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Daily Newsletter, Monday, 10/14/2002

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The Option Investor Newsletter                   Monday 10-14-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: A Day Off
Futures Wrap: 3rd Day of "Buy the Dips" on an "Inside" Monday
Index Trader Wrap: The paint dried, but it didn't peal
Weekly Fund Wrap: Equity Funds Rebound
Traders Corner: More on Relative Strength

Updated on the site tonight:
Swing Trader Game Plan: This is the Thanks I Get?

Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
10-14-2002                High    Low     Volume Advance/Decl
DJIA     7877.40 +  27.11 7915.00 7745.70  1380 mln   769/586
NASDAQ   1220.53 +  10.06 1221.60 1193.42  1200 mln   762/430
S&P 100   425.54 +   2.86  427.17  418.28   totals   1531/1016
S&P 500   841.44 +   6.12  844.39  828.37
RUS 2000  346.53 +   1.60  346.63  342.83
DJ TRANS 2138.75 -  15.92 2159.08  2130.36
VIX        42.12 -   1.32   44.05   42.12
VIXN       59.08 +   0.21   60.49   57.89
Put/Call Ratio 0.93
*******************************************************************

A Day Off
by Steven Price

Wake me up on Tuesday morning.  Today was quite a sleeper, with 
the bond market closed.  We are in earning's season, but most of 
today's releases were after the close, so the day's trading had 
very little to kick start it in one direction or another.  There 
is one development that seems to be giving us some guidance as 
far as the current resistance level for the Dow.  Any bear market 
will get its share of intermediate rallies, and figuring out just 
where they are going to run out of steam, or break higher, can 
provide some good long/short opportunities.  The Dow lost 1879.52 
points from its intraday high of 9077.01 on August 22, to its 
intraday low of 7197.49 last week.  I highlighted last week that 
I would need to see a trade of 8012 intraday, or a close above 
8000, in order to change my bearish sentiment and for the trend 
of lower highs to be broken.  The other interesting development 
of the last two trading days, one a high-volume, enormous rally, 
and one a low-volume, up and down day, is the point at which the 
index found resistance.  Both days, the move to the upside was 
halted right at the 38.2% Fibonacci retracement level of 7915.46.  
Friday's rally ran out of stem at 7901.26 and today's upside 
movement (I hesitate to call it a rally) ended right at 7915.00.  
Some could argue that this is a series of higher highs, given 
Thursday's high of 7560.93.  However, a look at the bigger 
picture still shows a downward trend, with failure at a 
significant retracement level.  Below are examples of the daily, 
weekly and monthly charts on the Dow.  While I'd like to put a 
smile on readers' faces, these charts are not pretty.  Cover the 
kids' eyes, and if you are sensitive to graph-ic violence, you 
may want to turn your head. 

Daily Chart of the Dow


 

Weekly Chart of The Dow


 

Monthly Chart of the Dow


 


This week should give us a good look into the crystal ball of the 
fourth quarter.  There are many large companies releasing 
earnings this week and should give commentary along with those 
releases in regard to outlook for the fourth quarter.  Intel 
releases after the bell on Tuesday and Advanced Micro Devices 
releases Wednesday.  Both should comment on PC demand outlook for 
the fourth quarter.  The chip stocks have been trying to find 
some legs after a sell-off that saw the Semiconductor Sector 
Index  (SOX.X) lose 41% of its value between August 19 and 
October 9.   Chip stocks have been a short trader's goldmine in 
recent months and they finally appear to be trying to set a 
bottom.  However, each rebound in the sector index has been 
turned away from breaking the trend of lower highs.  The SOX has 
been in a descending channel since April and a trade over the 
recent intraday high of 263, or close over the recent closing 
high of 256 would help it break that channel.  

Chart of the Semiconductor Sector Index (SOX.X)


 

This morning brought another automotive downgrade. Merrill Lynch 
downgraded both Ford and General Motors, citing deteriorating 
prices for both new and used cars.  What I find most disturbing 
is that these companies were beat up for several reasons, 
including lowered earnings estimates, pension problems, poor debt 
ratings and the possibility of sales declines in 2003.  Add 
pricing pressure, when they are already offering zero-percent 
financing and there is only one way to go.  We'll be getting GM's 
earnings release on Tuesday, and should also get some insight 
into their fourth quarter and 2003 outlook. 

This weekend's bombing in Bali, which killed more than 180 
people, only added to the rising price of oil futures, as war 
fears were further stoked.  This, combined with OPEC's reluctance 
to raise output quotas, continues to filter down to companies' 
earnings reports.  This morning, Airborne Express (ABF) announced 
that they would miss earnings expectations.  The company cited $4 
million in airplane related costs and a $2 million increase in 
fuel costs.  We heard the same sentiment from American Airlines, 
and it is likely to be repeated until oil costs drop.  That is 
unlikely to happen, with an Iraqi invasion looming.  While those 
costs don't get much publicity, it undoubtedly affects the bottom 
line for everyone from airlines, to chemical companies (See Dow 
Chemical), to pizza delivery drivers. Crude Oil futures are now 
back over $30 per barrel, after trailing off for the last couple 
of weeks. 

Chart of Oil Futures


 

Oil prices are one of many factors that will affect the economy 
if we do take action against Iraq.  There is also concern 
consumers will be inside watching television reports, rather than 
shopping during the holiday season, and staying home out of fear 
of retaliatory strikes in public places. Recent statements 
attributed to Osama Bin Laden, praising terrorist attacks on U.S. 
soldiers in Kuwait and on a French supertanker off the coast of 
Yemen, threaten continued action against the U.S. if it continues 
its presence in Muslim nations.  While it is not clear if the 
statements are from Bin Laden, they underscore the fear of 
retaliation for action in Iraq.  

