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Daily Newsletter, Thursday, 09/19/2002

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The Option Investor Newsletter                 Tuesday 09-19-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Count on It!
Index Trader Wrap: "Dow bears" got their target
Market Sentiment: Lack of Support
Weekly Manager Microscope: Steven Kaye: Fidelity Growth & Income 
   (FGRIX)


Updated on the site tonight:
Swing Trader Game Plan: Where Is That Bounce?


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      09-19-2002           High     Low     Volume Advance/Decline
DJIA     7942.39 -230.10  8170.65  7939.83 1.76 bln    752/2459
NASDAQ   1216.44 - 35.70  1242.91  1216.19 1.48 bln   1037/2477
S&P 100   423.06 - 12.93   435.46   422.88   Totals   1789/4936
S&P 500   843.32 - 26.14   869.46   893.92 
RUS 2000  365.54 - 11.21   376.75   365.37 
DJ TRANS 2158.87 -  3.90  2211.96  2140.93   
VIX        46.16 +  5.27    46.72    43.95   
VXN        62.76 +  3.43    62.76    59.36 
Total Vol   3,447M
Total UpVol   377M
Total DnVol 3,052M
52wk Highs   89
52wk Lows   644
TRIN        1.98
PUT/CALL    1.22
************************************************************


Count on It!

If you had thought a retest of the July lows was possible before 
you can count on it after today. Even more depressing is the 
thought that maybe those lows will be broken, not tested. Market
conditions are continuing to deteriorate and we are a long way
from being out of October. There are still a lot of companies 
which have not warned and the end of September is shaping up
as serious pothole. 

Dow Chart



Nasdaq Chart




It was an ugly day. Seems we are getting a lot of those lately. 
The futures before the open were down -15 from the 4:PM numbers
on Wednesday. This caused a straight -165 point drop to 8008.
The Dow bounced about +100 points from the lows and the 8000 
level held until 3:09 when sellers all joined together to break
the stalemate. Once below 8000 it was all over but the bleeding
and bleed it did. The Dow closed at 7942 and the low of the 
day. The Nasdaq lost a whopping -35 points to close at a low
not seen since the 1205 August 5th low. 

EDS profit warning last night turned into 50% haircut as the 
stock dropped from $36 to $17.23. Their warning also impacted
Dow component IBM, which dropped -4.75 to $64.90 in regular
trading. IBM has yet to warn and several analysts came to their
defense today. Considering today's drop to levels not seen
since 1998 a warning could easily push them under $60. INTC
dropped to $14.90 and a low not seen since Nov-1996. 

There was a flood of missed earnings today along with another
flurry of earnings warnings. TXI reported $.18 cents vs
estimates of $.52 cents. They sell concrete and the lack of
construction is hurting their business as well as weather
patterns in Texas where they are located. 

Morgan Stanley reported earnings of only $.55 cents a share
when analysts were expecting $.67 cents. The banker said
earnings were hit by weak trading results and declining 
merger and underwriting revenue. AG Edwards (nyse:AGE) fell
-6.1% after missing analyst's estimates by -13 cents. AKLM
fell -20% after warning of a pending shortfall. ASTE lost 
-29% after warning that it now expects a loss of -6 cents
instead of a gain of 11 cents. Belden Wire & Cable (BWC)
fell after warning that sales of fiber optics and network
cable would fall short due to a continued decline in 
capital expenditures.

Not all the news was bad. FDX beat estimates and soared +4.75
on strong growth in its ground business. They affirmed estimates
for the full year. The Dress Barn jumped +32% after beating 
the street on high margins and cost cutting. Herman Miller 
(MLHR) beat the street by a dime and gained +15% on strong
cost cutting and improved margins. Other winners included 
IM, MET, PAYX, AAII and STTX. Despite the -230 Dow there
were gainers although all the Dow stocks were negative. 

After the bell there was good news tonight instead of bad. 
JBL beat the street by a penny and said business conditions
had stabilized during the just completed quarter. They 
said the outlook for JBL was very positive and it expected
substantial growth in the coming quarters. Wow! A recovery?

Qualcomm jumped $2 in after hours when it announced that
chip orders for the 4Q would be around 20 million, four
million more than the last quarter. They also said the next
quarter would be stronger than expected due to strong demand
for their newer generation of chips.  

TEK reported earnings of 15 cents a share and easily beat
analyst's estimates of only 7 cents. It forecast only a
-5% drop in sales for the next quarter based on weakness 
in the optical market. 

After a bad day the news from JBL, QCOM and TEK was welcome.
The futures in after hours were up and expectations 
were improving for the open tomorrow. After a series of
bad opens and no major economic reports on Friday maybe
the stars are finally aligned in the bulls favor. 

Economics today were just another weight on the market. 
The jobless claims fell to 424,000 but from a strong 
upwardly revised 433,000 number from the prior week. The
economy is still losing steam with continuing claims
rising to 3.615 million. This is the highest level since
June 22nd. Housing Starts declined to 1.61 million and
well below consensus of 1.65 million. This is the third
consecutive drop in starts and could be indicating the
end of the demand cycle. Single family starts were the 
slowest since Nov-2001. The Philadelphia Fed Survey came
back from brink with a 2.3 and while low it diffused the 
-3.1 numbers from last month. The shipments component 
jumped to 10.6 from -3.3 last month. These numbers tend 
to be volatile but they have been closely watched for 
signs of a second dip in our future. 

The immediate and unconditional return of the inspectors 
to Iraq now has a date. An "advance" party is scheduled 
to arrive on October-15th to "continue" discussions about 
the rules of what and where the inspectors can go with
their unconditional access. UN authorities said it could
be as much as two months before Iraq will let the full
inspection team go to work. That should be plenty of time
to hide anything of value don't you think? My idea of
unconditional would be "open it or lose it". Anything on
the list of prohibited sites becomes rubble the following
night.

Where to from here? With 2.2 negative warnings for every 
positive preannouncement the outlook is not good. The
positive news from QCOM and JBL after the close was nice
but not of a broad market nature. The futures spiked but
then they were very oversold at the close. The VIX is
nearing 50 again and the TRIN was near 2.0. The put/call
ratio has spent more time over 1.0 this week than I can
remember in quite some time. The volume continued to 
increase as traders ran to the exits. I have not mentioned
capitulation for a couple weeks. With the down volume
running nearly 10:1 to up volume for only the second time
in two months it appears that capitulation is drawing
near. The good news tonight is not likely going to change
the overall trend but we could see a bounce at the open 
without any negative overnight news. 

I was surprised today that we did not see a Fed bounce at 
the close. With the Fed meeting next Tuesday and chances
increasing for a rate cut, I expected the bulls to be 
mounting a much stronger "buy the rumor" attack. That
possibility still exists for Friday along with short 
covering from the weeks -369 Dow and -75 point Nasdaq 
drops. With a Fed meeting only two days away the shorts
should want to go into the weekend flat. 

Dow 8000 was a significant support point. Coupled with the
OEX at 428 and the SPX at 850 the breakdown today was a 
significant event. This almost guarantees a complete
retest of the July 7532 intraday lows. Before we see 
those lows again we have to get by the Fed meeting. I
doubt they will cut rates but bears will not want to be
short in case they do. Sellers will want to wait for the
meeting to sell in hopes of a bounce on a cut announcement. 
Either way it spells the possibility of an uptrend until 
2:PM on Tuesday. 
 
Enter Very Passively, Exit Very Aggressively!

Jim Brown

Check out the Traders Corner "Charting Trendlines" by
Leigh Stevens in tonight's newsletter.  
http://www.OptionInvestor.com/indexes/traderscorner.asp



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

"Dow bears" got their target

Stocks found plenty of willing sellers again today as the major 
market averages all traded down better than 2.75%.  Only "Dow 
bears" saw their initial target get hit, and then follow through 
with further downside into the close, as the Dow Industrials 
(INDU) 7,942 -2.81% closed below "psychological support."

With the Dow Diamonds (AMEX:DIA) 79.64 -2.18% breaching our 
initial bearish trader's target near $80.45, I'm going to now 
"roll down" our retracement bracket and add a regression channel 
to give us some new levels to monitor.  Bears still holding 
positions will find the levels useful, while those looking for 
new entry points should also benefit.

Dow Diamonds (AMEX:DIA) - Daily Interval



The Diamonds opened just right near our bearish target of $80.50 
and for the better part of the day (until about 02:00 PM EST) 
traded just above that level.  This hints that we may have been 
"right on the money" as far as the $80.50 as a near-term bearish 
target.  With a violating close, thought now becomes that excess 
supply is present so I'm going to "roll down" my retracement 
bracket and "fit" some levels to past trading.

While we don't have much data (just 20-sessions) to have a lot of 
confidence in a regression channel, I have added a bearish 
regression channel to the DIA chart.  In early September, the DIA 
fell to the base of this newly added channel and eventually 
bounced back to the upper levels.  As such, a trader that closed 
out positions today looks for a rally back above the $82.28 level 
as a new bearish entry point.  Bears still holding positions and 
looking for further downside could now lower stops to just above 
the 38.2% retracement level of $80.45 (say $80.55 to get above a 
round Dow Indu. level of 8,050).  Until the point and figure 
chart generates a buy signal ($88.00) or the Dow Industrials 
Bullish % ($BPINDU) reverses back into "bull confirmed" from 
"bull correction" my longer-term target is still $74 from the 
bearish vertical count.  I like the way the bottom of retracement 
comes out at $74.55.  I'm also leaving in place our "old" upward 
pink trend.  I'm a believer that sometimes, support broken 
becomes resistance and this trend may come into play should the 
DIA rally.

S&P 500 Index (SPX) Chart - Daily Interval



While the Dow reached and broke its August 5th close, the SPX is 
getting close, but didn't trade our 835 bearish trader's target 
today.  As such, I'll leave retracement as it is until our first 
bearish goal is achieved.

SPX traders will want to monitor the Dow Industrials tomorrow to 
perhaps get a feel for any technical support coming in at the 
DIA's lower end of regression.  If the DIA looks like it's going 
to slice lower still, then odds are high the SPX would do the 
same.  However, if a rebound looks to be shaping up in the Dow, 
an SPX trader assesses near-term risk to 19.1% retracement near 
870, then 900.  Just as a DIA bear looks for another rally entry 
point, and SPX bear would look for a rally back above 870 as a 
potential area to establish a new position.

