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Daily Newsletter, Tuesday, 09/17/2002

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The Option Investor Newsletter                 Tuesday 09-17-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Volume is Back!
Index Trader Wrap: No pleasant surprise in a bull's "Happy Meal"
Market Sentiment: I Think I Broke My Neckline
Weekly Fund Screen: European Region Funds

Updated on the site tonight:
Swing Trader Game Plan: Testing Support


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      09-17-2002           High     Low     Volume Advance/Decline
DJIA     8207.55 -172.60  8482.34  8192.01 1.67 bln    949/2242
NASDAQ   1259.94 - 15.90  1298.50  1295.30 1.45 bln   1204/2104
S&P 100   438.55 -  8.10   453.44   437.86   Totals   2153/4346
S&P 500   873.52 - 17.58   902.68   872.38 
RUS 2000  379.31 -  6.82   388.46   379.15 
DJ TRANS 2203.69 - 28.30  2262.91  2201.04   
VIX        41.96 +  1.42    42.21    38.50   
VXN        60.39 +  2.66    60.67    57.08
Total Vol   3,321M
Total UpVol   547M
Total DnVol 2,733M
52wk Highs    88 
52wk Lows    340
TRIN        2.81
PUT/CALL    1.20
************************************************************

Volume is Back!

Unfortunately it was all down! For all U.S. markets the total
down volume at 2.7 billion swamped up volume of only 548 million. 
Traders came back to news of an apparent Iraq capitulation and
were faced with covering shorts in an exploding market. Once 
the Iraq news was called into question those same traders piled 
on the shorts again to recover their lost profits. 

Dow Chart


 

Nasdaq Chart


 


It was an ugly day after about 9:40. All the good news for the 
bulls was sold with abandon by institutions looking for an
opportunity to raise cash and get out of stocks. The bad news
started with the Industrial Production numbers which came in
much lower than expected at -0.3% instead of estimates for a
gain of +0.1%. This was the first decline in production in 
seven months and shows that the economy is rapidly coming to
a halt. Construction was the only sector to post an improvement.
Business equipment has now declined two months in a row. The
risks to the economy are definitely to the downside as the Fed
would say. There was slightly more than a 10% chance of a rate
cut by October yesterday. After this report and the JPM warning
tonight those chances should get much better tomorrow. 

We had earnings warnings from almost every sector today and 
those warnings helped add speed to the bursting Iraq bubble. 
McDonalds lead the parade with a McWarning, the 6th in the 
last two years. Store traffic is down, sales are down, competitors
are kicking Mcbutt with the 99 cent menus. MCD fell to 18.91
and a seven year low. Who says there is no recession? (grin)

Kroger (nyse:KR) missed analyst's estimates for the quarter and
lowered estimates for the year. The slumping economy was the
major reason along with increased competition. ToysRus (nyse:TOY)
was cut after analysts were told that buyers were cutting 
nonessential inventory for the 4Q and reducing the number of 
toy lines carried. It appears that inventory levels are too
high for the current and expected holiday sales levels and 
TOY is going to cut the expected losses early. BBY hit lowered
estimates this morning but said profits would be flat the rest
of the year. They said sales of big screen TVs and DVD players 
are slowing due to worries over unemployment and the market. 
Schwab (Nyse:SCH) warned that retail trading volume was dropping
significantly as traders closed accounts and bailed out of the
market for safer investments. They were cutting another -1800
employees and earnings were going to suffer. 

I could go on but you get the picture. Chips, healthcare, food,
restaurants, brokers, banks, software, toys, retail and insurance 
all saw earnings warnings today. After the bell the carnage 
continued. Oracle (nasdaq:ORCL) announced earnings after the 
bell and while they hit the proforma seven cent number analysts 
were expecting they missed the revenue numbers. Oracle said it 
is still difficult to forecast future revenue and with license 
revenue down the outlook is not positive. New license revenues 
were down -24%. Larry Ellison said businesses around the globe 
were still reluctant to spend for IT until economies recovered. 

Even more detrimental to trading tomorrow was a high profile
warning from JP Morgan (nyse:JPM). They warned that 3Q earnings
would be significantly below 2Q levels. They blamed higher 
corporate credit losses, weaker trading losses and higher 
reserves for non-performing assets. They only made $100 million
in trading profits for this quarter after $1.2 billion in the
prior quarter. (You thought swing trading was hard?) They said
they had $1.4 billion in credit losses for the quarter and were
going to lose another $1 billion in questionable credit assets. 
Analysts had expected $.54 cents per share and now the guesses
are anywhere between zero and $.25 cents. This knocked the 
bottom out of the futures which were down -8.00 in after hours. 
       
Iraq news after the bell is starting to show cracks all ready. 
After the inspectors said they could be in Iraq by tomorrow
the Iraq authorities said no! We will meet with you in Vienna
in about ten days to discuss the terms of the inspection. Terms
to an unconditional offer? It appears Iraq wants limited teams,
closely watched, inspecting military sites only and lasting only 
a "matter of days". Unconditional? The only unconditional thing
about this offer is that it will not fly. Iraq saw the pressure
building and is trying to buy time. If they can delay the process
several months then it could delay the war up to a year before
the weather would be right again.  

Traders came back to work with a vengeance today and the result
was a 5:1 down volume day. The negative news tonight will apply
added pressure at the open tomorrow. Support appears to be in the
OEX 436, SPX 870, Dow 8050 level. This is not that far below where
we closed today. The TRIN closed at 2.81, VIX at 41.98, VXN 60.39
and the put/call ratio at 1.20. These are all levels that indicate
strong fear in the market and a possible bounce ahead. Unfortunately
these were closing levels and with the ORCL/JPM news they could
become even more oversold at the open. I have made the mistake
many times of seeing the market close deeply negative, have more
negative news after the bell and just when I turned severely
bearish in my outlook have it rally at the open. I don't think
that will happen tonight but with support just below us there is
a good chance the bulls will buy the dip again. I think that any
bounce is just another opportunity to get short again but my 
main point is that I would not be surprised to see us not go 
straight down. Bottom line, if you are short, stay short. If you
are not short look for a failed bounce and get short. The next
two weeks will be heavy with earnings warnings and there will not 
be many opportunities for good news. The best we could hope for 
is a rate cut from the Fed next week and that is only a slim 
chance tonight. The bears are on a feeding frenzy prior to 
hibernation and they are far from full.  

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

No pleasant surprise in a bull's "Happy Meal"

It is a day like today when a plethora of trader's axioms run 
through my mind.  An old trader-buddy and staunch technical 
analyst friend of mine would say "those that anticipate a move 
with a large bet, better be careful as they often participate in 
a move against them."

I would be hard pressed to say that today's action could have 
been predicted, just as it was relatively impossible to predict 
last night's news out of Iraq.

While stocks opened higher, the major market averages were hard 
pressed to make a meaningful challenge of their still trending 
lower 50-day simple moving averages (an intermediate-term moving 
average) for more than 20-minutes of this morning's trading 
session.

Perhaps an early morning warning on earnings from Dow component 
McDonald's (NYSE:MCD) $18.91 -12.8% after a plethora of broker 
downgrades in recent sessions and pattern of new 52-week lows 
since mid-July's break of the $25 level set the table for some 
negative action in the Dow and what eventually unfolded by 
session's end.  While a Dow bull didn't like the taste of today's 
action, what comes at the end of a kid's "happy meal" will most 
not likely be a pleasant bullish "surprise" either.

While the Dow Industrials (INDU) 8,207 -2.05% posted a 102 point 
gain in the early going, this major market average didn't come 
close to testing its 50-day simple moving average of 8,544 nor a 
more psychological level of 8,500.

Let's take a look at the Dow DIAMONDS (AMEX:DIA) $82.17 -2.35%.  
What I'm doing tonight is removing the "aggressive" upward trend 
we've talked about in recent wraps, and now leaving only the 
"conservative" trend, which is anchored from the 07/23 close of 
$77.17.  For "historical" purposes, I'm going to place a 
retracement bracket on the DIA from this spring's highs and 
anchor to the relative low close of $77.17 of 07/23.  The reason 
I'm showing retracement tonight, is only for future use should 
the Dow break to new 52-week lows in the coming months.  Then and 
only then, would we use a "rolled down" retracement bracket 
technique.

Dow DIAMONDS Chart (DIA) - Daily Interval


 

Bears got the technical break of trend on a more meaningful basis 
and a close below the 19.1% retracement level.  These were to two 
technical levels identified that stood between a swing-trader's 
target of $80.50, which marks a level near the August 5 close of 
$80.47.

A DIA bear would love nothing more than some type of bearish 
catalyst to help further a move to the $80.50 level, especially 
if he/she is a trader that factors in stochastics reaching the 
"oversold" level on the daily interval bar chart.

