103.08 in bearish market conditions.  
Today's drop in the Dow, as Alan Greenspan talked about the 
government pulling in the spending reins and the possibility of 
higher interest rates, does not bode well for the overall market 
in the short-term.  While SPX's long term prospects still are 
promising, we are not willing to take on the possibility of a $7 
loss on the play while we wait.  Rather than waiting to get 
stopped out, we have decided that overall market conditions have 
changed and we will close the play, rather than "wish and hope" 
for a turnaround.

---

IDPH $41.77 -1.87 (+1.06 for the week) IDEC was a prime candidate 
to participate in a post-9/11 relief rally, coming off strong 
support and pushing ahead in the face of some biotech weakness.  
The Biotech Index (BTK.X), however, was turned back soundly from 
its 50-dma and IDPH suffered right along with it.  With the broad 
market retreat and the BTK experiencing resistance, we will close 
this play and wait for more favorable market conditions.  While 
IDPH has found support at its own 50-dma, we would rather put our 
"call money" on a stock that isn't carrying the weight of a 
falling sector.


PUTS:
*****

None


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

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

CALLS              Mon    Tue    Wed   Thu  

CVG      18.70    0.56   0.65   0.04 -0.45
DJX      N/A                                Drop, market drop
IDPH     41.77    1.57   1.32   0.14 –1.87  Drop, BTK sinking
LLL      55.70    1.99   0.11   0.17 –0.11  Holding new level
MSFT     47.19   -1.44   1.09  -1.75 –1.39  Strong PnF support
OMC      63.66    2.04   1.20   0.89 –0.13  Relative strength
QQQ      22.81    0.41   0.57  -0.67 –0.64  Drop, market failure
SPW     109.99    0.56   2.92  -2.21 –2.00  Drop, no pop
TRMS     45.38   -1.05   0.17  -1.08 –0.84  Good medicine


PUTS               

AA       22.77    0.71   0.46  -0.28 –1.10  Failed rally
AET      39.23    0.19  -0.57  -0.17 –1.75  New, stars align
AGN      54.00   -0.61  -1.28  -1.21 –0.14  still dropping
CMA      53.80    0.43  -1.53  -1.20 –2.00  New, no support
CTX      48.87    1.59  -0.53  -0.53 –2.10  New, higher rates
EXC      44.01    0.58  -0.22  -0.12 –1.62  Downward pressure
GE       28.00    0.63  -0.12  -0.36 –1.00  New, leading us down
MTG      54.93    0.69  -1.09  -1.10 –2.07  New, looking at $51
TXU      43.53    0.09  -1.19  -0.55 –1.47  Bye Bye 50-dma


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

TRMS $45.38 -0.84 (-0.08 for the week) Trimeris pulled back with 
the rest of the Biotech sector today.  However, it held above its 
recent consolidation between $43 and $45.  While the market is 
experiencing a broad sector retreat, this stock appears to be 
setting a higher low.  The intraday low of $44.98 appeared to 
bring the buyers back, and a look at the 5 minute chart shows 
strong support at that level.  The stock found support here at 
the beginning of August, before rallying to recent highs just 
under $50.  The point and figure chart shows the stock still in a 
column of "X" and bullish support at $44.00, which is our stop 
loss.  A trade below that level would lead to a three-box 
reversal down and would stop us out on the play.  However, with 
both PnF support and support on the daily chart at this level, 
the risk/reward ratio looks promising.  The ICAAC conference is 
coming up at the end of the month, which is one of the largest 
medical conferences in the country and attended by many analysts.  
TRMS will be releasing promising data at the conference about its 
drug T-20, which will be coming on the market in 2003 and is 
expected to bring in up to a billion dollars in yearly revenue.  
They will also be releasing promising data about a new drug in 
the pipeline, T-1249, which performed well in studies which were 
done in conjunction with Cornell Medical Center, Duke University, 
Stanford and several other educational institutions, and may be 
even more promising than T-20.   The current support, and news 
related possibilities, leaves us long on TRMS with an initial 
target of $50.  New entries can enter at this level, with a stop 
loss of $44.00, as the stock appears to have successfully tested 
support at $45.

---

MSFT $47.19 -1.39 (-0.63 for the week) Microsoft pulled back 
today with the rest of the techs.  As a Dow component, it also 
experienced a sympathy drop as the Dow rolled over following Alan 
Greenspan's testimony about the possibility of rising interest 
rates and his recommendations that the government reduce its 
fiscal stimulus spending.  What Microsoft had going for it today, 
however, was amazing support on the point and figure chart.  It 
has followed a pattern of higher lows on six straight occasions, 
as its bullish support line slopes up below it.  The last several 
pullbacks have been halted at the bullish support line at $42, 
$43, $44, $45 and $46.  The current level of $47 has held for the 
sixth straight increase in support.  A trade of $46 would be 
needed to break this support line, and this is our stop loss.  
After the bell, Adobe Systems (ADBE) released earnings that beat 
expectations by 0.03 per share and was already trading up over 
$2.00 after hours.  This should give a boost to the software 
sector, of which Microsoft is the biggest player. Software maker 
Verity also posted earnings after the bell, time in line with 
expectations and was trading slightly higher. We will look for 
the stock to reward our faith after the announcements, by heading 
back toward our initial target of $53.50.  New entries should 
look for a trade over today's high of $48.30 to initiate 
positions.