SPX bears looking for a tighter stop-profit level than 870 can 
use the account management technique of assessing downside to 
target (8 points) and simply add those 8-points back to today's 
close of 843 and establish a stop at 851.  That would be just 
above a nice "round number" and keeps risk/reward to target at 
1:1.

S&P 100 Index (OEX) Chart - Daily Interval



Currently looking for resistance back near 435 (19.1% 
retracement) and would now look for bearish trade entries above 
the 440 as close to the 50-day MA as possible.  Just like an SPX 
trader will be doing, keep an eye on the Dow Industrials for any 
support at lower regression if bearish trade target is achieved.  

While I won't be "focusing" on buy/sell program premium levels, 
which we give out each morning in the 09:00 AM EST update, I will 
have my premium alerts set tomorrow.  If the SPX trades 935 and 
OEX trades 420 and I start seeing some "buy program" premium 
level alerts, I will post in the market monitor and that my be a 
"reason" to lock in gains at targets.  However, if the Dow 
Industrials rocket lower through the lower end of regression and 
we get "sell program" alerts, I'll post that too.  

The thinking for bears that may have closed out some trades with 
a gain today, could actually leg into a bearish SPX or SPY trade, 
risking some of their DIA gains.  If the Dow Industrials is going 
to lead lower like it appears to be doing, the might as well try 
and take the SPX, OEX bearish trade along for the ride.  

Still scratching my head over this....

While a bear can't be disappointed in a NASDAQ-100 Tracking Stock 
(QQQ) $21.58 -1.59% decline, there's got to be some frustration 
for a bear in this security considering the NASDAQ-100 Index 
(NDX.X) 866 -3.26% fell my a noticeably larger percentage.

What the heck is up with that?  I have no clue.  We started 
noticing this earlier this morning in the 11:00 intra-day update.  
I even looked at all 100 stocks and percentage declines.  Even 
the more heavily weighted stocks were seeing some downside.

The only thing I can think is that the QQQ is a security in and 
of itself and that there just weren't enough sellers to drive the 
price lower.  The AMEX site does state that the "NASDAQ-100 Index 
Tracking Stock is intended to provide investment results that, 
before expenses, generally correspond to the price and dividend 
yield performance of the NASDAQ-100 Index, and its initial market 
value approximates 1/40 of the value of the underlying NASDAQ-100 
Index.  There is no assurance that the price and yield 
performance of the Nasdaq-100 Index can be fully matched."

Anyway, I've got a call into the AMEX and should get a call back 
tomorrow morning with some type of "explanation."

Right now, as a trader, I must trade under the assumption that 
this security, just like any stock, will have its price action 
determined by supply and demand.  As such, we need to FORGET for 
now last night's conversation regarding what impact the software 
or biotechs would have on the group, let alone the Heatmap and 
representative securities.

Right now, I'm a little "miffed" if I'm a bear in the Q's and 
looking for the door in a bearish trade.  The reason being is 
that as a "bear" I feel I interpreted the NASDAQ-100 correctly 
and got downside action.  However, the QQQ did not perform to the 
downside like the NASDAQ-100, as such, I would no longer want to 
do business with the QQQ until I get some information as to why I 
didn't get anything close to the downside performance I feel I 
should have.

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



Currently, I would want OUT of a QQQ bearish trade considering 
today's "lack of downside" performance as it relates to the 
NASDAQ-100.  The Biotech Index (BTK.X) 318 -5.4% and Software 
Index (GSO.X) 86.59 -3.75% did everything a NASDAQ-100 bear 
wanted, but the QQQ didn't follow that action.  If the NASDAQ-100 
Index (NDX.X) 865.93 -3.26%, which is tied directly to the 
underlying 100 stocks were to go UP 5%, will the QQQ gain 7%?  
That's the RISK I think a trader needs to factor in right now.  
An old trader's saying is.... "when in doubt, time to get out!"  
As such, will challenge a bearish trade in the QQQ with a tight 
stop at $22.13.

NASDAQ-100 Index (NDX.X) Chart - Daily Interval



The NASDAQ-100 Index (NDX.X) performed more inline with how the 
100 components traded today.  "Heavyweights" Microsoft 
(NASDAQ:MSFT) $47.13 -1.2%, Intel (NASDAQ:INTC) $14.98 -1.96%, 
Cisco Systems (NASDAQ:CSCO) $12.00 -2.35%, Amgen (NASDAQ:AMGN) 
$42.00 -7.65%, Dell Computer (NASDAQ:DELL) $25.27 -5.14% and 
Qualcomm (NASDAQ:QCOM) $25.72 -1.03% traded lower on the session.

These are perhaps the "Six Horsemen" of the NASDAQ-100, combined 
weighting is about 35.7% of the NASDAQ-100 weighting.(MSFT:13.6%, 
INTC:5.47%, CSCO:4.92%, AMGN:4.16%, DELL:3.89%, QCOM:3.69%)

The "key stock" that a bear wants to see break is MSFT, and this 
bugger continues to find support above $46.  Until it does, I'm 
still more willing to cover at least a portion of a bearish 
position on a trade at the lows near 857.  If MSFT were to break 
above $52 then things could get dicey for a bear in the NASDAQ-100.

The NASDAQ-100 and broader technology might get a boost tomorrow 
out of late night QCOM news that it expects to ship approximately 
20 million MSM phone chips during Q4, including approximately 15 
million third-generation (3G) CDMA2000 1X MSM phone chips.  QCOM 
traded higher at $27.80 (+8% from its close).

A NASDAQ-100 bear would like to see the stock find resistance 
below its 21-day and 50-day SMAs near $28.00.  A break much above 
that level might have NASDAQ-100 traders thinking the NASDAQ-100 
itself could challenge its correlative 21-day and 50-day SMAs back 
near 950.

Currently, NASDAQ-100 traders might at least use my current 
observation of potential "lack of selling" in the QQQ as a 
"reason" to be cautious near-term.

If the AMEX calls me back before the open of trading, I'll post 
the AMEX reply in the 09:00 AM update or in the market monitor.

Jeff Bailey


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

Lack of Support
by Steven Price

That was quick.  When the Dow broke through support at its 50% 
retracement of the rally between July 24 and August 22, it looked 
like 8000 would be the next stop.  I just didn't realize it would 
happen in two days.  I have renewed faith in my technical 
analysis education after watching a classic head and shoulders 
formation across all major indices.  The neckline break came at 
the same time as the 50% retracement support level fell and the 
result has been bloody.

IBM led the average down after its business rival EDS cut 
earnings estimates by more than 80%.  Big Blue finished the day 
down $4.75 to $64.80.  This was without a warning from IBM, which 
may be coming soon.

The Dow went tumbling early in the day, but appeared to find some 
support just over 8000.  It looked like we had found a new range, 
which was going to hold the group before re-testing its July 
lows.  That floor lasted only a few hours before late day selling 
pushed the group below 8000 to finish the day at 7942.39.  We are 
likely to slow down as we approach the July lows of 7532.66.  In 
fact, with the market sinking quickly, talk of a rate cut at next 
Tuesday's FOMC meeting will most likely lend some support.  Up 
until now, it appeared there was little chance the Fed would cut 
rates, as the market had rebounded throughout the last two months 
and looked like it had taken its best shot and held up.  Numerous 
Fed governors had indicated that rates were low enough to help an 
economic recovery.  The economy was growing slowly, but still 
growing.  Now that the market has sold off and much of the recent 
economic data has been weak, there may be speculation of a cut 
next Tuesday.  The talk of the Fed holding their bullets until 
after September 11, in case of another attack, is behind us, so 
the risk of lowering rates seems less than it was at the August 
meeting.   I still do not believe the Fed will lower rates next 
week, but expect to hear optimism creeping back in.  

Some of the reasons for today's sell-off, beside the EDS warning, 
came from economic data released this morning.  Jobless claims 
hit a four-month high, as rising layoffs have taken their toll.  
Housing starts were also off 2.2%, sending the homebuilders 
tumbling. The Dow Jones Home Construction Index (DJUSHB) lost 
over 7%, crashing through prior support and landing just above 
300.  

The  Philly Fed also reported that its monthly business survey 
had increased from -3.1 in August to 2.3 in September.  This was 
slightly below expectations and the bank said that although the 
indicators have recovered from negative readings, growth is 
sluggish in the region.  At least we are seeing positive growth, 
however, so there could be some bullish sentiment drawn from the 
report if you look hard enough.  The markets didn't like what 
they heard however, as the sell-off continued after the report 
was released.

A look at the bullish percentages shows just how severe the 
recent rollover has been.  The Dow has fallen from a recent high 
of 60%, which reflects the number of stocks in the average giving 
point and figure buy signals, to just 33%.  The Nasdaq 100 
(NDX.X) has dropped from 50% to 30%.  The S&P 500 has fallen from 
58% to 40%.  The NDX once again led the rollover, shifting into a 
column of "O"s before the others, so keep an eye on this index 
for the first signs of a rebound.

After the bell, Qualcomm actually released some good news, saying 
it expects fourth quarter shipments of mobile phone chips to 
increase from the expected 18 to 19 million to 20 million.  The 
company did not, however, increase earnings or sales targets.

I have been very bearish lately, predicting a re-test of 8000 in 
the Dow and 1200 in the Nasdaq.  Now that the Dow has broken this 
level and the Nasdaq has dropped to 1216.45, I am a little 
cautious about predicting another big drop tomorrow.  While I 
still think we may re-test July's lows, we are getting awfully 
close and we could see some slowing of the downward trend.  There 
is likely to be a bounce at some point soon, so I would keep 
stops on open short positions very tight to lock in any profits 
in the case of a bounce.  That bounce may provide a better entry 
point for shorts, as well.  Remember to trade what you see, and 
keep a few extra puts on hand just in case.

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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7532
Current     :  7942

Moving Averages:
(Simple)

 10-dma: 8352
 50-dma: 8508
200-dma: 9603



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  843

Moving Averages:
(Simple)

 10-dma:  887
 50-dma:  895
200-dma: 1048



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  856
Current     :  866

Moving Averages:
(Simple)

 10-dma:  915
 50-dma:  950
200-dma: 1276



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


The Semiconductor Index (SOX.X): Just two days ago we said that 
250 looked like the next target in the SOX after breaking below 
support at 275. The average now sits at 252.  The mention of a 
new 52-week low seems redundant at this point, as it may just 
need to be a permanent headline to this update.  You have to go 
back to October 1998 to see the index this low.  Unless we see a 
rebound over 300, this will be the sixth straight red candle on 
the monthly chart.  Coincidentally this is also the sixth 
straight red candle on the daily chart.  We are probably in for 
some kind of bounce soon, although it is not likely to recover 
much of the recent losses.  Qualcomm's announcement after the 
bell that they are predicting higher cell phone chip shipments 
will probably give us that bounce tomorrow.  We are likely to 
hover over 250 for a few days, but if it breaks below that level, 
get out of the way, or just get short.

