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Daily Newsletter, Tuesday, 10/08/2002

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The Option Investor Newsletter                 Tuesday 10-08-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: The Market Giveth and The Market Taketh Away – and Giveth 
again!
Futures Markets: 775 & Dock Strike
Index Trader Wrap: A bull is "banking" on a rally
Market Sentiment: Still in the Shallow End
Weekly Fund Screen: Conservative Hybrid Funds

Updated on the site tonight:
Swing Trader Game Plan: A bear couldn't "bank on it"


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
     10-08-2002           High     Low   Volume Advance/Decline
DJIA     7501.49  + 78.65 7623     7331    1939 mln   1325/1425
NASDAQ   1129.22  +  9.82 1144     1110    1840 mln   1572/1711
S&P 100   401.62  +  5.47  408.57   393.49 totals     2897/3136
S&P 500   796.32  + 11.04  808.86   779.50
RUS 2000  338.77  +  0.48  341.04   333.77
DJ TRANS 2115.35  + 56.78  2131    2059
VIX        46.46 - 2.72
VIXN       62.32 + 2.04
Put/Call Ratio     0.90
************************************************************

The Market Giveth and The Market Taketh Away – and Giveth again!
By Mike Parnos

This morning the S&P futures were positive throughout the pre-
market period – finishing about 10-points above fair value 
signifying a rather strong positive opening.  It looked like the 
wishful thinkers were going to have a day to remember.  And 
that’s exactly how it started.

Chart of the DOW: 


 

Watching the DOW bounce around a 290 point trading range was like 
watching a tennis match.  I felt like Linda Blair in The 
Exorcist.  The eternal optimists were happy as the DOW moved up 
to the 7530 level early.  Then, before you can say, “Gee, this 
may be a bottom,” it gave back 60 points to 7470.  We’re just 
getting started.  The DOW then decided to test the high and move 
back up to over 7520.  The air was a little thin and so was the 
buying, so down it went – about 90 points -- until it reached its 
intra-day low of 7331 at about noon.   Then, while the sellers 
were at lunch, the DOW reversed direction, showed some strength, 
and slowly made its way up to the high for the day – 7623 shortly 
before 3 p.m.  But, as usual, it was too good to be true.  Profit 
takers stepped in and snatched back over 75 points and the DOW 
finished at just over 7500.  

A decent day, but let’s not break out the cheerleader uniforms 
just yet.  The DOW may have finished positive (18 of the DOW 30 
were up), but the broader market showed decliners beating 
advancers by 1425 to 1325.  The NYSE volume was up a little from 
yesterday at 1.94 million shares and the DOW 78-point gain 
snapped a four-day losing streak.
__________________________________________________________

The NASDAQ chart was very similar – starting strong, giving it 
back, testing the high, tanking down, moving to the day’s high 
and giving back most of the positive move, leaving only a gain of 
9.21.  Decliners on the NASDAQ led decliners 1711 to 1572.

Chart of COMPX:  


 

After four losing days in a row, today could be interpreted as a 
faint light at the end of the tunnel, but, then again, we may as 
well be waiting for the Tooth Fairy to show up.  I hope he does, 
because many bulls have, not only lost their teeth, but lost 
their shirts as well.  The earnings have been more positive than 
negative, but it’s going to take more than that to change the 
direction of the market.

BBH (Biotech Holders) made a nice move up, broke through 
resistance at $80, ran up to $80.80, but came back down to finish 
just below the $80 level.  We’ve been keeping an eye on BBH in my 
columns, tracking the stock for the past month.

Chart of BBH:


 

It’s been hovering around $80 and, one of these days, is going to 
bust out.  The direction?  Flip a coin.  But, if you are looking 
for a straddle or strangle candidate, you might check this out.  
If you have any questions on the right way to put on a straddle 
or strangle, feel free to contact me.  I go into these strategies 
in depth in my Option 101 and Traders Corner articles that can 
easily be found in the OptionInvestor archives.

What’s Up Docks?
Retail index was up about 5%. Partially as a result of the news 
that the dock workers are scheduled to return to work tomorrow.  
They’re debating on whether it’s justified to invoke the Taft-
Hartley act to force the end of the work stoppage.  Today, the 
dock-workers were bored so they were driving their trucks around 
in circles blowing their horns in support of their union.  What 
can I say?  Some bulbs don’t burn as bright as others.

Inventories are already low at many retailers because they’re 
trying to run lean and mean.  Without the ability to replenish 
their already lean inventories, they’d be running mean – without 
the lean – and without sales.  The potential devastating effect 
on our sensitive economy prompted George W. to take his attention 
away, at least temporarily, from his saber rattling, to do 
something productive for the economy.   Some CEO of a toy company 
was interviewed on CNBC.  He was crying the blues because his 
products might not be able to get to the U.S. market in time for 
the Christmas season. 

Some big option bets were being placed on Ford Motor Co. (F) as 
the AMEX January 5 calls and November 5 calls were the most 
actively traded today.  Why?  Today Ford traded at a 52-week low 
of $7.51 before finishing at $7.75.  That’s a nasty looking 
chart.

Pepsi (PEP), after tremendous option volume on Monday, beat the 
street’s estimates and was up $5.32 today to finish at $41.10.  
It has some serious resistance to get through at $41-42.  If it 
does, the next resistance level is at $45.  Remember, Pepsi owns 
a large chunk of YUM – which owns KFC, Pizza Hut, Taco Bell and a 
lot of snack foods.  If you’ve read my columns, you can 
appreciate why PEP is one of my favorites.  When I go on a diet I 
always get two letters – one from PEP and the other from Hostess.  
They want to know what’s wrong and why I don’t love them any 
more.

Morgan Stanley trimmed estimates for car sales for 2003.  Tobacco 
stocks rebounded Monday from getting nailed on Friday, but today 
these same stock’s sails lost a few puffs.  MO was down $2.36 and 
CSCO keeps going down as analysts keep reducing their estimates. 

Support & Resistance Levels
Dow Jones Industrial Average (INDU) – support at 7330; resistance 
at 7700 
Nasdaq Composite (COMP) – support at 1080; resistance at 1160
S&P 500 (SPX) – support at 775; resistance at 825

Tomorrow’s Earnings Announcements
Tomorrow’s trading should be interesting.  Among the companies 
that will be announcing earnings are Rambus, Yahoo, YUM, Abbot 
Labs, Commerce Bancorp, Winn-Dixie, Sun Trust, Genentech, Sonus 
Networks, and Redback Networks.   

Happy Trading!  Do your homework and make sure you know, and 
limit, your risks before you click those “buy” and “sell” buttons.  
That’s the beauty of options.  They can do almost anything if you 
know how to use them.

Regards,
Mike Parnos

Contact me at: mparnos@OptionInvestor.com


***************
FUTURES MARKETS
***************

775 & Dock Strike
By Alan Hewko

This article will be rather short tonight.

Due to shortness of time, I must omit the "Recap of Last 24 
hours" section I've been doing. However, you can read my several 
comments from today that were made in the Market Monitor if you 
wish.

Monday open: 10 Point ES (Emini SP Futures) gap DOWN at 9:30 AM 
caused a rally from the open.

Tuesday open: 10 Point ES gap UP at 9:30 AM resulted in it being 
Faded (was Sold into) rather quickly after the open.

Tuesday's opening strength was largely due to Pres. Bush's speech 
last night and his tone of "war being an action I would rather 
avoid if possible", and the rumors on the West Coast dock strike 
ending.

As mentioned several times, SP 500's July 24th Low was 775-777.

This 775 number was an area that was either 

1.   Going to bring in Shorts taking Profits, 

- or -
 
2.   If it was firmly lost (much like the Dow 7500 support was 
lost); who knows how large the selling might have become. A Dow 
-300 type day could not have been ruled out.

Tuesday at 10:30 AM, ES had a double top at 797-798, and just 
couldn't climb through that ES 800 number that we've talked about 
so very often.

It was steady hard selling the next 90 minutes.  ES lost its 
supports at 795-6, 793, 787, 783-5, 780, until finally coming 
very close to that Magic Number of 775.

At exactly 12 Noon Oct 8th, ES was 777s and I guess Shorts 
decided that number was "close enough" to the 775 level. If the 
whole market was waiting to cover at 775, beat the rush and cover 
a few points higher. 