---

CVG $18.70 -0.45 (+0.76) The bulls' first attempt at pushing CVG
through the $19 resistance level ran out of steam, likely due to
the broad market's inability to sustain yesterday's rally attempt.
While the $19 level held up as intraday support for most of the
day on Thursday, the breakdown in the broad market created too
much selling pressure and the stock ended the day down more than
2%.  The first significant support is $18.50, the site of
Tuesday's low, followed by $18, which is the site of broken
resistance from this week's breakout.  Look for a rebound from
one of those levels to provide the opportunity to enter new
positions as the buyers return.  Those looking to trade the
breakout will need to wait for CVG to trade through the $19.50
level.  A move through that level should get the shorts covering,
as it would create another double-top breakout on the PnF chart.
Keep stops set at $17.

---

LLL $55.70 -0.11 (+2.86) With President Bush's ultimatum to the
United Nations in his speech this morning, Defense stocks
continued to trade well for most of the day, with the Defense
index (DFI.X) still testing the $580 resistance level.  Despite
the fact that the bulls couldn't get through that level on
Thursday, that was likely due to the broad market weakness.  LLL
spent most of the day in the green, but fell back at the end of
the day to post a fractional loss.  The $56 level is proving a
tough nut for the bulls to crack, and the stock may need to pull
back a bit and take another run to finally push through.  Look
for a rebound from intraday support (first at $55 and then down
at $53) to provide for attractive entries, keeping stops in place
at $52.  Should war fears escalate, that could be the added fuel
that the bulls need to push higher from current levels, but we
don't want to consider new momentum-based entries until the stock
rallies through the $57 level.  A move through $57 will clear
intraday resistance from this week, although there is more
resistance to deal with at the $58 level.  For that reason,
buying the pullbacks is the lower risk approach.

---

OMC $63.66 -0.13 (+3.66) The impressive rally in OMC over the
past week and a half was due to take a break eventually, and the
broad market weakness today seems to have been the catalyst for
traders to take some profits off the table.  Showing its
impressive relative strength, OMC actually pushed to a new recent
high of $64.69 before being pressured back to support near the
$63 level due to the broad market weakness.  It is impressive
that the stock ended the day with a mere 13-cent loss on a day
when the major indices lost between 2-3%.  The $63 support level
is important, as it is the site of the highs on Tuesday, as well
as the ascending trendline that has been established during this
rally.  OMC is now in the middle of the consolidation range
($61-66), so new entries are tough to call near current levels.
While this afternoon's rebound from the $63 level could be used
for new entries, a pullback into the $61.50-62.00 area (stronger
support) would make for a more favorable entry.  Momentum traders
will need to wait for a volume-backed breakout over the $66 level
(overhead resistance) before attempting to buy a breakout.  Keep
stops set at $61.


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

None


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

AA  $22.77 -1.10 (+0.18 for the week) Alcoa failed during the 
pre-9/11 rebound as it attempted to catch up to its September 3rd 
high, which is the day it broke support at $24. This failure 
below our stop loss of $24.50 provided a good entry point for new 
shorts.  It has continued its pattern of lower highs with this 
rebound attempt.  It now appears ready to test support at $22.  
Aluminum has been under pricing pressure since China increased 
production and became a net exporter of the material.  New 
smelting capacity at several plants in Iceland have also created 
worries that prices will drop even more than the 15% they gave up 
in the last year.  Yesterday, Morgan Stanley lowered its 
investment rating on non-ferrous metals and mining companies.  It 
cited the Chinese concerns and smelting capacity in its research 
note (apparently they've been reading our play descriptions for 
the last week), and lowered aluminum price projections for 2002 
through 2005.  Earnings estimates were specifically cut on Alcoa, 
along with Alcan (AL), and Century Aluminum (CENX). Morgan said 
investors would need to be patient for a turnaround in the 
sector.  We are not patient and will capitalize on the short-term 
negative prospects for the industry.  Look for AA to break $22 
for new short entries.  We will leave our current stop loss of 
$24.50 in place, as it has been sufficient to provide for new 
entries on a failed rally. Our target is now $15 on the play, 
with some possible support at $18.

---

AGN $54.00 -0.14 (-2.35) Wednesday's euphoric rally attempt
didn't last very long, but it did last long enough to give us an
attractive entry into our AGN play.  The stock spiked up to the
$56 level and promptly fell back.  It didn't take long for the
$55 support level to fail and by the end of the day the stock
was resting just above $54.  While there wasn't much meaningful
action on Thursday, with the stock trading in a narrow range on
very light volume, the picture on the PnF chart tilts the scales
further in the bears' favor.  With the drop under $54, the bullish
support line has been broken.  Due to the stock's inability to
fall further on Thursday, it appears likely that there is an
oversold bounce in the near future.  Look to initiate new
positions on a failed rally at $55 or possibly as high as $56.
With the heavy resistance now in place at $56, any move above $56
would be a strong clue that the bulls are getting interested in
the stock again, so we are lowering our stop to $56.50.