52-week High: 657
52-week Low : 252
Current     : 252

Moving Averages:
(Simple)

 10-dma: 278
 50-dma: 321
200-dma: 474

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

Market Volatility

On Tuesday we said to look for the VIX to creep into the mid 40s, 
and that we could see it back into the 50s if we re-test July's 
lows.  That appears to be happening before our eyes.  The VIX 
back up to 46 could be viewed as a contrarian indicator, as 
rallies generally follow spikes in the VIX.  However, with 
support in the Dow gone at 8300 and 8000, July's low of 7500 may 
be in the near future.  There is likely to be some sort of bounce 
before we reach that point, but a dip in the VIX may only be 
temporary on that bounce. 

CBOE Market Volatility Index (VIX) = 46.16 +5.27
Nasdaq-100 Volatility Index  (VXN) = 62.71 +3.38

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

          Put/Call Ratio  Call Volume   Put Volume

Total          1.23        547,243       674,433
Equity Only    1.04        359,372       375,434
OEX            1.14         56,842        64,001
QQQ            2.25         27,791        62,506

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

Bullish Percent Data

           Current   Change   Status
NYSE          38      - 4     Bull Correction
NASDAQ-100    29      - 6     Bull Correction
Dow Indust.   33      -10     Bull Correction
S&P 500       40      - 8     Bear Confirmed
S&P 100       35      - 9     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  1.75
10-Day Arms Index  1.46
21-Day Arms Index  1.51
55-Day Arms Index  1.32

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        576          2203
NASDAQ      922          2379

        New Highs      New Lows
NYSE         21              19
NASDAQ      209             280

        Volume (in millions)
NYSE     1,750
NASDAQ   1,511


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

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 MANAGER MICROSCOPE
*************************

Steven Kaye: Fidelity Growth & Income (FGRIX)

This valuation conscious manager reigned in his technology stake 
and lagged his large-cap blend category peers in 1999, but since 
then has limited losses considerably relative to the S&P 500 and 
category peer group.  Over the past 10 years, Kaye's performance 
has exceeded the market, as measured by the S&P 500 index, by an 
average of 1.2% a year, while ranking near the top decile of the 
large-blend category per Morningstar.

Fidelity likes their stock fund managers to finish in one of the 
top two quartiles within their respective category.  In five out 
of the last seven years, Kaye has done that, and more.  Trailing 
1-year performance ranks the Fidelity Growth & Income Portfolio 
in the top quartile of performance, while 3-year, 5-year and 10-
year annual average returns rank in the category's top quintile, 
using Morningstar's rankings.

Compared to its broad peer group (all U.S. equity funds), Kaye's 
relative performance in the last three years has been well above 
average.  According to Lipper, Kaye's fund is a Lipper Leader in 
four categories they evaluate: total return, return consistency, 
preservation, and expenses.  Lipper's analysis is based on three 
years of recent history and is relative to all funds in a fund's 
broad peer group.

This week, we take a closer look at Steven Kaye and his Fidelity 
Growth & Income Portfolio, a popular choice in 401(k) retirement 
plans across America.  The fund has a low expense ratio of 0.66% 
and requires a minimum initial investment of $2,500 for regular 
accounts ($500 for IRAs).  There is generally no minimum amount 
in company thrift plans since participants contribute regularly 
into their retirement account.


Manager Background


Kaye is a vice president and portfolio manager with FMR (Fidelity 
Management & Research), the investment arm that serves as advisor 
to Fidelity's fund family.  His manager start date on the fund is 
January 5, 1993; thus substantially all of the fund's performance 
may be attributed to him.

Previously, Kaye was head of Fidelity Select Portfolios as well 
as assistant director of research.  Kaye joined the Boston-based 
fund giant in 1985 and served as a pharmaceuticals analyst until 
1990.  From October 1990 until January 1993, he managed Fidelity 
Blue Chip Growth Fund, his first lead portfolio management role.  
Before joining Fidelity in 1985, Kaye spent a couple of years as 
a research analyst with Strategic Planning Associates.

At nearly ten years, Kaye has one of the longest active manager 
tenures at Fidelity.  Only Joel Tillinghast (Low Priced Stock), 
Bill Danoff (Contrafund), and Neal Miller (New Millennium Fund) 
have been at their portfolio management assignments longer than 
Kaye has.

Kaye received an undergraduate degree in 1981 from John Hopkins 
University and earned his M.B.A. in 1985 from the University of 
Pennsylvania's Wharton School.


Investment Style/Strategy


Fidelity Growth & Income Portfolio (FGRIX) pursues high total 
return over time through a combination of current income and 
capital appreciation.  In pursuit of the fund objective, Kaye 
normally invests a majority of assets in common stocks with a 
focus on those stocks that are currently paying dividends and 
show potential for capital appreciation. 

Kaye may also invest in bonds, including debt securities with 
lower-quality credit ratings, and stocks of companies that are 
not currently paying dividends but have the prospect of future 
income or capital appreciation.

In terms of style, Kaye is large-cap oriented and blends value 
and growth characteristics suitable of a core stock investment.  
Lipper classifies the fund as large-cap core while Morningstar 
groups it in with other large-cap blend funds.  At $60 billion, 
the fund's average market capitalization at August 31 was much 
higher than the average large-blend fund ($38.7 billion) using 
Morningstar's fund report.  Over 56% of assets are invested in 
what Morningstar calls giant-cap stocks, with another 35.5% in 
large-cap stocks.  So, this fund is decidedly large-cap biased.

Kaye's average price valuations (P/B, P/E, P/C, etc) land this 
fund right on the category average.  This blended portfolio is 
well diversified in terms of sector weightings, keeping sector 
bets to a minimum, near those of the S&P 500 index (benchmark).  
Rather than make large sector bets, Kaye relies more on equity 
research and stock selection to drive fund performance.  Today, 
Kaye remains shy on technology, with just 13% of stocks in the 
tech sector (0.86 versus the S&P 500 index).

As of January 31, 2002, Kaye had 87.5% of assets in stocks and 
9.2% of assets in short-term investment funds ("cash").  Almost 
99% of stock holdings were in the U.S. and Canada, with only 1% 
of stocks invested abroad.  Whether Kaye has moved monies back 
into the market and become more fully invested now isn't known.  
This higher-than-average cash allocation may partially explain 
why Kaye has been successful in preserving capital through the 
downswing better than his large-cap peers have.


Ratings, Risk and Performance


We already mentioned that Fidelity Growth & Income Portfolio is a 
Lipper Leader for capital preservation (last 36 months).  That is 
relative to its broad peer group (all domestic stock funds).  Per 
Morningstar, the fund has produced "low" risk and "above average" 
returns relative to the average large-cap blend fund for all time 
periods evaluated, for a Morningstar overall rating of five stars 
(highest). 



The 3-year chart above gives you a graphical depiction of the 
fund's fluctuating net asset values over the past three years.  
During that period, Kaye lost an average of 7.8% a year, 4.4% 
better than the S&P 500 index's 12.2% annualized loss for the 
trailing 3-year period as of September 18, 2002.  Although it 
represents a loss for investors, Kaye's 3-year average return 
(loss) ranked in the category's top quintile.  For comparison 
purposes, the average large-cap blend fund lost 11.0% a year.

Kaye's trailing 3-year performance is an example of "active" 
management doing its job.  That is, minimizing losses versus 
benchmark (S&P 500 index) in down markets.

For the trailing 10-year period through August 31, 2002, the 
portfolio has an average annual return of 11.6%, beating the 
benchmark S&P 500 index by an average of 1.2% a year to rank 
close to the top decile within the category (12th percentile).  
That in my opinion is a reasonable expectation for this fund, 
about one percent more a year than the market (S&P 500 index) 
through active management.

Contributing to the fund's relative performance is its below 
average expense ratio of 0.66%.  That gives the fund a "cost 
advantage" and helps Kaye in that he doesn't have to take on 
excessive portfolio risk to achieve the fund's growth/income 
objective.  Funds with high costs and expenses may overreach 
risk-wise in order to overcome their relative cost deficits.


Conclusion


My sense is that if Lipper's ratings/rankings went back five 
years or ten years, that the story would be the same.  In my 
opinion, Kaye is one of the industry's leading fund managers, 
backed by Fidelity's vast equity research capabilities.  His 
consistent strong performance and ability to preserve capital 
through downturns should give fund shareholders great comfort. 

For more information on Steven Kaye and the Fidelity Growth & 
Income Portfolio, log on to www.fidelity.com.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com



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The Option Investor Newsletter                  Tuesday 09-19-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Stock Picks: PDLI
Dropped Calls: INVN
Dropped Puts: AGN, TXU, PNRA, TRMS
Daily Results
Call Play Updates: AZO
New Calls Plays: MMM
Put Play Updates: BRL, LTR, TIN, AVY, MXIM
New Put Plays: MAR, BSC



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

PDLI - Protein Design Labs, Inc. - $9.20 
Strategy: Long stock with put insurance 

Gone are the days when PDLI would move up (or down) $5, $10, or
even $20 in a single day.  The air has been let out of the
Biotechnology sector, along with much of the rest of the former
Tech darlings.  But with the compression in price that has taken
place over the past 2 1/2 years, many Biotech stocks are now
actually trading at attractive valuations.  That may seem like a
bit of an oxymoron due to the vague manner in which these stocks
have traditionally been valued, but a quick look at the balance
sheet provides some bullish clues.

PDLI currently (as of last quarter) has over $7 in cash per share
and is trading for about 1.5 times its book value.  While the
company is still losing money, the outflow has slowed to a
trickle, in large part due to the fact that the company has
several products currently in production with its collaborative
efforts with Hoffman-La Roche and Igeneon.

In July, Igeneon (a European Biotech company focused on cancer
immunotherapies) announced that it had licensed a humanized
monoclonal antibody from PDLI.  PDLI has also licensed rights
of its humanized antibody product (Zenapax) to Hoffman-La Roche,
which is marketing it for the prevention of kidney transplant
rejection.  PDLI is also testing Zenapax for the treatment of
autoimmune disease.  Additionally, the company has several
other humanized antibodies in clinical development for
autoimmune and inflammatory conditions, asthma and cancer.