The Nasdaq Composite (COMPX) is getting even closer to breaking 
the trend of lower highs, which was actually broken by the Nasdaq 
100 (NDX).  In the past, the NDX has given the first signals of a 
turnaround, and that pattern break occurred last week.  Bears may 
want to watch this index, which contains some of the largest tech 
stocks, for signs of failure, before picking a top and going 
short.  If it continues higher, it could be a sign that the Dow 
will follow. 

Chart of the Nasdaq Composite and Nasdaq 100


 


The slowdown in retail and PC demand has made it into the 
electronics manufacturing services sector (EMS), according to 
this morning's prudential downgrade.  The research note stated," 
With demand for communications equipment continuing to be weak, 
enterprise hardware having recently weakened and PC demand trends 
mixed, we are concerned that there are very few 'legs' left 
supporting demand for electronics goods and consequently our 
companies' services."  The note also cited weak end demand and 
customer credit concerns.   

Boeing got more bad news, as they were beat out for a commercial 
jet contract by Airbus. Easyjet, Europe's no-frills version of 
Southwest, ordered 120 planes, with options for 120 more.  The 
deal was worth up to $6 billion, although Airbus offered a 30% 
discount, which would place the order closer to $4 billion.  Up 
until now, Easyjet has had an all-Boeing fleet, and loss of the 
order casts additional doubt on Boeing's 2003 and 2004 
projections.  The company produced 527 commercial jets in 2001, 
380 in 2002, and predicted 275-300 in 2003.  Analysts now predict 
only 250-260 in 2004, as well as possibly fewer in 2003, as well. 
Boeing has complained for some time that Airbus, which is 
government subsidized, is able to win a price war, and those 
fears appear to be well founded.  That doesn't mean there is 
anything they can do about it.

Energy firm TXU Corp. cut its dividend by 80% this morning, 
announced it plans to significantly reduce capital expenditures 
at all of its divisions and put its European businesses up for 
sale.  Morgan Stanley and CFSB downgraded the stock.  The moves 
were made to try and free up cash to deal with serious debt 
problems created by European operations. TXU's debt ratings were 
lowered by Standard and Poor's and Fitch, which lowered its 
ratings on the European subsidiary to "CCC," which indicates a 
likelihood of default. The stock lost 31%, to close at $12.94.  
TXU traded as high as $40 on October 1. 

After the bell, forest and paper product producer Temple Inland 
(TIN) beat earnings estimates by $0.03.  Profits were still down 
66% from a year ago, due to low prices for lumber and the boxes 
it manufactures.  The entire industry has been hammered to levels 
not seen since November 2000, but has rebounded the last few days 
with the broader markets.  Mohawk Industries, which makes floor 
coverings for homes and offices, beat estimates by $0.01.  That 
was an increase of 46% over the year ago period and reflected a 
reduction of shares, increased sales due to a merger and internal 
growth of Mohawk products, including a 9% increase in residential 
products.  MHK's results seem to indicate continuing strength in 
the housing market, although that could change this quarter, if 
the homebuilding stocks are any indication.

Volume was very light today and it is hard to make any momentum 
judgments based on that lack of activity.  Although advancing 
volume outstripped declining volume by a small ratio, new lows 
beat new highs by a 3:1 ratio.  Things should pick up tomorrow, 
with the earnings releases and continue for the rest of the week. 
Until then, make sure to keep an eye on the big picture, and the 
important resistance levels just overhead. 


************
FUTURES WRAP
************

3rd Day of "Buy the Dips" on an "Inside" Monday
by Alan Hewko
futures@OptionInvestor.com


As of the close for Monday, October 14, 2002 the Cash and Futures 
were:

4:00 PM Cash Close:    ES 842, YM 7859, NQ 904
4:15 PM Futures Close: ES 842, YM 7865, NQ 907

I did not trade on Columbus Day Monday so this article shall be 
rather brief. 

For the third day in a row, the market tone was "Buy the Dips" 
vs. "Sell all rallies" on a rather low volume wait-and-see type 
day.

As previously done, the below abbreviations apply for this 
article:

ES = E-mini SP500 December futures
YM = E-mini Dow $5 December futures
NQ = E-mini NDX 100 December futures

"Fade the Open Gap" worked again Monday as ES gapped down 10 
points lower Monday morning at ES 828 from its Friday close, and 
said gap-down was bought. As written Sunday night, it seemed 
likely that some long profit taking would occur Monday and the 
key would be whether support held and the market continued the UP 
tone, - OR - whether support would fail sending the Dow back to 
the 7500-7600 level.

For Monday - support held.

I had written in Sunday night's Market Monitor, "Friday's ES 
support from 11 AM and 3:30 PM is 826-828; below that is 823, 
815, 812, 809. Above the current ES 833 is 835, 838-840, 843-44 
(Friday's High), and then 848-852"

Those numbers of trade pivots, support and resistance played out 
rather well Monday as ES held the 826-828 level at the morning; 
taking out to the upside the minor trade pivot of 832-33, then 
835, 838, and spending a great deal of time 'chopping' around 
Friday's level of 835-838 before  closing Monday right near its 
day highs.

A late day attempt to lose support at 3:30 PM failed (exact 
mirror of Friday's 3:30 low).

The Dow spent the entire day between 7800 and 7900, closing a bit 
under 7900, but above the 7850 pivot.

NQ had the 'strongest' day as it closed above the 902-905 
resistance and at day highs.

The only bearish comment I might make on Monday's action is that 
it all came on rather low volume as the Bond markets were closed 
today for Columbus Day; and I also imagine some equity traders 
took the day off to spend a three-day weekend, or to await all 
the earnings which start Tuesday morning taking a 'wait-and-see' 
attitude on how the market in general holds up coming up off that 
stunning rally we've seen last Thursday and Friday.

Before moving on to today's ES Chart, I'd like to make a comment 
on why Futures can sometimes be a large help on an options 
trade/position.

Here is a chart of Microsoft (MSFT) from Monday showing the 
stock's performance until its 12:30 PM.