---

EXC $44.01 -1.62 (-0.39) Thursday was another painful day for the
bulls, and the Utility index (UTY.X) took out the $260 support
level enroute to losing nearly 3%.  Now below the 50% retracement
of the rally off the July lows, the UTY index now looks like it
could very well retrace that entire rally.  Shares of EXC gave us
another attractive entry yesterday as the stock popped up to just
below $46.  While EXC didn't fall apart yesterday, the selling
pressure in the Utility sector, as well as the broad markets was
too much for the buyers to withstand.  By Thursday's close, EXC
had fallen right back to the $44 level, but still held above that
support level.  More selling in the sector tomorrow could very
well break this support and usher in the next leg of the decline.
Use a drop under $43.25 (just below the past week's intraday
lows) to initiate new positions.  If EXC fails to break down on
Friday, we'll be dropping it this weekend, as that resilience
would be a sign of relative strength. 

---

TXU $43.53 -1.47 (-2.39) Unlike our EXC play, which has failed
to break down under support this week, shares of TXU have really
gotten with the program.  As the Utility sector (UTY.X) broke
below support again on Thursday, TXU plunged back below its 50-dma
($44.54) on its way to a 3.25% decline.  After rolling over at
the 200-dma and then violating the 50-dma, the stock is moving
further into the bears' camp and appears likely to head
substantially lower.  But we're likely to see an oversold bounce
before TXU heads significantly lower.  Note that it came to rest
today near $43.50, the site of significant historical support.
Look for a rebound to take price up near the $46 resistance level,
where we can once again look to initiate new positions on the
failed rally.  Traders looking to enter on further price weakness
will want to wait for a violation of the $42 support before
initiating new positions.  Lower stops to $46.50 tonight.


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

CTX - Centex - $48.87 -2.10 (-1.00 for the week)

Company Summary:
Centex Corporation, through other subsidiaries, ranks as one of 
the nation's largest non-bank-affiliated retail mortgage loan 
originators and general building contractors. The company also 
has operations in home services and investment real estate and 
owns a majority interest in a publicly held construction products 
company. (source: company release)

Why We Like It:
If there's one thing that prospective homebuyers treat like 
kryptonite, it is higher interest rates.  Alan Greenspan warned 
of just that in his testimony before Congress today.  And he 
wasn't talking about the type of rates he would be setting.  He 
was talking about the need to reverse the lack of discipline the 
government has been exhibiting in allowing the deficit to grow 
once again.  This would need to be done by reducing spending, and 
tying tax cuts to the budget, which is much easier said than 
done.  After the homebuilders experienced a terrific run, mostly 
due to low rates, the idea of rates being driven up my market 
forces is something that could burst the housing bubble quickly.  
Investors took notice and hammered the sector today.  But more 
significant than just a one-day drop is the fact that these 
stocks had been bought up on the idea that low rates would 
continue to spur buying of new homes to record levels.  The first 
signs of thunder in the distance came earlier in the week with 
the release of foreclosure data.  Mortgage foreclosures reached 
an all-time high last month, indicating that home buyers who had 
stretched their wallets to get in on low rates are now having a 
hard time meeting the payments as the pace of layoffs increases.  
Which brings us to the next significant data, jobless claims.  
This morning's data showed a surge in layoffs, driving the four-
week average up by 8,750 to 409,500, which was a three-month 
high.  

A look at the Dow Jones Home Construction Index (DJUSHB) shows a 
massive rollover at its 200-dma.  This resistance level coincides 
with recent resistance from the end of August and has started to 
establish a pattern of lower highs. It is starting to appear as 
though the massive second quarter insider selling that was 
reported at the end of August was not simply coincidence.  CTX 
also failed at its 200-dma, and unlike the DJUSHB, has already 
fallen through its 50-dma as well.  The next level of support for 
CTX looks like $44 and it could reach that level in a hurry. 
Place stops at $55, just above recent highs and the level at 
which it has failed on its recent rally attempt.

