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Daily Newsletter, Tuesday, 10/15/2002

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The Option Investor Newsletter                 Tuesday 10-15-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: +1050 Points in Four Days
Futures Markets: 870 is the Number to Watch
Index Trader Wrap: Tech wild card turns up "joker"
Market Sentiment: Out of Steam
Weekly Fund Screen: $500 Minimum Funds

Updated on the site tonight:
Swing Trader Game Plan: Don't Stand In Front of Speeding Trains


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      10-15-2002           High     Low     Volume Advance/Decline
DJIA     9255.68 +378.30  8255.68  7883.23 2.19 bln   2418/ 834
NASDAQ   1282.42 + 61.90  1282.74  1259.87 1.89 bln   2568/ 860
S&P 100   447.26 + 21.72   447.26   425.54   Totals   4986/1694
S&P 500   881.26 + 39.82   881.26   841.44
RUS 2000  360.53 + 14.00   360.63   346.53
DJ TRANS 2286.46 +147.70  2286.51  2139.53
VIX        39.74 -  2.87    41.21    39.58
VXN        56.37 -  2.71    58.29    55.33
Total Vol   4,341M
Total UpVol 3,841M
Total DnVol   457M
52wk Highs    75
52wk Lows    277
TRIN        0.42
PUT/CALL    0.78
************************************************************

+1050 Points in Four Days

A monster rally prompted by bottom fishing last week and short
covering this week. Surprise earnings gains by several Dow stocks
and upgrades to others gave shorts a serious headache today. The
huge gains are begging for profit taking and with the tech
earnings after the close it looks like Wednesday will be the day.

Dow Chart




Nasdaq Chart





Kicking off the rally this morning was news from JNJ and Citigroup,
both Dow components, that each had beaten earnings estimates by
a penny. GM, also a Dow component, beat estimates by 21 cents.
Suddenly the bear market and the possible double dip scenario
was history and bulls bought as bears ran for cover. Positive
comments about MSFT and IBM added to the explosion. The Dow
gapped up over +200 points and never looked back. The Nasdaq
gapped up over +50 points and then moved sideways the rest of
the day until tech shorts covered before the close to avoid a
positive Intel surprise.

They should have not worried as the surprise was negative not
positive. Intel missed estimates of 13 cents by posting only
11 cents and guiding lower again. The trouble in PC land is
simply no buyers, lots of inventory and no IT recovery in sight.
Intel posted revenue that was only slightly below what was
expected but earnings were much less. Intel blamed it on slower
sales, higher inventory costs, excess capacity and unrealized
manufacturing savings. They also said they were cutting back on
capital expenditures and that tanked the equipment suppliers.
They also said they were going to reduce spending by re-using
some older equipment and older technologies that had been
scheduled for replacement. They said margins would fall to 49%
for the next quarter, which was down from 51%. Also, they expect
revenue to be flat to up only slightly. Considering this is
their strongest quarter that outlook is bleak. A 2% margin drop
on $6.5 billion in revenue would be more than most companies make
in total. They made $686 million this quarter and a -$130 million
drop in margins for the 4Q puts their earnings in serious trouble.
They said PC demand was coming in at the very low end of
forecasts. This does not paint a very pretty picture.

NVLS beat analyst's lowered estimates by 2 cents but the stock
got killed in after hours on the Intel news. After closing near
$26 it traded in the $23.50 range in after hours. They said they
were on track to post a higher profit for the 4Q despite an
anticipated drop in sales. The CEO said there was a glimmer of
hope in the industry for those with cash. Despite the lack of
a recovery those with cash were gaining market share and
restructuring to be more profitable when the recovery finally
came. They said 4Q bookings could be 10% below the prior forecast.

Motorola hit estimates of 5 cents, which they had affirmed twice.
The CEO backed off previous forecasts of a rebound in the chip
sector for the last quarter and 2003. They did not warn but said
the road ahead would be anything but smooth. He said the slow
quarter-to-quarter upward growth was over and rougher times were
ahead.

AMCC beat estimates by a penny and said they were focused on
cutting costs and hoarding cash until a recovery appeared. They
plan on continuing to invest in new product lines in an effort
to stimulate sales that had dropped -27%.

Oracle made some comments today about earnings visibility being
minimal. This depressed some of the software stocks and should
make investors cautious before MSFT earnings on Thursday. However,
I think Thursday is the least of our problems. The biggest
problem in our outlook is IBM which reports on Wednesday after
the close. IBM was down -2.50 after the close based on the Intel
warning. There is a very good chance that IBM disappoints
based on the Intel miss. IBM has the consulting business and
a strong services business to help offset losses in the equipment
division but how big are those losses? If Intel says there is
no recovery, no seasonal 4Q buying surge and no IT recovery in
sight then how can IBM weather the storm?

35% of the S&P announces earnings this week. Tomorrow there are
numerous big caps including several Dow components. BA, AMR, HON,
CAT, F, GD, JPM, MER, PFE, PGR, IBM are among the most watched.
Tech stocks AMD, AKAM, ATI, AAPL, BRKT, CLS, CTSH, EFII, EXTR,
IWOV, LSS, QLGC, RFMI, RSAS, SNDK, SYMC, TMTA, TXCC, UTEK are
just some of the announcers. There is literally so much data that
the markets will be in overload but the trend will be the key. If
the trend tomorrow follows the trend tonight then the last weeks
rally will be ancient history.

The biggest wild card here is the October bottom scenario. October
has been the bottom and the end to so many bear markets that the
trend to buy weakness in October is firmly entrenched. Yes, we
will see some profit taking tomorrow. Yes, we are very likely to
get more bad news than good this week. The key will be how much
bad news is already priced into the current bear market. We all
know if the bulls want to buy, all the bad fundamental news in the
world will not slow them down. They will buy any dip and make up
reasons for doing so. We also have the "best six-month" crowd that
buys the October dips and sells the April highs. They are so
ingrained into buying the dip and being strongly rewarded that
we have almost no chance of ending October any lower than the Dow
7200 we saw last week.