Dow Industrials For the 4th day in a row, The Dow traded 200 
points off its day highs. Early in the morning, Dow was 7525, and 
near 12 noon it was 200 points lower at 7325. Another reason that 
12 noon saw Shorts starting to cover in my view as the last four 
days, the market did reverse at that -200 from day's high level.

The below ES (Emini SP500 Futures) chart tells the story better than I can with words.

Chart: E-Mini S&P 500 (intraday chart for Oct. 8th, 2002)


 


At 2:55 PM, ES made day highs at 810, stopping at the prior 
resistance of 809-812. Monday's day high was also 809-810 area, 
and that made a logical "Double Top" area for some Longs to take 
profit.

What added fuel to the afternoon rally was the West Coast dock 
strike news. The workers indicated they will go back to work for 
30 days under the old contract, while at the same time Pres. Bush 
invoked the Taft-Hartley act requiring an 80 day return to work. 
Confusion reins on what exactly will happen. Look at the reaction 
in the RLX Retail Index.

WEDNESDAY THOUGHTS:

Dow closed right at 7500.
ES (SP500 Futures) closed over the Key 800 level at 801.

Technically speaking, SP500 has now formed a double bottom at 
775.

Dow today touched a support level of 7325-50.

An easy way to sense Market direction for Wednesday I believe is 
watching the same two numbers that have been spoken about many 
times this past week:

ES (Emini SP500 Futures) 800 and Dow 7500

I'm not going to try and out-think how the market views this Dock 
Strike ending. 

I'll let those two numbers tell me.

Today, in the Market Monitor, at 2:55PM (ES 810, Dow 7625), I had 
made the comment of exiting Longs at that level, and/or Opening a 
scalp short. 

Thought being "Buy the Rumor, Sell the News" relating to Pres. 
Bush on TV near the end of day when he formally gave us the News 
on invoking Taft-Hartley as the market had been Buying this 
Rumor.

That short was good for above 10 ES Points, 100 Dow points but 
Flat seems to make sense going into Wednesday; and watching those 
two numbers of ES(SPX) 800, Dow 7500.

Alan Hewko

futures@OptionInvestor.com

PS: There's another article tonight on using Futures to Hedge 
Option positions as many of you had emailed questions relating to 
that.  Check it out here.


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

A bull is "banking" on a rally

The major market averages snapped a four-day losing after this 
afternoon's news that President Bush would seek a court 
injunction to force the reopening of West Coast ports for an 80-
day "cooling-off" period.

While this may be partially true, I'm a technician and believe it 
was the rebound in the banks that hinted of a more bullish day in 
the making and something that traders and investors will need to 
follow in the coming sessions.

In last night's Index Wrap this was "the sector" that I thought 
might cast the "swing vote" in today's action and while the major 
market averages did drip red like an explosive ink bomb inside a 
money bag, both of the banking index (BIX.X) 248.44 +4.62% and 
(BKX.X) 638.53 +4.31% sustained gains above yesterday's lows and 
seemingly pulled the markets higher.

Other financial groups like the Broker Dealer Index (XBD.X) 
335.63 +4.58% and Insurance (IUX.X) 236.53 +4.08% showed strong 
gains today.

Now this makes one wonder if bears aren't trying to get off the 
hook easy.  At least it does to me.  While I would admit that 
some banks and insurance company's might see a reprieve if dock 
workers were able to get back to work, I'm a bit confused how the 
"other" financial group like the broker/dealers would benefit.  
Who knows?  Maybe there's a bunch of "buy orders" sitting on some 
of those large ships off the coast of California that are yet to 
be unpacked.

After today's trading, it becomes somewhat apparent to me that it 
will be the "financials" that hint of broader market direction as 
these are the groups that seemed to hold gains early and build 
throughout the day and pull the major averages higher.

It certainly wasn't the Semiconductor Index (SOX.X) 215.92 
-1.83%, North American Telecom Index (XTC.X) 311.62 -2.71%, 
Utility Index (UTY.X) 227.10 -4.69% or Gold/Silver Index (XAU.X) 
62.79 -3.07% helping a move higher.

In last night's wrap, we looked at a monthly interval chart of 
the S&P Banks Index (BIX.X).  The components of this index are 
more "regional" banks and don't have as great an exposure to 
large investment banking deals and global markets as do 
components of the KWB Bank Index (BKX.X).  

From a bulls perspective, I think a market rally has potential 
and I'm going to "fine tune" things a bit as it relates to the 
BIX.X.  My brief hypothesis is that if the BIX.X can break above 
today's high, the BIX has rally potential to 267 and under such a 
rally, could help lift the broader market averages.

S&P Banks Index Chart - Daily Interval


 

There has been little "leadership" from any type of economically 
sensitive group in recent weeks or months.  While one day is no 
reason to be calling a trend, its the banks and the financial 
sectors that showed some DIVERGENCE from the major market 
averages today and perhaps is the group that BULLS and BEARS 
should monitor near-term with their index trades.  While the Dow 
Industrials (INDU), SPX, OEX, NDX, and QQQ all broke their 
morning lows, it was the recently beaten down banks that held 
their lows and built gains as the session wore on.

Some may think I'm a bit "crazy" for identifying the banks as a 
leadership group, especially the tried and true bear.  But did a 
bull or bear question our 09/11/02 intra-day update as it relates 
to the BIX.X? 
http://members.OptionInvestor.com/archive/intraday/2002/091102_3.asp

I would once again ask subscriber to visit our Swing Trade 
Section tonight as we're trying to get the newsletter out in a 
timely fashion and I've discussed all the major indexes there 
once again while I'm filling in for Jim Brown.

In this section, I want to quickly look at a point and figure 
chart of the Dow Industrials.  This is a rather "simple" index to 
understand as it only has 30 components.  It also helps perhaps 
to put into perspective "risk" as it relates to the bullish %.  
While the bullish % is make up of just 30 stocks, it makes sense 
then that each stock gets one equally weighted "vote" when 
described by the bullish %.  In essence each stock's point and 
figure chart is "worth" 3.33% (30 components times 3.33 = 99.99, 
which is pretty close to 100%).  As such, tonight's reading for 
the Dow Industrials Bullish % ($BPNDX) from www.stockcharts.com 
is 9.99%, meaning just 3 of the 30 components currently have a 
"buy signal" associated with its point and figure chart.

The three stocks currently showing a "buy signal" are Citigroup 
(C) $27.84 +4.15% (would be negated with a trade at $26), Johnson 
& Johnson (JNJ) $58.49 +3.15% (would be negated with a trade at 
$51) and Procter & Gamble (PG) $89.30 +0.4% (would be negated 
with a trade at $87).

Today, the Dow Diamonds (DIA) $75.39 +0.86% achieved their 
bearish vertical count of $74.00, when the DIA traded a session 
low of $73.40.  On September 30th, the DJX.X traded its bearish 
vertical count of $75.00 and has been hanging around current 
levels of $75.01 for the past week.

With the Dow Bullish % ($BPINDU) at 9.99% and "oversold" the 
point and figure chart may give traders some perspective of 
"risk" to a point and figure buy signal where the bullish % tells 
a bear he/she is at a HIGH RISK LEVEL, and where some bearish 
vertical counts have recently been achieved.

Dow Diamonds (DIA) Chart - $1 box


 

If the DIA were a stock, I'd look at the low 9.9% bullish % 
reading and understand that risk is HIGH for bears holding short.  
With the DIA and DJX both reaching bearish vertical counts, it 
becomes more difficult to assess further potential downside.  As 
such, this the only major index right now that is trading 
anywhere close to its bearish vertical count and ties in with an 
"oversold" bullish %.  A trade at $81 (9.45% from current levels) 
would be the first sign of strength.  

Near-term, the first major index I'd look for strength would be 
the Dow Industrials.  The first index that shows some signs of a 
rebound would be the financials, particularly the S&P Banks Index 
(BIX.X).