While the Spring is normally the worst time of the year for
Biotechnology firms, the Fall is the best, due to the
proliferation of industry conferences that frequently serve
as a platform for companies to announce new products.

PDLI's chart gives us cause for bullish interest as well.  The
stock bottomed near the $8.50 level back in June and July and
after participating in the brief Biotech rally (leading to a
move up near $14), is back down near the $9.00-9.50 support
level.  While most of the August rally has been erased, it is
interesting to note that the stock appears to be putting in a
slightly higher low than during the summer.

PDLI will need a rally in the overall Biotechnology sector
(BTK.X) to really get moving, but it could very easily challenge
the $14-15 area later this year or early next year if the BTK
cooperates.  Once through that level, the next bullish target
would be a move up towards major resistance in the $20 area.

The play as we see it is to go long CSCO stock at our target of
$9.00-9.50 and go long one contract of the Feb-2003 $7.50 puts
PQI-NU at $1.25 for each 100 shares you are long.  Note that we
are using the Feb contracts because PDLI does not have Jan
contracts available.

There is no requirement to go long the put but it does prevent
all but a very minimal loss should something unexpected happen
to PDLI. 

Option 1: If PDLI is not above $13.50 by Feb-3rd, close both
positions and exit the play.

Option 2: If PDLI is below $9 on Feb-3rd then you have the
option of closing the put for a slight profit and lowering your
basis in the long stock play by the amount of the put premium
received or closing both positions and exiting the play. 

Option 3: If PDLI is above $15.00 by Jan-2nd then close the put
position for any remaining premium and set a stop loss on PDLI
at your entry point of $9.00-9.50 plus any short fall on the
put premium. ($10.75 max) 



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

INVN $29.85 -$4.15 (-5.91 for the week) The Senate voted to extend the 
deadline for airports to comply with baggage screening requirements by 
a year.  While this decision should not affect INVN's order flow in 
total, it will affect the time frame in which the orders are completed. 
This could affect earnings in the near term, although later earnings 
should pick up the slack. However, the stock dropped beneath its trend 
on the news, and we have been stopped out on the play.  We will close 
this play and look for other opportunities.

PUTS:
*****

AGN $52.04 -0.36 (-1.01) We've gotten a nice little ride our of
our AGN play, as it has dropped from the $55 area to as low as
$50.80 yesterday.  Nimble traders should have taken at least
partial profits (as we recommended on Tuesday) as the stock found
support near the $50 level, the site of major support.  Even with
the broad markets weak again today, AGN spent most of the day in
positive territory, indicating to us that the slide has come to
an end.  Rather than try to squeeze a bit more out of the play,
we're closing it out tonight and booking it as another winning
bearish play.  If still holding open positions, use any early
drop tomorrow (follow-through on the dip in the final hour) to
lock in a more favorable exit.

TXU $42.70 -1.00 (-1.60) Perfectly scripted, TXU followed the
Utility sector lower over the past week, and we're quite happy
with the results.  But with the Utility sector (UTY.X) finding
support near $250 and TXU likewise finding support at $42, it
looks like it is time to leave this party before we are asked to
help clean up.  While TXU could certainly fall further, the fact
that it (and the UTY index) didn't fall apart with the rest of the
broad market on Thursday hints at some internal strengthening.
This looks like a good point to harvest gains on the play, so
we're dropping TXU tonight to focus on plays with more potential.


PNRA  $26.85 +1.50  (+1.87 for the week) Panera has surged the 
last two days.  Much of this can be blamed on rumors of a 
possible takeover.  News surprises can get in the way of 
technicals, whether they are founded in reality or not. The CEO 
of Darden Restaurants made comments, when asked about a possible 
takeover, that they are looking at everything.  While we don't 
give rumors much weight without evidence, we won't fight the tape 
on this one.  The trend we were attempting to capture has been 
broken and we will let this one go. 

TRMS $43.60 -2.35 (-2.60 for the week) The biotech sector took a 
beating today, as Wyeth announced they would begin selling shares of 
Amgen, acquired as a result of Amgen's acquisition of Immunex.  This 
sale, which will be 98.28 million shares in total, put the entire 
biotech sector into a slide.  While we don't like letting a good pick 
go, based on news from another company, the stock broke our stop loss 
and in volatile markets, respecting your stops is at the top of the 
rules list.  We will re-examine TRMS at a later date, as we still feel 
the long-term prospects for the company could still be positive.  
However the sinking tide has lowered this boat and broken the trend we 
were attempting to capture.  We will let this one go and look for 
better opportunities.

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

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

CALLS              Mon    Tue    Wed   Thu   Week

AZO      74.78    0.70  -0.31  -0.69  0.53  Rally mode
INVN     29.85    0.39  -1.73  -0.53 –4.15  Drop, delayed spending
MMM     117.19   -0.99  -2.40   1.69 –1.16  New, nice recovery
TRMS     43.50   -0.30   0.35  -0.23 –2.45  Drop, Amgen's fault


PUTS               

AGN      52.04    0.21  -1.54   0.73 –0.36  Drop, profits
AVY      56.62   -0.09  -0.63  -0.41 –2.25  bad business
BRL      62.72   -0.20  -0.68  -1.03 –2.57  dropping fast
BSC      58.21    0.11  -2.20   1.93 –2.22  safety net gone
LTR      47.55    0.13  -1.41   0.30 –1.37  50-dma in rear view
MAR      28.51    0.57  -0.74  -0.76 –1.99  New, empty rooms
MXIM     24.45   -1.07  -0.89  -0.18 –0.86  sliding SOX
PNRA     26.83   -0.48  -0.28   1.11  1.48  Drop, rumors
TIN      43.52   -0.29  -0.94  -1.95 –1.05  On its lows
TXU      42.70    0.61  -1.97   1.30 –1.00  Drop, profits

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

AZO $74.78 +0.53 (+0.36 for the week) Talk about relative 
strength!  The Dow loses 230 points and AZO is heading north.  
The stock is actually following its rising trendline from July 
24.  It has found support there on the last four pullbacks and 
rebounded once again.  While it is hard to recommend long entries 
with the Dow tanking and breaking below 8000, this appears to be 
a diamond in the rough.  The stock experienced a triple top point 
and figure breakout with its recent trade of $76, and while it 
has given back some of that gain, it has held above support as 
the broader markets have slid.  It has also established its 
fourth higher low on the pullback, a very bullish sign. A trade 
of $77 would constitute a bullish catapult, which is a triple top 
breakout followed by a double top breakout.  The triple top 
breakout, according to Professor Earl Davis' study, is profitable 
87.9% of the time and delivers an average gain of 28.7% within 
6.8 months.  While we are targeting a much smaller time frame, 
these numbers are very compelling from a bullish standpoint.  The 
current bullish vertical count of $91 only adds to our bullish 
sentiment on this play.  We are targeting the $82 range initially 
on this play, which served as resistance in June, however we will 
raise our stop accordingly if that looks conservative when we get 
there.  Because the weight of the market has held the stock back, 
I still like this point for a long entry.  However, be aware that 
a sinking tide can lower all boats and look to the broader market 
for signs of a rebound before initiating a new entry.

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

MMM – 3M Company $117.19 -1.16 (-2.64)

Company Summary:
Commonly known as the maker of the ubiquitous, adhesive-backed
Post-It Notes, MMM is also a leading manufacturer of a variety
of industrial, consumer, and medical products.  Reflective
sheeting on highway signs, respirators, spill-control sorbents,
and Thinsulate brand insulations are just some of the company's
industrial products.  MMM also makes microbiology products,
making it easier for food processors to test for the
microbiological quality of food.

Why We Like It:
In a bearish market, bullish traders need to focus on relative
strength more than ever.  With the broad market breaking under
major support levels over the past 2 days, there aren't a lot of
stocks, particularly in the DOW that haven't given up important
levels of support.  Not only is MMM holding above important
support in the $116-117 area, but the stock hasn't come anywhere
close to testing its July lows down around $108.  While the broad
market weakness dragged it back from its intraday highs today, at
one point it looked like MMM was going to blast back through the
$120 level.  Note that with the VIX north of 46 and the broad
markets nearing major support levels, we likely are due for an
oversold rebound in the broad market.  Also figuring large in
the windscreen is next Tuesday's FOMC meeting, and investors are
leaning more and more towards expectations that the Fed will
drop interest rates again.  Since MMM has been one of the
strongest components of the DOW over the past few days, it will
likely lead any broad market rebound between now and Tuesday.
Looking at a daily chart, it is impressive to note how the $116
level has provided a floor for the stock lately.  That allows us
to target new entries on any rebound from the $116-117 level and
set tight stops at $115, just below the recent intraday lows.
Should a meaningful rally develop, then momentum traders will get
their opportunity to enter the play on a rally through the $120
level, with an eye on $125 as a near-term target.

BUY CALL OCT-115 MMM-JC OI=1842 at $6.60 SL=4.50
BUY CALL OCT-120*MMM-JD OI=4017 at $3.90 SL=2.50
BUY CALL OCT-125 MMM-JE OI=3758 at $1.90 SL=1.00
BUY CALL JAN-125 MMM-AE OI=1950 at $6.30 SL=4.25

Average Daily Volume = 2.70 mln


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

BRL $62.72 -2.57 (-4.45) There's nothing quite so gratifying as
having a play move immediately in your direction!  We started
coverage of BRL on Tuesday after it rolled down from the 200-dma
and came to rest just above the $66 support level.  That didn't
last long at all, as the stock got hit by selling over the past 2
days and gave up nearly 4% today alone.  Adding to the bearish
picture, BRL closed at the low of the day, violating the 50-dma
($62.94) and that could accelerate the decline down to the next
level of support at $61.  The recent downward move has generated
a fresh PnF Sell signal, and the vertical count is now pointing
at $55 as the bearish target.  So any rebound from support is
likely to be short-lived.  That being said, we don't want to risk
a large move against us, should the broad markets decide to rally
from their deep oversold condition.  So we're lowering our stop
to $65.50, just above the top of today's gap.  Those looking to
initiate new positions can use a breakdown under today's low,
but need to keep a sharp eye out for a rebound as BRL approaches
the $61 level.  The better entries will come from a failed rally
below the $65 level.