As traders we need to be aware of the historical patterns and be
prepared. That means any dip we see tomorrow could last one day or
it could last a couple weeks but it should not last more than that.
We need to be ready to buy a rebound from this dip and ride the
wave. I am not saying that wave will carry into 2003. It will
only last until the buyers run out of money. This may only last
a couple weeks. Once the shorts cover and the bulls finish buying
the fundamentals will once again become important. Economic
reports will become key again. The strength of the holiday
shopping season will assume serious importance and its impact
on the 4Q GDP. With no pickup in IT spending and retail PC sales
trending to the very low cost models the outlook is still grim.
Unless this changes soon any October bounce will run smack dab
into a November decline.

What is the difference between these two charts?

Dow Rallies Chart





The first rally was July of this year. The Dow rallied +1250 points
off its lows in four days before dropping -750 points several days
later as the earnings pictures became clear.

Dow Scenario Chart




If you take the current identical rally through Oct-15th and
overlay the current chart calendar over the July history then
it makes a very good representation of how October/November
could play out. Even the numbers, with Dow 9000 being the top,
all fit my possible profit taking, rebound and possible decline
perfectly. Remember, this is just one of several possible
scenarios but it will be very interesting to see if it plays
out.

I would continue to expect some profit taking followed by another
bounce but be wary of the market after that. A real end to this
bear market will require a bounce and hold over Dow 9000 and there
is significant resistance between today's close of 8250 and that
level. With +1000 Dow points in four days we are walking on
quicksand toward any continued rally. Without some base building
over the next several days we will be hastening the markets demise.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

870 is the Number to Watch
by OI Staff
futures@OptionInvestor.com


As of the close for Tuesday, October 15, 2002 the Cash and
Futures were:

4:00 PM Cash Close:    ES 883, YM 8252, NQ 950

Unfortunately, due to technical difficulties beyond our control
Alan is unable to deliver his futures wrap tonight.  He did want
to make an observation on the ES02Z.

Alan feels that if the ES02Z loses the 870 level then the futures
will probably consolidate back to the 852 to 855 levels.

If you look at the chart below you will notice that the profit
taking has already begun as the ES02Z was well above the 880
level at the close of the regular session and is already trading
near 873.

(*note, the chart below does point to 850 as the lower range and
not 852.)

Chart:





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

Tech wild card turns up "joker"

The major market indexes posted strong gains for a fourth
consecutive session as the Dow Industrials surged 378 points
(+4.8%), while the S&P 500 Index jumped 39 points (+4.7%) after
bellwethers like Citigroup (NYSE:C) $34.14 +12.6% and General
Motors (NYSE:GM) $36.70 +10.34% surged after reporting earnings
that may not have been as bad as investors had feared.

However, as bulls kept drawing favorable cards in a game of five-
card stud, the 10 of spades, followed by the Jack, then Queen and
King of spades, which marked a four-session rally, found a "wild
card" being dealt in the form of a "joker" after semiconductor
bellwether Intel (NASDAQ:INTC) $16.52 +9.4 announced quarterly
earnings of $0.11 per share, which missed estimates by 2-cents a
share.  As has been the case for many technology stocks, Intel
said that corporate purchasing remained weak in Q3.

That news had Intel falling $2.10 to $14.42 (-12.7% from its
close and other NASDAQ-100 Index (NDX.X) 950 +5.5% components
like Applied Materials (NASDAQ:AMAT) $13.03 +8.58% falling $1.00
to $12.03, Cisco Systems (NSADAQ:CSCO) $11.00 +10.1% trading
lower to $10.45 and Microsoft (NASDAQ:MSFT) $52.35 +6.2% trading down
$1.81 at $50.54 in after-hours trading.

December NASDAQ-100 futures (nd02z) fell 27 points (-2,8%) to
924.00, while S&P futures (sp02z) traded off 9.5 points (-1%) to
873 after Intel's earnings report and conference call.

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




The Q's gapped above another downward trend, this time our
longer-term bearish trend from the December 2001 relative highs.
As a trader that has tended to be more bearish the Q's, they've
been shoved far enough down this bear's throat to have me chasing
the gap lower in the morning as a short.  There's plenty of bears
that will look for Intel's negative news to become a near-term
short-covering opportunity and I'd expect some support at "old"
upward trend of $22.50 and the 50-day to have some bears looking
to cover at these levels of technical support.  Instead, a bear
looking for some downside might look for a rally back near $23.25
for a trade and then look to target the $21.21-$21.44 level into
late October, just ahead of Cisco Systems' (NASDAQ:CSCO) earnings
of November 6th.  In the meantime, monitor Intel (NASDAQ:INTC)
the next couple of days for MARKET response as I think similar
things lie ahead for Cisco.

The NASDAQ-100 Bullish % ($BPNDX) saw a net gain of 12 stocks to
point and figure buy signals today and is no longer "oversold."
Current status remains "bull alert" at 38%, after a recent low
reading of 13% on October 9th.

S&P 100 Index Chart - Daily Interval




Today's action has the S&P 100 Bullish % ($BPOEX) reversing up
into "bull alert" status at 36%, after a recent low reading of
18%.  I'd think any type of pullback into the 430-418 sees some
good support buying, not only from bulls, but bears that have
seen enough the last four days.  If holding some calls long, look
to pump out some profits on a trade near 460.  Financials were
strong today with BIX.X +5.54%, BKX.X +7.54%, XBD.X +6.41% and
XBD.X +6.41%.  Intel's news may be "reason" to take profits in
the financial sector, but bulls are learning that technology
remains suspect and cash coming out of bonds is going to be
looking to try and dodge as many tech-woes as possible so SPX and
OEX still good indexes to be looking long on pullbacks.

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




Today's action has the S&P 500 Bullish % ($BPSPX) reversing up
into "bull alert" status at 33%, from a recent low reading of
18.2% on October 10th.  I've marked some recent "inflection"
points on the SPY chart and the bullish % readings from those
dates.  What we find currently is that the SPY internals are
STRONGER at today's close than they were on July 31st.  While the
SPY did pull back after the July 31st peak, the pullback would
have made an excellent buying opportunity for a trade as the SPY
reversed course back higher while the bullish % continued to
build.  Stochastics have the SPY looking near-term "overbought,"
but a pullback near $83.77-$85.97 creates good opportunity for
bullish entry on pullback.  Those subscribers holding some longs
would most likely look to sell any further rally near $91.72
should it happen as that level has both retracement and the
bearish resistance trend from our point and figure chart
formidable resistance after such a powerful move from  the lows.