Jeff Bailey


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

Still in the Shallow End
by Steven Price

I've been discussing the levels in the Dow (7500), S&P 500 (800) 
and S&P 100 (400) that I felt would be pivotal points that could 
send us in one direction or another.  For some reason, these 
indices have failed to co-operate with my plan.  Actually they 
have only underscored their importance as pivot points and 
support and resistance levels, confounding me slightly in the 
process. The Dow finished above 7500 (7501.49); the OEX (S&P 100) 
finished above 400 (402.88) and the S&P 500 (SPX) finished below 
800 (798.55).   After yesterday's close below the aforementioned 
levels, I was looking for intraday resistance at those points, in 
order to reinforce my bearish sentiment. That did not happen 
today.  Instead, all of the averages broke through those levels 
and then two of them found support as the market sagged toward 
the end of the day.  

Does this mean I'm bullish?  Not a chance - at least not yet.  
But what it does mean is that I haven't gotten the sign I was 
looking for to pile on the shorts. I want to know there is a 
ceiling to my short positions before I put them on in entirety.  
While I have been bearish for the last couple of months, we are 
at a point where the drop has slowed.   It is true that we have 
continued to establish a series of lower highs and lower lows, 
but a look back at the Dow shows an awful lot of noise between 
7400 and 7500 in the falls of 1997 and 1998.   The SPX also shows 
some consolidation at that point in time, although it is 100 
points higher, around 900.  The SPX, however, has yet to break 
its July intraday low of 775.  The OEX activity is similar to 
that of the SPX.  My point is, the screw seems to be tightening, 
and I'm not going to bet the farm until I get the signals I am 
looking for.  

OK, now that I have presented both sides of the argument, the 
market still "feels" awfully bearish.  The rally in the banking 
sector, with the S&P Banks Index (BIX.X) gaining 10.99 to close 
at 248.44, looks like short covering; or possibly short profit 
taking, as there is still nothing but bad news coming out of the 
group.  More layoffs and bad loans have plagued the banks and 
unless bankrupt companies start having garage sales to pay off 
their debt, there doesn't appear to be a rosy immediate future 
for lenders. The series of lower lows remains in tact and the 
sector was probably due for a bounce after the BIX lost 16% in 
the previous four trading sessions. 

The Retail Index (RLX.X) also got a boost, gaining 11.86 to close 
at 265.54.  This group had also lost 12% in the last three weeks, 
as September sales continued the trend of coming in under 
previous estimates.  The west coast port lockout also hurt the 
stores, as merchandise sitting on ships could not be sold.  News 
that the President was getting involved in the dispute, helped 
boost the group today. The announcement that he would invoke the 
Taft-Hartley Act, re-opening the docks for 80 days (which 
conveniently ends just after Christmas), should continue to give 
the retailers a boost tomorrow.  However, it does not solve the 
problems that led to the sell-off in the first place - people 
aren't buying merchandise, due to increased layoffs and a poor 
economy.  Friday should be a big day for the sector, as we will 
get the final retail numbers for September and a look at the 
preliminary University of Michigan Consumer Sentiment report.  
Sentiment will give us an idea just how consumers are faring and 
what can be expected for the holiday shopping season.  

A look at the final market data for the day looks pretty 
positive, but doesn't really tell the story of the late afternoon 
fade. At one point the Dow was up almost 200 points, before 
falling back and landing right above 7500, for a gain of 78.65.  
The SPX was up almost 25 points, before falling back and closing 
just under 800, for a gain of 13.27.  The OEX was up over 12 
points, before landing just over 400, for a gain of 6.73.  
Overall, the rally didn't feel like such a rally by the end of 
the day.  I am still looking for that intraday resistance before 
jumping into the deep end, but until then I will be wading in the 
short, I mean shallow, water.  

The S&P Retail Index(RLX.X): The retailers finally got a bounce, 
as the president got involved in the west coast port lockout.  
President Bush said he would invoke the Taft-Hartley act, keeping 
the docks open through the holiday shopping season (he didn't 
mention the shopping season, but that was the effect).  The group 
was led higher by Wal-Mart (+2.25), Target (+2.06) and Kohl's 
(+2.83).  This was a nice boost, after Sears reduced earnings 
estimates on Monday.  Unfortunately, the President can't do much 
about shoppers staying out of the malls because they are worried 
about their jobs. The end of the week will bring us September's 
retail sales numbers, but we already know they will be rather 
low, as a host of companies have already said that numbers will 
be below expectations. the RLX has now bounced at its July 
support level of 250, but I expect that level to be re-tested 
before the end of the year. 


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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7331
Current     :  7501

Moving Averages:
(Simple)

 10-dma: 7699
 50-dma: 8351
200-dma: 9458



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  798

Moving Averages:
(Simple)

 10-dma:  821
 50-dma:  882
200-dma: 1027



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     :  811

Moving Averages:
(Simple)

 10-dma:  843
 50-dma:  818
200-dma: 1224



Market Volatility

The VIX gave back some of yesterday's pop, which had put it just 
below the 50 level, getting as high as 49.71 intraday and closing 
at 49.18.  the slow and steady rise in market volatility has 
mirrored the drop, although the drop has occurred at a faster 
rate.  The last several times the VIX has hit 50, we have 
experienced a broad market rally shortly thereafter.  However, it 
has made it into the upper 50s or 60 before the rally ensued. I 
am still looking for the VIX to break 50 on another downswing in 
the Dow and S&P, before we begin to hit higher ground.  The VXN 
has mirrored the movement in the VIX, with the upper 60s, or 
possibly 70 being the target before a Nasdaq rally.  

CBOE Market Volatility Index (VIX) = 46.46 –2.72
Nasdaq-100 Volatility Index  (VXN) = 31.16 –1.16

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.90        635,529       574,415
Equity Only    0.71        465,468       328,736
OEX            1.09         40,933        44,452
QQQ            0.66         35,734        23,822

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

Bullish Percent Data

           Current   Change   Status
NYSE          27      - 3     Bull Correction
NASDAQ-100    15      - 2     Bear Confirmed
Dow Indust.   10      + 3     Bull Correction
S&P 500       20      - 4     Bear Confirmed
S&P 100       20      + 0     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   1.50
10-Day Arms Index  1.40
21-Day Arms Index  1.49
55-Day Arms Index  1.34

Extreme readings above 1.5 are bullish, and readings below .85 
are bearish.  These signals don't occur often and tend be early, 
but when they do, they can signal significant market turning 
points.

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

Market Internals

        Advancers     Decliners
NYSE       1324          1426
NASDAQ     1581          1708

        New Highs      New Lows
NYSE         22              10
NASDAQ      351             414

        Volume (in millions)
NYSE     2,231
NASDAQ   1,831


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

Commitments Of Traders Report: 10/01/02

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

There has not been much change in the positions of Commercials, 
who reduced both longs and shorts by about 2,000 contracts each. 
Small traders are also relatively unchanged, with reductions of 
about 1,000 contracts to both the long and short sides.


Commercials   Long      Short      Net     % Of OI 
09/10/02      426,230   470,537   (44,307)   (5.0%)
09/17/02      476,224   503,268   (27,044)   (2.7%)
09/24/02      425,276   442,661   (17,385)   (2.0%)
10/01/02      423,661   440,133   (16,472)   (1.9%)

Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year: ( 16,472) - 10/01/02

Small Traders Long      Short      Net     % of OI
09/10/02      166,696    85,259    81,437     32.3%
09/17/02      182,243   116,377    64,866     21.7%
09/24/02      124,232    73,506    50,726     25.7%
10/01/02      123,371    74,704    48,667     24.5%

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

Commercials reduced both longs and shorts, but by a relatively 
small percentage, giving up 600 long contracts and 1,700 shorts.  
Small Traders also made few changes to their overall positions, 
getting slightly longer overall, by about 600 contracts.


Commercials   Long      Short      Net     % of OI 
09/10/02       53,309     58,745    (5,436) ( 4.9%)
09/17/02       72,522     75,815    (3,293) ( 2.2%)
09/24/02       46,637     54,613    (7,976) ( 7.9%)
10/01/02       46,000     52,976    (6,976) ( 7.0%)

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
09/10/02       14,024    10,494     3,530    14.4%
09/17/02       15,288    14,142     1,146     3.9%
09/24/02       11,163     9,421     1,742     8.5%
10/01/02       11,896     9,575     2,321    10.8%

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 left long positions unchanged, while reducing shorts 
by 10%.  Small traders reduced longs by 1,000 contracts, while 
adding the same amount to the short side.