LTR $47.55 -1.37 (-2.71) Both Tobacco and Insurance stocks have
taken it on the chin this week, and since LTR operates in both
sectors, it has gotten the double-whammy.  Actually in all
fairness, LTR held up pretty well today, suffering less than a
3% loss.  But that strength is likely due in part to the fact
that it reached pretty substantial support near $47.50.  While
we expect this level to be violated eventually, we've got our eye
on the next failed rally (probably in the $49 area) as our next
high-odds entry point.  Part of the reason we want to avoid new
entries on a drop below current levels is the light selling
volume seen in the stock on a day that saw robust selling volume
in many of its peers.  The other factor at work here is that the
broad market averages are nearing some important support levels
that could very likely generate a decent oversold rally.  But
that rally (when it comes) is unlikely to have much staying
power, with significant resistance between $49.00-49.50, the
50-dma at $49.03 and the 3-week descending trendline at $50.
Lower stops to $51.

TIN $43.52 -1.05 (-4.47) Negative action in some of the leading
Home Construction names as well as a less-than-stellar Housing
report this morning have acted in concert to get our TIN play off
in the right direction.  In fact, since we began coverage of the
stock on Tuesday, TIN has shed another $3, breaking below the $47
support level in the process.  Highlighting the negativity in the
stock, selling volume has been running close to double the ADV
over the past 2 days, both of which resulted in the stock going
out at the lows of the day.  The interesting point about today's
action is that after the initial gap lower, the stock traded
sideways until the broad market driven drop in the final hour.
TIN is deeply oversold and could be readying itself for a rally
attempt.  So we don't want to consider new entries near current
levels.  Rather, we want to wait for that rally attempt to fail
before playing.  Look for a rollover, possibly near the top of
today's gap at $44.60, or even as high as the bottom of
yesterday's gap at $46.25.  As noted in the Market Monitor today,
we are lowering our stop to $46.50.


AVY  $56.62 -2.25 (-3.38 for the week) As business spending has 
weakened, so has Avery Dennison's stock.  They make everything from 
binders to adhesives that are used on labels and tape. However, a poor 
business spending environment bleeds through all sectors.  Not only do 
businesses spend less on supplies, but also there are many companies 
that have closed their doors.  This is a play that encompasses many 
businesses instead of just one.  The stock broke below its 50-dma and 
200-dma and then found overhead resistance at $60.  The stock was also 
in a neatly defined descending channel from August 22 through 
Wednesday.  That channel broke down to an even more bearish level 
today, as AVY gave up $2.25 after previously moving down in a slow 
orderly fashion.  Any path it takes lower is fine with us.  The stock 
may find some support at $55; however, the trade through previous 
support at $56.84 looks very bearish.  After a drop which is extreme by 
AVY's standards, there may be a bounce.  New shorts should look for a 
bounce and then a failed rebound blow $58 for an entry.  We have 
lowered our stop on the play to $61.00 to allow for a bounce below 
Tuesday's high.  For those readers who have been in the play and don't 
want to give up profits, an alternative stop would be $58.50, just 
above today's high.

MXIM $24.45 -0.86 (-2.90 for the week) Maxim has continued to 
ride the semiconductor wave lower.  The Semiconductor Sector 
Index (SOX.X) lost almost 4% today, finishing down 10.33 to close 
at 252.46.  Maxim followed in its footsteps, giving up 3.39%.  
Last night's release of data showing chip-gear orders dropped for 
the third month in a row got the sector rolling downhill.  The 
book to bill ratio for the chip equipment sector dropping for the 
third month in a row kept it going.  The book-to-bill ratio shows 
how many new orders are received compared to how much is billed 
for the month.  A declining ratio is usually a bad sign.  While 
bookings were higher than a year ago, the trend is down and does 
not show signs of further improvement in the industry.  There 
could be some support for the sector at 250 in the SOX, but the 
trend is decidedly down.  The decline may slow as the index 
fights that number, but until there is a sign of an increase in 
consumer or business spending, future prospects still look bleak. 
Maxim is till in its triple bottom breakdown point and figure 
formation, which is another bearish sign. We are lowering our 
stop on the play to $27.50 from $28.50, as this coincides with 
the top of Tuesday's range. New entries should look for a break 
in the SOX below 250 as a sign of a new wave of selling the 
sector.

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

MAR - Marriott International - $28.51 -1.99 (-2.69 for the week)

Company Summary:
MARRIOTT INTERNATIONAL, INC., a leading worldwide hospitality 
company celebrating its 75th Anniversary in 2002, has over 2,600 
operating units in the United States and 64 other countries and 
territories. Marriott International operates and franchises 
hotels under the Marriott, JW Marriott, The Ritz-Carlton, 
Renaissance, Residence Inn, Courtyard, TownePlace Suites, 
Fairfield Inn, SpringHill Suites and Ramada International brand 
names; develops and operates vacation ownership resorts under the 
Marriott Vacation Club International, Horizons, The Ritz- Carlton 
Club and Marriott Grand Residence Club brands; operates Marriott 
Executive Apartments; provides furnished corporate housing 
through its Marriott ExecuStay division; and operates conference 
centers. Other Marriott businesses include senior living 
communities and services, and wholesale food distribution. The 
company is headquartered in Washington, D.C., and has 
approximately 145,000 employees.


Why We Like It:
Marriott has experienced a sell-off for many of the same reasons 
as the rest of the stock world.  A lack of consumer spending 
means less social travelers and a lack of business spending means 
less business travelers.  U.S. hotel room revenues fell 3 to 5 
percent in August, mostly due to the lack of business travel.  
luxury hotels saw the biggest drop in room revenue, as travelers 
opted for cheaper rooms.  As Marriott hotels are located in many 
high priced business districts, their rooms tend to be in the 
higher price category. The revenue decline was actually greater 
than the 2.1 percent dip in June, and with September slow because 
of the anniversary of 9/11, next month's release should show a 
continuation of the trend.  Apparently investors have noticed, as 
the stock has suffered a breakdown in support below $30.  

MAR had been in a consolidation pattern between $30 and $35 since 
late July.  Today's drop below $30 found few buyers waiting 
below, and based on the earlier consolidation rectangle, $25 
would be the minimum measuring objective.  The point and figure 
shows a descending triple bottom breakdown, which is really just 
a series of successive sell signals with each column of "O"s.   
The descending channel on the PnF chart is well defined, as the 
original triple bottom breakdown was followed by two double 
bottom breakdowns.  The signs are all bearish for MAR and we will 
use an initial target of $25. Below $25, $20 looks like the next 
significant support level, back in 1998.  Place stops at $31.50, 
just above Wednesday's high.

BUY PUT OCT-30 MAR-VF OI= 2068 at $3.10 SL=1.60
BUY PUT JAN-30 MAR-VF OI= 2068 at $4.10 SL=2.20

Average Daily Volume = 1.54 mil



BSC - Bear Stearns - $58.21 -2.22 (-2.90 for the week)

Company Summary:
Founded in 1923, The Bear Stearns Companies Inc. is the parent 
company of Bear, Stearns & Co. Inc., a leading investment banking 
and securities trading and brokerage firm serving governments, 
corporations, institutions and individuals worldwide. With 
approximately $29.6 billion in total capital, the company's 
business includes corporate finance and mergers and acquisitions, 
institutional equities and fixed income sales, trading and 
research, private client services, derivatives, foreign exchange 
and futures sales and trading, asset management and custody 
services. Through Bear, Stearns Securities Corp., it offers prime 
broker and broker dealer clearing services, including clearing 
and securities lending. Headquartered in New York City, the 
company has approximately 10,500 employees worldwide. 


Why We Like It:

Bear Stearns beat analysts' earnings estimates by a penny, and 
investors didn't care.  The earnings were released on Wednesday, 
but the industry outlook is so poor that BSC is being sold off 
with the rest of the sector.  Investment banking and brokerage 
firms are suffering greatly after J.P. Morgan warned on its 
earnings and Morgan Stanley missed their estimates by 12 cents 
per share.  Trading and securities divisions of these companies 
are not producing, as investors flee their mutual funds and 
equity portfolios.  While the sell-off of the financial stocks 
only feeds the cycle of a declining market, it is a cycle we are 
jumping on short.  The current financial witch-hunt related to 
IPOs and investment banking activities is slowly worming its way 
through the sector and seems to take down another firm each week. 
Whether it reaches BSC's doorstep or not isn't even the issue.  
The specter of a possible investigation and the dirt being turned 
up at other financial houses has investors fleeing the sector. 
BSC's earnings held it up for a day, but that was all.  Just 
today, Credit Suisse First Boston and Goldman Sachs both handed 
over IPO related documents to the U.S. House Financial Services 
committee, which will examine them for violations. This follows 
the problems at Salomon Smith Barney, where telecom IPOs are 
under scrutiny by the SEC.

Wednesday's rally by BSC failed at its 50-dma and 200-dma, and 
today's sell-off has it back into its descending channel, which 
began a month ago.  The failure at these levels, which now appear 
to be acting as resistance, is bearish for the stock, and the 
next area of support appears to be $55.  We expect a continued 
sell-off in the sector, especially after it appears that Merrill 
Lynch may have some Enron-related dirty laundry hanging on the 
clothesline as well.  Wednesday, Merrill released two top 
executives for refusing to testify in the Justice Department's 
investigation of its relationship with Enron.  With BSC's 
earnings now behind it, there will be very little to rescue the 
firm from falling with the rest of the firms, as more bad news 
continues to leak out of the sector.  The stock is currently 
sitting right on its bullish support line on the point and figure 
chart and a trade of $57 would constitute a complete breakdown of 
that line.  The current bearish vertical count for BSC is $51, 
which will be our initial target on the play, as there will most 
likely be round number support below that at $50, which coincides 
with support on the PnF chart.  Place stops at $61.00, just above 
the 50-dma and 200-dma, where the stock failed on Wednesday.

BUY PUT OCT-60* BSC-VL OI= 5968 at $4.20 SL=2.20
BUY PUT OCT-55 BSC-VK OI= 2558 at $2.15 SL=1.10

Average Daily Volume = 1.22 mil



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The Option Investor Newsletter                  Tuesday 09-19-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three: 

Play of the Day: BSC
Traders Corner: Charting: Trendlines; Effective Uses in Trading –
Traders Corner: Of Deadly Sins and Lively Condors – Q & A
Traders Corner: Exponential Improvements
Options 101: Differentiating Sow's Ears From Lemons

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

BSC - Bear Stearns - $58.21 -2.22 (-2.90 for the week)

Company Summary:
Founded in 1923, The Bear Stearns Companies Inc. is the parent 
company of Bear, Stearns & Co. Inc., a leading investment banking 
and securities trading and brokerage firm serving governments, 
corporations, institutions and individuals worldwide. With 
approximately $29.6 billion in total capital, the company's 
business includes corporate finance and mergers and acquisitions, 
institutional equities and fixed income sales, trading and 
research, private client services, derivatives, foreign exchange 
and futures sales and trading, asset management and custody 
services. Through Bear, Stearns Securities Corp., it offers prime 
broker and broker dealer clearing services, including clearing 
and securities lending. Headquartered in New York City, the 
company has approximately 10,500 employees worldwide. 