How about a warning from the nations second-largest bank and Dow 
component JP Morgan (NYSE:JPM) $21.55 -0.73% warning that its 
upcoming Q3 earning will be "well below" Q2 EPS of $0.58 and 
analyst's consensus for Q3 of $0.55, citing a larger than 
expected corporate credit losses of -$1.4 billion.  In Instinet 
trading, the NYSE listed JPM has traded down $-3.55 at $18.00, 
which represents an additional 16.4% decline from the close.  

While I won't argue that a fast food restaurant like McDonald's 
(MCD) is cause for a broader market decline, one has to wonder if 
the MARKET smelled out tonight's warning from JP Morgan (JPM), 
the nation's second-largest bank and sold this morning's strength 
in the markets.

It's a little "too weird" that in this weekend's index wrap, I 
actually "switched" places from a bear's shoes to a bull's shoes 
with the DIA and started thinking like a bull that was a bit 
underwater and thought a bull might sell strength on a rally near 
the 50-day SMA and sit things out.

From here, managing a trade in the DIA becomes a little easier.  
If short 1/2 position from Thursday's open, can leg to full 
position above $80.50 as some gains are found from first 1/2 
bearish position.  

Trader that went full position and took on more risk Thursday 
morning, may look to take 1/2 off the table at trader's target.

For now, looking for rallies back near $82.80 DIA as entry 
points, using the 50-day MA as a stop.

Even if you're an OEX or SPX trader.  Perhaps the above 
"thinking" on a technical basis will help you with some trade 
strategy and "level" thinking as it relates to retracement and 
the moving averages.

Did you say JP Morgan?

While I mentioned JP Morgan's (JPM) warning as a possible 
catalyst for further downside in the Dow, JPM is also a component 
of the OEX and SPX for all you S&P bears.  

For those that did some homework from Friday evening's wrap and 
looked at "financial" weighting's in the OEX and SPX, a bear 
feels some desert coming on in bearish trades held in the OEX and 
SPX to also provide a downside catalyst tomorrow morning.

Remember, "financials" represent an approximate 21% weighting in 
the SPX and JPM is a component of both the SPX and OEX.  So is 
MCD for that matter.

Tonight I'm also removing the "aggressive" trend we had in the 
OEX has we've got a break and close below our most "conservative" 
trend, which the OEX had been holding a close on for the past 
three sessions.  Still some work to be done for a break of 19.1% 
retracement at 434.90, but I'm looking for the JPM news to get 
than done in the morning.

S&P 100 Index Chart - Daily Interval


 

The OEX was a "stubborn" little bugger and closed on our upward 
trend for three-consecutive closes.  While most view the "Iraq 
news" as a positive for the markets, you and I are left to wonder 
if it was this morning's weaker-than-expected production data, or 
tonight's JPM news that the MARKET knew about.  

DON'T get frustrated if you closed out a bearish trade in the OEX 
today on the break above 50-day SMA.  Just don't do it.  However, 
just make a quick note perhaps of how the DIA may have signaled 
some pending weakness from past intra-day updates as it was 
perhaps a little weaker at trend and didn't come close to 
breaking above its 50-day SMA.  Maybe in the future, Dow weakness 
will be the thing that would keep a trader in a trade in the OEX 
(long or short).  Just remember that each Dow component comprises 
your SPX and OEX.

Now, think about this.  If it's true that "weakness leads" then 
an OEX and SPX trader are darned sure going to be monitoring the 
DIA or Dow Industrials at their respective 07/23/02 low closes of 
$80.50 and 8,050 aren't you?  Why?  Who knows how many 
computerized "buy programs" may be lined up to "buy" stocks when 
the Dow trades 8,050 or a round number like 8,000 (not 
predicting, just thinking ahead.  I'm always looking for 
trouble).

What if there's a bunch of institutions that were playing a 
"negative" scenario on an invasion of Iraq within the next two-
weeks and now changes their scenario and stock allocation a bit.  

If the OEX is trading 425 and the DIA is trading $80.50, it may 
be helpful to have the morning's "buy/sell" premium execution 
levels we post from HL Camp & Company set on your trade station 
that day.  Then, if DIA $80.50 is traded, a trader might be able 
to use any "buy program" alerts as a head's up for some program 
buying.  If you have q-charts, or a charting service where you 
can track the premium, (q-charts symbol is $prem), check out the 
5-minute chart.  See those premium execution levels at $-1.32, 
which started at about 09:40 AM EST, then 3 more times between 
then and 10:30 AM EST.  Those were computerized sell programs 
whacking the S&P futures in the early morning.  I'll discuss this 
tomorrow, but as described above, might take some notes and look 
for reverse action at lower levels described.  

Hey!  Let's do this.  Since the OEX and SPX look pretty much 
identical on their daily intervals and we have retracement set to 
mark identical ranges, lets look at the 60-minute interval chart 
of the SPX.  Let's also tie in the "sell program" premium 
execution levels of $-1.32 that were hit between 09:40 AM and 
10:40 AM, which pretty much covers the first hour of today's 
trading in the SPX.

S&P 500 Index Chart - 60-minute intervals


 

I'll confess!  I didn't have my "buy/sell program" execution 
levels set on my trade station today.  I'm not showing the 60-
minute chart of the SPX to say "see how the buy/sell programs" 
told you to short/put this morning's rally.  Nope, this is an 
index wrap and what took place and information that may help us 
in the future.  Observation is that for whatever reason (economic 
data, JPM eventual warning) there were several computerized sell 
programs lined up after the open.  Heck, maybe it was the "round 
number" of SPX 900.  Maybe it was based on all that SPX 900 open 
interest in the calls/puts with triple-witching this week.  Who 
knows and who really cares right?  That's right!  Trade what you 
observe, not what you believe.

SPX and OEX traders may also want to review today's 03:00 intra-
day update http://members.OptionInvestor.com/intraday/091702_4.asp
 and what took place in the Retail HOLDRS (AMEX:RTH) $81.10 
-2.26%.  Tomorrow, all the "focus" is going to be on the banks.  
Keep an eye on the retailers in order to view/monitor a key 
sector that comprises a weighting in the SPX and OEX.  Often 
times, it is helpful to monitor sector's AWAY from all the news 
to really get a feel for things.

QQQ traders

Aaaaaagh!  Guess what you're in for?  If you've been following 
the recent battle between bulls and bears at the DIA, OEX and SPX 
upward trends, you know what to be looking for near-term don't 
you.  Now, I'm not saying we're in for a 3-day battle, but as the 
dominos slowly get tipped over, your "domino" at trend is now in 
play.

NASDAQ-100 Index Tracking Stock (QQQ) - Daily Interval


 

Nobody has to take more heat than a QQQ trader and there was some 
heat at the open, but nowhere close to a challenge of the QQQ's 
50-day SMA or 21-day SMA.  Still targeting the $21.35 level if 
short/put.

In last night's wrap, I thought bear could play his/her short 
safe with a stop just above Friday's high of $23.08, and by 
golly, that would have gotten taken out just after the open at 
$23.05.

Only thing I see that could have saved a bear from that tighter 
stop was in two key sector Indexes today.

As discussed in recent commentary, software and biotechs are the 
two biggest weighting's in the QQQ.  That darned GSTI Software 
Index (GSO.X) opened flat then rallied to a session high of 
$95.62, which was just below the 50-day SMA of $95.90.  

Then, this sector index (GSO.X) turned red, while the Biotech 
Index (BTK.X) 331.03 -0.82% was still just under it's 50-day SMA 
of 343.92.  All be darned if the BTK.X didn't trade down from its 
50-day SMA and kind of like a hammer, help drive the QQQ lower.

What a QQQ bear simply wants to see is further negativity from 
the BTK.X and GSO.X.  

The "good news" near-term is that Microsoft (NASDAQ:MSFT) $47.29 
-1.02% is a BIG weighting in the QQQ and it is also a "software" 
stock.

Key stocks are biotech=AMGN and software=MSFT.  Both traded 
relatively strong today considering how things panned out.  

Always remember, the BIG guys lead and advance, and trail a 
decline.  The decline looks to be taking place in the QQQ, now 
you want the BIG guys to give in.  These are the "institutional" 
stocks that will hold bullishness longest.  Only when the 
institutions need to meet redemptions from their mutual fund 
shareholders will they get rid of their more fundamentally sound 
and liquid stocks like AMGN and MSFT.

Jeff Bailey


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

I Think I Broke My Neckline
by Steven Price

So much for the theory that we would rally on the news that Iraq 
had decided to let weapons inspectors back into the country.  
Actually we did rally briefly, but eventually this morning's 
economic data caught up with the euphoria, as well as the Bush 
Administration's comments about Hussein's "unconditional" pledge 
being merely a ploy to split the U.N. Security Council.  Even 
Crude Oil Futures made it back over $29 a barrel after initially 
plunging on the Iraqi news.  This would indicate that oil traders 
don't believe much has changed in regard to an invasion.