MSFT Chart: 


 


Example: a few days ago, when MSFT was 43-44, you bought some 
Long Oct MSFT 45 calls. You wish to take some profit on 1/2 your 
position at some point today, but were not exactly sure where. 

Umm....so far this chart of MSFT isn't really helping to suggest 
an exit point for 1/2 of those MSFT calls. You know $50 is a 
likely area of some resistance, but you are torn what to do. So 
far nothing on this MSFT chart is saying "take some profit"

Let's try and see if the NQ (Nasdaq futures) chart offers any 
help:



 


You know that NQ 905 has been an area of resistance, and at 12:30 
PM today, it was trading up 25 points from its morning open, and 
at what you knew to be an area of resistance (905). Also, 12:30 
PM sometimes becomes a time of day when resistance comes into 
play as the buying from the morning sometimes falls off a bit 
going into the 2-3 PM timeframe.

So you can see that the MSFT chart alone was not offering much 
help whether or not to take some Long MSFT profit; however the NQ 
(NDX futures) chart did. MSFT leaked lower from 12:30PM to about 
2 PM and the NQ number of 905 did provide a great place to exit 
some of those MSFT calls that you had wished to take profit on 
today.

Another way to have traded this was to have kept all those MSFT 
calls and to have shorted NQ futures at that known level of 905 
resistance then hold them short for a few hours until you formed 
an impression at 3 PM on how the market (and MSFT) would finish 
out the day. Near 3 PM, NQ dipped down to 892 (see NQ chart 
above), which was a 50% retracement of NQ's low/high of 880/905, 
and you could have then exited the hedge NQ short from 905 at 
895, making 10 NQ points profit, and when the market did indeed 
hold support at the 50% retracement level; and closed at day 
highs, made the decision to take all of your MSFT calls home 
overnight.

Note: 10 NQ points profit x $20/per point = $200 or roughly 20% 
gain. So not only would the NQ 'short hedge' have made a 
potential 20% profit, you got to keep all of your MSFT calls 
without ever once losing the bid-ask option spread by selling 
them and then buying them back.

ES02Z: E-mini SP500 December Futures for Monday Chart
        (NOT including the overnight session from  
         Sunday 6:30 PM - Monday 9:29 AM)



 


Monday ES opened 10 points lower from Friday's close, found a bid 
at Friday's 3:30 PM level at prior support of 826-28, leaked 
higher for 90 minutes until hitting 843-44, which had been 
Friday's highs. Profit taking took it down to the minor ES 
support at 832-833, and resumed the 'trend' from Dow 7200 which 
remains "up". The ES made a new high above the 843 area at 12:30 
PM (845) and right under the next higher resistance of 848-852. 

ES then leaked lower from that new high at 12:30 PM into the 3 
PM period, where a bid was found at 836 (the 50% retracement of 
today's Low/High 828/845) which can be seen in the above chart.

As we've seen now for a few days, near 3:30 PM shorts try and 
press the market lower under a support level (in today's case it 
was 835-836, in Friday's case at 3:30 PM it was 826-828). Once it 
became clear that attempt would fail, ES rallied going into the 
close.

Here is Monday's Dow Jones Industrials Chart:


 


As you can see, the Dow stayed within a 100 point range of 7800-
7900 all day, and a great deal of "chop" at the pivot of 7850.

Thoughts for Tuesday

Monday did (by a very few points) make higher highs today.
Monday also made higher lows.  In general, the market produced a 
lackluster "inside day" on low volume given the Bond Market being 
closed.  Nonetheless, after a 700-point two-day gain in the DJIA, 
the market held up extremely well on Monday.  Tuesday starts the 
earnings for the week and there are hundreds of them.

Tuesday pre-open finds some important bank stocks reporting their 
earnings. As written on Sunday, companies' earnings expectations 
have been so greatly reduced this last month, that I would expect 
most of them to be in-line or even beat by a small amount. The 
question remains how much of that is already priced into the 
market.

The next ES (SP500 futures) / SPX cash resistance area is a large 
one, from between 848 to 860; with 852 being a pivot number. 

For Tuesday morning, I plan to watch the ES 839-842 level, and 
the BKX banking index to get a sense of market direction.

Some Futures Q & A

Shall try and respond to some of the emails from readers 
concerning HOW futures trade online, and Margin examples:

You have heard the term "E-mini": well, the E in E-mini means 
"Electronic" which means that Futures do indeed trade online, 
just like stocks and options. In a similar fashion to 
stocks/options, the phone can be used if you lose your Internet 
connection, etc. 

For those that have not traded futures, please do not try and 
make them more complicated than they are. Quite simply, futures 
trade just like a STOCK on the Island (ISLD) exchange. It's truly 
not more complicated than that.

Just as there is Level 2 data for Stocks, showing Bid and Ask 
prices and SIZE a few levels above and below current prices; 
Futures work the same way. The only difference is that there are 
no Market Makers; similar to the Island (ISLD) book has no Market 
Makers for stock; it's comprised of just Bid and Ask prices (and 
size).

Yes, the tickers are of course different, but there are only 
three of them:

ES for SP500 futures, NQ for NDX futures, YM for Dow $5 futures.

Yes, there is a difference to the value of a 1 point move.

Stocks: - one point move is worth $1 

Options: MUCH more complicated - a $1 move in the underlying 
stock can be anything from a $0 move to $1 move in the option 
depending on which month you have, what strike price, option 
delta, the stock's volatility when you bought the option to the 
market's current VIX, etc.

Futures: A one point move does indeed mean three different dollar 
amounts depending on which future contract you bought. But it's 
so simple that one post-it note on your monitor will have all the 
information you would need:

     ES (SP500)  1 ES point  = $50 per contract
     NQ (NDX100) 1 NQ point  = $20 per contract
     YM (Dow $5) 1 Dow point = $ 5 per contract

Times of Day: If anything, the fact that Futures trade 22.50 
hours a day (plus their Sunday 6:30 PM open) is an advantage over 
stocks and options. However, this is yet another difference 
between Futures and Options. But at 4:10 PM or at 8:45 AM - if 
there is a market moving earnings or news event - you can't trade 
in the options market, but of course can in the Futures market.