Why We Like It:

Bear Stearns beat analysts' earnings estimates by a penny, and 
investors didn't care.  The earnings were released on Wednesday, 
but the industry outlook is so poor that BSC is being sold off 
with the rest of the sector.  Investment banking and brokerage 
firms are suffering greatly after J.P. Morgan warned on its 
earnings and Morgan Stanley missed their estimates by 12 cents 
per share.  Trading and securities divisions of these companies 
are not producing, as investors flee their mutual funds and 
equity portfolios.  While the sell-off of the financial stocks 
only feeds the cycle of a declining market, it is a cycle we are 
jumping on short.  The current financial witch-hunt related to 
IPOs and investment banking activities is slowly worming its way 
through the sector and seems to take down another firm each week. 
Whether it reaches BSC's doorstep or not isn't even the issue.  
The specter of a possible investigation and the dirt being turned 
up at other financial houses has investors fleeing the sector. 
BSC's earnings held it up for a day, but that was all.  Just 
today, Credit Suisse First Boston and Goldman Sachs both handed 
over IPO related documents to the U.S. House Financial Services 
committee, which will examine them for violations. This follows 
the problems at Salomon Smith Barney, where telecom IPOs are 
under scrutiny by the SEC.


Wednesday's rally by BSC failed at its 50-dma and 200-dma, and 
today's sell-off has it back into its descending channel, which 
began a month ago.  The failure at these levels, which now appear 
to be acting as resistance, is bearish for the stock, and the 
next area of support appears to be $55.  We expect a continued 
sell-off in the sector, especially after it appears that Merrill 
Lynch may have some Enron-related dirty laundry hanging on the 
clothesline as well.  Wednesday, Merrill released two top 
executives for refusing to testify in the Justice Department's 
investigation of its relationship with Enron.  With BSC's 
earnings now behind it, there will be very little to rescue the 
firm from falling with the rest of the firms, as more bad news 
continues to leak out of the sector.  The stock is currently 
sitting right on its bullish support line on the point and figure 
chart and a trade of $57 would constitute a complete breakdown of 
that line.  The current bearish vertical count for BSC is $51, 
which will be our initial target on the play, as there will most 
likely be round number support below that at $50, which coincides 
with support on the PnF chart.  Place stops at $61.00, just above 
the 50-dma and 200-dma, where the stock failed on Wednesday.

BUY PUT OCT-60* BSC-VL OI= 5968 at $4.20 SL=2.20
BUY PUT OCT-55 BSC-VK OI= 2558 at $2.15 SL=1.10

Average Daily Volume = 1.22 mil



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

Charting: Trendlines; Effective Uses in Trading - 
By Leigh Stevens
lstevens@OptionInvestor.com 
[A list of my PRIOR Trader’s Corner articles are at bottom]

As you draw and get familiar with chart trendlines, the con-
struction of which is described in my previous Trader’s Corner 
article (9/15), you’ll find more occasions where you see and use 
the “best fit” technique connecting the most number of highs or 
lows – this technique may cause some extreme highs or low bars to 
be “cut” through.  This method of constructing “internal” 
trendlines is different than the convention understanding of how 
to draw them – point #1 in my prior Trader’s Corner article was 
that there are “some variations in drawing trendlines, but ‘use’ 
guidelines are the same”. 

Point #2 is that: trendlines are, in effect, “angular measures of 
momentum”, shown visually on a price chart.  If you remember this 
point on the nature of what trendlines are, you will also 
probably recognize that a rate of momentum is a quality of the 
trend that is sometimes hard to measure exactly. So, trendlines 
are not always precise. 




Related to point #2 - within the exceptions and limitations, 
trendlines are nevertheless sometimes so accurate in depicting 
the trend that it’s easy to forget this cautionary reminder – 
  



Trendlines show, in effect, the “rate of change” for prices in an 
up or down direction as expressed as an angle line.  If prices 
are going up an average of 3 percent a month, this mathematical 
progression can be shown as a line.  

However, drawing trendlines must also take into account the 
extreme highs and lows (above or below the “mean” or average 
change), which are emotional points of excess in the market.  
Therefore, we can expect that there will be some false signals 
given by trendline breaks and breakouts – that is, downside or 
upside penetrations of the line that you are drawing – because 
points of excess go further than is normally predictable.  

You can anticipate that you will need to periodically or even 
frequently re-draw trendlines to account for some new extremes if 
you want the most accurate visual depiction of the trend 
momentum.  There is the axiom in technical analysis, like many 
disciplines, that you must put in time and work if you expect 
rewards from the technique.  

The money or risk management rule about always limiting losses 
will help protect you in the times that trendlines don’t “work”; 
i.e., they fail to identify the exact parameters of a trend or 
trend reversal. Nothing that I know of works all the time in 
technical analysis.  

Getting in early on trends, for which trendlines will be of 
considerable help, provides the best opportunity for capturing 
the most profit from a trend.  Accomplishing this objective more 
often than not tends to make up for periodic losses along the 
way.  The idea is to keep using trendlines - they’ll work over 
time if you just keep using them and don’t expect more than the 
tool can provide.

Point #3 on trendlines - trendlines look like they make 
identifying every trend and trend reversal easy AFTER the fact.  
Once the price action has unfolded it’s easy to see the dominant 
trendlines as is apparent in the next charts. 

This chart looks like there a trend reversal after a major run 
up, but there were some other technical considerations - the 
break did NOT take out the prior downswing low, at least not on 
two back to back days. I often indicate that if a new closing low 
lacks downside follow through the NEXT day, it may be a false 
“signal”.   



There will be further discussion later on the need to re-draw 
trendlines, especially in the beginning of new trends.

THE FOLLOW ON CHART STORY IS BELOW – 



The downside price action shown above did NOT take out the prior 
downswing low on two back-to-back days. I often indicate that if 
a new closing low lacks downside follow through the NEXT day, it 
may be a false “signal”. 

The sideways consolidation above – really a “rectangle” (see my 
Trader’s Corner article on “Patterns-continuation: rectangles”) 
was merely a pause in the trend before a next up leg.  Trendlines 
are not the sole technical tool that we need to use to profit 
from the trend shown above. 
 
Of course, the break of Trendline T3 above was fine as an exit 
point to stand aside awaiting a next move in the stock; then, re-
entry made on the upside move above the minor down trendline 
which suggested that the consolidation had run its course.  

HERE’S ANOTHER CHART STORY – 



AND, THE “LOOK BACK” CHART –- 



AND, STILL LATER ---



It takes some time to make nearly as good of use of trendlines 
going forward, as looking BACKWARDS. When market action is 
unfolding and you are in a stock or index that you identified as 
having begun an uptrend due to its breakout above a down 
trendline, along come points where it’s hard to figure how to 
draw or redraw a trendline – and, they do need to be adjusted as 
market action unfolds.  

Some technicians will apply a rule that a trendline must be 
penetrated by a certain percentage or dollar amount to “confirm” 
the penetration.  Then there is the question of whether to draw a 
trendline “through” an apparent extreme (cutting through a bar) 
or not and so on.

There is also the risk that placing a stop under a trendline will 
result in exiting a position because prices dipped under the 
line, then resumed an upward course. For this reason, exiting 
only on a close above or below the trendline, depending on 
whether you are long or short, could be a method employed to try 
to “confirm” that a trend reversal has in fact occurred.  

However, the “close-only” strategy is also a difficult trade off 
in terms of a stop order entry strategy as in stocks you have to 
be watching the close to exit on this basis. If you were unable 
to exit at the close, you have to have the discipline to do so 
the next morning and not back pedal in your risk control 
strategy.  

Also, exiting on a closing basis means you may not be adequately 
protected against a severe price move against you, where a close 
is far above or below the trendline in question.  Here’s where it 
is important to know not to adopt too “loose” of a risk control 
strategy in a very “overbought” or very “oversold” market.  

Point #4 on trendlines - trendline breaks often lead to some 
outstanding trading and investing opportunities later on if you 
only continue to keep track of the previously broken trendline. 
This point relates to the same concept as a support level, once 
broken, assuming the role of resistance later on and vice versa; 
e.g., a support trendline, once broken, often “becomes” 
resistance later on.  

 


An up trendline that indicates support on the way up, if 
penetrated, often defines (“becomes”) resistance on a return to 
this line later.  Technical analyst Michael Jenkins used to call 
such broken up trendlines, “kiss of death” trendlines and it was 
often a very apt term. 

Once prices return to an up trendline like this, the trendline 
will act as a deflector to prices and they’ll then start falling 
more often than not.  This is one of the more useful patterns in 
chart analysis.  A return to trendline situation doesn’t set up 
all the time, but when it does it’s a high-potential trade to 
take by selling in the area where prices make the return.  

If short, (buy) stops can then be placed above the trendline 
because, if prices regain the line, it’s a “pattern failure”. 
Moreover, risk can usually be tightly limited at that point as 
the stop-out point is just above the line.  Downside potential, 
relative to risk is usually excellent. 



The reverse situation is provided with a down resistance 
trendline during a declining trend when the trendline is pierced 
by a rally – this trendline may come back into the picture later 
if prices drop back or return to this previously broken line.  
This “return” point can offer a second, more favorable, entry 
point.  Expectations are that prices will rebound from this line, 
marking a final low before a secondary up trend develops.  

The two charts above are examples of this principal and also 
demonstrates that the return to the prior trendline can be a more 
favorable entry than would be the case for anyone who bought or 
sold at the point where the trendline was first penetrated.  Of 
course since you don’t know if this trendline “return” will 
happen, the strategy, by necessity, is to buy or sell when the 
trendline is first penetrated with an appropriate stop.  

A return of prices to a previously broken down trendline but at a 
lower price point, is seen somewhat often and when this pattern 
develops it offers a good set up or basis on which to take a 
trade. (Even for investors, these return rebounds can offer a 
more favorable entry for a longer-term buy and hold.)  