Industrial Production fell 0.3%, registering the first decline 
since December.  Output from factories also fell 0.1%, also the 
first decline of the year.  Capacity Utilization dropped 0.2% to 
76.0 and output of both business and consumer goods fell, as 
well. The decline in output was unexpected, as analysts were 
looking for a 0.2% gain.

The day started out looking like the head and shoulders pattern 
that had been forming across the broader markets, would once 
again fail to breakdown - a very bullish sign.  However, by the 
end of the trading day, the Dow had fallen through the neckline, 
which had formed at the 50% retracement of its gains from July 24 
through August 22.  The Nasdaq suffered the same fate, however it 
can be argued that a true break in Nasdaq support comes 9 points 
below today's close of 1259.94 at the September 5 low of 1251.00.  

The Semiconductor Sector Index (SOX.X)  may help speed that 
process along, however, as it set its fourth 52-week low in the 
last six weeks.  We are already trading at 1998 levels, but those 
levels keep getting lower.  yesterday's downgrade of 15 semis 
apparently was too much to be overcome by Microchip Technology 
(MCHP) raising its guidance after the bell last night.

Following the bell, J.P. Morgan (JPM) warned that it would miss 
earnings, saying it would fall well below their second quarter 
numbers.  It blamed the shortfall on commercial credit costs of 
$1.4 billion, due to the "adverse actions" of several telecom 
companies, leading to bad loans.  This level is compared to $302 
million in the previous quarter.  If JPM is only the first domino 
to fall amongst the banks, due to credit defaults from other 
suffering sectors, the head and shoulders breakdown may lead us 
below the July lows.

Oracle met earnings expectations after the bell, however, it was 
not enough for investors as the stock dropped from a close of 
$9.03 to $8.40 in after hours trading.

After today's failed rally, I hate to be the "bear"- er of  more 
bad news, but JPM's warning should lead us lower tomorrow. The 
breakdown in the semiconductors also should lead the Nasdaq 
through a decisive head and shoulders neckline break, although 
many analysts (myself included) can argue the break actually 
occurred today.  If the semis aren't enough, then the sell-off in 
Oracle should do the trick.  I'm out of hibernation, but that 
doesn't mean we won't see some bullish candidates here and there.  
Hang onto your puts, we should find old ground again tomorrow.


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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7702
Current     :  8207

Moving Averages:
(Simple)

 10-dma: 8411
 50-dma: 8544
200-dma: 9620



S&P 500 ($SPX)

52-week High: 1226
52-week Low :  797
Current     :  873

Moving Averages:
(Simple)

 10-dma:  892
 50-dma:  898
200-dma: 1051



Nasdaq-100 ($NDX)

52-week High: 1782
52-week Low :  892
Current     :  897

Moving Averages:
(Simple)

 10-dma:  919
 50-dma:  954
200-dma: 1283



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

The Semiconductor Index (SOX.X): This is starting to sound like a 
broken record, but the SOX set its fourth 52-week low in the last 
six weeks.  Yesterday's downgrade of 15 stocks in the sector 
seems to have pushed it over the edge since breaking its support 
level of 275.  250 looks like the next likely target, following 
today's close of 263.56.  The Nasdaq is on the verge of a head 
and shoulders breakdown, which would follow that of the Dow.  The 
semis should lead it through the next nine points to the downside 
to achieve that breakdown.  The sell-off in Oracle following its 
earnings release after the bell looks bearish for the software 
sector, as well, and should give the entire tech sector a push 
downward tomorrow.

52-week High: 657
52-week Low : 263
Current     : 263

Moving Averages:
(Simple)

 10-dma: 283
 50-dma: 325
200-dma: 476

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

Market Volatility

The VIX should be heading higher tomorrow after today's technical 
breakdowns in the broader markets.  J.P. Morgan's warning after 
the bell should only serve to increase anxiety over bad debts as 
they blamed their losses on defaults in the telecom sector.  This 
most likely means there are other banks with outstanding loans to  
other sectors not making good on their business debts.  Watch for 
the VIX to creep toward the mid 40s, and we could once again see 
it into the 50s if we re-test July's lows.

CBOE Market Volatility Index (VIX) = 41.96 +1.42
Nasdaq-100 Volatility Index  (VXN) = 60.39 +2.66

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

          Put/Call Ratio  Call Volume   Put Volume

Total          1.20        478,669       572,073
Equity Only    1.14        307,066       349,696
OEX            1.27         33,734        42,800
QQQ            1.23         17,193        21,128

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

Bullish Percent Data

           Current   Change   Status
NYSE          42      - 1     Bull Confirmed
NASDAQ-100    35      + 1     Bull Correction
DOW           43      - 7     Bull Correction
S&P 500       48      - 3     Bear Confirmed
S&P 100       44      - 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  1.71
10-Day Arms Index  1.32
21-Day Arms Index  1.42
55-Day Arms Index  1.34

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        730          2017
NASDAQ     1131          2024

        New Highs      New Lows
NYSE         22              30
NASDAQ      108             180

        Volume (in millions)
NYSE     1,659
NASDAQ   1,490


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

Commitments Of Traders Report: 09/10/02

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 reduced long positions and added to shorts, 
reflecting an increase of almost 8,000 short contracts overall.  
Small traders increased both sides of the equation considerably, 
leaning long by an extra 3,000 contracts.


Commercials   Long      Short      Net     % Of OI 
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%)
09/10/02      426,230   470,537   (44,307)   (5.0%)

Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year: ( 36,481) - 10/16/01

Small Traders Long      Short      Net     % of OI
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%
09/10/02      166,696    85,259    81,437     32.3%

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 to both long and short positions, for a net 
reduction of 1,000 contracts to the short positions.  Small 
traders also added to both sides, netting out about the same as 
they finished the last period.


Commercials   Long      Short      Net     % of OI 
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%)
09/10/02       53,309     58,745    (5,436) ( 4.9%)

Most bearish reading of the year: (15,521) -  3/13/02
Most bullish reading of the year:   9,068  - 06/11/02

Small Traders  Long     Short      Net     % of OI
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%
09/10/02       14,024    10,494     3,530    14.4%

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

DOW JONES INDUSTRIAL

Commercials added slightly to both sides, leaving their long 
contract positions slightly higher by about 800 contracts.  Small 
traders beefed up both sides, with an extra 1,000 short contracts 
overall.  


Commercials   Long      Short      Net     % of OI
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%
09/10/02       22,946    14,936    8,010      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
08/20/02        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%)
09/10/02        7,568    10,129    (2,561)   (14.5%)

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

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


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******************
WEEKLY Fund Screen
******************

European Region Funds

Last week, we looked at the Pacific ex. Japan funds category; 
this week, we screen for the best European Region funds using 
various online screen tools.  European region funds invest at 
least 75% of stocks in Europe to use Morningstar's definition.  
For the most part, that means the developed markets of Europe, 
including the U.K., Germany, France, Switzerland, etc.  Since 
they belong to the broad international equity fund peer group, 
U.S. stocks are generally limited to 10% of assets.

The category's largest fund, Vanguard Europe Stock Index (VEURX) 
with assets today of $4.5 billion, seeks to track the investment 
returns of the Morgan Stanley Capital International Europe Index 
(MSCI Europe).  This market-cap weighted index fund measures the 
performance of 16 developed European countries: 

 Austria
 Belgium
 Denmark
 Finland
 France
 Germany
 Greece
 Ireland
 Italy
 The Netherlands
 Norway
 Portugal
 Spain
 Sweden
 Switzerland
 United Kingdom

According to Morningstar, Vanguard Europe Stock Index Fund had 
35.4% of assets invested in U.K. stocks as of mid-year for the 
largest country exposure.  France is second, representing 13.5% 
of assets.  Switzerland and Germany each represent about 10% of 
the portfolio, while the Netherlands comprises 8.6% of net fund 
assets.  So while it invests in 16 developed European countries, 
the top five countries represent the lion's share (78%) of fund 
assets.

That gives you a good sense of what the category's largest fund 
(and index benchmark) is all about.  Who should invest in Europe 
stock funds?  According to Vanguard's website, investors seeking 
capital growth and to further diversify a portfolio of U.S. stock 
holdings may find these funds to be appropriate for them.  These 
investors should have a long-term investment horizon of at least 
five years.

Last week, we showed you how you could invest in the Pacific 
region (excluding Japan) using mutual funds.  If you want to 
avoid the Pacific region altogether but still seek to have a 
little international diversification, Europe stock funds can 
provide that specific regional exposure.  As an example, you 
could invest 80% of your equity assets in Vanguard 500 Index 
(VFINX) and 20% in Vanguard Europe (VEURX).  That equity mix 
would provide for 20% international exposure and be invested 
principally in the largest developed markets of the U.S. and 
Europe (including the U.K.). 