*** September Contracts Expire In Less Than 2 Weeks ***

BUY PUT SEP-50*CTX-UJ OI=1151 at $2.45 SL=1.20
BUY PUT OCT-50*CTX-VJ OI=1435 at $4.00 SL=2.00

Average Daily Volume = 1.47 mil


---

AET - Aetna $39.23 -1.75 (-2.42 for the week)

Company Summary:
Aetna is one of the nation's leading providers of health care and 
related group benefits, serving approximately 14.4 million health 
care members, 11.9 million dental members and 12.0 million group 
insurance customers, as of June 30, 2002 (source: company 
release)

Why We Like It:
Investors were listening carefully today as Fed Chairman Alan 
Greenspan talked of the healthcare problems that would be facing 
the U.S. in the coming years.  The lack of proper funding he 
referred to for the Medicare program will mean even less dollars 
for private insurers, such as Aetna, which operate Medicare HMOs. 
Companies have been complaining for years that Medicare 
reimbursements are not keeping up with costs and that they are 
losing money in many markets. The problem is already having an 
effect on large health insurers, such as Aetna, who are being 
forced to pull out of markets where their bottom line is 
bleeding.  Monday was the deadline for companies to drop out of 
markets that they could no longer serve, and Aetna was among 
those who reduced their program load.  The President's budget 
included a 6.5% increase for Medicare spending next year, which 
sounds great, until it is compared with the 10% increase in costs 
this year.  With Greenspan's talk of reduced spending by the 
government, in an effort to reduce deficits, cash flow to those 
companies that rely on government reimbursement is likely to 
suffer.  These companies will be faced with the decision of 
operating at a loss, or pulling out of certain markets entirely.

AET had been in consolidation between $40 and $45 since the end 
of July.  It rode a rising 200-dma and a falling 50-dma until 
getting squeezed out of the formation on today's drop. The 200-
dma had provided support on each dip and had not been crossed to 
the downside since November of 2001.  All streaks must end and 
this one has.  The break in support looks very bearish after such 
a long consolidation and the minor support around $38 does not 
look all that significant.  While the previous dip below the 
recent consolidation might otherwise be a significant point of 
support, it appears that the July drop was actually halted by the 
rising 200-dma, which failed today.  Nonetheless, we will note 
that level for conservative investors looking for more 
confirmation of the downward trend. However, we view the current 
break as significant and will enter the short position here.  The 
significance of this break is confirmed by a look at the point 
and figure chart, which shows a solid break in bullish 
resistance, along with a triple bottom breakdown.  The stars seem 
to be aligning for this short play, with a target price of $30.  
Place stops at $42.50, just above the recent relative high on 
Monday.

*** September Contracts Expire In Less Than 2 Weeks ***

BUY PUT SEP-40*AET-UH OI=2207 at $1.65 SL=0.85
BUY PUT OCT-40 AET-VH OI=4980 at $2.95 SL=1.50

Average Daily Volume = 1.47 mil


---

CMA – Comerica Inc. $53.80 -2.00 (-4.08 this week)

Company Summary:
Comerica Incorporated is a multi-state financial services
provider.  The company has strategically aligned its operations
into three major lines of business: the Business Bank, the
Individual Bank and the Investment Bank.  The Business Bank is
comprised of middle-market lending, asset-based lending, large
corporate banking, international financial services and specialty
deposit gathering.  The Individual Bank includes consumer
lending, consumer deposit gathering, mortgage loan origination
and servicing, small business banking and private banking.  The
Investment Bank is responsible for the sale of mutual fund and
annuity products, as well as life, disability and long-term care
insurance products.

Why We Like It:
The Financial Services sector hasn't had a very good year, as
the equity markets have continued to erode.  It is hard to have
a meaningful rally in the broad markets without the participation
of the Financials, and for that reason, the more than 3% decline
in the Banking index (BKX.X) on Thursday is particularly ominous.
Not only did the sector lead to the downside today (at least
outside of the Technology arena), but the BKX solidified its
decline under the important 50-dma ($757) and broke below the
$740 support level.  The BKX ended at $730, the bottom of the
August 8th gap, and judging by the fact that daily Stochastics
have just tipped over without even entering overbought territory,
there is more to come on the downside.  In that environment, it
should come as no surprise that shares of CMA have continued to be
under severe selling pressure the past 3 days, capping it off with
today's 3.5% slide on strong volume.  Now back under all of its
moving averages, CMA has now shattered former support at $56.50 as
well as $54.50.  That turned the PnF chart particularly negative,
with a new Sell signal, and a vertical count that is currently
pointing to the $48 level (near the site of the July lows).  There
is significant support near current levels, so prudent traders
will wait for an oversold bounce before taking a position.  Look
for that rebound to find resistance near the $56.00-56.50 level
and enter as the stock rolls over.  Place stops initially at $57,
the site of Wednesday's high.

*** September contracts expire next week ***

BUY PUT SEP-55 CMA-UK OI=195 at $1.85 SL=1.00
BUY PUT OCT-55*CMA-VK OI=555 at $3.00 SL=1.50
BUY PUT OCT-50 CMA-VJ OI=185 at $1.20 SL=0.50

Average Daily Volume = 997 K


---

GE - General Electric $28.00 -1.00 (-0.30 this week)

Company Summary:
As one of the largest and most diversified industrial companies
in the world, GE's products include major appliances, lighting
products, industrial automation equipment, medical diagnostic
equipment, electrical distribution and control equipment and
power generation and delivery products.  Additionally, GE
provides commercial and military aircraft jet engines,
locomotives and nuclear power support services.  Through the
National Broadcasting Company (NBC), GE delivers network
television services, operates television stations and provides
cable, Internet and multimedia programming and distribution
services.