Dow Industrials Chart - Daily Interval




Subscribers are really picking up on the "risk/reward" theme that
the Dow Industrials provides when considering the NASDAQ-100 and
QQQ as bullish plays.  While the NDX and QQQ both gained about 5%
on the session, the more "boring" stocks in the Dow Industrials
kept pace with a 4.8% gain.  Intel exposure in the Dow will weigh
on things tomorrow, but I would be surprised if the percentage
loss at the open is as severe as the NASDAQ-100.  According to
www.stockcharts.com, the very narrow Dow Industrials Bullish %
($BPINDU) jumped to 36.67% bullish after today's action, from a
recent low of 6.66%.  Undoubtedly a bear short below 7,624 is
wondering what he/she was thinking with this bullish % so low and
looks to cover on any pullbacks from 8,000 to Monday's low of
7,745.  The Dow has retraced roughly 61.8% of its decline from
the August highs, and Intel's news may be "reason" for a rest and
pullback.  Bears can look for a short-term trade, but eager to
lock in any gains on a pullback near 8,000.

Jeff Bailey


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

Out of Steam
by Steven Price

Well, now, wasn't that nice?  A 1000-point rally in four days.
Makes me almost bullish - almost.  Actually, if the rally had put
on 300-500 points in four days, I might still be bullish.
However, we have rallied furiously, first on no news, then on
earnings that were "not bad."  In fact we rallied right up to
significant resistance around 8300.  I mentioned in last night's
market Wrap that 8350 was probably the next stop if we made it
past 8000.  We got there much faster than I thought, as shorts
seemed worried after a round of decent earnings reports.    While
I'm starting to believe, based on the selling in the bond market,
that we may have found some real buyers the last few days, the
massive rally looks overdone.  The fact that we are right back to
a resistance point, after a rally that seems unsustainable, tells
me we should see some selling tomorrow.

A look at the 5-year and 10-year Treasury note yields shows that
they have run right up against their 50-day moving averages, as
has the Dow.  The Dow's 50-dma of 8282, coincides closely with
the previous support level of 8305, which coincides with the head
and shoulders neckline breakdown in September, which coincides
with the 50% retracement level (8304) of the trip up from July 24
to August 22, which coincides with the 61.8% retracement level of
the drop from August 22 to the low on October 10.  Phew!  As you
can see, there is an awful lot going on just overhead.

The fact that bonds have sold off shows that there has been an
asset allocation into stocks.  That may indicate that we have
found some sort of bottom in the market.  However, unless we get
some stellar earnings reports, any continuing massive rally will
be founded on very little but hope.  Much like the guesswork that
was being done during the internet rally of the 1990s.   The
problem is that as we head into earnings season, expectations
have been dialed down so far that the euphoria over a company
beating estimates needs to give way to perspective.   When we
finally see a stream of steadily increasing earnings from stocks
that aren't cooking the books, confidence will creep back in and
the stock market can return to higher values as businesses
increase their values.   However, when a stock like GM gains 10%
in a day because it beat estimates, in spite of huge pension
liabilities and problems with their Fiat acquisition, the
euphoria seems more than a little overdone.

Another interesting development today was the semiconductor
sector.  The Semiconductor Index (SOX.X) finally broke out of its
recent descending channel and at the same time broke the bearish
pattern of lower highs on each rebound attempt.  The index closed
at 269.10, well above the recent high of 256.45.  After the bell,
Novellus beat estimates, but issued cautious comments about the
fourth quarter.  RF Micro Devices also beat estimates, but raised
guidance for the fourth quarter.  The big daddy of them all,
however, shut out the lights on the day's party.  Intel, the
world's largest chipmaker, missed forecasts by 2 cents per share
and sent the semis south after hours.  Intel had previously
revised revenue guidance, which they met, but said little about
earnings.  Now we know why. It will be interesting to see how the
sector responds, after breaking some important technical barriers
today. Unfortunately, it looks like we will have to wait for the
cake.

Look for a market pullback tomorrow, but keep in mind that the
bond market is indicating some actual strength behind the rally.
It will be hard to maintain any rally without help from the tech
sector, and Intel isn't giving us any help.  However, Microsoft
reports later this week, and if they can post decent numbers,
that may be the medicine we need to find a higher low on the
pullback.


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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7286
Current     :  8255

Moving Averages:
(Simple)

 10-dma: 7672
 50-dma: 8282
200-dma: 9400



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  881

Moving Averages:
(Simple)

 10-dma:  816
 50-dma:  877
200-dma: 1019



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     :  950

Moving Averages:
(Simple)

 10-dma:  951
 50-dma:  914
200-dma: 1206



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


The Semiconductor Index (SOX.X): The index finally broke its
trend of lower highs, with today's rally to 269.10.  It also
broke out of its descending channel and gave investors something
to cheer.  Not so fast, however.  After the bell, Intel missed
earnings and the chip stocks were already trading significantly
lower after hours.  It looks like we will be right back into that
channel tomorrow morning, but the first signs of a trend break
seem to be in place.

52-week High: 657
52-week Low : 214
Current     : 269

Moving Averages:
(Simple)

 10-dma: 234
 50-dma: 282
200-dma: 446


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

Market Volatility

A 1000-point rally was all that was required to break 40 to the
downside in the VIX.  However, 39.74 isn't breaking it by much.
We broke through significant resistance levels, but actually got
right up to another, due to the extent of the rally.  With
resistance between 8275 and 8375 looming just above, based on
retracement levels and prior support, the VIX may be back over 40
by the open on a pullback. Last week's break of 50 signaled the
massive rally, however, traders remember the levels we saw just
four days ago and will be quick to raise premiums at any hint of
a fall.