Screen Process

We begin our search this week using Standard & Poor's (S&P's) 
mutual fund screener located at the www.funds-sp.com website.  
The database you want to use is called "USA Mutuals" and that 
database is then broken down into various main and sub-groups.  
We went into the main category called "Equity Funds" and then 
found the category known as "Regional Market/Developed" funds.

Once in the regional market/developed fund database, we sorted 
the funds by their S&P rating (similar to Morningstar's 5-star 
based system).  This quick rank isolated five funds that sport 
S&P's highest rating of five stars, including an institutional 
fund and an Asian small-cap fund that doesn't really belong in 
this category.  The three retail class funds with S&P's highest 
overall rating of five stars are as follows:

 Driehaus European Opportunity (DREOX)
 Mutual European (Multiple Class)
 Ivy European Opportunity (Multiple Class)

Two of the three funds, the Driehaus and Mutual offerings, are 
also rated five stars by Morningstar, with Ivy's fund having a 
Morningstar 4-star rating in relation to the Europe stock fund 
category.  Morningstar's 5-star funds in the European category 
are as follows:

 Driehaus European Opportunity (DREOX)
 Mutual European (Multiple Class)
 JP Morgan Fleming European (Multiple Class)

Note that JP Morgan Fleming's offering is only 3-star rated by 
Standard & Poor's versus its European region stock fund peers.

Lipper Analytical Services' Lipper Leader screen tool found at 
the www.lipperleaders.com website yielded some additional fund 
possibilities based on strength/consistency of returns and the 
fund's ability to preserve capital.  In contrast to Morningstar 
and Standard & Poor's, Lipper ranks return and preservation in 
relation to a fund's broad peer group (all international stock 
funds in this case).

The Lipper leaders for consistent return and preservation include 
Merrill Lynch EuroFund (Multiple Class), Morgan Stanley: European 
Value Fund (Multiple Class), and Van Kampen European Value Equity 
(Multiple Class).  Below is how the Europe funds with the highest 
S&P and Morningstar ratings scored according to Lipper's system.

 Driehaus European Opportunity (Return = 1)(Preservation = 4)
 Mutual European (Return = 2)(Preservation = 1)
 Ivy European Opportunity (Return = 1)(Preservation = 4)
 JP Morgan Fleming European (Return = 2)(Preservation = 2)

To summarize our observations so far, we have two funds (Driehaus 
and Ivy) that are associated with above-average volatility versus 
the broad peer group but have excelled at delivering returns that 
are consistently above the broad peer group (of all international 
stock funds).  In Ivy's case, returns have not been strong enough 
to get Morningstar's 5-star rating, while in Driehaus' case their 
returns have been superior, earning Morningstar's highest rating.

Two funds (Mutual and JP Morgan) preserve capital better than the 
average international stock fund, but aren't Lipper Leaders based 
on consistent return.  Lipper's screener identified three further 
possibilities, funds that were top-rated in both measures of fund 
performance: consistent return and preservation of capital.  But, 
on a risk-adjusted basis, none of them are 5-star rated by S&P or 
Morningstar.

How come we haven't seen Vanguard Europe Stock Index Fund's name 
show up in any of our screen results so far?  The long and short 
of it is that Vanguard's offering is rated only two stars by S&P 
while Morningstar rates the fund four stars.  In my opinion, the 
Morningstar ratings are better suited to long-term investors, as 
their rating system gives more weight to a fund's 5-year/10-year 
results than its does a fund's trailing 3-year returns (both S&P 
and Lipper's system look back just three years).

The other reason we tend to rely more heavily on the Morningstar 
ratings is because Morningstar's ratings reflect performance as 
adjusted for risk as well as for all sales charges and expenses 
of the fund.  The three funds that Lipper's system identified as 
Lipper Leaders for consistent return and preservation aren't top 
rated (5-star rated) by Morningstar because of their "loads" and 
expenses.  That's also why a no-load, 0.30% expense ratio "index" 
fund like Vanguard can be rated four stars in Morningstar's star 
rating system, yet not look as good in other mutual fund screens.

In the next section, we identify the funds we like the best over the very long-term (10+ years).

Our Favorite Funds

If your investment horizon is very long-term, let's say 10 years 
or more, then it's hard to argue with Vanguard Europe Stock Fund 
(VEURX).  For the trailing 10-year period ended August 31, 2002, 
Vanguard's European stock index fund had an average total return 
of 7.8%, twice the annualized return of the MSCI EAFE index (the 
MSCI EAFE index is comprised of the MSCI Europe and MSCI Pacific 
indices).  The fund's 7.8% annual-equivalent return ranked it in 
the 28th percentile near top quartile of the European stock fund 
category per Morningstar, so it outperformed nearly three out of 
four funds within the category over the last ten years.




 


For the same trailing 10-year period, the average European stock 
fund averaged 6.9% a year, while the average international stock 
fund had only a 4.4% average rate of return.  Only four funds in 
the category have delivered more total return for investors over 
the past decade than Vanguard Europe Stock Index Fund managed by 
Vanguard's index guru, Gus Sauter.  One of them is Merrill Lynch 
EuroFund (MAEFX) which sports a 10-year average annual return of 
11.6% through August 31, 2002.  The Class B shares (MBEFX) sport 
a 10-year annualized return of 10.5%.

Merrill Lynch EuroFund seeks capital appreciation by generally 
investing at least 80% of assets in European stocks, with the 
majority of assets invested in western Europe (the "developed" 
region within Europe).  The fund also intends to capitalize on 
opportunities in eastern Europe (the "emerging" markets within 
Europe).  The prospectus states that geographic allocation is 
based on the relative climates for economic, currency, tax and 
political factors.  James MacMillan has managed the fund since 
April 2000.  He has been a portfolio manager for Merrill Lynch 
Asset Management or its affiliates since 1993.




 


Compared to other Europe stock funds, Merrill Lynch's offering 
has "low" risk.  It holds a 10-year Morningstar rating of five 
stars, but is 4-star rated overall by the funds tracker.  Fund 
investors that are using a Merrill Lynch financial advisor may 
want to speak to their advisor about the EuroFund fund, to see 
whether it may be appropriate for them.  Note that this fund's 
equity style is value-driven, so when value stocks lag, so may 
this offering.

Conclusion

Our analysis this week identified some Europe stock funds with 
above average risk-reward profiles versus comparable funds per 
different independent ratings.  We found that the results from 
the three funds trackers were somewhat different, with S&P and 
Lipper basing their ratings on 3-year performance, while stars 
are assigned by Morningstar giving more weight to longer-term 
returns as adjusted for risks, costs and expenses of the fund.  

Because the majority of mutual fund investors are longer-term 
oriented, we showed two funds that have performed well in the 
last decade relative to the competition.  One was the Vanguard 
Stock Index Fund, which can represent the core portion of your 
European stock portfolio.  In addition to Vanguard and Merrill 
Lynch, the Europe stock funds from Morgan Stanley, Fidelity, T. 
Rowe Price, Mutual, Scudder and JP Morgan Fleming may be worth 
considering as well.   

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

Testing Support

Wednesday all the indexes will see new support levels tested after 
a solid failure of Dow 8300 Tuesday. Solid support at SPX 880 
failed and the index closed on the verge of significantly breaking 
875 as well. With the ORCL and JPM news after the bell it would 
not be surprising to see Dow 8050 tested at the open.


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The Option Investor Newsletter                  Tuesday 09-17-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Stock Picks: RSAS
Dropped Calls: MSFT, LLL
Dropped Puts: AET, CTX, CMA, FDX, GE, MTG
Daily Results
Call Play Updates: AZO, TRMS, INVN
New Calls Plays: None
Put Play Updates: AVY, AGN, TXU
New Put Plays: PNRA, MXIM, BRL, LTR, TIN


***********
STOCK PICKS
***********

A Secure Choice

Stock Pick: RSAS - RSA Security - Close $3.84
Strategy: Long stock with put-option insurance

An area that has received very little attention during the past 
year's security escalation is internet security.  While it has 
not made the news, which has been dominated by photographs of the 
9/11 plane crashes and stories about possible biological weapons, 
internet security has not escaped the view of the White House.  

In fact, President Bush appointed Richard Clarke as his special 
adviser for cyberspace security following last year's attacks.  
Clarke was given the task of developing a set of guidelines the 
administration could follow to ramp up protection against 
terrorists attacking our information networks.  

Unlike terrorism that relies on destruction or poisoning, a 
program that searches a database for information, classified or 
otherwise, does not have to pass through a metal detector and can 
continue its attempts indefinitely.  It is this threat that 
contributed to Clarke's recent report.