Commercials   Long      Short      Net     % of OI
09/10/02       22,946    14,936    8,010      21.1%
09/17/02       26,863    21,187    5,676      11.8%
09/24/02       18,951    10,074    8,877      30.6%
10/01/02       18,969     8,903   10,066      36.1%

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
09/10/02        7,568    10,129    (2,561)   (14.5%)
09/17/02       13,393    11,637     1,756      7.0%
09/24/02        7,939     9,453    (1,514)   ( 8.7%)
10/01/02        6,809    10,503    (3,694)   (21.3%)

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

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


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

Conservative Hybrid Funds

This week, we screen for the best low-risk domestic hybrids using 
Morningstar's Fund Selector online tool.  In general, these funds 
emphasize current income but maintain some exposure to stocks for 
their long-term capital growth potential.  We'll be searching for 
hybrids that normally have near 20% of assets in stocks with the 
remainder invested in fixed income (and money market) securities.

Although conservative in strategy, these funds will exhibit some 
fluctuations in share price.  So, if you are unwilling to accept 
this moderate volatility, you may not want to invest.  Likewise, 
if you seek maximum capital growth over the long run, then these 
conservative hybrid funds may not be appropriate.  They are more 
suited to investors seeking a high level of current income, with 
some growth of capital potential (or as an inflation hedge).

In addition to low-equity stake funds, we may also look at other 
specialized funds that apply covered call, long/short, or market 
neutral strategies to manage portfolio risk.  These unique funds 
can be among the least volatile offerings in the domestic hybrid 
funds group.  Since many of the online screen tools haven't been 
updated through September 2002, we'll rely on Morningstar's fund 
screener, where you'll usually find the most current mutual fund 
information online.

Screening Process

We began our search process by selecting the following criteria, 
using Morningstar's Fund Selector tool as follows:

 Morningstar Category = Domestic Hybrid
 Minimum Initial Purchase < or = $3,000
 Morningstar Star Rating = 4 or 5 
 Morningstar Risk Rating = Low

Funds with Morningstar Risk equal to Low are among the best 10% 
of their relative category peer group in terms of limiting risk 
(volatility and downside risk).  So in our case, we're limiting 
the universe to the lowest-risk funds in the hybrid fund group.  

This stringent criterion produced 35 results, which were then 
sorted by highest Morningstar Star Rating.  Funds with 5 stars 
are summarized below for your convenience.

 Screen Results w/ Morningstar 5-Star Ratings:
 Calamos Market Neutral (CVSIX)
 Concorde Income (COINX)
 Fidelity Freedom 2000 (FFFBX)
 Fidelity Freedom Income (FFFAX)
 Fifth Third Strategic Income (MXIIX)
 Frank Russell LifePoint (RCLCX, RCLEX)
 James Market Neutral (JAMNX)
 Merger (MERFX)
 Scudder Lifecycle Short (BTSRX)
 Scudder Retirement VII (KRFGX)
 Vanguard LifeStrategy Income (VASIX)
 Vanguard Wellesley Income (VWINX)

The above dozen funds make for a good short list to begin with.  
By their fund names, we see that there are some funds with low 
stock allocations, a couple market neutral funds, and a merger 
arbitrage fund, a good pool of low-risk hybrids.  

We then sorted the screen results by highest YTD return through 
October 7, 2002 and found that six funds have managed to report 
positive total returns in 2002.  Leading the pack with a +10.9% 
return in 2002 is James Market Neutral Fund (JAMNX) followed by 
Fifth Third Strategic Income (MXIIX), up 5.8% this year.  Other 
funds with net gains in 2002 include Concorde Income (COINX) up 
5.3%, Berwyn Income Fund (BERIX) up 5.1%, Scudder Retirement VII 
(KRFGX) up 3.4%, and Calamos Market Neutral (CVSIX) 3.1% higher.

Next we scored the results using Morningstar's Score tool based 
on customized criteria (low beta, low standard deviation, high 
alpha, high Sharpe Ratio, and low expense ratio) to see how the 
tool would score these funds using our customized risk criteria.  
The highest scoring funds were Berwyn Income Fund (BERIX) and 
Vanguard Wellesley Income Fund (VWINX), tied with scores of 40.  
Fifth Third Strategic Income Fund (MXIIX) scored 38 points, to 
rank in third place.  James Market Neutral Fund (JAMNX) ranked 
fourth with a score of 36.     

In the next section, we tell you which funds are our favorites.

Our Favorite Funds

While Vanguard Wellesley Income Fund (VWINX) is among the best 
run balanced funds in the nation, it normally allocates 35%-40% 
to stocks, well above what we are looking for here.  If you can 
tolerate the higher potential volatility the fund might produce, 
then it may be well worth your while to have a closer look.  At 
0.33%, the $8 billion fund has one of the lowest expense ratios 
in the hybrid category.  The fund has only a 2.2% YTD loss thru 
October 7, 2002, compared with a loss of 14.4% for the category 
average and 29.4% for the S&P 500 index.

Sibling Vanguard LifeStrategy Income (VASIX) has the "desired" 
stock allocation of approximately 20% of assets and invests in 
other Vanguard index funds to produce an income portfolio with 
some growth potential.  Since December 31, LifeStrategy Income 
Fund has lost just 4.6%, ranking in category's top decile (top 
10%).  Its trailing 3-year and 5-year annualized total returns 
also rank in the top decile for performance (with low relative 
risk).  




 
 

Compared to the 14.7% average annual loss by the S&P 500 index 
during the last three years, LifeStrategy Income Fund has done 
very well, producing an annualized 3-year total return of 3.1% 
for shareholders.  While the market (S&P 500) is down 3% on an 
annualized basis over the past five years, this "conservative" 
fund sports a positive 4.9% average total return.  Because it 
invests in its own Vanguard index funds, total expense is low.

Berwyn Income Fund (BERIX) is another favorite.  Like Vanguard 
Wellesley Income Fund, Berwyn Income Fund seeks current income 
with some potential capital appreciation by normally investing 
the bulk of assets in fixed income securities.  It limits the 
equity stake to 30% of assets, and requires that common stocks 
currently pay cash dividends.




 

According to Morningstar, Berwyn Income sports a trailing 3-year 
average total return of 7.3% as of October 7, 2002, 22.1% better 
than the S&P 500 index, and ranking in the category's top decile.  
Since December 31, the fund has risen in value by 5.1%, compared 
with the negative 14.4% total return for the hybrid fund average.  
A low 0.69% expense ratio adds to its appeal.

At 2.23%, the expense ratio for James Market Neutral Fund (JAMNX) 
isn't cheap.  However, this tiny $10 million market neutral fund 
boasts a positive YTD return of 10.9% thru October 7, 2002, true 
to its objective of providing positive returns regardless of the 
direction of the market.  It invests in undervalued common stocks 
and "sells short" overvalued common stocks while maintaining high 
levels of liquid assets (cash) for collateral needs.

For the trailing 3-year period thru October 7, 2002, James Market 
Neutral Fund produced a positive annualized total return of 8.8%, 
23.5% better than the market (S&P 500 index) and ranking the fund 
in the category's top 4% per Morningstar.  The category lost 3.6% 
on average over the same period.  

Like James Market Neutral Fund, Calamos Market Neutral (CVSIX) is 
in positive territory in 2002, and offers a strong return to risk 
tradeoff for conservative investors.  The $571 million fund has a 
lower expense ratio (1.50%) and solid long-term track record, but 
is currently closed to new investors.

Conclusion

You may also want to have a closer look at Fifth Third Strategic 
Income Fund Advisor Shares (MXSFX), Concorde Income Fund (COINX) 
and Fidelity Freedom Income Fund (FFFAX).  They also have strong 
return and risk characteristics within the hybrid fund category.  

Conservative investors seeking a low-risk hybrid fund have some 
strong options here.  For more information, visit the respective 
fund family's website.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

A bear couldn't "bank on it"

Crud.  Things were looking good for being short in the Swing 
Trader Model this morning after the early morning rally began to 
fade and the major indexes actually broke to new lows.  There was 
just "one problem" in my eyes and that was the bid that continued 
to hold in the financials and slowly built throughout the 
session.