CBOE Market Volatility Index (VIX) = 39.74 –2.87
Nasdaq-100 Volatility Index  (VXN) = 56.37 –2.71

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.78      1,070,910       838,647
Equity Only    0.54        776,894       420,320
OEX            1.14         65,425        74,786
QQQ            0.75         94,491        71,221

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

Bullish Percent Data

           Current   Change   Status
NYSE          30      + 4     Bull Correction
NASDAQ-100    38      +16     Bull Alert
Dow Indust.   37      +24     Bull Confirmed
S&P 500       33      +11     Bull Alert
S&P 100       36      +16     Bull Alert

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   0.59
10-Day Arms Index  1.05
21-Day Arms Index  1.31
55-Day Arms Index  1.31

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

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

Market Internals

        Advancers     Decliners
NYSE       2195           589
NASDAQ     2459           797

        New Highs      New Lows
NYSE         33              72
NASDAQ       32             125

        Volume (in millions)
NYSE     2,175
NASDAQ   1,990


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

Commitments Of Traders Report: 10/08/02

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.

S&P 500

Commercials got shorter, as they increased both positions,
by increased shorts by an additional 1600 contracts.
Small Traders also added significantly to both sides, but
added an additional 1800 contracts to the long side.


Commercials   Long      Short      Net     % Of OI
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%)
10/08/02      427,070   445,135   (18,065)   (2.1%)

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
09/17/02      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%
10/08/02      131,486    81,010    50,476     23.7%

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 increased short positions by 2,500 contracts,
while reducing longs by 700.  Small traders reduced longs
by 1,000, but reduced shorts by 4,000, getting decidedly
longer.


Commercials   Long      Short      Net     % of OI
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%)
10/08/02       45,384     55,504   (10,120) (10.0%)

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
09/17/02       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%
10/08/02       10,735     5,721     5,014    30.4%

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

DOW JONES INDUSTRIAL

Commercials increased long positions slightly, and
added 3,000 short contracts, reducing the net long
position significantly.  Small traders increased
long positions by 1,000 contracts and lowered
shorts by the same amount, reducing the net short
position by 50%.


Commercials   Long      Short      Net     % of OI
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%
10/08/02       19,550    11,823    7,727      24.6%

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
09/17/02       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%)
10/08/02        7,890     9,645    (1,755)   (10.0%)

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

$500 Minimum Funds

These domestic stock funds have no load charges, below average
expenses in relation to their category and low minimum initial
investments of $500 or less.   This week, we will screen these
"low cost of ownership" funds to see which ones offer the best
risk and reward tradeoffs for equity investors.  Because these
funds invest primarily in stocks, they're appropriate for long-
term investors who can accept significant fluctuations in share
price in pursuit of their goal.  If your horizon is under five
years, or you are unwilling to accept significant fluctuations,
then these stock funds may not be suitable.

Morningstar's Fund Selector tool (www.morningstar.com) is once
again our online screener of choice.  It quickly lets you find
top funds that meet your specific criteria, and it usually has
the most up-to-date information available online.  As we often
do, we will limit the screen universe to funds with Morningstar
4-star and 5-star ratings to isolate those with "above average"
to "high" ratings for risk-adjusted performance.  Morningstar's
ratings are great starting points in your analysis, but they're
not to be relied upon solely when making an investment decision.

You should "always" read the fund's prospectus carefully before
investing since each investor is different and no one fund fits
all.

Screening Process

Our initial screen criteria are summarized below.  The idea here
is to get a manageable set of fund results (50 or less) which we
can then evaluate more closely.  If your initial screen provides
too many results (let's say 200 plus) then you can add criterion
or make the criteria you have more stringent.  If you get only a
few results, then you can make your criteria less restrictive to
suit your purposes.

 Fund Group = Domestic Stock
 Manager Tenure > or = Category Average
 Minimum Initial Purchase < or = $500
 Load/No Load = No load funds only
 Expense Ratio < or = Category Average
 Star Rating = 4 stars or 5 stars

Generally, by limiting our fund group to Morningstar 4-star or 5-
star funds, we get a manageable set of funds that rank in the top
one-third of their category peer group for relative risk-adjusted
performance.  To make this screen more stringent we also asked to
see only funds in which the manager tenure is equal to or greater
than the category average.  This may exclude some good funds that
have recently undergone management changes, but for now we assume
that we'll still get a good set of fund results to review.

Our initial screen criteria yielded 59 fund results.  The results
were then sorted by YTD total return through October 14, 2002, to
see which funds have performed the best in the volatile market of
2002.  Atop the list was Prudential Natural Resources Fund, Class
Z (PNRZX) up 6.4% since December 31.  By its name, you can see it
is a sector fund, so unless you're targeting specific exposure in
that equity sector, you may want to consider something else (more
diversified).  Waddell & Reed Advisor Asset Strategy Fund Class Y
was second (WYASX) with a positive 0.3% YTD return, while sibling
Waddell & Reed Asset Strategy Fund Class Y (WSAYX) was third with
a negative 0.4% YTD return.  The two funds vary only in their fee
structure and availability.

To make the screener more stringent, we changed the fund criteria
to exclude funds with above average or high relative risk (versus
category).  We also asked the screener to give us only funds with
average market capitalizations of at least $10 billion to exclude
those investing primarily in small/mid-cap stocks, which may give
you more potential return over time, but generally come with more
volatility in the short-term.  Last week's strong rally was large
cap core/growth led, so it may be a good time to invest in a fund
with a large-cap blend or growth style.  The additional criteria
reduced the number of fund results to 29, which we sorted by YTD
return.  Atop this group were three domestic hybrids as follows:

 American Century Strategic Allocation: Conservative (ACCAX)
 Salomon Brothers Balanced Opportunity (STROX)
 STI Classic Balanced Trust (SBATX)

Compared to around a 26% YTD loss for the S&P 500 index and U.S.
stock fund average, the 8%-10% losses for the above three hybrid
funds looks good.  Next we isolated the top YTD diversified fund
performers, finding two full-equity funds that have done a solid
job of limiting their YTD loss to around 13%, about half that of
the average domestic equity fund: American Century Equity Income
(TWEAX) and AmSouth Select Equity (ASEPX).

Next, we scored the fund results on the seven default criteria
included in the Morningstar Fund Score tool: high 3-year return,
high 5-year return, low expense ratio, high Morningstar rating,
high earnings growth rate, low P/E, and high YTD return % rank.

The highest scoring fund, Elfun Trusts (ELFNX) with a 38 score,
is limited to "qualified" investors (GE employees and retirees).
In fact, three of the top 10 scoring funds are run by GE, so if
you are eligible for their investment programs, they are worthy
of consideration.  Excluding the three GE managed funds the top
"seven" funds ranked by highest score are shown below.