Number of day-trades per week: 
Again, this is a difference. If your Equities/Options account is 
under $25,000; you have vast restrictions in place from the SEC. 
In general, you are allowed a maximum of no more than three day-
trades per five days. Futures have no restrictions of this type 
at all. One could have a $5,000 Futures account and daytrade the 
ES (E-mini SP500 futures) 100 times a day (or more) if they 
wanted to [grins]. I'm only making an extreme example obviously 
to demonstrate that Futures trading does not have the same 
restrictions as to the number of daytrades done per week and NOT 
suggesting that 100 round-turns a day on ES is a good thing 
[grin]. On average, one to five ES trades a day would be "normal" 
for most traders.


Leverage and Margin on Futures:
The last important difference is leverage and Margin 
requirements:

It is slightly more complicated as the Margin requirements to 
daytrade one futures contract varies (sometimes greatly) from one 
futures broker to another.

I shall use the following averages: the daytrade margin for ES 
(SP500 futures) and NQ (NDX futures) is $1000, and $800 for YM 
(Dow $5).

As an example on the rate of return of an "average" trade:

If a trader was long 2 ES contracts at 830.  This would probably 
requires about $2000 in your margin account to daytrade.

If you sold sell those two ES contracts at 835 then your gross 
profit would hypothetically be five ES points.

Gross profit of 5 ES points x $50 per point x 2 contracts = 
$500.00.

Don't forget to subtract your commission, which probably averages 
about $20 (2 contracts x $10 commission each).

Your net profit would be close to $480.  

Remember, that it only required $2000 in your margin account to 
open the position.

This would be a rate of return of 24% for the trade.

It would equate to an option trade where one bought $2000 worth 
of long calls and having that trade make $480 net.

For some reason, there is a mystique that Futures trading is so 
very different than Option/Stock trading. Other than the above 
differences, Futures trading truly is as easy as Trading MSFT 
Stock via an Island exchange Level 2 book. (except futures don't 
need a downtick to open a short).

Of course the opposite side of this hypothetical gain would be a 
loss.  If we opened the long position on the ES at 830 and we had 
a stop or sold it at 825, then the trader would have lost $500.00 
(5 ES points x $50 per point x 2 contracts = $500.00).  Plus the 
commissions.  This would be a 26% loss on the trade.

I am certainly NOT suggesting everyone run out and open a Futures 
account.  Futures trading is not for everyone and you should 
discuss it with your own qualified investment advisor before 
attempting to trade futures.

I do suggest that if you find the concept of some of the 
advantages of Futures Trading a positive, please do not make it 
more complicated than it truly is. If you have traded MSFT or the 
QQQs via an ISLD Level 2; or MSFT options(MSQxx) electronically; 
you have the experience to trade Index Futures after learning the 
simple differences and three new tickers (assuming of course that 
you wished to - grins)

Alan Hewko

Questions/Comments?  Please send them to:
futures@OptionInvestor.com


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

The paint dried, but it didn't peal

Today may not have been the most "exciting" day to be an index 
trader, but I do think and index investor can take away some 
bullish thoughts from today's action.

While institutions didn't have the Treasury bond market to play 
against, the broader market averages along with the bulk of 
sectors posted gains by session's end.

Today, along with the past 9 of 11 Monday's prior to October 
expiration, the major averages posted a positive gain.  Not much, 
but just enough to hint that bears are a little jittery as "bad 
news" get bought and that upcoming earnings season may have baked 
the bulk of the bad news into the cake.

Suffice it to day, the color green that has been painted on the 
major equity averages late last week has the paint drying, but 
not pealing today.

The Biotech Index (BTK.X) 342.81 +5.44% was today's "tech sector 
winner" and built gains into the close, while finishing right at 
its 50-day SMA.  

Adding gains to Friday's rally was the software stocks as 
depicted by the GSTI Software Index (GSO.X) 90.96 +1.83%.  It too 
managed a close right on its 50-day SMA.

With combined heavier weightings in the NASDAQ-100 (NDX.X) 900.75 
+1.13%, the bullish leadership from biotech and software may 
portend of good things to come for the NASDAQ-100 into the 
fourth-quarter.

And leadership from the biotechs and software is exactly what the 
NASDAQ-100 Index (NDX) and NASDAQ-100 Trust (AMEX:QQQ) $22.48 
+1.17% need at this point as the Q's edge above our longer-term 
downward regression dating back to December of last year, and try 
to get back on upward trend anchored from the October lows.

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


 

It was tough for any index to "bust a move" today as stock 
traders lacked the guidance it needed from the Treasury market, 
but a break much above $22.50 in the Q's has this once favored 
index among technology traders getting back above an old upward 
trend and above our LONGER-TERM regression channel.  On Friday, 
our short-term downward regression channel was broken to the 
upside and the Q's inched further higher today.  This week's 
option expiration along with key earnings from some of the big 
technology stocks will most likely provide some volatility, but 
support should be firm near $21.21 on a break above $22.50.

A quick look at the QQQ point and figure chart on conventional $1 
scale gives traders a good understanding that bullish positions 
should be eased into, but fourth-quarter seasonality, which tends 
to be kind to technology has some upside potential.  

NASDAQ-100 Index Tracking Stock (QQQ) - $1 box


 

While the bar chart of the QQQ hints of bullishness, the point 
and figure chart has yet to reverse up 3-boxes and still hints 
that bulls doing any buying here are "bottom feeders."  Last 
year, the QQQ's made a nice little move from early October into 
the latter part of the year from $31 to $43, but the pending sell 
signal and vertical count column hinted the Q's might trade $25.  