Why We Like It:
Remember late last year when the spectre of asbestos litigation
costs pummeled shares of numerous large companies like HAL to
multi-year lows?  Don't look now, but the issue of asbestos
litigation is being talked about again, and the list of companies
at risk is much longer this time around.  Even the venerable GE
is being bandied about as having significant asbestos-related
risk.  Given the recent poor price action, that isn't the sort of
thing the bulls want to hear.  The DOW is on the cusp of breaking
under major support, and as a proxy for the DOW, GE is in danger
of breaking below major support at the $28 level.  GE telegraphed
its lack of bullish conviction in late August with its refusal to
trade through the $33 resistance level, and that weakness came to
fruition last week when GE gapped below its 50-dma (currently
$29.61) and that level has been acting as resistance this week.
Turning to the PnF chart, with the stock's trade below $28 today,
GE generated a fresh double-bottom Sell signal and now has
downside risk to $23.  Since the stock could be due for an
oversold rebound before continuing lower, ideal entries will come
as the stock rolls over from resistance near the 50-dma, also the
bottom of last Tuesday's gap.  Momentum trades can be initiated
on a decline below today's intraday low of $27.85.  In an effort
to give GE some room to move before the decline really gets
moving, we are setting our stop at $30.50, just above the top of
the gap.

*** September contracts expire next week ***

BUY PUT SEP-30 GE-UF OI=53772 at $2.20 SL=1.00
BUY PUT SEP-27 GE-UY OI=28289 at $0.70 SL=0.25
BUY PUT OCT-27*GE-VY OI= 7257 at $1.65 SL=0.75

Average Daily Volume = 29.6 mln


---

MTG – MGIC Investment Corp. $54.93 -2.07 (-3.45 this week)

Company Summary:
MGIC Investment Corporation is a holding company that, through
its wholly owned subsidiary, Mortgage Guaranty Insurance
Corporation (MGIC), is a provider of private mortgage insurance
coverage in the United States to the home mortgage lending
industry.  Private mortgage insurance covers residential first
mortgage loans and expands home ownership opportunities by
enabling people to purchase homes with less than 20% down
payments.  Private mortgage insurance also facilitates the sale
of low down payment mortgage loans in the secondary mortgage
market, principally to the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation.

Why We Like It:
There has been a lot of discussion about whether the housing
market is in a bubble, but it has been difficult to make a
definitive case with the housing market remaining strong.  But
news out earlier this week of a record number of foreclosures in
the second quarter seems to be pointing towards the likelihood
that the housing market is softening.  The foreclosure news
doesn't bode well for lenders, but it is even more disconcerting
to MTG, whose principal business is providing mortgage insurance
coverage.  Apparently investors agree, as the stock found a top
this week at the $59 level and has been heading steadily lower.
Today's rout in the broad market dragged MTG under the $57 level
on very heavy volume (nearly triple the ADV), which had been
providing support in recent sessions, and it now appears the bears
have set their sights on the July lows near $52.  Judging by the
PnF chart, $52 could just be a speed bump on the way to
significantly lower prices.  The breakdown below $57 put the stock
back on a sell signal and the current vertical count points to an
eventual bearish price target of $46.  There is significant
support near current $54, so it is likely that we could be setting
up for an oversold bounce.  Given the deteriorating fundamental
and technical picture, MTG should run into stiff resistance near
$57 (broken support becomes new resistance), so the best case for
new entries will be on a rollover near this level.  Due to the
$54 support level, we really don't want to consider new positions
on a breakdown.  Place stops initially at $58, as a more above
that level would call into question the current bearish tone in
the stock.

*** September contracts expire next week ***

BUY PUT SEP-55 MTG-UK OI=1222 at $1.60 SL=0.75
BUY PUT OCT-55*MTG-VK OI= 205 at $3.40 SL=1.75
BUY PUT OCT-50 MTG-VJ OI=   0 at $1.80 SL=1.00

Average Daily Volume = 782 K



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The Option Investor Newsletter                 Thursday 09-12-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: PUT - AET
Traders Corner: Option Chains: The Missing Links
Options 101: Puts On Your Personal Residence

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

AET - Aetna $39.23 -1.75 (-2.42 for the week)

Company Summary:
Aetna is one of the nation's leading providers of health care and 
related group benefits, serving approximately 14.4 million health 
care members, 11.9 million dental members and 12.0 million group 
insurance customers, as of June 30, 2002 (source: company 
release)

Why We Like It:
Investors were listening carefully today as Fed Chairman Alan 
Greenspan talked of the healthcare problems that would be facing 
the U.S. in the coming years.  The lack of proper funding he 
referred to for the Medicare program will mean even less dollars 
for private insurers, such as Aetna, which operate Medicare HMOs. 
Companies have been complaining for years that Medicare 
reimbursements are not keeping up with costs and that they are 
losing money in many markets. The problem is already having an 
effect on large health insurers, such as Aetna, who are being 
forced to pull out of markets where their bottom line is 
bleeding.  Monday was the deadline for companies to drop out of 
markets that they could no longer serve, and Aetna was among 
those who reduced their program load.  The President's budget 
included a 6.5% increase for Medicare spending next year, which 
sounds great, until it is compared with the 10% increase in costs 
this year.  With Greenspan's talk of reduced spending by the 
government, in an effort to reduce deficits, cash flow to those 
companies that rely on government reimbursement is likely to 
suffer.  These companies will be faced with the decision of 
operating at a loss, or pulling out of certain markets entirely.