 Alliance Balanced Shares (CBSYX)
 American Century Strategic Allocation: Aggressive (ACVAX)
 American Century Equity Income (TWEAX)
 Oppenheimer Quest Opportunity Value (QOPYX)
 MSB Fund (MSBFX)
 Eaton Vance Tax-Managed Growth (CAPEX)
 STC Classic Balanced Trust (SBATX)

In this group is another American Century Strategic Allocation
portfolio, the Aggressive Portfolio (ACVAX), a large-cap blend
fund by virtue of its high equity stake.  The Conservative and
Moderate portfolios are categorized by Morningstar as domestic
hybrid.

The last thing we did with the Morningstar scoring tool was to
increase the weights (importance) of high earnings growth rate
and low P/E.  Here we're looking for the combination of higher
potential total return (high earnings growth rate) and reduced
volatility (low P/E).   In the next section, we identify which
funds are our favorites based on the various screens performed
and other factors, such as manager tenure and style, portfolio
characteristics, and expense.

Our Favorite Funds

If you are seeking a fund with a high average earnings-growth
rate and a low average P/E, then you may want to consider the
Oppenheimer Quest Opportunity Value Fund (QOPYX).  It has the
highest earnings growth rate (20.9%) in the fund group, while
also sporting a below average P/E ratio of 20.  That compares
with an average earnings growth rate of 8.7%, and average P/E
ratio of 24.3, for the S&P 500 index.  This below average P/E
ratio helps to reduce volatility, while offering greater than
average return potential over time.




Oppenheimer Quest Opportunity Value Fund, managed by Richard J.
Glasebrook II since December '96, pursues growth of capital by
allocating assets among stocks, bonds and cash.  Common stocks
and convertible securities normally constitute the majority of
investments although Glasebrook has the ability to invest more
than 50% of assets in income securities.  He may also invest in
foreign securities without limit, giving the fund a go-anywhere
approach.

According to Morningstar, the fund sports a 5-year "annualized"
total return of negative 0.2%, 1.3% above the S&P 500 large-cap
index which has an annual-equivalent loss of 1.5% over the last
five years.  If you're not convinced the market rally will last,
this may be a good "core" fund to hedge your bet.  Glasebrook's
moderate approach should appeal to those investors who prefer a
more flexible stock investment.  For more information or a fund
prospectus, go to www.oppenheimerfunds.com.

Other flexible portfolios we like are Alliance Balanced Shares
(CBSYX), American Century Strategic Allocation Aggressive Fund
(ACVAX), and STC Classic Balanced Trust (SBATX).  The American
Century aggressive allocation fund attempts to outperform over
time a customized benchmark equal to 78% stocks (Russell 3000),
20% bonds (Lehman Aggregate Bond index), and 2% cash (3-month
Treasury bill index).  It has the ability to invest in stocks
across all capitalization ranges, but lands in the Morningstar
large-cap blend style box.  Its role in an equity portfolio is
"core."

Another interesting hybrid is the Eaton Vance Tax-Managed Growth
Fund (CAPEX).  It seeks long-term, after-tax return by investing
in a diverse portfolio of equity securities.  While the original
CAPEX shares aren't available for new investments, there's other
classes to consider.  An Eaton Vance representative can help you
determine which one may be appropriate for you.




Prior to March 1, 2001 the fund was named Capital Exchange Fund.
It may invest up to up to 65% of assets in common stocks, which
are acquired with the expectation of being held for the long run
(hence, limiting capital gains distributions).  It cannot invest
more than 25% of assets in any one industry and it may invest up
to 25% of assets in foreign securities.  No more than 15% of net
assets may be invested in illiquid securities.

Duncan W. Richardson of Boston Management & Research has managed
the CAPEX shares since March 1990, although the fund's inception
dates back to March 1966.  Because of its high equity allocation,
Morningstar evaluates CAPEX against other large-cap, blend funds.
For the 10-year period as of September 30, 2002, the fund earned
an annual-equivalent rate of return of 10.7%, 1.7% above the S&P
500 index and ranking in the top decile of the large-blend group
per Morningstar.  So, Richardson has gotten the job done for his
shareholders over the long run.  For more information, go to the
Eaton Vance website at www.eatonvance.com.

Conclusion

Long-term investors seeking strong risk-adjusted performance and
low cost of ownership have some potential funds to consider here.
While reducing risk through diversification, low P/E's and other
measures, these funds have produced above average to high returns
relative to their category peer group.

Because Eaton Vance Tax-Managed Fund takes a long-term view when
investing, it may be appropriate for regular (taxable) accounts.
Since the original CAPEX shares are closed, you'll need to think
about other share classes, and an Eaton Vance rep can help there.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

Don't Stand In Front of Speeding Trains

Wow, the conditions sure changed overnight. From expecting an
overbought dip on Monday night to full-blown rally on Tuesday.
Unfortunately we came full circle and it looks like the direction
is south again. Stay off the tracks or go along for the ride.


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The Option Investor Newsletter                  Tuesday 10-15-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Stock Picks: Off Leash
Dropped Calls: LMT, WLP, AZO
Dropped Puts: HAR, GS
Daily Results
Call Play Updates: ITMN, LLY, MBG, MME
New Calls Plays: NPSP
Put Play Updates: GIS
New Put Plays: DIA, C


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


Off Leash
PETM - Petsmart - $19.40
Strategy: Long stock with put insurance

Petsmart is a stock that has not really experienced a bear market
over the last few years. In fact, it has acted in a somewhat
contrarian manner.  The stock reached a high of $30 back in 1996,
and then slowly drifted down during the internet boom of the late
90s.  The stock found its bottom way down at $3.00 in March of
2000, just as the broader markets were rolling over, and has been
on the way up ever since.  In fact, since December of 2000, the
stock has posted a gain in 18 of the last 22 months.   The stock
did drop during the July market swoon, but after finding its
legs, and support at its 200-dma, it has continued a series of
higher highs and higher lows.