To read the rest of the Swing Trader Game Plan Click here:
http://www.OptionInvestor.com/itrader/indexes/swing.asp


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The Option Investor Newsletter                  Tuesday 10-08-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: GSK
Dropped Puts: FLIR, MRK, TECD
Daily Results
Call Play Updates: ITMN
New Calls Plays: MDT
Put Play Updates: WHM, GM, PHM
New Put Plays: HAR, BCR


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

GSK $40.10 +0.41 (-0.55 for the week) We didn't like the intraday 
action on GSK, feeling it should have seen more of a push through 
$40 to the upside, as the Dow and Pharmaceutical Index (DRG.X) 
rallied strongly in mid afternoon. It was turned back on Monday 
at $40.50, as well.  On the positive side, it did find support at 
its 50-dma of $39.02, rebounding from an intraday low of $39.23.  
While the stock looks as though it could be at an entry point 
after the bounce from the 50-dma, we are no longer sure about the 
strength of GSK, and have decided to close the play within 0.39 
of where we entered.  If readers want to hold the play for a move 
back toward the 200-dma of $44.01, we have no argument, but the 
stock has not shown the action we were looking for and we will 
invest our "call money" elsewhere.


PUTS:
*****

FLIR $30.63 +2.41 (-2.10) The tighter this bear market spring
gets wound, the more explosive the eventual release of that
spring.  After reaching down to just above $27 in yesterday's
volatile session, shares of FLIR got a nice pop at the open
this morning.  Following a bit of sideways trade, the battle was
resolved in favor of the bulls with the stock pushing up to close
near its high of the day, just over our $30.50 stop.  This play
treated us well, and those that took advantage of the
capitulation spike lower yesterday afternoon could have booked
a $7+ gain on the play, depending on the quality of their entry.
We'll leave this one with fond memories as we search for another
pleasing ride.

---

MRK $46.00 +1.87 (+1.74) When we added MRK to the Put list over
the weekend, we were expecting a pending breakdown due to the
growing list of earnings warnings in the Drug sector.  On Monday,
MRK broke to a new recent low, but then rebounded strongly with
the rest of the market on Tuesday.  Due to the fact that it
failed to break down and instead found support near $44.50, we're
going to protect ourselves and drop the play tonight.  Look to
exit any open positions on an early dip on Wednesday.

---

TECD $25.03 -0.17 (-0.50) When we added TECD to the Put list a
couple weeks ago, our initial target was for a drop to the $25
level, with a secondary target down near $20 if it really broke
down.  Despite the weakness in the broad market in recent days,
TECD continues to find support near $25, and this looks like a
warning to us that here is a good point to harvest gains on the
play.  The market is trying to find a bottom, and a decent
short-covering rally could be favorable to TECD.  Let's remove
that risk, harvest those gains and move on to the next play.


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

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

CALLS              Mon    Tue    

GSK      40.10    0.06   0.41  Drop, weak rally
ITMN     31.49   -0.74   1.29  entry point, again
MDT      27.46   -1.55   1.01  New, 200-dma break


PUTS               

BCR      51.70   -0.58  -1.22  New, below congestion
FLIR     30.63   -4.29   2.41  Drop, profits
GM       33.60   -0.79  -2.28  Rolling downhill
HAR      48.60   -1.27  -1.49  New, new, low fidelity
MRK      46.00   -0.23   1.87  Drop, sector upgrade
PHM      38.62   -1.61   1.51  not strong enough
TECD     25.03   -0.27  -0.19  Drop, profits
WHR      43.33   -1.94   1.55  Failed PnF rebound


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

ITMN $31.39 +1.11 (+0.39 for the week) ITMN continued its 
pullback further than we would have liked.  However, it bounce 
right at its 200-dma and looks like a stock we would enter long 
at this level. That's our way of saying we should have waited for 
the pullback, but we like the current price for new entries.  The 
stock followed a similar pattern to that of the Biotechnology 
Index (BTK.X), which also found its legs, but is far below its 
200 and 50 dmas.  However, unlike the Biotech Index, ITMN has 
continued its series of higher highs and higher lows, a good sign 
of a stock on the rise. The last two days have brought additional 
positive news in ITMN, so we are still very interested in this 
long play.  Intermune has an alliance with Maxygen to develop a 
once a week treatment for its Actimmune drug, currently used to 
treat congenital diseases in children, and given three times per 
week.  Actimmune has also shown effectiveness in the treatment of 
idiopathic pulmonary fibrosis and is currently being tested for 
use in treating liver fibrosis and ovarian cancer.  The idea of 
being able to give a medicine once a week, as opposed to three 
times, is very appealing to doctors, as it requires less 
attention from patients to keep up with a regimen.  The testing 
has gone so well, that ITMN has given Maxygen a $1 million 
milestone payment for successfully achieving drug performance 
criteria.  ITMN also announced a similar pact with Inhale 
Therapeutics Systems to develop a new Hepatitis C treatment, 
using Intermune's Infergen and Inhale's PEGylation expertise.  
Conservative traders can wait for another successful re-test of 
the 200-dma of $30.23, however, we like new entries at the 
current level and will leave our stop loss at $29.00, as this 
would show a distinct break below the 200-dma.


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

MDT - Medtronic, Inc. $44.18 +0.93 (+0.98 this week)

Company Summary:
As a medical technology company that provides lifelong solutions
for people with chronic disease, MDT offers therapies to restore
patients to fuller, healthier lives.  Reading like a medical
journal, applications for the company's primary products
include bradycardia pacing, tachyarrhythmia management, atrial
fibrillation, heart failure, coronary and peripheral vascular
disease, cardiac surgery, spinal and neurosurgery and
neurodegenerative disorders.

Why We Like It:
Lehman upgraded their outlook for the major U.S. large cap
Pharmaceutical group from Negative to Positive on Tuesday
morning, keeping the Pharmaceutical index (DRG.X) from plunging
through important support near the $275 level.  That lent a bid
to most of the Medical sector throughout the day, and that
bullish sentiment could very well continue throughout the rest
of the week.  There are few stocks (even in defensive sectors)
that can be described as being in an uptrend, but MDT is
definitely one of them.  The stock has been consistently posting
higher lows and higher highs since the July lows, and has
achieved a couple of important technical milestones this week.
After pushing through the $43 resistance level, MDT decisively
crested its descending 9-month trendline on Tuesday and then
fractionally crept above the 200-dma ($44.11) at the close.
Additionally, the recent trade at $44 confirmed the bullish
condition of the stock, by putting the PnF chart back on a Buy
signal.  There is mild support now at the $43 level, which
becomes quite strong down at $42.  The current volatile market
action ought to give us an attractive entry on an intraday dip
and rebound from somewhere between these levels over the near
term before the bulls take a serious run at the first serious
resistance level between $45-46.  Due to the staggered resistance
that reaches from $6 up through $48, we would prefer buying the
pullbacks due to the greater ease of managing risk.  Place stops
initially at $42.

*** October contracts expire in less than 2 weeks ***

BUY CALL OCT-42 MDT-JV OI=3954 at $2.25 SL=1.00
BUY CALL OCT-45 MDT-JI OI=3245 at $0.70 SL=0.25
BUY CALL NOV-42*MDT-KV OI=8337 at $3.20 SL=1.50
BUY CALL NOV-45 MDT-KI OI=7144 at $1.65 SL=0.75

Average Daily Volume = 4.45 mln



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

WHR $43.33 +1.55 (-0.40 for the week) WHR bounced with the 
broader markets intraday, and wound up tacking on $1.55 at the 
end of the day.  Its intraday chart, however, shows an 
interesting story.  The stock broke down on the point and figure 
chart at $44, which is also just below its 200-dma of $44.15.  
While we could expect some rebound after dropping $2 in three 
days, today's rebound was stopped dead just under that $44 
breakdown level, reaching an intraday high of $43.80, before 
sinking into the close. The failure at that level looks as though 
there is now resistance where the stock previously found support.  
This is common and usually requires a re-test of the level, which 
we got today. The failure provides a good point for new entries, 
as long as the market continues its retreat.  We are at a pivotal 
level, with the Dow closing around 7500, the SPX around 800 and 
the OEX around 400, so we will keep an eye on overall market 
sentiment before initiating new shorts.  