The last point - #5 - already touched on somewhat, is that 
trendlines often have to be re-drawn, especially in the beginning 
stages of a new trend as demonstrated in the chart below -   



An upside or downside penetration of a trendline, especially in 
the early part of a trend, does not necessarily negate the 
emerging trend or confirm a trend reversal.  An upswing high that 
exceeds a prior high or a downswing low that exceeds a prior low 
offers a strong suggestion that that the prior trend is 
continuing.  Prices may be undergoing a sideways consolidation or 
only a minor correction in the initial formation of a trend, so 
final definition for a trendline can take some time to form. 

Within an emerging uptrend, one key to what is going on with a 
correction is whether this downswing stops above its prior low.  
If it has not, simply redraw the trendline from the lowest low 
through the bottom of this newest low.  The reverse is true in an 
emerging downtrend – redraw the down trendline through a new 
higher high, as long as the top of this price swing does not 
exceed a prior significant high.  

It is rarer to have to as frequently redraw a down trendline, as 
declines that mark a new downtrend tend to fall more in a steep 
fashion.  This goes back to the nature of bear market trends and 
the fact that a lot of selling tends to come in all at once – a 
one-time decision is often the case for long liquidation, whereas 
buying is phased in typically by both individuals and 
institutions, especially in the stock market.
 

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

Of Deadly Sins and Lively Condors – Q & A
By Mike Parnos, Investing With Attitude

CPTI students have asked – and who are we to deny?  In life there 
are few concrete answers – and fewer concrete questions.  But in 
OptionInvestorland, we are here to contemplate, calculate, clarify,
 and confuse.  Today, we endeavor to clarify a few well
thought out questions on our Iron Condor and Put Selling 
strategies.  We can all learn from these.  I know I did. 

Dear Mike,
In the BBH Iron Condor position you put on two weeks ago, why 
cover the short put every time by shorting stock every time it 
falls below $80?  Aren’t you covered by the long $75 put?  
Also, if you plan on shorting stock to cover the short positions, 
why bother to buy the long puts in the first place?

Response:
When you have a credit spread, you are exposing yourself to a 
potential loss of the difference between the strike prices.  In 
the case of the hypothetical BBH condor trade that we’re tracking, 
we sold the $80 put and bought the $75 put for protection.  We’re 
exposed for $5.00.  If BBH’s movement honors the estimated support 
level and stays above $80, we keep the credit and live happily 
ever after – or at least till the next trade.  If not, we have to 
be prepared.  We have to have a plan.

1.  Here are reasons for buying the long put:
a)  Most option traders do not have permission to trade naked 
(uncovered) options.  For them to take advantage of option 
selling strategies, they have to create a spread situation by 
covering the short option with a long option to limit exposure.  
This is for the benefit of the brokerage firm, the trader, and 
the trader’s beneficiaries.

b)  The experienced trader will buy the long put as insurance 
against a catastrophic move.  If a stock reverses and is trending 
down, you can adjust by shorting the stock at a support level.  
But what happens if a stock is trading at $81, above that support 
level, and the CEO gets caught, half in the bag (don’t ask which half)
, with the kid who delivers groceries?  Quicker than you can 
say “perp walk,” the stock could open at $70.  If you are covered 
by the long put, your exposure is limited to $5.  If you didn’t 
have that protection, you would be facing an $11 loss instead of 
$5.

(One of the reasons we chose BBH is that it’s an index as opposed 
to an individual stock.  Using an index minimizes the chance of a 
catastrophic loss.  However, that doesn’t mean you don’t need the 
long protective put.)

2.  When BBH dips below the $80 support level, we don’t know if 
it’s testing it or not.  Will it bounce back?  Will it keep going 
down?  Hard to say.  But we know that it’s going to require an 
adjustment.  There are a lot of choices:
a)  If the size of our trading account permits, shorting BBH 
stock when it violates the support level is a favorite 
adjustment.  It protects our profits in the trade.  As we saw in 
the BBH trade, if BBH bounces back up, we simply cover the short 
shares.  If BBH continues down, two things can happen – one good 
and one OK.  For example, if BBH moves down to $70, at expiration 
the long $75 put will have a value of $5.  Since your short $80 
put is covered by the short stock, you’ve just profited by an 
additional $5.

The “short stock” adjustment requires almost constant attention 
to the market.  Once the stock is short, you are vulnerable to a 
reversal in trend back up through the shorting price.  You have 
to stay on your toes like the proverbial midget at a urinal.  You 
may have to cover on short notice or have buy stop orders intact.  

b)  If BBH breaks support, you could also roll out the entire 
$80/$75 bull put spread for a month or two.  You may break even 
or even put a little additional premium in your pocket.  You 
would have to have a bullish outlook on BBH, because you and BBH 
are going to be bosom buddies for two more months.

c)  If you have turned bearish on BBH, and anticipate a 
substantial downdraft, you could simply buy back the $80 short 
put and ride the $75 put down.  The $75 put will increase in 
value as BBH goes lower.  BBH would not have to go down too far 
before you would be even and then, ultimately, into profitable 
territory.

d)  If BBH breaks support, you could simply liquidate your entire 
position, take your lumps (which will be moderate), salvage what 
you can, and be on your not-so-merry way.  At least you’ll be 
free of the situation and that often provides a peace of mind 
that’s worth a couple of bucks.

Hello Mike,
I'm pretty new at this and have a question regarding the write-up 
you did on Sept 05 “Seven Deadly Sins – Plus One.”  This seems 
like and excellent way of purchasing stock. However, I wanted to 
run an example by you to get your feedback as to see if I'm 
getting this.

XRX currently trading at $7 a share.  You feel in the next 5 
months or so the stock will rise to say $10 a share.  You would 
sell the April 03 $10 put option that is at $3.50.  Say you 
wanted to buy 1000 shares. You have the $7,000  in cash, so this 
would be a cash secure put.  Selling the April 03 Put would give 
you $3,500 in your pocket. 

What is the danger here?  Seems like you don't have too much 
downside here?  
Thanks

Response:
First, you would need to keep $10,000 in your account for this to 
be considered a “cash secured put” because that’s the strike 
price (10) of the put you propose selling.

What’s the danger?  The danger is that XRX is still at $7.00 (or 
below) at April expiration and you get your wish – you’re 
assigned a $7.00 stock.  You took in $3.50 (3,500).  That made 
your cost basis $6.50 ($6.500).  What have you accomplished?  You 
just waited eight months for $.50 ($500).  If it’s below $6.50, 
you’ve lost money on the deal.  It’s a touch unrealistic to 
expect XRX to appreciate by almost 50%.  A $3.50 move doesn’t 
sound like a lot, but on a $7 stock, it’s a “great expectation” 
that would make Charles Dickens gag.

What’s the best that can happen?  The stock rises and finishes 
above $10 and the put expires worthless.  You made $3.50 and you 
didn't have to buy the stock.  But you’ve tied up your $10,000 
for eight months.  As you know, at the CPTI, we are proponents of 
hands off trading, but eight months is a long time.  It won’t 
hurt to get our hands a little dirty once a month.

Normally, the purpose of selling puts is to generate a monthly 
cash flow and/or to ultimately buy the stock at a discount.  If, 
at expiration, the stock is below the sold strike, you can accept 
the stock – or not.  The benefit of selling the puts monthly is 
that you give yourself a choice.  At each month’s expiration, you 
can choose to accept the stock or buy back the put.  If you sell 
an April 03 put, eight months away, your choices are limited.  
You can only buy back the put or try to make some bizarre roll up 
or roll down adjustment, which can defeat the original purpose of 
the trade.

XRX has exceptionally low premiums, making it tough to generate 
much of a cash flow.   As of this writing, with XRX at $7.00, the 
Oct. $7.50 put is only $.85.  It seems hardly worth selling 
because, if XRX stays at $7.00, you will only make $.35 ($350).  
But, if you make $350 a month for the next eight months, you will 
have made $2,800 ($350 x 8 months).  True, you may absorb a few 
more commissions, but you have the benefit of choice.  Choices 
are a luxury that translates into peace of mind.

Let’s try the same strategy with another stock that has a 
little more fluff in its pillows.  For example, PDLI is trading 
at $9.75.  The October $10 put is $1.10.  Based on a 10-contract 
position, you can take in $1,100.   In a month, if PDLI is still 
at $9.75 you have a choice.  a) accept the stock or b) buy back 
the put for $.25, pocket the $.85 ($850) profit, and sell the 
next month.  Imagine eight months pocketing $850.  That’s $6,800.  
That’s 680 large pizzas, 3,400 Quarter-Pounders with cheese, 
1,700 Blockbuster rentals, or two new 55” wide screen digital 
TVs.  At the CPTI, we obviously focus on the necessities.

The trading strategies we discuss are not always easy concepts to 
understand, let alone use profitably.  You need to be prepared.  
Don’t take a knife to a gunfight.  Keep the questions coming!

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  


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

Exponential Improvements
By John Seckinger
jseckinger@OptionInvestor.com

As a trader, the independence of choosing any technical 
indicator(s) can be a freeing experience.  As far as moving 
averages are concerned, one can choose either a simple, 
exponential, Weighted, Least Squares, Adaptive, Endpoint, 
Triangular, Sine Weighted, Modified, or Triple Smoothing 
average, a combination of the above, or none at all.  For a 
number of years, I have only used the 22, 50, and 200 moving 
averages.  All three have been exponential.  The plan now is 
to explain “why”.  

What is an exponential moving average (EMA)?  

By definition, an EMA is a moving average calculated by weighting 
recent values more heavily than older values.  For comparison 
purposes, let’s compare an EMA to a Simple Moving Average (SMA), 
an average that many traders use. 

A simple moving average shows the average price over the last n 
days: 

Simple MA = (P1 + P2 + ...... + Pn) / n

where P = Price

The problem is that simple moving averages respond twice to each 
piece of data - once when it is added, and again when it drops 
off.  Having the moving average change when a price is removed is 
a bad thing.  When a high price is dropped, the SMA will most 
likely tick down.  When a low price is dropped, the SMA will 
probably tick up even if the price went up that day, but by an 
amount smaller than the value that was dropped.  The following 
quote describes this dilemma, "A simple moving average is like a 
guard dog that barks twice."  The solution?  Of course, just use
an exponential moving average instead. 

Why?  An exponential moving average gives more weight to the 
latest data and responds faster to changes than does a simple MA.  
At the same time, EMA does not jump in response to old data being 
dropped off. 