Many of the stocks that have rallied in the last week have
rebounded from oversold conditions.  However, PETM is not one of
them.  Rather than trying to buy the top of a possible failed
rally, we like the trend and business of Petsmart.   The pet
supply business has shown tremendous resilience and appears as
recession-proof as an investor can hope for.  In the past year,
Petsmart and competitor Petco posted sales of $4 billion.  Same
store sales gains have been in the 8-11% range, and currently
show no sign of slowing down.  As the baby-boom population ages,
empty nesters are looking at pets as affordable luxuries, which
also fill the need for another body in the house. In addition,
the number of households with children ages 5 to 15, which is the
primary market, continues to grow.

PETM, currently with 570 stores, is adding another 25 in 2002 and
60 more in 2003. The fact that the company sells relatively low
cost merchandise, with a short life span (as any investor who has
seen their dog chew through toys faster than they can be replaced
can attest), leads to many return trips. The stores also offer
pet training, grooming, and veterinary centers, for a one-stop
pet needs shopping center.

The company beat earnings estimates in its most recent release,
citing cost cutting measures and rapid growth in the pet services
business.  The earnings rose from $0.02 per share in the year ago
period, to $0.14 per share, with same store sales increase of
11.4%.  The company raised guidance, saying it expected to earn
12-13 cents in the third quarter and 70-72 cents for the year.
Morgan Stanley ranked the stock as overweight when it initiated
coverage in August.

The stock recently consolidated on the point and figure chart,
finding support at $17.50 and then breaking out to a new buy
signal at $19.50, as it reached an intraday high of $19.67.  It
also found support, on its recent pullback, at the 50-dma of
$17.17, which coincides with the PnF support. The recent breakout
led the stock to its third higher high, after establishing its
third higher low since July, a good sign that the upward trend is
in tact. We can see this stock reaching back to at least its
previous high of $30 in the next 18 months.  Its ability to add
stores and still increase same store sales should continue to
grow the bottom line.  The fact that it has held up, in spite of
the Dow's decline, also shows the possibility to continue higher
on market pullbacks.

We like the support at $17.00 on both the daily and PnF charts,
and would recommend the purchase of a protective put at 17.50, in
case of a trend reversal.  After the recent rally up to today's
close of $19.40, the stock may experience a pullback and traders
can use a higher low on that pullback to initiate positions.  If
the stock simply keeps going up, a breakout over $20 could be a
signal, as well.

Option 1:  Wait for a pullback in PETM and then use a higher low
as a trigger to go long the stock.  Purchase one April 17.50 put
(QPT-PW), for each 100 shares purchased, at $1.60 for protection.
The price will likely be higher on a pullback than where it is
currently offered.

Option 2: Look for a breakout above $20 as a signal to go long
PETM.  Purchase the April 17.50 put as protection, or a put at
the $20 strike, which would cost more, but give more immediate
protection on a trend reversal.

In either of the above options, the put can be sold if the stock
goes down, in order to mitigate any losses. If that occurs, once
the put is sold, we recommend watching the earnings pattern to
see if projections by PETM are accurate.  If they are not, then
the trader can sell the stock and the put.  If it is simply a
market related pullback, the trader may want to hold the stock
position.






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

LMT  $58.93 -1.17 (-3.52 for the week)  Lockheed Martin surged
right after we picked the stock, but met resistance at its 50-dma
of $63.50 on Friday.  It then rolled over and followed the rest
of the defense stocks down today. We were attempting to capture a
repeated trend in LMT, from the last time it rebounded at its
200-dma, with Iraqi invasion talk heating up after the Congress
gave President Bush approval for military action. With that trend
not materializing, we will close the play and look for more
reliable candidates.

---

WLP $84.80 +2.52 (+3.96 for the week) We listed WLP with a long
trigger at $80.  The stock broke out after it cleared that
hurdle, racing $6.40 in the last three days, from Thursday's
close of $78.40. Our initial target was in the $86 range (with
potential to $90) and today's action saw the stock rally into the
close.  Normally, we would just raise our stop and continue to
play this stock long.  We would certainly not have a problem with
traders who choose to do so from this point.  We are concerned
about the overall extension of the 1000-point rally in the last
four days, and expect a pullback in the very near future.
Therefore, we will close this play for a significant profit and
put the money elsewhere.

---

AZO $83.50 +1.05 (+2.20) After rebounding from the $77 level last
week, shares of AZO have given us quite a ride up the charts.
The strong open this morning pushed the stock up to just below
major resistance at $85, from which the stock drifted lower
throughout the day.  With the broad market looking awfully
overextended here and more than $4 in gains since we added the
play, we want to err on the side of caution.  Let's take
advantage of the recent strength and harvest gains on the play.


PUTS:
*****

HAR $54.15 +4.20 (+4.93 for the week) HAR rebounded impressively
from its low last week of $45, floating along with the rising
tide of a 1000 point Dow rally.  While these upper end audio
products do not appear to stand much chance during a recession
like holiday shopping season, we were stopped out of this play on
the rally and will have to watch from the sidelines as it tries
to hold its gains. It is once again up against a significant
resistance level at $55, but has broken its head and shoulders
formation, so our bearish sentiment will have to stand on
its own, without a technical foundation for support. We are
closing the play and will look for other opportunities.

---

GS $70.00 +4.70 (+5.80) Bear market rallies are known for their
irrationality and volatility.  Just when our GS play looked like
it could be setting us up for an entry yesterday afternoon, the
stock bolted sharply higher this morning on better-than-expected
results (a questionable description to be sure) from Citigroup.
Whether the move lasts or not, we clearly can't stand in the way
of the runaway move in GS.  Today's more than 6.5% gain
obliterated our $68.50 stop, and it came on heavy volume too.
Any open positions should have been stopped out shortly after the
open, and we're dropping the play tonight.  If still hanging onto
open positions, use any early weakness tomorrow to get out and
limit losses.