The point and figure charts will sometime give traders a 
"staggering" view of risk/reward.  Even a bear in the QQQ's 
becomes a little jittery when it would take a QQQ trade of $23 to 
mark any type of reversal, while it would take a trade at $27 to 
get this security back on a point and figure "buy signal" (an X 
column exceeding a previous column of X).  

S&P Depository Receipts (AMEX:SPY) - $1 and $2 box


 

The S&P 500 Index (SPX.X) 841.44 +0.73% inched higher today, as 
did the SPDRS (AMEX:SPY) $84.63 +0.55%.  The first sign that 
demand (Xs) would begin to outstrip supply (Os) would come with a 
trade at $86.  Bulls can look long 1/4 or 1/2 positions on a 
break higher at $86, which would be a triple-top buy signal.  
With the S&P 500 Bullish % ($BPSPX) still rather weak at 21.6% 
and yet to reverse back higher, caution is still advised for 
bullish traders.

S&P 100 Index Chart - $5 box


 

As you can see, none of the point and figure charts are showing 
"buy signals" yet.  The conventional $5 box scale of the S&P 100 
Index (OEX.X) does show the OEX bouncing from its bearish 
vertical count objective of 390, but it would take a trade at 430 
to get its chart back on a buy signal.  

With the narrow and more volatile NASDAQ-100 Bullish % ($BPNDX) 
recently reversing up into a column of X, I'd expect the also 
narrow, but nearly as volatile OEX Bullish % ($BPOEX) to show 
some internal confirmation of bullishness should the OEX attempt 
a break higher at 430.  It would currently take a reading of 24% 
to have the S&P 100 Bullish % ($BPOEX) reversing higher.  At 
"oversold" levels, look for a trade at 430 in the OEX to have 455 
coming into play near-term.  

Dow Industrials Chart - $50 box


 

The Dow Industrials (INDU) 7,877 +0.34% was the only point and 
figure chart to show an entry being made today with a 3-box 
reversal lower at 7,750.  However, by the close, the Dow rallied 
back to 7,877.  Tomorrow morning, Dow component Johnson & Johnson 
(NYSE:JNJ) $57.83 +1.99% reports earnings.  In our September 30th 
market wrap, JNJ was a "key stock" we identified as a potential 
leader in the Dow.  The stock's up from its 09/30 close of $54.08 
and tomorrow morning's earnings and forward guidance could be a 
Dow catalyst.  Look for a Dow break above 7,950 as a good 1/2 
bullish play, with further bullish confirmation at 8,050.  I've 
drawn "tentative support" (dashed green) for a trailing stop at 
7,700 on a Dow break higher at 7,950.  

While the Dow Industrials only comprise 30 stocks, today's action 
has the Dow Industrials Bullish % ($BPINDU) from 
www.stockcharts.com reversing higher to "bull alert" status at 
20%.  The recent low reading was 6.66% on Monday, October 7th.

Just as the Dow Industrials had perhaps been the worst 
risk/reward trade for a bearish trader in recent weeks, it now 
looks to be the best risk/reward trade for bulls on partial 
positions with a trade at 7,950. 

Jeff Bailey


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**************************************************************


****************
WEEKLY FUND WRAP
****************

Equity Funds Rebound

U.S. stocks and funds finished the week higher for the first time 
in seven weeks, with the S&P 500 large-cap index producing a 4.3% 
weekly price gain.  The mid-cap sector as measured by the S&P 400 
index closed the week 3.1% higher, while small stocks as measured 
by the S&P 600 index declined in price by 0.4%.  The largest U.S. 
companies (S&P 100 index) were the week's top performers, picking 
up 4.8% in price performance.



 


All Lipper equity fund indices reported gains for the week except 
for emerging market funds, gold funds, and small-cap value funds. 
Science and technology funds led the way, up 8.0% on average over 
the 5-day period ended Friday, October 11.  Large-cap core/growth 
funds equaled or bettered the return of the market as measured by 
the S&P 500 index.  Value-driven funds lagged growth funds, while 
small-cap stock funds lagged large-cap funds overall.

International stocks and funds followed the U.S. higher, with the 
MSCI EAFE index up 2.4% for the week using the Vanguard Developed 
Markets Index Fund as the proxy.  The average international stock 
fund lagged the index benchmark, rising just 0.9% on average last 
week while the average emerging markets fund was 3.9% in the red. 
The U.S. dollar moved higher against most other major currencies, 
while gold prices fell.  The Pacific stock index closed the week 
down 1.2%, reflecting continued weakness in Japan.  

With stock values sharply higher, U.S. bonds fell in price, down 
0.7% on the week using the Vanguard Total Bond Market Index Fund 
as the index benchmark.  Short-term bonds held up the best, down 
0.3% on average.  The intermediate-term bond sector lost 1.0% on 
average, while the long-term bond sector finished 1.5% lower for 
the week using Vanguard's bond index funds as the index proxies.

Per Lipper's weekly numbers, the average intermediate investment-
grade bond fund fell by 0.7% while the average corporate A-rated 
debt fund lost 0.8% on the week.  The worst performing bond fund 
group was high current yield funds, down 1.7% on average for the 
week.

Lipper Equity Fund Indices

Lipper's equity fund indices reflect the generally positive mood 
on Wall Street last week, which produced strong rallies Thursday 
and Friday to cap off the week.  