The report suggested that government become involved in the issue 
of internet security and said changes will be needed in key 
internet protocols and endorses trustworthy computing 
technologies.    One draft of the report has companies 
contributing to a fund to secure computer networks.  While that 
may not come to pass, one thing is clear.  Someone will be 
spending an awful lot of money to increase security over the 
internet, and much of that money will most likely come from 
Congress.  Although the report is only a set of recommendations, 
the fact that it was prepared at the request of the White House 
to deal with an issue of national security, is a pretty good 
indication that new regulations and funding will be sought from 
the legislature.  

One company that stands to gain from increased government 
spending is RSA Security, which designs security solutions to 
help authenticate the identity of people, devices and 
transactions used over the internet. As the government seeks to 
make it harder to access its databases, a company such as RSA, 
which has received many awards for its third-party authentication 
devices, will be at the head of the line to help the cause. 

While business IT spending may be taking a hit right now, one way 
to drum up business is to land the U.S. Government as a customer.  
While there is no guarantee that RSA will be landing a massive 
government contract, the possibility adds bullish intrigue to a 
stock with limited downside.  The fact is that the Government 
will be increasing security, so firms such as RSA and Symantec 
will most likely get a piece of the pie.

RSA traded in the 50s regularly during the internet heyday, and 
was as high as $19 earlier this year.  While the stock has 
dropped precipitously during the last 9 months, it is positioned 
in a business with a great deal of potential, as spending on its 
product is likely to greatly increase over the next 24-36 months.  
While $19 may not be achievable during that time frame, a 100-
200% increase in the current  price of $3.84 seems reasonable.  
The stock has already found support over $2 and has begun to turn 
upward, with a 63% gain in the last three days. We recommend 
protecting a long position in the stock with a purchase of a 
protective put, using the April 2.50 put (QSD-PZ) currently 
offered at 0.55.

Option 1:
Purchase the stock at the current level.  For every 100 shares of 
stock that is purchased, purchase 1 April 2003 2.50 put, 
currently offered at 0.55.  This will ensure the purchaser of the 
ability to sell the stock at $2.50 until the third week of April 
next year.  By then there should be progress on the White House 
cyber-security plan and those stocks that will benefit should 
show some life. The purchaser will limit upside potential by the 
cost of the put, however the 0.55 increases the entire purchase 
price per share by a relatively small amount.  If the stock drops 
from its current level to zero, the put and stock owner will be 
able to sell the stock at $2.50, which will be a loss of $1.34, 
plus the cost of the put, for a total loss of less than $2. 
however, if the sock hits our target, the only cost is the 0.55 
paid for the put

Option 2: 
Purchase the stock without the put for protection, risking the 
entire share price of approximately $4.00 per share.

Option 3:

If the stock does not appear bullish as the time to expiration 
nears, the stockholder can sell the put at its current bid and 
sell the stock.  If the stock is below $2.50, the option holder 
can exercise the put and sell the stock for $2.50



 


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

MSFT $47.29 -0.49 (-0.49 for the week) Microsoft has held its 
support level above $47, as the point and figure bullish support 
line has proven amazingly consistent.  However, with the falling 
tech indices, it appears that MSFT will have a hard time reaching 
our $53.50 target in the short term. While the risk/reward ratio 
in the trade is still favorable from a mathematical standpoint, 
we would rather not let our options decay any further while 
waiting for a tech turnaround.  If we do get one, MSFT will most 
likely be back on the call list, as this strong company will most 
likely lead the rally.

---

LLL $53.83 -3.67 (-3.15) It looks like we tightened that stop on
LLL just in time to protect the gains accrued since we began
coverage.  With the war bid coming out of most of the Defense
stocks this morning following Iraq's offer to allow weapons
inspectors back in, LLL gapped down to $56.50 this morning and
sold off throughout the day, ending with a loss of more than 6%.
Open positions should have been stopped out on the opening tick,
and with the sharp selloff and easing of the war fears, we need
to wait for the stock to build a new base before considering new
positions.  For now, we're dropping LLL as a successful bullish
play in a difficult market.


PUTS:
*****

AET $38.45 -0.79 (-0.80 for the week) Aetna has experienced a 
technical breakdown, establishing a triple bottom PnF breakdown 
with the trade of $40 on September 12.  This was followed by 
rumors that the company would issue an earnings warning this 
week. The stock dove on that rumor, but gave us an early snapshot 
of support levels when the buyers came in and took the stock back 
above its July low of $38.30.  AET has found support there since 
that action, and we will take our small profit on the play and 
close it. The emphatic buying at lower levels is not what we like 
to see in a put play and there are plenty of other candidates in 
the current downtrend to focus on.

---

CTX $49.20 -0.70 (-0.60 for the week) Centex has continued to 
fail on rebound attempts over $50, however also seems to be 
finding support from its 50-dma of $48.99.  These current support 
and resistance levels have the stock moving sideways and we would 
rather wait for a more significant breakdown.  Option premiums 
decay fast in sideways moving stocks, and the current across the 
board volatility increase, due to today's big drop in the Dow, 
may give us an opportunity to close the position at higher 
premium level. We will close the play and wait for a breakdown in 
the 50-dma, or the Dow Jones Home Construction Index (DJUSHB) for 
a sign to get back into the sector from the short side.

---

CMA $54.51 +0.49 (+1.01) Despite the weakness seen throughout
most of the market on Tuesday, shares of CMA quickly rebounded
from the reactionary dip to the $54 level and then traded flat
for the majority of the day.  The bearish pressure seems to be
easing, and with the daily Stochastics turning up out of oversold
territory, prudence demands that we close the play before it
moves significantly against us.  There are several better bearish
plays currently on the playlist, so we want to focus our
attention there.  Use any opening weakness tomorrow to exit open
positions.

---

FDX $44.40 +0.43 (-0.10) FDX bucked the trend in the broad market
on Tuesday, and although it drifted lower throughout most of the
day, the fact that it refused to fill its opening gap hints at
some underlying strength.  Even the DOW Transports ended the day
in the red, and this gives us another comparison that shows
relative strength in shares of FDX near the $44 level.  With
earnings set to be released Thursday morning, we want to take
advantage of the expected opening weakness tomorrow to exit any
open positions.

---

GE $27.70 -0.20 (+0.65) With the broad markets showing significant
weakness again on Tuesday, GE stubbornly refused to break below
the $27 level.  Aggressive day-traders could have pocketed a nice
gain on the stock's decline from its opening high near $29, but it
is starting to look like the near-term downside is limited.
Following the warning from JPM tonight, the broad markets are
likely to open in the red tomorrow.  Take advantage of the opening
weakness to exit open positions at a more favorable level and then
look for a higher-odds play in which to deploy your gains.

---

MTG $43.29 -5.41 (-11.94) If you thought Monday's sharp decline
in shares of MTG was exciting, then today's 11% decline on
extremely heavy volume was really a treat.  Yesterday, MTG warned
and was subsequently downgraded and the fallout from that news
continued to be felt throughout Tuesday's trading session.  In
just the past 2 days, MTG has shed nearly $12, and with those
solid gains accrued, let's just close the play and harvest those
gains before we get an oversold rebound.  With the markets likely
to open in the red tomorrow, we can wait for the opening dip
before closing open positions.  But harvest those gains on the
first sign of strength.


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

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

CALLS              Mon    Tue

AZO      74.94    0.70  -0.31  Great relative strength
INVN     34.53    0.39  -1.73  Still holding up
LLL      53.83    0.50  -3.67  Drop, stopped out
MSFT     47.29    0.18  -0.49  Drop, sideways movement
TRMS     46.18   -0.30   0.35  up on a down day


PUTS               

AET      38.45    0.09  -0.79  Drop, profits and holding
AGN      51.67    0.21  -1.54  Looking great short
AVY      59.28   -0.09  -0.63  Failed at $60
BRL      66.32   -0.20  -0.68  New, room to fall
CMA      54.51    0.51   0.49  Drop, underperformer
CTX      49.20    0.15  -0.70  Drop, trapped between levels
FDX      44.40   -0.68   0.43  Drop, earnings coming up
GE       27.70    0.80  -0.20  Drop, new support at $27
LTR      48.62    0.13  -1.41  New, rollover to $40
MTG      43.29   -1.20  -5.41  Drop, $11.64 profit
MXIM     25.48   -1.07  -0.89  New, like it's 1999
PNRA     24.24   -0.48  -0.28  New, supply at $25
TIN      43.52   -0.29  -0.94  New, below July lows
TXU      42.40    0.61  -1.97  Red engulfing 



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

AZO $74.94 -0.31 (+0.52 for the week) Relative strength is the 
name of the game for AZO.  On a day the Dow lost 176 points, AZO 
lost less than half a percentage point, after setting a new 
relative high this morning.  The stock has still held above point 
and figure support, which continues to rise on each pullback.  
The stock experienced a triple top breakout on September 10 and 
came within 0.02 of adding another "X" to the chart this morning.  
While the extreme selling in the broader markets prevented AZO 
from reaching new highs, the fact that it held up so well on a 
day that saw a significant head and shoulders break in the Dow is 
encouraging. Zack's recently added AZO to its recommended list as 
a #2 ranking. This was before the triple top breakout.  The 
continuing series of higher highs and higher lows looks bullish 
and the stock is one of the few issues which can brag about a 14% 
gain since the beginning of the year.  We will remain long on 
AZO, with a stop loss of $71.00, just below the 200-dma of 
$71.60.  Look for new entries on a re-test of the 200-dma, in the 
case of continued market weakness, or a trade over $76, where the 
stock found intraday resistance.