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

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

CALLS              Mon    Tue    Wed   Thu   Week

AZO      83.50    1.65   1.05  Drop, profits
ITMN     35.50    1.88   1.29  Finding higher support
LLY      64.01   -0.02   2.02  6 out of 7 higher days
LMT      58.93   -2.35  -1.17  Drop, broken pattern
MBG      31.80    0.63   1.47  found a bottom
MME      41.77    1.53  -0.31  still trending up
NPSP     26.62    0.40   2.02  New, breakout
WLP      84.50    1.44   2.52  Drop, profits


PUTS

DIA      82.80    0.99   3.86  New, time to change sides
C        34.14    1.83   3.83  New, party's over
GIS      42.81    1.33  -0.02  poor relative strength
GS       70.00    1.70   4.70  Drop, stopped
HAR      54.15    0.72   4.20  Drop, stopped


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

ITMN $35.50 +1.29 (+3.14 for the week) Intermune finally rewarded
our faith in the company with a move of over $3 in two days. The
stock actually outperformed the biotech sector, which saw many
stocks on the downside, in spite of a 2% gain for the sector.
Apparently Banc of America Securities finally caught on to the
recent developments at ITMN, and initiated coverage today with a
"strong buy" rating.  Options also started trading on ITMN at the
Pacific Exchange today, giving traders one more place to purchase
calls on the stock, and hopefully a little more competition to
tighten up the bid/ask. The stock continues its series of higher
highs and higher lows, after the last pullback found support at
$30, which coincided with its 200-dma.  Today's action helped the
stock to its third higher high since it began its rally in late
August, in spite of the decline in the broader market during that
period of time.   The stock experienced a six-box PnF reversal
up, after trading as high as $37.30 intraday.  An extension of
that magnitude usually sees a pullback to test support along the
way and today's pullback to a new higher support level of  $35
seems to have been that test.  Because the Dow has experienced a
1000-point rally in the last 4 days, it is possible we will see a
pullback tomorrow.  While ITMN has continued its upward trend, in
spite of Dow volatility, a sinking tide can take all boats with
it. If ITMN pulls back below $35, traders can look for another
higher low in the stock as an initiation point for long entries.
If the stock keeps going up, look for a trade back over $36 to
enter.  Raise stops to $32, just below Monday's low of the day.

---

LLY $64.01 +2.02 (+2.01 for the week) Lilly broke out on the
daily chart after consolidating between $60 and $55 for the
better part of the last 2 months.  While the broader market
screamed forward the last four days, Lilly just continued its
upward movement in orderly fashion, which began prior to the
rally. On Monday, it broke out on the point and figure chart,
trading over $63 to get the stock above resistance from the end
of August.  It then reversed course and headed lower, but found
support right at $61, for a successive higher low.  Today, the
stock sat close to unchanged for most of the morning, before
starting its climb toward another new high.  While watching LLY
intraday can be frustrating from the long side, the stock has now
posted gains for 6 of the past seven days, losing only $0.01 on
the one day it did not. We are approaching the 200-dma of $65.54
and the stock could certainly see some resistance there.  The
company settled a lawsuit today over a 1991 suicide that a man's
family based on his use of Prozac, and Johnson and Johnson
beatings earning's also helped its rise.  If we experience a
broad market pullback, after the recent surge, a sinking tide
could drag LLY back a bit with it.  We are raising our stop on
the play to $61, where the stock found support yesterday.
Another higher low, above this level, can be used for long
entries, as long as the bottom is not falling out of the Dow.  In
the case of a major sell-off, we don't recommend long entries.

---

MBG $31.80 +1.47 (+1.61 for the week) Mandalay Bay certainly
found its legs after the recent sector downgrades.  The fact that
estimates were actually raised on MBG, while lowered on Harrah's,
was overlooked in the gaming sell-off.  With Nevada casino
revenue up in August, and travel still cheapest to gaming
centers, MBG shouldn't see too much of a fall-off in its
businesses and investors appear to have taken notice.  Even MBG's
CEO has stated that the market underestimates the company's
earning power.  He stated that free cash flow for the company
could rise to about $6 a share by fiscal 2004, compared with
$3.88 a share in fiscal 2002.  I think back to my trip to
Mandalay Bay last winter, when our host said to me, "They don't
keep building them bigger and more elaborate because they're
losing money."   MBG fell right to its 200-dma, where it found
support and then broke out back above the 50-dma with today's
rally. The stock bounced at previous PnF support as well, and has
already experienced a three-box reversal up after breaking $32
intraday. New entries should look to the broader market, as a
sell-off after the recent rally could lead many profitable stocks
lower.  If that happens, look for intraday support above $30 for
new entries.  If MBG continues higher, look for intraday support
over $32 as evidence of strength to initiate new long positions.

---

MME $41.77 -0.31 (+1.52) After breaking out to new all-time highs
last Friday, MME didn't miss a beat, powering higher again
yesterday to close over $42 for the first time ever.  After such
an impressive rally, we wanted to see a bit of consolidation
before continuing higher, and apparently there were a lot of
other market participants who agreed.  MME gapped up above $43
this morning and then dropped right back near where it
consolidated for most of yesterday afternoon, helping to work off
some of the near-term overbought condition.  Judging by the
after-hours reception of earnings news, we will likely see some
early weakness tomorrow, and that could pressure MME enough to
give us our next attractive entry point.  Intraday support now
rests first at $40.25-40.50 and then down at $39.00-39.50.  A
solid rebound from either of these level can be used for
initiating new positions ahead of the next attempt on the highs.
One note of caution is that more than a third of today's heavy
volume came from the selloff in the first hour of trade.  Before
attempting to buy the next dip, we'll want to see any additional
selling come on relatively light volume with buying volume rising
on the rebound.  Keep stops in place at $38.50.


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

NPSP – NPS Pharmaceuticals, Inc. $26.62 +2.02 (+2.42 this week)

Company Summary:
NPS Pharmaceuticals is a biopharmaceutical company engaged in
discovering, developing and commercializing small molecule drugs
and recombinant proteins.  The company's product candidates are
primarily for the treatment of bone and mineral disorders,
gastrointestinal disorders and central nervous system disorders.
NPSP has three product candidates in active clinical development
and several pre-clinical product candidates.  Two of these
candidates (Preos and AMG073) are in Phase III clinical trials.
The third candidate, ALX-600, is in a pilot Phase II clinical
trial.