---

GM $33.60 -2.28 (-2.82) When we added GM to the Put list a
couple weeks ago, it was on the expectation that the recent
string of strong auto sales was unsustainable.  Our first
confirmation came with the news that the company's September
sales fell by 13%.  That was good enough to drive the stock
decisively below the important $40 level.  Adding fuel to the
bears' argument today, the company's CEO admitted that he sees
2003 sales falling due to expectations that economies won't
revive until the middle of 2003.  While the company didn't change
its revenue or earnings forecasts, investors took the admission
as an ominous sign, dropping the stock for a more than 6% loss on
very heavy volume (more than double the ADV).  That drop puts GM
at its lowest level since January 1993.  The column of O's on the
PnF chart grew again today, with the vertical count now pointing
to $17 as an eventual target.  Intraday resistance is now firming
up near $35, with even more resistance at $36.  Use the next
failed rally at either of these levels to initiate new positions,
lowering stops to $36.  Keep in mind that we are now approaching
GM's earnings announcement on October 15th, so there is only one
more week left to play.

---

PHM $38.62 +1.51 (-0.52) After the brutal selloff in Housing
stocks in the past several sessions, the group was due for a bit
of a rebound and that's just what materialized off the lows on
Tuesday.  After slightly undercutting Monday's low, PHM caught a
bid near the $36.50 level and advanced smartly into the closing
bell, posting a 4% gain on the day.  But that doesn't change the
fact, that the stock (along with the overall $DJUSHB sector) is
mired in a persistent and powerful downtrend due to a growing
belief that the Housing and Refinancing bubbles are in the
process of deflating.  Despite the short-covering in PHM, the
stock ran into strong resistance just below $39.  That doesn't
mean that the bulls won't be able to push through it tomorrow,
but without some sort of catalyst, it looks like only the latest
opportunity to enter new bearish positions.  The company is set
to release earnings on October 22nd, and with the PnF chart
still bearish to the $32 level, there is very likely more
downside left in the play.  Look to enter new positions on a
rollover near $39, or possibly as high as $41, which is the site
of much stronger resistance.  Stop is currently $41.50.


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

HAR - Harman International - $48.60 -1.49 (-2.76 for the week)  

Company Summary:
Harman International Industries, Incorporated is a leading 
manufacturer of high-quality, high fidelity audio products and 
electronic systems for the consumer and professional markets. The 
Company's stock is traded on the New York Stock Exchange under 
the symbol: HAR.  (source: company release)

Why We Like It:
As layoffs have increased and the economy has shrunk, high-end 
high fidelity audio products are not at the top of most consumers 
shopping list.  At least not above food and household items.  
With the retail industry seeing a drop off in sales over the last 
several months, the holiday shopping season does not look very 
promising. Everyone from Wal-Mart to Federated (owner of 
Bloomingdale's and Macy's) has seen sales below previous 
expectations for the last several months and the port lockout did 
not help the industry.  While the ports have been re-opened 
through Christmas, one of the main ongoing effects is the delay 
in getting the ships back overseas to catch up with holiday 
loads.  Even if they manage to overcome that roadblock, the trend 
in retail sales is still below expectations.

HAR has experienced a classic head and shoulders technical 
pattern, with an added punch.  The neckline and 200-dma actually 
run very close to one another.  Today's breakdown broke both of 
these levels, in addition to the 50-dma, which was looming just 
below.  The neckline break carries with it a downside measuring 
objective of $42.  The point and figure chart also shows a new 
sell signal on the intraday trade of $48, on a double bottom 
breakdown, or a descending triple bottom breakdown, depending on 
how it is viewed.  The PnF bearish vertical count of $42 
coincides with the downside measuring objective of the head and 
shoulders.  While one technical indicator is always nice, having 
two indicators point to the same target is even better.  There is 
a bullish support line at $44, which could be a speed bump on the 
way down, but that will not deter us from using $42 as our 
initial target.  Of course, even if the stock gets held up at 
$44, it will still be good for a gain of more than $4.  
Conservative traders can wait for a failed rebound underneath the 
200-dma of $49.40 for an ideal entry point, but if we don't get 
that chance, then a break below today's low of $47.81 would be an 
alternative.  OI sees the current level as acceptable for 
initiating the play. Place stops at $52, just above Monday's 
high. 

*** October contracts expire in less than 2 weeks ***

BUY PUT NOV-50*HAR-WJ OI= 50 at $4.20 SL=2.10
BUY PUT NOV-45 HAR-WI OI= 10 at $1.90 SL=1.00

Average Daily Volume = 297 K


---

BCR - C. R. Bard, Inc. $51.70 -1.22 (-1.82 this week)

Company Summary:
C. R. Bard, Inc. is engaged in the design, manufacture, packaging,
distribution and sale of medical, surgical, diagnostic and patient
care devices.  Hospitals, physicians and nursing homes purchase
approximately 90% of the company's products, most of which are
used once and discarded.  BCR's major product group categories
are: vascular diagnosis and intervention, urological diagnosis
and intervention, and oncological diagnosis and intervention.
In addition, the company maintains a fourth product group,
surgical specialties.

Why We Like It:
Carnage has been the name of the game lately in many of the
previously high-flying Health Care stocks.  Lab-testing companies
LH and DGX have been plunging in recent sessions, largely due to
the Q3 warning from LH, which resulted in a more than 33% one-day
hair cut for the stock.  This has cast a pall on many of the
stocks involved in medical testing and diagnostics industry.
Shares of BCR had been trading between $53-56 for much of the
past 2 months but broke down in a big way on Tuesday, losing the
$53 support level.  This is historically significant, as the
stock traded in a similar pattern in May and June before breaking
down with the rest of the market, eventually trading as low as $46
before recovering with the rest of the market.  While there is
some mild support near the $51 level, once below that level, BCR
could quickly seek out its July lows.  Now that the stock has
started to break down, any rebound will have to contend with
strong overhead resistance in the $53.50-54.00 area.  Momentum
traders can consider new positions on a drop under $51, while more
cautious traders will want to enter on a failed rally below $54.
We are initiating coverage with our stop set at $54.25.  Note that
BCR is set to announce earnings on October 16th, so this will be
a short-term play.  We'll be dropping coverage ahead of the
earnings release.

*** October contracts expire in less than 2 weeks ***

BUY PUT OCT-55 BCR-VK OI=256 at $3.80 SL=2.25
BUY PUT OCT-50 BCR-VJ OI=523 at $0.90 SL=0.50
BUY PUT NOV-50*BCR-WH OI= 30 at $1.80 SL=1.00

Average Daily Volume = 335 K



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The Option Investor Newsletter                  Tuesday 10-08-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: PUT - HAR
Traders Corner: USING INDEX FUTURES TO HEDGE AN INDEX OPTION 
    POSITION
Traders Corner: Open To Close


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

HAR - Harman International - $48.60 -1.49 (-2.76 for the week)  

Company Summary:
Harman International Industries, Incorporated is a leading 
manufacturer of high-quality, high fidelity audio products and 
electronic systems for the consumer and professional markets. The 
Company's stock is traded on the New York Stock Exchange under 
the symbol: HAR. (source: company release)

Why We Like It:
As layoffs have increased and the economy has shrunk, high-end 
high fidelity audio products are not at the top of most consumers 
shopping list.  At least not above food and household items.  
With the retail industry seeing a drop off in sales over the last 
several months, the holiday shopping season does not look very 
promising. Everyone from Wal-Mart to Federated (owner of 
Bloomingdale's and Macy's) has seen sales below previous 
expectations for the last several months and the port lockout did 
not help the industry.  While the ports have been re-opened 
through Christmas, one of the main ongoing effects is the delay 
in getting the ships back overseas to catch up with holiday 
loads.  Even if they manage to overcome that roadblock, the trend 
in retail sales is still below expectations.