 Top Five Equity Fund Indices:
 +8.0% Science & Technology Funds (YTD -47.5%)
 +4.5% Large Cap Growth Funds (YTD -29.4%)
 +4.2% Multi Cap Growth Funds (YTD -33.0%)
 +4.1% Large Cap Core Funds (YTD -24.4%)
 +3.8% Mid Cap Growth Funds (YTD -32.1%)
  
 Bottom Five Equity Fund Indices:
 -5.8% Gold Funds (YTD +32.3%)
 -3.9% Emerging Markets Funds (YTD -15.1%)
 -1.0% Small Cap Value Funds (YTD -19.6%)
 +0.1% Small Cap Core Funds (YTD -26.7%)
 +0.9% International Funds (YTD -19.1%)

Tech funds rebounded the most last week, rising 8.0% on average.  
The category's largest fund, T. Rowe Price Science & Technology 
Fund (PRSCX) reported a 9.8% weekly total return, followed by a 
9.4% gain by Seligman Communications & Information Fund (SLMCX).  
Waddell & Reed's Science & Technology Fund (UNSCX) finished the 
week with a 1.1% gain, pale in comparison to its category peers.  
Fidelity Select Technology and Select Software funds, meanwhile, 
were the group's top performers, rising in excess of 10% for the 
week.

Fidelity's large-cap growth funds also did relatively well.  The 
Blue Chip Growth Fund (FBGRX) rose 4.8%; Growth Fund (FDGRX) was 
5.1% higher; OTC Portfolio (FOCPX) returned 5.2%: and Aggressive 
Growth Fund (FDEGX) posted a 7.2% weekly gain.  Lagging the peer 
group was Morgan Stanley American Opportunities Fund (AMOBX), up 
just 1.4% for the 5-day period through October 11.  The Vanguard 
Total Market Index Fund (VTSMX), which mirrors the Wilshire 5000 
index, the broadest measure of U.S. stocks, netted a weekly gain 
of 3.7%.  

Lipper Fixed Income Fund Indices

Bond funds were lower, with short-term and high-grade bond funds 
holding up better than those funds with longer average durations 
and lower average credit qualities (higher yields).  

 Top Five Fixed Income Fund Indices:
 -0.1% GNMA Funds (YTD +7.1%)
 -0.2% Short Investment Grade Funds (YTD +2.8%)
 -0.2% High Yield Muni Bond Funds (YTD +5.3%)
 -0.3% Short Muni Bond Funds (YTD +3.1%)
 -0.3% International Income Funds (YTD +11.1%)
 
 Bottom Five Fixed Income Fund Indices:
 -1.7% High Current Yield Funds (YTD -10.4%)
 -0.8% Corporate A-Rated Debt Funds (YTD +5.6%)
 -0.7% Intermediate Investment-Grade Funds (YTD +5.0%)
 -0.6% Global Income Funds (YTD +6.3%)
 -0.4% General Muni Debt Funds (YTD +8.3%)

GNMA funds and short-term bond funds minimized their losses the 
best in last week's bond market slide, but not all "short-term" 
funds held up well.  Vanguard Short-Term Corporate Fund (VFSTX) 
lost 0.7% for the week, for instance.  Fidelity Short-Term Bond 
Fund (FSHBX) was 0.4% lower while sibling Fidelity Intermediate-
Term Bond Fund (FTHRX) lost 0.8% for the week.  The more credit 
and duration risk a fund took, the worse it generally performed 
relative to the broad peer group (all fixed income funds).

Largest Mutual Funds

Fidelity Magellan, once the largest fund in America (now third 
behind Vanguard 500 Index and PIMCO Total Return) finished the 
week with a 4.6% total return, beating rival Vanguard 500 Index 
Fund by 0.2%.   
 
 Largest Stock Funds:
 +4.4% Vanguard 500 Index (VFINX) YTD -26.4%
 +4.6% Fidelity Magellan (FMAGX) YTD -26.0% 
 +2.3% Investment Company of America (AIVSX) YTD -20.36%
 +2.9% Washington Mutual Investors (AWSHX) YTD -21.0%
 +3.0% Growth Fund of America (AGTHX) YTD -26.5%
 +2.3% Fidelity Contrafund (FCNTX) YTD -10.0%
 +3.8% Fidelity Growth & Income (FGRIX) YTD -19.8%
 +0.7% EuroPacific Growth (AEPGX) YTD -19.8%
 +1.9% New Perspective (ANWPX) YTD -23.1%
 +1.8% Vanguard Windsor II (VWNFX) YTD -22.1%
 
 Largest Bond Funds:
 -0.6% PIMCo Total Return (PTTRX) YTD +6.7%
 -0.1% Vanguard GNMA (VFIIX) YTD +8.1%
 -0.6% Vanguard Total Bond Market (VBMFX) YTD +5.7%
 -1.1% Bond Fund of America (ABNDX) YTD -0.5%
 -0.7% Vanguard Short-Term Corporate (VFSTX) YTD +2.8%
  
 Largest Balanced Funds:
 +1.7% Vanguard Wellington (VWELX) YTD -12.3%
 +0.3% Income Fund of America (AMECX) YTD -11.5%
 +1.9% Fidelity Puritan (FPURX) YTD -13.5%
 +2.0% American Balanced (ABALX) YTD -13.4%
 +2.0% Fidelity Asset Manager (FASMX) YTD -13.5%

You can tell which stock fund bellwethers had "value" tilts and 
which ones primarily invest abroad.  Both types of funds lagged 
large-cap core/growth funds such as Fidelity Magellan.  PIMCO's 
Total Return Fund is now the nation's second largest mutual fund 
behind Vanguard 500 Index Fund, reports Morningstar.  That goes 
to show how popular bond funds have been in the volatile market 
of 2002.

The American Funds Group's high-yield exposure hurt the relative 
weekly performance of two fund bellwethers, Bond Fund of America 
(ABNDX) and American Balanced Fund (ABALX).  Northeast Investors 
Fund (NTHEX) declined by 0.6% for the week, minimizing its 5-day 
loss relative to other high yield bond funds.   

Money Market Funds

iMoneyNet's all-taxable money market fund average stood at 1.22% 
as of October 8, 2002, down three basis points (or 0.02%) on the 
week.  The highest retail money fund yields belong to PayPal MMF 
(1.80%) and Touchstone MMF (1.73%), while INVESCO Treasurers MMF 
is third with a current 7-day simple yield of 1.59% at October 8. 