---

TRMS $46.18 +0.35 (-0.02 for the week) Trimeris has held its 
support level, put into place at the beginning of September. At 
that time the stock dipped just below $43. The last pullback 
stopped at $45, creating a higher low.  On a day when the broader 
markets tanked heavily, TRMS actually went up.  It got as high as 
$47.65, before finishing the day at $46.18, up 0.35. This 
strength, and evidence of newfound support at a higher level, 
improves our risk/reward ratio.  The upside target of $50 is 
$3.82 away, while there now appears to be support just $1.18 
below.  Today Trimeris announced that they have submitted a New 
Drug Application to the FDA for approval to market Fuzeon.  They 
have requested priority review status for the drug formerly known 
as T-20, which if granted, could allow the review to be completed 
within six months.  There is already more demand for the drug 
than current supply capabilities can fill.  Trimeris, along with 
its partner Roche, also announced completion of the next 
manufacturing hurdle, validation of the first three commercial 
batches of the active ingredient in Fuzeon.    They will be 
presenting favorable data about Fuzeon and T-1249, their pipeline 
drug, at the end of the month at the ICAAC conference in San 
Diego.  With nothing but good news, and strong technical support, 
we like the long play on TRMS and see entry points on a re-test 
of $45.00 support, or the current level if the broader markets 
rally.  With expiration only a few days away, new entries should 
look to October contracts.  

---

INVN $34.54 -1.74 (-1.22) Iraq's announcement that they would
allow the weapons inspectors back into the country unfettered
took a bite out of the war bid that had been established in many
of the Defense and Security oriented stocks, and the Defense
index (DFI.X) plunged 4% on Tuesday.  This dropped the index back
under the $580 support/resistance level despite the fact that
Iraq's definition of 'unfettered' is apparently far different
than that of the rest of the world, keeping the war rhetoric from
the Bush administration echoing louder than ever.  INVN showed
its advantage in this space on Tuesday, by finding support
(although just barely) near the $34 level.  With its business
focus on explosives detection, INVN should not be as susceptible
to the effect of reduced war fears, so we're looking at this
pullback as an attractive entry point into the play.  Look for
bullish conviction tomorrow to show itself with the stock
rebounding from the $33-34 level, helped once again by the 10dma
($33.51).  Keep stops in place at $32.50, as a close below that
level would indicate the bullish move has run out of steam.


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

None


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

AVY $59.28 -0.63 (-0.72 for the week) Avery Dennison has made a 
valiant effort to reverse its fortunes since breaking below its 
200-dma (currently $61.09) last Thursday.  The stock has failed 
each time.  In addition to the 200-dma failure, the stock has 
broken below the $60 level and a look at the short-term chart 
shows that its attempts to break back above this level have also 
failed.  The stock has established a tightly defined descending 
channel since rolling over at $65 in August, and each attempt to 
break the channel falls further away from the top trend line.  
The stock is sitting right on its bullish support line on the 
point and figure chart and a trade of $59 would constitute a 
break in support.  The trade of $60 already established a new 
sell signal, and the weakness in the attempts to cross back over 
that level indicate that $59 is probably not far away.  The 
bearish vertical count remains $55, but will go to $53 with a 
trade of $59.  Our initial target on the play is $54, where the 
stock bottomed in July, and where there is also PnF support.  New 
entries should look for a trade of $59 and focus on October 
contracts, as September expires this Friday.

---

AGN $51.67 -1.54 (-1.38) Another day, another loss.  That seems
to be the daily mantra for shares of AGN.  Monday's consolidation
day was just the setup for another great entry this morning.  AGN
gapped up at the open along with the rest of the market, and that
provided aggressive investors with yet another attractive entry
point as the stock rolled over just below the $54 resistance
level.  That rollover led the stock down to a fresh multi-year
closing low, with the only tangible nearby support being the
July intraday lows near $49.50.  Today's decline added another
'O' to the PnF chart, extending the bearish price target to $40.
Near-term, the stock is becoming a bit extended to the downside
though, so we would look to harvest partial gains tomorrow on a
dip down near the $50 level, and then look to re-enter following
the next failed bounce.  With more and more resistance piling up
overhead, we'll look to take on new positions on a rollover near
the $54 level.  Note that we don't want to give back the gains
in the play, so we are lowering our stop to $54.50 tonight.

---

TXU $42.40 -1.97 (-1.90) It seems there is no tangible buying
interest in Utility stocks, as demonstrated by the UTY index
taking out another level of support ($255) on Tuesday.  Adding to
the pressure on Monday was Dominion Resources warning for 2003,
resulting in a 14% haircut so far this week.  TXU finally
succumbed to the selling pressure today, shedding nearly 4.5%
on increasing volume.  As long as the downward trend continues,
we'll continue to ride it lower.  With the stock now solidly
below the 50-dma ($44.19), look for the $44-45 area to provide
substantial resistance on any attempted rallies.  Speaking of
rally attempts, we could be setting up for one in the near
future, as TXU is rapidly approaching its next solid level of
support at $42, which is just above the 50% retracement of the
rally off the July lows.  Should shares attempt to rebound from
that level, look to harvest partial gains in the play and then
look to re-enter on the next rollover from resistance.  Lower
stops to $45, which is just above today's intraday high.


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

PNRA - Panera Bread - $24.24 -0.28 (-0.74 for the week)

Company Summary:
Panera Bread owns and franchises bakery-cafes under the Panera 
Bread and Saint Louis Bread Co. names. The company is the leader 
in the emerging specialty bread/cafe category due to its unique 
bread combined with a quick, casual dining experience. As 
previously reported, as of April 20, 2002, 390 Panera Bread 
bakery-cafes (including one specialty bakery-cafe) were operating 
in 30 states (117 company-owned and 273 franchised bakery-cafes). 
(source: company release)

Why We Like It:
Panera has been on the verge of a technical breakdown for the 
last several days.  It appears that breakdown has now arrived.  
The stock had found support at $25 as far back as July, when the 
broader markets were in the throws of a significant collapse.  It 
ventured below $25 on two occasions, only to find buyers both 
times.  Recently it has revisited this previous area of support.  
The difference this time is that rather than hitting $25 on a 
couple of large drops, it has stepped down to this level with a 
series of lower highs and lower lows - a very bearish sign.  The 
other significant difference is that rather than finding buyers 
at this level, PNRA has now found additional sellers.  PNRA 
tested the waters below $25 on Thursday and found some buyers.  
Not so on Friday, Monday and Tuesday.  Friday's drop below $25 
found the buyers at that level overwhelmed by the sellers and the 
stock has been pinned underneath ever since.  Each of the last 
three trading sessions, it has experienced a failed rebound to 
that level, and closed on a lower low. The pattern gets more 
bearish everyday and the supply at $25 is now providing a ceiling 
on the stock

A look at the longer term charts shows Panera on the verge of an 
even larger technical breakdown, having dropped below support at 
$24.61 on the weekly chart and about to break its December 2001 
low of $24.00.  The stock was profiled in this past weekend's Ask 
the Analyst column, highlighting past support levels, which can 
be viewed with this link 
http://www.OptionInvestor.com/ask/091502_1.asp. The new addition 
to these charts would be the current overhead supply at $25.  
Below $24, the next level of support is $20, going back to 
November of 2001, and then $15 below that.  The current bearish 
vertical point and figure count is $14.  OI sees the current 
level as ideal for short entries.  The stock has managed to break 
above $25 intraday the last three days, but has been unable to 
hold these rallies.  We will place our stop at $26.50, just above 
Thursday's high, as this would signal renewed support. 