HAR has experienced a classic head and shoulders technical 
pattern, with an added punch.  The neckline and 200-dma actually 
run very close to one another.  Today's breakdown broke both of 
these levels, in addition to the 50-dma, which was looming just 
below.  The neckline break carries with it a downside measuring 
objective of $42.  The point and figure chart also shows a new 
sell signal on the intraday trade of $48, on a double bottom 
breakdown, or a descending triple bottom breakdown, depending on 
how it is viewed.  The PnF bearish vertical count of $42 
coincides with the downside measuring objective of the head and 
shoulders.  While one technical indicator is always nice, having 
two indicators point to the same target is even better.  There is 
a bullish support line at $44, which could be a speed bump on the 
way down, but that will not deter us from using $42 as our 
initial target.  Of course, even if the stock gets held up at 
$44, it will still be good for a gain of more than $4.  
Conservative traders can wait for a failed rebound underneath the 
200-dma of $49.40 for an ideal entry point, but if we don't get 
that chance, then a break below today's low of $47.81 would be an 
alternative.  OI sees the current level as acceptable for 
initiating the play. Place stops at $52, just above Monday's 
high. 

BUY PUT NOV-50*HAR-WJ OI= 50 at $4.20 SL=2.10
BUY PUT NOV-45 HAR-WI OI= 10 at $1.90 SL=1.00

Average Daily Volume = 297 K



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

USING INDEX FUTURES TO HEDGE AN INDEX OPTION POSITION
By Alan Hewko

After last night's "Index Futures Basic Information" article, I had 
received a few emails asking for more information regarding the use 
of Index Futures to HEDGE an existing OEX options position (or DIA 
options, etc).

As always, real world examples work the best.

Using Index Futures to Hedge a - WINNING - Option Position
----------------------------------------------------------

Near Monday's close, OI staffer Jeff Bailey had suggested:

Buying Long OEX puts at OEX Cash 399 
(aka - when the OEX index trades at 399). 

Assume you followed that trade and took them home into Tuesday's 
open.

On Tuesday morning the market had gapped up higher (reasons why are 
not important for this article).  Today, Tues. Oct 8th - 9:30 AM 
open, OEX Cash was approx. 401, but you felt this Gap Up would sell 
off, which it did.  Everyone had been talking about the strong 
SP500 support at 775-77.

ES (Emini SP500 Futures Chart) - intraday for Oct. 8th.


 


OEX Chart - intraday for Oct. 8th.


 

Sure enough at 12 Noon, OEX was 393, ES (Emini SP Futures) were at 
777s (very close to what you felt would be a likely large support 
area). On the other hand, you also knew that if by some chance the 
ES were to lose that large 775-777 support then the market could 
have had a Dow -300 point Meltdown day.

At this very important Market Index support pivot, you could have 
HEDGED your OEX Puts in this fashion:

     Keep the existing winning OEX puts

--- AND

     Go LONG ES (Emini SP500) Futures at 778 

By doing this, you have "Locked In" your winning Put profits no 
matter what happened.

In today's case, the market confirmed that 778 was indeed a 
"bottom" but by this Hedge, there is NO PANIC or need to make a 
snapshot decision as you are fully Hedged. 

After 5-10 minutes of the market confirming that 778 was a very 
likely Bottom, you decide to take OEX put profits.

ES is now 781, OEX is 394.2 

Sell to close (take profits) on the winning OEX puts from 399.

At that point you have 2 choices to make:

     1.     Either go totally flat by Selling to Close your ES long
            from 778 at 781 (for a gain of + 3)

---  OR
  
     2.     If you have now become Bullish, thinking that 778 very
            likely was a great entry for a long position, there's 
            no rush to buy OEX calls as you are already LONG in 
            this ES position from 778.

As the afternoon developed, ES traded as high as 810; but let's 
assume you exited the ES long before that at 805 for a Gain of 17 
points (as you knew that ES 805 was a trade pivot several times 
before).

It will vary from one futures broker to another, but based on 
average margins, that 17 point ES gain intraday would have been 
approx. gain of 50-100%!

And add in the several points from the winning OEX put makes for a 
very nice trade.

The point of hedging an Index option position with Futures is that 
a great many times, the market gets to a very key support or 
resistance number - it may Hold, it may Fail - NO ONE KNOWS with 
100% certainty.

Hedging at those important levels, especially when holding a 
winning Option Position is smart trading.

Other good moments to hedge :

1.     Right before an important economic number.
2.     Before an important earnings report.
3.     Able to hedge in the Overnight markets later in the evening, 
       or very early in the morning (when the Options and Stock 
       market is Closed) as Futures trade 22.5 hours a day.


Using Index Futures to HEDGE a --- LOSING --- option position:
--------------------------------------------------------------

Example:

You are flat but bearish and buy OEX Puts.
5 minutes later some amazing Good news comes out and the market 
goes vertical upward.
You know how difficult it will be to quickly Exit those Puts as the 
spread will become very wide, the Option Market Makers will be 
playing their usual "games" on fills.

My thought would be this: The second you see that Good News and 
realize in your gut that you were Very Wrong - don't worry about 
those losing Puts for a moment, and instead, HEDGE by going LONG ES 
Futures (or Dow, or NDX futures). 

You are now hedged, so no matter how high the market goes, you 
won't lose more money.

You now have a few moments to decide the merits of this News.

Is it going to hold? Is the Market near an important upper level? 
etc.

          Hedging in this fashion affords you the TIME to think 
          more clearly vs. making a panic decision ! 

Read that above sentence again.

If you decide it truly is Great News, exit the losing puts, and 
hold onto the winning ES Futures Long.


Using one Index Futures contract to HEDGE 
another type of Index Futures Contract
-----------------------------------------

SOME BASIC INFORMATION FIRST:

On an average day, ES (Emini SP500 Futures) moving 1 point will 
equal a 10 point YM (Dow Futures move) by a 1:10 ratio.

5 ES points = 50 YM points; 10 ES points = 100 YM points, etc.
ES (SP500  Futures) is $50 per SPX point.
YM (Dow $5 Futures) is $ 5 per DOW point.

Roughly speaking, the Margin on each ES and YM contract is 
approximately the same. 

If you held 1 ES contract for a 10 point ES move, you make $500 
profit on that trade. (10 SPX points x $ 50 = $500).

If you held 1 YM contract for a corresponding 100 point YM move, 
you also make $500 profit. (100 DOW points x $ 5 = $500)

So in other words, if you bought 1 ES -or- 1 YM contract at the 
exact same time that rally started, on an AVERAGE day, your net 
gain would be about the same ($500). 

HEDGING Example:

You are bearish and  Short YM (Dow Futures) at 7700.

       Position:   YM Dow Futures: Short 1 contract at 7700
                   ES SP  Futures: No position
                   
You are right, and three hours later, YM is at 7500, ES are 800.

Currently, your position has a YM gain of 200 points. Yea!

You know that these two levels are serious support (ES 800 and Dow 
7500).  The market has stopped selling and is going sideways for 
10-15 minutes.  You realize that IF these key support levels give 
way, the selling might really pick up again providing you with even 
more Short gains.

Obviously, no one can know with total certainty.

So you decide to HEDGE your existing YM short by buying a ES 
contract.

Remember, (and this is important) ES and YM roughly move the same 
DOLLAR amount.

Trade: Buy to Open (go Long) 1 ES (Emini SP Future) at 800

Current Position:
     Prices: YM 7500, ES 800
     YM Dow Futures: Short 1 contract (from 7700)
     ES SP  Futures: Long 1 contract  (from 800)

This does 2 things:
Locks in your 200 point YM profit (which would be $1000), and 
allows you some TIME to decide whether or not those key supports 
will hold or not.

15 minutes later, the market is going up on Short covering from 
those key support areas and you decide to exit your YM short and 
(in this example), to exit the ES long as well at the same time.

Exiting the 2 positions and going Flat:

Buy to Close (Cover) 1 YM contract at 7550 for Gain of + 150
Sell to Close 1 ES Contract at 805 for Gain of + 5
Net Profit on both Trades is still the same $1000
(150 YM x $5) + (5 ES points x $50) = $1,000

Naturally, you could also have confirmed that those levels were 
indeed a Bottom, exited the YM Dow short at 7550 and held onto the 
ES long from 800, perhaps selling it a level above 805 for 
additional profit.

So what did this accomplish you might ask? I had the same $1000 
profit both times.

Well, let's see what might have happened if those key supports did 
not hold (similar to the market action we saw this past Monday).