AET had been in consolidation between $40 and $45 since the end 
of July.  It rode a rising 200-dma and a falling 50-dma until 
getting squeezed out of the formation on today's drop. The 200-
dma had provided support on each dip and had not been crossed to 
the downside since November of 2001.  All streaks must end and 
this one has.  The break in support looks very bearish after such 
a long consolidation and the minor support around $38 does not 
look all that significant.  While the previous dip below the 
recent consolidation might otherwise be a significant point of 
support, it appears that the July drop was actually halted by the 
rising 200-dma, which failed today.  Nonetheless, we will note 
that level for conservative investors looking for more 
confirmation of the downward trend. However, we view the current 
break as significant and will enter the short position here.  The 
significance of this break is confirmed by a look at the point 
and figure chart, which shows a solid break in bullish 
resistance, along with a triple bottom breakdown.  The stars seem 
to be aligning for this short play, with a target price of $30.  
Place stops at $42.50, just above the recent relative high on 
Monday.

*** September Contracts Expire In Less Than 2 Weeks ***

BUY PUT SEP-40*AET-UH OI=2207 at $1.65 SL=0.85
BUY PUT OCT-40 AET-VH OI=4980 at $2.95 SL=1.50

Average Daily Volume = 1.47 mil



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

Option Chains: The Missing Links
By Mike Parnos, Investing With Attitude

I know that, even though you have hundreds of TV channels from 
which to choose, sometimes even a Couch Potato Trading Institute 
student can’t find anything to watch.  If you need some mental 
stimulation, spend some quality time with your friendly option 
chains.  

The famous detective Nero Wolf was one of the original couch 
potatoes.  He managed to solve a murder between meals and without 
ever leaving his house.  They didn’t have television in those 
days, so he had to be content to read, raise orchids, and yell at 
his personal chef (all couch potatoes should have one).  

How did Wolf solve these murders?  Simple deductive reasoning.  
He looked at facts, applied his own brand of logic, and put the 
pieces of the puzzle together.  There’s always more than one 
interpretation – and often it’s not the most obvious.

I received a question this week that is an example of the 
benefits of the powers of observation and the doors that open as 
a result.

Mike:
I've been a reader of OptionInvestor for three years now. Back in 
the 1999, 2000 I thought I perfected the OTM strangle play. Where 
I would buy OTM call and OTM put to hedge my position. I always 
played this around a special event and my favorite was around 
earnings time.  I was delighted to hear about your ITM strangle.
As I was doing some research today, I came across something very 
eye catching. Someone, and I bet a big institution or 
fund, bought 20,030 contracts of the December 22 put (QAVXU) for 
1.75 ($3.5 million). They also bought 20,000 contracts of Dec 27 
Calls (QAVLA) for 1.1 ($2.2 million) for a total cost of $5.7 
million. 

Now, someone betting this much money is guessing to the downside 
more than the upside since their bet of the puts are close the 
QQQ's price.  What are your thoughts about this play?  Thank you.

Response:
That is a huge bet – especially by my standards.  I usually feel 
a 20-contract position is extravagant.  Those two comma trades 
are out of my league.  I’m glad it’s not my money on the line.

What is described above could be a big down bet.  Did you look to 
see if they sold a large quantity of near term puts or calls 
against these long positions?  They probably did not.  With all 
the simple and complex options strategies out there, it can be 
very difficult to ascertain the purpose behind a trade or the 
method to their madness -- even for Nero Wolf. 

Possibility #1:
In recent columns we discussed “buy strangles” where both puts 
and calls are purchased, but at different strike prices.  This 
trade may be a “sell strangle” where puts and calls are sold at 
different strike prices. In this case, they took in the $5.7 
million and they expect the QQQs to stay within a range.  They 
may believe that the QQQs will stay above $22 and below $27.  
That wouldn't be a bad trade either. 
If they are aggressive traders, they can make trades within the 
context of the sell strangle as the QQQs fluctuate up and down 
between now and December expiration. 

As the QQQs move up to near $27 (there’s actually some pretty 
good resistance at the $26 level), they could lock in profits by 
buying back the $22 puts, etc.  They have a $2.85 margin for 
error that means the QQQs would still be profitable from $19.15 
to $29.85.  That seems like a pretty safe bet.