Fidelity Cash Reserves Fund and Vanguard Prime Money Market Fund, 
two of the largest and best-run money market funds in the nation, 
have 7-day simple yields of 1.51% and 1.49%, respectively, today.     
 
Mutual Fund News

Morningstar reports that the nation's fourth largest mutual fund 
family, Putnam Investments, has hired a turnaround specialist in 
the wake of its funds consolidation and manager/employee layoffs.  
Per the story, Putnam has hired Delaware Investments and Lincoln 
National Investment Companies President and CEO Charles E. ("Ed") 
Haldeman, Jr. to serve as a senior managing director and co-head 
of investments with Steve Oristaglio, the current deputy head of 
investments with Putnam.  Both will report to Putnam’s President 
and Chief Executive Lawrence J. Lasser, says Morningstar.

Meanwhile, TIAA-CREF has named former Merrill Lynch president and 
Chief Operating Officer Herb Allison as its new chairman and CEO, 
replacing John Biggs.  Biggs, who is reportedly retiring after 10 
years, is a candidate for the head of the Securities and Exchange 
Commission’s new accounting oversight board, reports Morningstar.

Putnam and TIAA-CREF aren't the only fund families making changes 
to its funds lineup and personnel.  State Street Research Mid-Cap 
Growth Fund (SCFAX) has a new lead manager, Eileen Leary, who has 
worked on the fund for the past three years.  Morningstar reports 
that State Street Research also plans to merge or eliminate other 
funds including Strategic Income (SIFAX), High Income (SSHAX) and 
Large-Cap Growth (SGFAX), to name a few.  MFS is cutting jobs for 
the first time in its 80-year history, removing 110 jobs or about 
4% of its workforce due to the protracted bear market.  These job 
cuts are limited to support staff, however.  No MFS managers have 
been let go according to the Morningstar news story.

Fidelity Investments at the close of the third quarter announced 
plans to lay off 5.4% of its staff (nearly 1,700 employees), but 
like MFS, no fund managers were dismissed due to the downturn in 
the market.  In Fidelity's case, no fund analysts were dismissed 
either.

That is it for this week's Weekly Fund Wrap.  Have a great week.  

Steve Wagner
Editor, Mutual Investor 
steve@mutualinvestor.com


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

More on Relative Strength
by Mark Phillips
mphillips@OptionInvestor.com

Last week's discussion centered on use of Relative Strength to
pinpoint areas in which to focus from either a bullish or bearish
approach.  Without beating this horse to death, I want to do a
bit of follow-up showing how the situation has developed since
last week's article.  Recall that I actually wrote last Monday's
article on the prior Thursday (10/03) so that it could be
published while I was out of town, so we've got almost 2 weeks
worth of additional data to digest.

I'm not going to spend a lot of time rehashing last week's
article, but it is going to be the springboard for today's
discussion, so if you missed it, you might want to catch up by
reading it Here.

The basic premise of relative strength analysis is that it can
pinpoint a sector of the market or stock within a sector that is
poised to move, often before those signs of strength/weakness
are readily apparent on the price chart itself.  From last
week's article, we know that the Biotechnology index (BTK.X)
was showing relative strength compared to the broader NASDAQ
Composite.  But without taking advantage of some relative
strength analysis, that strength was hard to see on a chart of
the BTK.  Take a look below, and I think you'll see what I mean.



 

There were hints of some bullishness in the sector, primarily
from the fact that the BTK simply wasn't plunging to fresh lows
along with the rest of the broad market.  About the only sign
of strength was the series of higher lows beginning in the last
week of September.  That ascending trendline (along with
resistance at 339) gave a hint of a bullish triangle being
formed.  But it certainly didn't look like a strong bullish
candidate on its own merits, as each successive high was still
being posted at lower levels from mid-August, all the way up
through early October.  The real clue was in the simple
relative strength chart I showed last week, reproduced here
for reference.



 

That chart provided clear evidence that there were some bulls
starting to make their presence known in the sector.  Either
that, or the bears were focusing their attention elsewhere.
Either way, if the markets were to put in a bottom, it certainly
looked like the BTK index should outperform to the upside.  And
with so many different factors showing the markets were getting
close to an important bottom (from Bullish Percent readings, to
a high VIX, to the broad markets nearing their bearish price
objectives), it looked like the time to strike was drawing near.

The setup looked good enough to me that I decided to put my money
where my mouth was, and took a bullish position in November $85
Calls on the Biotech HOLDR at the close on October 4th.  Using
the BBH saved me the effort of trying to pinpoint which stock in
the sector might be most likely to advance and lead the overall
group higher.  But if I had taken the time, I could have
ferreted out which 1 or 2 stocks in the sector were showing the
best strength relative to the BTK index, and there's a good
chance I would have stumbled across CHIR, which has a truly
impressive Relative Strength chart for the past 10 months.  I'm
not going to show the chart here, but if you're curious, type in
"CHIR /BBH" in the symbol field in Qcharts and you'll see what I
mean.  Could it be that the market 'knew' the company was going
to have some good news this morning?

Let's come back to the issue of Relative Strength again.  Last
week, I highlighted 3 different indices, the BTK, SOX and BKX,
noting relative strength and weakness as I saw it.  Now that a
bit more water has passed under the bridge, let's look at the
performance of these three sectors relative to the S&P 500
(SPX.X) and see what our relative strength study did for us.



 

While I realize that is a really busy chart, it is loaded with
great information that I can use to help evaluate whether the
premise of my BBH trade still makes sense.  The candle chart is
the BTK index, the dark blue is the SPX, the red is the BKX and
the cyan is the SOX.  I set up the chart so that all of the
charts started at a common reference point at the close on
October 2nd.