Backing up to above Current Position:

     Prices: YM 7500, ES 800
     YM Dow Futures: Short 1 contract (from 7700)
     ES SP  Futures: Long 1 contract  (from 800)

This time, let's say those supports did NOT hold; and the market 
started to sell off very hard.

Simply exit the HEDGE long portion of the trade and continue to 
stay YM (Dow Short):

Trade: Sell to close (exit the long from 800) ES at 798 Profit -2

Current Position:
     Prices: YM 7480, ES 798
     YM Dow Futures: Short 1 contract (from 7700)
     ES SP  Futures: No position

The selling continued into the close once those supports were lost 
and you decide to take profits on the short and go Flat.

Prices: YM 7420, ES 792
Trade:  Buy to close (Cover) 1 YM (Dow) contract at 7420 Gain +280
Position: Flat ES, Flat YM
Profit:  YM + 280 dow points x $ 5 = Gain $1400
         ES - 2 SPX points x $ 50 = Loss of $100
Net Profit: $ 1300 (1400-100)

In this case, we made $300 more using what I call the "Hedge and 
Release" trade. We hedged at a known key support, and then released 
the hedge when it became obvious the market was going in the way we 
originally wanted it to, in this case - down.

If you have any questions or comments on this Hedging with Futures 
article, please email them at futures@OptionInvestor.com

Alan Hewko


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

Open to Close
By John Seckinger
jseckinger@OptionInvestor.com  

It all comes down to pattern recognition.  Tonight, the focus is 
on three patterns learned while trading in Chicago.  Moreover, a 
trader will be rewarded with a a good night’s sleep.  

As the title implies, these three trading strategies should be 
used from near the opening bell until 4:00 p.m.  Day traders 
only.  I would not advise keeping positions overnight when using 
either of the three strategies about to be mentioned; however, 
some traders differ.  If longer-term technical patterns confirm 
the daily trend, keeping a position overnight could make sense.  
I am just usually not comfortable doing it, especially since 
these patterns only work with a five-minute chart.  Positions I 
keep overnight are ones that initiated from a monthly, weekly, 
and daily chart patterns.  

The three trading patterns to be covered is (1) open drive, (2) 
open test-drive, and (3) responsive trading.  The first pattern 
deals with the market (or a particular security) opening up one 
direction and maintaining that momentum throughout the session.  
Pretty straightforward. The second pattern is when prices reverse 
to test levels under/above the opening range, only to trade in 
direction of the opening period for the remainder of the session.  
Example:  First five-minutes the Dow rises from 7400 to 7500.  
Soon afterwards, the Dow trades back under 7400 (“testing” the 
opening) before keeping with the first period pattern of higher 
prices (Dow rises back above 7500 and closes near its highs).  

The last trading pattern is simply a range-bound session (read: 
responsiveness) and actually occurs over 70% of the time.  The 
problem is asserting when the day is actually range-bound and not 
following an “open test-drive” pattern.  

Let us begin looking at examples.  I have decided to use the S&P 
100 (OEX) Index; moreover, all three patterns have occurred since 
September 24th.  Sure, every day a pattern can be “forced,” but, 
for the purposes of this article, a clean recognition of a 
pattern is needed. 

The first pattern covered is “open drive,” recognizable because 
the opening area is not tested during the remainder of the 
trading session.  The rebound seen after the first ten minutes 
does give the impression that the index will stay within a 
defined range; however, traders have to be disciplined.  If the 
opening level is not tested, treat the rebound as a selling 
opportunity.  Where should a stop be placed?  There is no set 
rule for stops; however, I would look to contain risk roughly 
2.00 above the opening level.  This 2.00 cushion can then allow 
stops to be triggered at the opening level and take prices 
slightly upwards.  Moreover, if the market does act responsively 
(traders selling resistance and buying support), look to exit 
near 422 and the bottom of the range.  

Chart of S&P 100 Index, 5 minute 


 

What would most likely have to happen in the above example for 
the stop to be hit?  An “open test-drive” pattern.  Looking 
below, this pattern is when prices trade opposite of the opening 
period (first five minute green candle) and “test” levels underneath 
the opening range.  Then, soon afterwards, prices go 
back into the range and begin its ascent throughout the remainder 
of the session.  The first few hours made it appear that the 
market would trade responsively; however, once above 412, prices 
never looked back.  Obviously, this pattern can occur in a 
downward fashion as well.   

Chart of S&P 100 Index, 5 minute


 

The hardest, but most common, pattern is the responsive scenario.  
Volume is usually heavy, volatility is initially high, and 
traders are most likely “picturing” a significant move before it 
happens.  Looking at the example below, the OEX really doesn’t 
give the indication of responsive price action until 12:30 p.m.  
This still gives traders 3  hours of “high probability trading,” 
which is more than enough time to capture a move in an otherwise 
dull, or hard to understand, market.  

Chart of S&P 100 Index, 5 minute


 

There are a few things to note with the responsive scenario.  
First, since the overall market is in a downward trend, it makes 
sense that there will be less tests of opening range by longs 
than shorts testing areas under 412.  The first spike up to near 
418 was most likely stops placed by shorts, confirmed later as 
the opening range held firm during the last hour of trading.  
So, why not sell the market at 411?  That is a plausible 
strategy, since the market could be in an “open test-drive” 
pattern.  Patience is what makes good day traders, especially 
since the important aspect is getting a high-odds move (413 to 
415).  If a trader was to sell, it would have made more sense 
near 416, since prices went back into the range and there are 
good odds the first period low will be tested.  

Another question you may be asking yourself:  How is the close 
neutral?  Since the day was responsive by nature and 410.86 is 
above two relative lows set earlier in the session, being short 
into the close may not be a “high-odds” move.  Would it make 
sense to be long?  In hindsight, yes; however, responsiveness can 
also mean directionless.  If directionless, why have a position 
on at the close if initiated that same session?  

What about the first two patterns, wouldn’t it make sense to keep 
a position overnight?  It would, but only if longer-term trends 
confirmed the directional price action.  Remember, for the 
purpose of this article, we have only looked at a five-minute 
chart.  I would turn to a 60-minute, daily, and weekly chart 
before deciding if it makes sense to hold the position overnight.  

In a trading environment where information is processed extremely 
quick, asset allocation generally can begin and end all in the 
same session.  Therefore, since the market has the appropriate 
liquidity, I generally worry about prices closing on their 
session lows/highs, only to gap higher/lower the following 
morning and trade with an entirely new mentality.  

For fun, let us look at a five-minute chart of the Dow during 
Tuesday’s trading.  The opening range was significant, and the 
follow-through move higher made me think two thoughts:  (1) open 
drive, or (2) open test-drive.  Note:  I usually like to wait an 
hour before putting on a trade, so pattern recognition now isn’t 
necessary.  In hindsight, it was good that I allowed the Dow to 
trade some more.  Only a few minutes later, prices reversed and 
the possibility of an “open drive” session was thrown out the 
window.  

Chart of Dow Jones, 5 minute


 

As prices came back into the range, selling the market is fine; 
however, the objective is really only for a test of the opening 
low.  Once under the opening low, the “open test-drive” scenario 
was the likely scenario.  Of course, only a few hours passed and, 
as a trader, odds were the market was in a responsive pattern.  
As a trader, the thought-process was for a move back to the high 
during the first five minutes of trading.  Remember, these 
patterns are only for day trading.  With the Dow coming back to 
close below the high of the first five minutes of trading, I 
would close out all positions (if any were on) and get a good 
night’s rest.  

Yes, time for the homework assignment.  Tomorrow and going 
forward, watch a five-minute chart for these three outlined 
patterns.  If you are able to see them and trade them profitably; 
fantastic.  Remember:  Do what is comfortable, and do not try to 
force some of my trading strategies into your system if the 
patterns become difficult to master.  The goal is to make money, 
so do what works.  Just give these three patterns a chance, 
watching for them over the next week or so.  Thanks.  As the 
five-minute chart of the Dow illustrated, the market is extremely 
dynamic, at-times volatile, and hard to forecast price direction.  
However, with discipline, we were able to eliminate two of the 
three patterns and it was possible to make money from the long 
side during the afternoon session.  Patience.  


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