Possibility #2:
It’s possible that a large institution owns 20,000 QQQ shares.  
They believe that the QQQs have bottomed and they feel it will 
rebound in the next three months.  They may have sold the 
December 27 calls for $1.10 as part of a covered call play.  
Then, they sold the 22 puts to take in an additional $1.75.  If 
the QQQs are below $22 in December, they may be willing to accept 
an additional 20,000 shares with a cost basis of $19.15 ($1.75 + 
$1.10).

It's challenging to try and figure out what's going through the 
minds of the big bettors.  We'll never know for sure, but 
speculation is fun and it stimulates thought.

Possibility #3:
The two trades were totally unrelated and mean absolutely 
nothing.  Who knows?  But we’re always on the lookout for a good 
conspiracy – or strategy.

An important aspect of detecting a potential trend or bias in an 
option chain is, to note the open interest on the day of the 
unusual activity.  Then check again the open interest again the 
following day.  If a similar number of contracts disappears from 
the open interest figure, you can deduce that the unusual 
activity was a closing trade rather than opening a new position.

We have a source of facts in the option chain (free at 
www.cboe.com) –  important pieces of the puzzle.  Find the 
largest concentration of open interest.  

At this writing, GILD (Gilead Sciences) is at $33.   The chart 
tells us that it has been in a trading range between $28 and $38 
for months.  GILD is a biotech stock that has held up relatively 
well during the recent market chaos.  
September $30 calls = 3,200 OI     	$30 puts =  2,200 OI
September $35 calls = 5,200 OI	$35 puts =    470 OI
September $40 calls = 3,200 OI	$40 puts =    450 OI
What does this tell you about the direction of GILD for the next 
week and a half? 
a) GILD will likely stay in the $30-$40 trading range.  But more 
likely, it will stay between $30 and $35.  Let’s figure out what 
scenario will most benefit the market makers?

If GILD finishes at $35, a total of 5,670 (calls + puts) will 
expire worthless and generate hundreds of additional 
transactions.  Take note that the total of $30 puts and calls is 
about the same (5,400).

The market maker would rather GILD finish at $30.  A similar 
total number of contracts are at the $30 and $35 strikes.  But 
there is one significant difference.  If GILD finishes at $35, 
the 3,200 $30 strike call contracts will still have a value of 
$5.00.  If GILD finishes at $30, the 5,200 open $35 contracts 
will expire worthless.

If at all possible, the market makers will guide GILD toward the 
lower $30 strike.  However, if the market is strong, they may try 
to guide it upward to the $35 level.

With this information, what strategies would best take advantage 
of this scenario?  A Sept. sell strangle?  A Sept. iron condor?  
A butterfly? Perhaps you believe the GILD will stay within the 
range for another month and are considering Oct. strangles or 
condors.  Check the option chain.  So far (and it’s probably too 
early for it to be meaningful) the Oct. $40 calls have the 
largest open interest.  It’s not unusual for biotech stocks to 
have traders speculate on an FDA approval or rejection.

The open interest, and corresponding changes in open interest, in 
an option chain is but one clue.  It may help you select a 
strategy, or it may suggest you avoid a strategy you were 
considering.  Keep in mind that option chain clues are but one 
indicator.  Look at the trading range and see if it is consistent 
with the option chain.  Check to see if there are any 
distinguishable chart patterns.  Check the trading volume.  Where 
are the short and long term moving averages?

The more ducks that are in a row, the better chance you have of 
success.  But remember, there are no sure things in life – unless 
her name is Trixie and you have $100.  

Nero Wolf says, “To ignore the facts doesn’t change the facts.”   
If you don’t consider all the facts available in researching your 
trade, you will fail miserably as a CPTI student and be doomed to 
couch potato hell -- watching The Anna Nicole Smith Show -- 
without a harpoon.

Happy trading!  The CPTI credo:  May our remote batteries and 
self-discipline last forever, but mierde happens.  Be prepared!  
In trading, as in life, it’s not the cards we’re dealt.  It’s how 
we play them. 

Your questions and comments are always welcome.  
mparnos@OptionInvestor.com


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***********
OPTIONS 101
***********

Puts On Your Personal Residence
Buzz Lynn
buzz@OptionInvestor.com

Huh?  Wha'd he say?  OK, show of hands. . .who remembers the late 
1980's and early 1990's when housing prices across the country 
fell apart as a result of the S&L crisis?  I remember quite well 
since I was the lucky recipient of a 30% haircut on the value of 
my home during that period of time.  Lucky?  Yes, many others lost 
more; 50% or more in some cases.  Thank God, those days are over 
now.  Yet history has a way of repeating.  What I would have given 
then for the opportunity to protect myself from price erosion.  
But no such thing existed.  

According to a recent Forbes article, more than 50% of homebuyers 
in the early 1990's experienced value declines in their markets 
over the next five years.  The best we could hope for then was to 
sell to someone and let them take the value hit, rent the place 
out to minimize the negative cash flow, or stay put for a while 
until the financial storm blew over.  But there is a way for a few 
fortunate souls to protect their investment against falling home 
prices.