BUY PUT OCT-25 UPA-VE OI= 809 at $2.35 SL=1.20
BUY PUT NOV-25 UPA-WE OI= 488 at $3.10 SL=1.60

Average Daily Volume = 883 K


---

MXIM - Maxim Integrated Products - $25.48 -0.89 (-2.42 for the 
week)

Company Summary:
Founded in 1983, Maxim Integrated Products (MXIM) designs, 
develops, manufactures, and markets a broad range of linear and 
mixed-signal integrated circuits (ICs) for use in a variety of 
electronic products. Maxim circuits "connect" the real world and 
the digital world by detecting, measuring, amplifying, and 
converting real-world and communications signals, such as 
temperature, pressure, sound, voice, or light to the digital 
signals necessary for computer and DSP processing. (source: 
company release)

Why We Like It:
We made a nice profit the last time we played this stock and 
we're going back to the well again. Maxim has suffered the same 
fate as many of the other chip stocks.    As consumer demand has 
dropped with the slow economy, so has demand for the 
semiconductor industry.  Add to this the continuing slowdown in 
IT spending by businesses, and there isn't much left in terms of 
demand for MXIM's product.  The Semiconductor Sector Index 
(SOX.X) has set another 52-week low and is now trading at its 
lowest level since 1998.  This is the fourth 52-week low in the 
last six weeks. Maxim has followed suit, with its latest decline 
taking it down to levels not seen since June 1999.  The bottom 
continues to fall out of the sector, and support is hard to find. 
On Monday Bank of America and Prudential cut 2002 and 2003 
earnings estimates on a combined 15 semiconductor stocks, citing 
weakness in the consumer segment.

Maxim experienced a spread triple bottom point and figure 
breakdown with its trade of $27.  This type of breakdown is 
sometimes considered a "bear trap," where a single "O" is 
followed by a rally, as the last sellers are exhausted.  Not to 
worry in this case, as the trade of $26 added another box to the 
column and got us through the trap. The stock has also formed a 
descending channel on the PnF chart,  which is headed for $18, 
coinciding with the bearish vertical count of $17, although some 
type of bounce is likely before that point.  We will target $20 
initially, as there is bound to be some round number support, as 
well as technical support from  February and March 1999. We will 
lower our stop loss and let it run if it breaks that level.  
Place stops at $28.50, just above Monday's high of the day.

BUY PUT OCT-25 XIQ-VE OI= 835 at $2.40 SL=1.20
BUY PUT NOV-25 XIQ-WE OI= 1257 at $3.20 SL=1.60

Average Daily Volume = 8.96 mil


---

BRL – Barr Laboratories $66.32 -0.68 (-0.85 this week)

Company Summary:
Barr Laboratories is a pharmaceutical company engaged in the
development, manufacture and marketing of generic and
proprietary prescription pharmaceuticals.  Barr markets
approximately 85 pharmaceutical products, representing various
dosage strengths and product forms of approximately 35 chemical
entities.  BRL's product line focuses principally on oncology
and female healthcare categories, including hormone replacement
and oral contraceptives.  The company's Duramed subsidiary
develops, manufactures and markets a line of prescription drug
products in tablet, capsule and liquid forms.

Why We Like It:
With virtually every sector of the market ending in the red on
Tuesday, it was like a smorgasbord, looking for attractive
downside plays.  While it hasn't broken down quite yet, the
Pharmaceutical index (DRG.X) is looking particularly top-heavy,
as it is resting just above critical support at the $284 level.
What is particularly telling is that each rally attempt over the
past few weeks has resulted in a lower high, with the 20-dma
(currently $296) continuing to provide resistance.  Add to this
the fact that the DRG index broke back under its 50-dma (just
above $287) on Tuesday, and it looks like the bears may be coming
out of their brief period of hibernation.  BRL had a nice run to
the upside throughout most of the month of August, but with the
DRG sector falling and BRL now solidly below the 200-dma ($67.68),
the bears are coming back out to play.  Particularly interesting
is the series of lower highs and lower lows that the stock has
posted over the past few weeks, and with the stock resting
precariously on the $66 support level, we have a couple of solid
action points to work with.  Momentum traders will want to enter
the play as BRL falls under the $65 support level (just below
this week's intraday lows), preferably with the DRG index
confirming this weakness with a break under the $284 support
level.  Should we get an oversold rebound first, look to fade
that rally attempt by entering on a rollover from resistance,
first at $67 and then possibly as high as $68.50.  Initial stops
are in place at $69.

BUY PUT OCT-65*BRL-VM OI= 86 at $3.10 SL=1.50
BUY PUT OCT-60 BRL-VL OI=356 at $1.65 SL=0.75

Average Daily Volume = 573 K


---

LTR – Loews Corp. $48.62 -1.41 (-1.64 this week)

Company Summary:
Loews Corporation is a holding company with subsidiaries engaged
in property, casualty and life insurance (CNA Financial
Corporation); the production and sale of cigarettes (Lorillard,
Inc.); the operation of hotels (Loews Hotels Holding
Corporation); the operation of offshore oil and gas drilling
rigs (Diamond Offshore Drilling), and the distribution and sale
of watches and clocks (Bulova Corporation).

Why We Like It:
In case you haven't noticed, there has been a confluence of
factors lining up to keep the Tobacco stocks under pressure.
From increased tariffs cutting into sales, low cost competition
requiring greater add revenue, and of course the constant drumbeat
of litigation, investors seem to be losing their appetite for this
group of stocks.  LTR went on a BIG PnF Sell signal back in May
and June, and that vertical count had the bears eyeing a drop all
the way back to the $19 level.  While that seems a bit extreme, it
is interesting to note that the column of 'X's created by the
rebound off the July lows came to a halt right at the $53 level,
which is where the violated bullish support line would be right
now.  Since topping out, LTR has been on a steady decline,
posting a continuous series of lower highs and lower lows.
Despite an attempted rebound this morning with the rest of the
broad market, LTR reversed just below the 20-dma ($51.23) and
proceeded to fall back under its 50-dma ($49.11).  That brought
the stock down to the top of its gap from August 8th, and if the
stock falls into that gap, it should at least fill it down to the
$46.75 level.  Of course, once below that level, the bears will be
eying the $45 level and then the $41 level as potential bearish
targets.  Use an intraday rally to resistance near $50 to
establish new positions on the rollover, or else wait to enter on
a drop below $48.25.  Initial stops are set at $51.25, just above
strong resistance.

BUY PUT OCT-50 LTR-VJ OI=117 at $2.85 SL=1.50
BUY PUT OCT-45*LTR-VI OI= 16 at $0.95 SL=0.50

Average Daily Volume = 603 K


---

TIN – Temple-Inland Inc. $46.52 -0.94 (-1.47 last week)

Company Summary:
Temple-Inland is a holding company that conducts all of its
operations through its subsidiaries.  Its principal subsidiaries
include Inland Paperboard and Packaging, Inc., Temple-Inland
Forest Products Corporation, Temple-Inland Financial Services
Inc., Guaranty Bank and Guaranty Residential Lending Inc.  TIN's
business is divided among three groups: the Paper Group, which
manufactures corrugated packaging products, the Building Products
Group, which manufactures a wide range of building products and
manages the company's forest resources of 2.1 million acres of
timberland, and the Financial Services Group, which consists of
savings bank, mortgage banking, real estate and insurance
brokerage activities.

Why We Like It:
While it seems clear that the housing bubble is starting to
deflate, pure plays on the Home Construction companies doesn't
seem to be the best way to go.  Instead, stocks of the companies
providing the raw materials and financing products seems to be
where the weakness is first presenting itself.  And that makes
sense with last week's news of record foreclosures, and this
week's news of the extremely high delinquency rate on FHA loans.
Not only that, but we're exiting the peak building season anyways,
and that is going to cause a slackening in demand for products
like paperboard, lumber and other associated building materials.
Apparently investors have been figuring that out, as shares of
TIN have been accelerating their downward move over the past
couple weeks.  First the bears took out the $50 support level and
then today, they pressured the stock under the July low ($46.87).
The breakdown under $50 created a bearish triangle breakdown on
the PnF chart, and once the $46 support level breaks, support at
$44 and then $42 should be tested in fairly short order.  Look for
an oversold rebound over the near term to provide for an
opportunity to enter the play as that rebound fails, either at the
$48 resistance level, or even a bit higher, near strong resistance
at $50.  Should the rebound fail to materialize, consider
momentum-based entries as TIN falls under $46.  Initial stops will
be set at $50.50.