Look how sharply both the SOX and BKX fell between October 2nd
and the morning of October 10th.  Even with the sharp and
powerful short-covering rallies of last Thursday and Friday,
both the SOX and BKX are still BELOW where they were at the
close of trading on October 2nd.  Contrast that with the SPX,
which has actually clawed its way to positive territory, now 13
points (1.5%) above its resting point on October 2nd.  The
takeaway from that comparison is that both the BKX and SOX
have underperformed the broader market, due to their inherent
relative weakness.  But look at the mighty Biotechs!  The BTK
index suffered only a minor dip and of Monday's close is 22
points (6.9%) above where it was on October 2nd.  I'll take
trades like that over and over until I'm old and gray!

I don't mean to suggest that Relative Strength analysis is the
Holy Grail of trading and that it will consistently lead you to
the pot of gold at the end of the rainbow.  But hopefully our
last two discussions on the topic have helped to illuminate how
adding this tool to your analysis approach can help to uncover
the occasional diamond in the rough.

Have a Great Week!

Mark


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

This is the Thanks I Get?

I leave you in Jeff's hands for a week and come back to a +875 
point rebound off the October 10th lows. We had throw away day on 
Monday but nobody sold anything. Did the economy change in a week 
and I missed it? If not then where did all the sellers go?

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The Option Investor Newsletter                   Monday 10-14-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:

Stop Loss Updates: AZO, ITMN, MME, WLP
Dropped Calls: None
Dropped Puts: None
Play of the Day: Call - ITMN

Updated on the site tonight:
Market Watch
Market Posture

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*****************
STOP-LOSS UPDATES
*****************

AZO - call
Adjust from $77 up to $79

ITMN - call
Adjust from $29 up to $31

MME - call
Adjust from $37 up to $38.50

WLP - call
Adjust from $75 up to $78.50


*************
DROPPED CALLS
*************

None


************
DROPPED PUTS
************

None


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traded options,” claims author Larry Spears in his new compact 
guide book:  

“7 Steps to Success – Trading Options Online”.  

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and clicking on the link to the book on its home page.

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**************************************************************


**********************
PLAY OF THE DAY - CALL
**********************

ITMN - InterMune - $33.99 +1.17 (+2.26 for the week)

Company Summary:
InterMune is a commercially driven biopharmaceutical company
focused on the marketing, development and applied research of
life-saving therapies for pulmonary disease, infectious disease
and cancer.

ITMN has continued its steady up trend of the last seven weeks.
While the Dow tacked on 316 points, ITMN continued its upward
creep with a modest $0.17 gain to close at $32.36.  While bears
may see this as a sign of relative weakness, we see it as
evidence that it did not experience a short covering bounce like
many other stocks that had been in severe downtrends recently.
It's Actimmune drug, which continues to show positive results in
both the next generation version with less dosing, and for new
diseases, is a positive for the company, which has kept it moving
forward.  The series of higher highs and higher lows continues
and the fact that the last pullback was stopped dead at the 200-
dma shows a solid level of support.  The company recently
announced a pact with Inhale Therapeutic Systems Inc. (INHL) to
develop an extended release treatment for hepatitis C.   The
companies plan on combining ITMN's Infergen, already in the
market, and INHL's PEGylation technology, which prolongs the
effectiveness of a drug, into a new medicine called PEG-Infergen.
if approved, the new drug would compete with Schering-Plough's
big-seller, Peg-Intron and a new drug from Roche, which is
expected to receive approval by the end of the year. ITMN
President Scott Harkonen said, "We believe PEG-Infergen will
build on the success we are having with Infergen in this market.
We expect this market will grow to $3 to $4 billion over the next
five years."    He also said the company plans to initiate
clinical trials in the first quarter of 2003.  The company's
strong pipeline should help it continue the upward momentum in
the stock price and OI sees the current level as a long entry
point.  Additional entries for conservative traders might be the
PnF 3-box reversal number of $34, or the buy signal of $35. We
would favor November contracts for new entries.

Why This is our Play of the Day
If you've been paying attention, you've noticed the Biotechnology
sector is starting to flex its muscles again, remaining a source
of strength even last week when the rest of the market seemed
about to implode.  Shares of ITMN provided us with a great entry
when the stock rebounded from the converged 20-dma and 200-dma
near the $30 level last week.  That got the stock moving back into
its upward trend and it was poised for a dramatic move higher.
The catalyst for that move came from CHIR this morning, when the
company raised guidance for the Q3 as well as the full year.  That
sent the Biotechnology sector (BTK.X) soaring, despite the anemic
market-wide volume and by the closing bell, the BTK had advanced
by nearly 5.5%.  Not to be left out, ITMN gained 5.78% closing
just below the high of the day.  Not only is the BTK on the cusp
of a breakout over the $343 level (coming to rest this afternoon
just below the 50-dma), but ITMN is poised to blast through its
recent highs near $35.  Today's rally was quite impressive and we
might see a bit of profit-taking before the bulls are ready to
power through this overhead resistance.  A pullback into the
$33.00-33.50 area might be all we can expect if looking to
establish new positions given the momentum that is building in
the sector.  If the bulls just push higher from here, look to
initiate new positions on a breakout through the $35 level, so
long as it is confirmed by continued strength in the BTK.  We've
raised our stop to $31 tonight, as any drop below that level
would call into question the strength of the current rally.

*** October contracts expire this week ***

BUY CALL OCT-30 IQY-JF OI=3848 at $4.60 SL=2.75
BUY CALL OCT-35 IQY-JG OI=1636 at $0.75 SL=0.25
BUY CALL NOV-30 IQY-KF OI=  30 at $5.90 SL=2.30
BUY CALL NOV-35*IQY-KG OI=  76 at $2.50 SL=1.00
BUY CALL JAN-35 IQY-AG OI=2403 at $4.50 SL=2.75

Average Daily Volume = 1.58 mln





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**************
MARKET POSTURE
**************

Testing Important Levels

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/mp_101402.asp


************
MARKET WATCH
************

Better Entry Points or Evidence of a Turnaround?

To Read The Rest of The OptionInvestor.com Market Watch Click Here
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