Making matters worse, there is the issue of leverage.  When we buy 
stocks, we can do so using 50% margin - 2:1 leverage - and must 
maintain at least 35% leverage or face margin calls.  In these 
heady days of 25% annual price appreciation induced by practically 
free money, a 1% down payment means 100:1 leverage, and in the 
case of zero down or 125% loan to value, the leverage is infinite.  
Now that's a housing bubble!  Ratios like this make the stock 
market look like the bastion of fiscal health!

Say that back in 1990 we bought a home with 20% down for $100,000 
- now a myth in California's coastal cites (L.A., or San Francisco 
Bay area) and most major metropolitan cities nationwide.  But for 
the sake of argument assume that's true and that over the next 
five years, our community or neighborhood, including our house, 
declined in value by 20%, thus wiping out our down payment, 
leaving us only with the loan value - or worse, "upside down" 
owing more than the house is worth.  That's a big hit.  We can't 
move and we can't refinance.

As Fundamentals Guy, and with a background in a prior life in the 
commercial real estate business, I've always wondered how I might 
protect myself against that kind of loss.  Lo and behold, there is 
now such a way.  It's normal for us to insure against fire, our 
health, our cars, etc.  It's normal for us to even insure against 
our stock portfolio with put options.  But until now, we've never 
been able to buy a protective put on our home values.  That's 
right, a protective put or insurance for loss of value on our 
homes!

OK, the bad news first:  It is currently only available in 
Syracuse, N.Y., but through use of data pooling on the Internet, 
is likely to expand to other cites next year.  

That said, here's how it works.  Instead of protecting against 
loss for our individual home, it protects against loss of an index 
for a particular zip code.  For a one-time fee of just 1.5% of the 
estimated home value, which can be financed over four years, we 
can get an "insurance policy" or a European-style protective put 
with a maturity of three years, but appears to never expire 
thereafter until we sell our home.  After three years, and IF we 
sell our home thereafter, if the index of home values in our zip 
code index has declined, we are paid that percentage decline of 
our stated home's value.

Say, we buy a $100,000 home today with 20% down payment.  The down 
payment really doesn't matter because we are buying protection 
against the stated value of the home, not the hard cash 
investment.  Again, it's like a put on a margined stock.  It 
insures against the value, not the margin.  For a 1.5% fee of 
$1500, we price-protect the home for $100,000.  The property's 
"protected value" goes into effect three years after the purchase.  
Thereafter, if we sell the home, whether for a loss OR a profit - 
it doesn't matter, we will be paid for the loss of the index value 
consistent with our zip code.  

Let's take the example used above.  We've bought a $100,000 home 
in the 99999 zip code (I just made that up, but it might be a real 
zip code).  We spend our 1.5% or $1500 for our value loss policy.  
Three years later, we can collect if we sell thereafter.  Say then 
that we sell the house for $115,000 - yes, a profit, perhaps 
because we've fixed it up.  Yet the zip code index, based on other 
selling prices in our area, shows an 18% decline in value.  
$100,000 "protected value" multiplied by an 18% decline equals a 
paper loss of $18,000.  Thus, we would be paid $18,000 for our 
"loss" - the loss in value of the index, not the loss in value of 
our home, which we obviously didn't have thanks to our expert 
skills as a home remodeler .  

Even if we had sold our home for a loss at say $94,000, we would 
still collect $18,000 on the policy since the index, and not the 
home, declined by 18%.

Pretty cool, eh?  Certainly I have some questions in which I still 
need answers. . .such as, in what window of time after three years 
must I sell in order to cash in?  I can't imagine they'd be 
willing to wait for six years or more thereafter to pay off when I 
actually sell.  Does that mean I must purchase another put after 
three years?  Etc.

OK, assuming we're interested in a protective put on our home, how 
do we get one?  Realliquidity.com is the developer or the product.  
We can get the address and phone number from the web site.  That's 
the place to start.  There is an on-line form there to register 
your interest.  However, I did not personally complete it since I 
don't want to volunteer that much information until the program 
expands and can pull its own weight - nothing worse than having 
your insurance firm turn out the lights after you've paid the 
premium.  But in fairness, the FAQ section says that it carries 
the equivalent of an A or AA rating.  Check out a detailed list of 
questions here:

http://www.nw.org/network/communityDev/homeEquity/fAQ.html

Additionally, there's a "soft" advertising pitch at equityhq.org, 
which is the non-profit group providing the service in Syracuse.  

My personal take:  An interesting and potentially viable start to 
a worthwhile service.  Only in operation for two months now, it's 
too early to tell how the Syracuse pilot program will work.  The 
program is far from complete and there are many questions that 
simply can't be answered until it is tried.  That is the purpose 
of the Syracuse pilot.

Furthermore, in the interest of full disclosure, I have absolutely 
nothing to do this operation.  It caught my attention because of 
my real estate background and my belief that housing is in a 
bubble on par with that of the stock market in late 1999.  It just 
struck a chord in me!

With that, make a great weekend for yourselves.  Questions always 
welcome.


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