BUY PUT OCT-50 TIN-VJ OI= 0 at $4.40 SL=2.75
BUY PUT OCT-45*TIN-VI OI=10 at $1.70 SL=0.75

Average Daily Volume = 527 K



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The Option Investor Newsletter                  Tuesday 09-17-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three: 

Play of the Day: 
Traders Corner: 

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

MXIM - Maxim Integrated Products - $25.48 -0.89 (-2.42 for the 
week)

Company Summary:
Founded in 1983, Maxim Integrated Products (MXIM) designs, 
develops, manufactures, and markets a broad range of linear and 
mixed-signal integrated circuits (ICs) for use in a variety of 
electronic products. Maxim circuits "connect" the real world and 
the digital world by detecting, measuring, amplifying, and 
converting real-world and communications signals, such as 
temperature, pressure, sound, voice, or light to the digital 
signals necessary for computer and DSP processing. (source: 
company release)

Why We Like It:
We made a nice profit the last time we played this stock and 
we're going back to the well again. Maxim has suffered the same 
fate as many of the other chip stocks.    As consumer demand has 
dropped with the slow economy, so has demand for the 
semiconductor industry.  Add to this the continuing slowdown in 
IT spending by businesses, and there isn't much left in terms of 
demand for MXIM's product.  The Semiconductor Sector Index 
(SOX.X) has set another 52-week low and is now trading at its 
lowest level since 1998.  This is the fourth 52-week low in the 
last six weeks. Maxim has followed suit, with its latest decline 
taking it down to levels not seen since June 1999.  The bottom 
continues to fall out of the sector, and support is hard to find. 
On Monday Bank of America and Prudential cut 2002 and 2003 
earnings estimates on a combined 15 semiconductor stocks, citing 
weakness in the consumer segment.

Maxim experienced a spread triple bottom point and figure 
breakdown with its trade of $27.  This type of breakdown is 
sometimes considered a "bear trap," where a single "O" is 
followed by a rally, as the last sellers are exhausted.  Not to 
worry in this case, as the trade of $26 added another box to the 
column and got us through the trap. The stock has also formed a 
descending channel on the PnF chart,  which is headed for $18, 
coinciding with the bearish vertical count of $17, although some 
type of bounce is likely before that point.  We will target $20 
initially, as there is bound to be some round number support, as 
well as technical support from  February and March 1999. We will 
lower our stop loss and let it run if it breaks that level.  
Place stops at $28.50, just above Monday's high of the day.

BUY PUT OCT-25 XIQ-VE OI= 835 at $2.40 SL=1.20
BUY PUT NOV-25 XIQ-WE OI= 1257 at $3.20 SL=1.60

Average Daily Volume = 8.96 mil



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

It’s about Time
By John Seckinger
jseckinger@OptionInvestor.com

Wilbert Delbert Gann was born on June 6th, 1878 in Lufkin, Texas 
and is considered a pioneer in the field of technical analysis.  
Mr. Gann used pattern, price, and time to project changes in both 
trend and market direction.

W.D. Gann first became interested in commodities as a kid, 
carefully watching his father who worked as a cotton farmer near 
Texarkana.  Later in life, Mr. Gann worked in a brokerage firm 
during the day and attended business school at night.  In fact, 
it wasn’t until he was 41 before he quit his job and went on his 
own.  W.D. Gann began publishing The Supply and Demand Letter, 
used to constantly predict price change in both stock and 
commodity markets.  

It is rumored that Gann’s predictions in the 1920’s were 85 
percent accurate, and that he correctly predicted the 1929 crash.
Other rumors included Gann opening an account in 1908 with $300 
in cash and turning it into $25,000 during a span of three 
months.  Another trading account was rumored to be opened with 
$130 and blossomed to $12,000 in the same 30 days.  In 1923, it 
is thought that Gann turned $1,000 into $30,000 trading cotton 
over a period of 60 days.  

Is this a chapter from Ripley’s Believe it or not?  I may not 
have the answers; nevertheless, W.D. Gann does deserve to be 
further examined due to his unique insights involving price and 
time.  Note:  There were roughly five institutional traders in 
Chicago that obsessively followed Gann, all extremely confident 
that W.D. Gann was on to something; however, I do not know how 
well these traders did while following W.D. Gann.

The significant discovery W.D. Gann is associated with includes 
time cycles dating back to over 100 years.  This was done to 
watch for past market action to be repeated.  Moreover, Mr. Gann 
called the fifth year of each decade the ‘year of ascension’ when 
looking at the All Ordinaries Index and The Dow Jones Industrial 
Average.  Dates used included 1905 to 1995.  Mathematics and 
number theory was critical to the success of Gann, giving much 
weight to ‘squaring time and price’ and his ‘squares’ of 52, 90, 
and 144.  

Pattern, price, and time, to Gann, clearly are not independent of 
themselves.  In fact, Mr. Gann was quoted as saying, “when time 
and price coincide, change is imminent.”  To Gann, the study of 
patterns consists of the construction of minor, intermediate, and 
main trend-indicator swing charts (bar charts) and closing price 
reversal patterns.  Pattern study itself is defined as the study 
of market swings.  Price study consists of Gann angle analysis 
and percentage price retracements, consisting of swing-chart 
price targets, angles, and percentage retracement points.  Lastly 
and most important is the study of time, which looks at swing 
timing, cycle timing, and historically recurring dates.  Time 
study involves natural and social cycles and uses swing charts, 
anniversary dates, cycles, and the square of price to measure 
time.

With Gann’s dedication to number theory, it should not be 
surprising to learn that Gann connected pattern, price, and time 
through geometric angles.  



 

The relationship above is expressed as a 1 by 1 Gann angle.  
Note:  A 45-degree angle has a tangent equal to one.

Gann angles are drawn between a significant bottom and top (or 
vice versa) at various angles.  Deemed the most important by 
Gann, the 1 x1 trend line is used as a criteria for both bull and 
bear markets.  Gann felt that a 1 x 1 trend line provided major 
support during an uptrend.  When the trend line is broken, it 
signifies a major reversal.  A bull market is signified if prices
are rising and are above the upward sloping 1 x 1 trend line.  
Conversely, a bear market is indicated when prices are falling 
and are below the downward sloping 1 x 1 trend line.

Gann understood the use of horizontal support and resistance 
lines, but he used his Gann angles for diagonal support and 
resistance.  If the 1 by 1 Gann angle wasn’t used, he would use 
the 1 by 2 angle, drawn via two units of time (right) and one 
unit either up or down (price).  Gann also used the following 
angles:  

1 x 8 - 82.5 degrees 
1 x 4 - 75 degrees 
1 x 3 - 71.25 degrees 
1 x 2 - 63.75 degrees 
1 x 1 - 45 degrees 
2 x 1 - 26.25 degrees 
3 x 1 - 18.75 degrees 
4 x 1 - 15 degrees 
8 x 1 - 7.5 degrees



 

Below is a chart of Real Networks (RNWK), used for illustrative 
purposes.  The red line represents the 1x1 Gann Angle, the green 
lines represent the 1x2 and 2x1 angles, the aqua lines represent 
1x3 and 3x1 angles, the blue lines represent 1x4 and 4x1 angles, 
and the purple lines represent 1x8 and 8x1 angles.



 

Gann was a strong believer that stop-loss orders should be used 
at all times.  Another belief of Gann’s was giving Saturday and 
Sunday a specific point value, since this was a factor of time 
and could not be overlooked.  Gann also believed that minor 
trends in the marketplace should be used to learn more about the 
intermediate and main trends.  Gann noted that the only way a 
minor trend could turn down was to cross a minor bottom.  Note:  
A minor top on a monthly top is always a minor top on the weekly, 
daily, or hourly chart.  

As far as Gann Angles are concerned, W.D. Gann had roughly 18 
geometric forms explaining his angle theory.  One of interest is 
squaring the range from a high price and using the intersection 
of the Gann Angle (1 x 1) and 50 percent of price to form major 
support/resistance level.  Looking at the chart below, the dashed 
horizontal line is the 50% price area, while the vertical lines 
represent time increments.  Notice how a minor low was formed as 
price and time comes together.  From the minor high, 1 x 1 Gann 
Angles are drawn.  This is also used as the minor lows.



 

My intention was to give the reader a quick insight to the life 
and theories of W.D. Gann.  I do believe that Gann’s approach to 
time cycles is very important, and should not be discounted.  One 
book recommended is James A. Hyerczyk’s Pattern, Price & Time.  
It is my impression that enough traders follow Gann theory to 
make it credible; however, it should only be used as a tool at 
first until one become comfortable with Gann’s unique approach to 
trading.  

The following quote sums up Gann pretty well:  "Water seeks its 
level," quoting Mr. Gann. "You can force it higher with a pump, 
but when you stop pumping it requires no force to cause it to 
return to its former level.  Stocks and Commodities are the same. 
They can be forced above their natural level of values to where 
lambs lose all fear, become charged with hope and buy at the top. 
Then stocks are permitted to sink to a level where hope gives way 
to despair and the most rampant bull becomes a bear and sells out 
at a loss.  My discover of the time-factor enables me to tell in 
advance when these extremes must, by the law of supply and 
demand, occur in stocks and commodities."


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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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Option Investor Inc
PO Box 630350
Littleton, CO 80163

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