EMA = price today * K + EMA yest * (1-K)

where K = 2 / (N+1)

This is a continuous formula with each new day given the most 
weight, while older data is weighted less.  The formula below 
illustrates how the most recent day will be weighted 3.9% of the 
value, while a 50 DMA Simple, by definition, only gives a 
weighting of 2% (50 times 2 is 100 percent).

Exponential Percentage = 2/(Time Period + 1) 

Therefore, a 50-day EMA will have a 3.9 % exponential average:   
.039 = 2/(50 + 1) 

Taking things to a practical level, let us first look at a daily 
chart of the Dow Jones Industrial Average.  Disclaimer:  When the 
market appears to be in a consolidation phase, I find it 
difficult to use moving averages effectively.  A trader can gauge 
risk by looking at the price deviation away from the moving 
averages; however, at that point, I would recommend other forms 
of technical analysis.  

How can a trader realize that the market is no longer in range?  
I like to use the 50 and 200 DMA’s, noting the potential for a 
change when the 50 crosses either underneath or above the 200 
DMA.  A more aggressive trader could use a crossing of the 22 
under/above the 50 DMA; however, a tighter stop should then be 
used just in case.  

Dow Jones Industrial Average Index, Daily



Since neither of the averages are currently threatening to cross 
above/below one of the other, I then turn my attention to a 60-
minute chart and 60-minute Period Moving Averages (PMA’s).  
Before we look at the 60-minute chart, we still have to note some 
obvious patterns in the daily.  The market is still trending 
lower and odds are still in favor of the bear market being in 
tact; moreover, it was not long ago when longs were “trapped” 
above both the 22 and 50 DMA’s.  This bearish psychology will not 
easily be forgotten.  Going forward, we can use this bearish 
sentiment when prices rally and we are curious about an exit 
strategy.  

Dow Jones Industrial Average Index, 60 minute



Looking at a 60-minute chart of the Dow, the first point of 
interest is when the 50 PMA acted as resistance and gave traders 
a reason to believe bears are in control.  The bearish 
confirmation took place soon thereafter, with the 22 PMA falling 
under the 200 PMA and signaling the likelihood of a sustained 
downward move.  When to cover?  A rise above the 22 PMA is 
usually a safe bet, but more conservative traders can use the 50 
PMA and keep things simple.  

On September 11th, a day that I was in fact bullish as the session 
began, shares actually rallied above the 200 PMA and towards the 
area where the 50 PMA crossed underneath the 200 PMA.  Was I 
wrong to be bullish?  Not really.  More importantly, when did the
market tell me I was wrong?  Answer:  By falling back underneath 
the 200 PMA.  If being bullish was correct, the 200 PMA would 
become support and not give such an obvious “false breakout” 
signal.  Once back underneath the 200 PMA, the confirmation took 
place when the 22 PMA crossed back under the 50 PMA moments 
later.  Where should stops be set?  Once again, a rise back above 
the 22 PMA would make sense.  Moreover, a trader should keep a 
bearish mindset until prices gravitate back above the 200 PMA and 
begin using that average as support.  

If a trader wants to take a more micro approach, it then makes 
sense to look at a five-minute chart and its period moving 
averages.  

Dow Jones Industrial Average Index, 5 minute



What can we learn with the five-minute chart?  Beginning on 
September 17th, the subsequent sell-off underneath all three 
averages certainly got my attention.  If not short already, it 
usually makes sense to sell short following such a reversal.  
Stops can then be set at either the 200 or 50 PMA, moved lower to 
the 22 PMA once profits are attained.  

Another thing to note:  If the Dow opens significantly lower, it 
is usually wise to wait for the 22 PMA to trend down and meet the 
current price action.  Then, once above the 22 PMA, shorts will 
generally cover and wait for another sell signal.  Looking at 
price action on Wednesday, the index moved above 8100 and above 
the 22 PMA.  Probably makes sense to cover then.  It doesn’t 
always work, but odds are in your favor.  The next thing to 
notice is, once again, the “false breakout” above the 200 DMA.  
Sure, it makes sense to go long at those levels; however, it 
makes even more sense to exit and take a short position if 
things turn around.  


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

Differentiating Sow's Ears From Lemons
Buzz Lynn
buzz@OptionInvestor.com

Two old proverbs: 1) When life give you lemons, make lemonade.  2) 
You can't make a silk purse out of a sow's ear.  In the first 
case, we learn to make the best of a bad situation.  In the 
second, we learn we cannot make the best of a bad situation.  So 
which is it?

Hmmm. . .a proverbial dilemma!  What got me thinking about this 
was our faithful readers' desires to make money in light of the 
drubbing the market has given our 401K accounts over the last 
three years.  I know - some probably don't need to be reminded.  
My apologies.  But the fact remains that despite the bear market, 
some stocks are going to do incredibly well over the next few 
years by experiencing huge price moves, even in the carnage 
experienced by most other stocks.  

Many of you know that I am a fan of dividend-paying, blue-chip 
stocks of great business on sale with a margin of safety.  A guy 
named Warren Buffet says the same thing about stocks he likes to 
own - except the part about dividends since he's a bigger fan of 
retained earnings.  

Anyway, much as technicals play the biggest part of my trading, 
I'm still Fundamentals Guy at heart.  To that end today, I want to 
walk us through the methods I use to uncover potential values.  I 
can't make a silk purse out of a sow's ear.  I can't cobble money 
from the scrap heap of dead companies either.  That's alchemy, a 
physical impossibility.

But in the case of stocks, there are invariably some fundamental 
bargains that are priced reasonably compared to the over-hyped 
(yes, it still happens) darlings of Wall Street.  Already within 
the apparent sour lemon are the makings of lemonade.  That's 
chemistry, a manageable science.

So where do we look for bargains?  Glad you asked.  It's really 
pretty simple.  The first two things in which I zero in are 1) 
does the company make money? 2) does it have any cash?  If it 
doesn't have any cash, it better be paying a hefty dividend by 
making money.  Real Estate Investment Trusts (REITS) and Master 
Limited Partnerships (MLP's), both of which are traded in 
abundance on the NYSE and, to some degree, on the NASDAQ and AMEX, 
are great examples of hefty dividend-paying issues.

But since MLP's produce not only a return on equity, but also a 
return OF equity, they eventually shut down or burn out.  With 
REIT's, all the eggs are in one real estate basket, which I 
consider to be greatly over-valued (despite attractive dividends) 
given the current state of the economy.  The good news is that 
there are old stodgy companies out there that make money.  One of 
my favorites is a sin stock - Philip Morris (MO).  Let's take a 
peek.  From Yahoo Finance, I pull up the Company Profile and see 
the following:

Yahoo Profile of MO:



First of all, while we don't see it here, a company description of 
MO would read something like, "Huge and efficient organization 
that sells stuff with broad appeal - mostly necessity or addiction 
(food, booze, cigarettes) - which command huge margins and make 
money for the company".  Everybody ought to want a piece of that 
kind business, moral issues aside [we're talking about making 
money here, not saving the world].  

Here's a dirty little secret too, which plays to investors' 
advantage.  I almost hate pointing this out.  But. . . the 
government will NEVER let MO's revenue stream slip, let alone 
allow MO to go out of business.  Why?  They want the money too - 
the tobacco taxes on every pack of cigarettes, not to mention the 
20-yrs of protection money to be paid in the name of healthcare 
expenses caused by overly-sick smokers.  Correction - the 
government NEEDS that money.

Did I mention MO pays a 5.44% dividend, which has steadily risen 
throughout the years?

But here's what jumps out me.  Remember, "First I look at the 
purse" to quote the Jay Giles Band.  Look at that cash - $1.38 bln 
worth, which although amounts to only $0.65 per share, MO clearly 
can pay their expenses with no danger of people all of a sudden 
ceasing to buy their products (Did I mention the steady 
revenues?).  Thus, it doesn't need to keep a Microsoft-like $38 
bln lying around.  MO doesn't need to keep it around thanks to its 
steady revenue and earnings stream.

Another thing - $90 bln in sales and nearly $9.5 bln available for 
distribution to owners AFTER Earnings Before I Trick Dumb Auditors 
(EBITDA)!  Note the valuation ratios too:  slightly greater than 
10 times a steady stream of earnings; slightly greater than 1 X 
sales.  Nearly 5 X book value isn't so hot, but considering that 
as depreciation is taken on assets until they are ultimately 
reduced to zero, which would cause book value to drop - and MO has 
some old assets that have been reduced to $0 through depreciation 
- the denominator in "price to book" ratio is decreasing.  As 
such, I can live with price to book a bit out of whack.

That's the lemon-aide  Now let's look at a sow's ear, Lucent (LU)

Yahoo Profile of LU:


Same analysis:  A company description might read, "Former giant in 
a beaten up industry trying to sell products that very few 
currently want in an already narrow market.  LU recently warned of 
their 9th straight loss." Yes, it's much harder to sell an optical 
telecom switch to a bankrupt CLEC than to sell a truckload of 
beer, cigarettes, ketchup, or pretzels at Wal-Mart.  LU does not 
have a business that anyone should aspire to be in right now.

But to be fair, let's look at the numbers.  Whoa! A juicy $5.4 bln 
in cash!  That's a bucket more than MO and the equivalent of $1.58 
a share in cash.  Their cash holding could buy back ALL of their 
own outstanding stock.  But wait - the share price is only $1.05 
and LU doesn't pay any dividend.  Man that's cheap!  A bargain?  

The market is valuing the company at less than the amount of cash 
on hand.  Why?  Take a look at that debt load - 3.71 debt to 
equity ratio in a wrecked industry

Anybody have in any confidence in their revenue stream?  Me 
either.  But again, to be fair, let's look.  Hmmm. . .sales of $15 
bln.  But what's this?  $11.9 bln loss before they tricked dumb 
auditors with an actual $16.5 bln loss to shareholders.  That's 
$31.5 bln in expenses vs. $15 bln in revenues.  Looks like that 
$5.4 bln in cash will be burned up in four months.  Is it any 
wonder investors have dumped this stock and reduced its price to 
just over $1 through lack of demand?  Yeah, it's cheap, but it's 
cheap for a reason.

I'll make this point here before I go.  Just because a stock is 
cheap does not make it a good value.  Any stock can go to zero, 
including LU.  To change their business picture would take an act 
of alchemy.  Conversely, an "expensive" stock may be the relative 
bargain.  If we want to make money in this market, we have to find 
the lemons and let the market make the lemonade.  Sows' ears will 
never be a silk purse.  Learn to distinguish the difference and 
reap the financial rewards.

Make a great weekend for yourselves!



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