Why We Like It:
Breakouts are flying fast and furious in the Biotechnology sector
(BTK.X), which is quickly becoming the new leadership group in
the Technology arena.  With economically sensitive areas of the
market unable to make the case of improvement in their business,
Biotechs are the de facto recipient of investor funds due to their
relative economic insensitivity.  And with the BTK index breaking
through the $344 resistance level and the 50-dma ($343.51), it is
clear the momentum has shifted back into the bulls' camp.  Another
factor in favor of the Biotech bulls is the fact that this is
historically the best part of the year for the group due to the
concentration of industry conferences where new products and
advances are frequently introduced.  NPSP has been recovering
nicely for the past few weeks, and in the past few days was
wedging up right under the $25 resistance and the 200-dma at
$24.96.  The strong move in the BTK index this morning helped NPSP
to break out with conviction, gapping above the 200-dma and
closing very near the top of its range with a more than 8% gain
on the day.  The recent triple-top breakout on the PnF chart
gained some more bullish fuel today, as the vertical count grew
to $49.  While we won't likely see such lofty levels during the
life of this play, it does hint that there is some significant
upside.  Our NPSP play will necessarily be short-lived, due to
the fact that the company is scheduled to release earnings on
October 24th.  Ideally, we'd like to see a bit of a pullback to
the $24.50-25.00 area to confirm support near the 200-dma before
initiating new positions.  With significant resistance in the
$27-28 area, we don't want to consider momentum based entries
until NPSP can push through the $28 level on continued strong
volume.  We're initiating coverage with our stop set at $23.50.

BUY CALL NOV-25*QKK-KE OI= 669 at $3.50 SL=1.75
BUY CALL NOV-30 QKK-KF OI= 672 at $1.10 SL=0.50
BUY CALL FEB-25 QKK-BE OI= 374 at $5.60 SL=3.50
BUY CALL FEB-30 QKK-BF OI=1385 at $3.30 SL=1.75

Average Daily Volume = 747 K



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

GIS $42.81 -0.02 (+1.31) The amazing rally over the past four
days has revealed some interesting points of weakness.  If the
rising tide of the broad market is unable to lift a stock, then
it makes sense that when the short-covering comes to an end,
those stocks that failed to participate on the way up are going
to be high on the bears' list for the next leg down.  GIS was
looking weak even before Moody's cut the company's debt rating
last week.  While the broad market traded in a fairly tight
range yesterday, GIS bucked the trend and caught a nice bounce
from the $41.50 area, confirming the strength of that support
level.  That party was short-lived though, as the gap up this
morning quickly faded when it became clear that the bulls didn't
have the conviction to even push through near-term resistance at
$43.25.  That rollover made for a decent entry for aggressive
bears, as our stop is just above there at $43.50.  More
conservative traders will want to see the stock fall through
the $41 support level before opening new positions.  That could
be on tap for Tuesday if the negative reception of earnings
reports after the bell put in investors in a foul mood in the
morning.


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

DIA - Diamonds (based on the Dow Industrial Average) - $82.80
+3.86 (+3.81 for the week)

Company Summary:
The Diamonds is a tracking stock that is derived from the value
of the Dow Jones Industrial Average, trading at a multiplier of
approximately 1/100 of the index value.

Why We Like It:
The Dow has experienced a furious rally of over 1000 points from
the low of the day on Thursday morning.  While there have been
some positive earnings reports, there has been nothing earth
shattering to lend fundamentals to such a furious rally.   There
are a number of factors that lead us to the belief that the rally
was a technical bounce, combined with some short covering.  The
rally did not take place until the S&P 500 broke the July 24
intraday low on Thursday morning, after which the market took
off, screaming upward on no real news.  The rally continued as
those investors playing short to that level, got out of the way
and covered positions more aggressively.  After posting
incredible gains, the Dow has now run into overhead resistance
around 8300.  On the way down, 8305 was the 50% retracement of
gains from July 24 to August 22.  It served as support repeatedly
and also served as the bottom of the right shoulder of a head and
shoulders formation.  That formation was eventually broken, with
the Dow fulfilling its downside measuring objective just under
7200.  Now, on the way up, the 8300 area has quite a few factors
which lead us to believe it act as resistance and turn the Dow
back. First, it is a significant previous support area, which is
likely to act as resistance.  Second, the 50-dma of 8282 closely
coincides with this level and should provide a barrier, as well.
Third, the 61.8% Fibonnaci retracement level, of the August 22
intraday high to the October 10 intraday low, a decline of almost
2000 points, lies just above at 8359.03.  Intel missed earnings
after the close and should start the ball rolling back down hill.
There are a number of other major companies reporting this week,
but so far, the biggest upside surprises have been tempered with
cautious comments. We expect a drop tomorrow morning and new
entries can look at a break below $82.00 to initiate short
entries.  In the case we get some continuation of the rally, look
for a failed rally below our stop loss of $83.75 for a better
entry point.  If the Dow can manage to break above 8375, we do
not recommend entry, as this will stop the play out.

BUY PUT  NOV-83 DAV-WE OI= 5075 at $3.40 SL=2.00
BUY PUT  NOV-81 DAV-WC OI=  793 at $2.55 SL=1.25

Average Daily Volume = n/a


---

C - Citigroup, Inc. $34.14 +3.83 (+3.74 this week)

Company Summary:
Citigroup Inc. is a diversified global financial services holding
company whose businesses provide a broad range of financial
services to consumer and corporate customers.  The company has
over 192 million customer accounts in over 100 countries and
territories.  C's activities are conducted through Global
Consumer, which delivers a wide array of banking, lending,
insurance and investment services; Global Corporate, which
provides corporations, governments, institutions and investors
with a broad range of financial products and services and Global
Investment Management, which offers a broad range of life
insurance, annuities and asset management products and services.
Additionally, the company's Investment Activities division
consists of the firm's venture capital activities.

Why We Like It:
The broad market extended its winning streak to four days on
Tuesday, largely on the back of 'positive' earnings reports from
the likes of JNJ, GM and C.  But were the earnings really
positive, or were they just not as bad as investors had feared?
Judging by the after-hours reaction to earnings tonight, it looks
like the bloom may already be off the rose, as the futures have
sold off rather sharply due to disappointment over INTC's earnings
report.  In the case of C, it appears that a convincing story was
told to make the earnings report appear to be better than it
actually was.  Kind of like the story of the Emperor Who Had No
Clothes.  There was talk during the day that the company actually
missed estimates if the gain from the sale of 399 Park Avenue is
excluded.  That sale boosted earnings by 6 cents per share, and
if excluded, bears could make the argument that the company
actually missed estimates by a nickel.  Regardless of the
interpretation of the earnings report, that news has now been
factored into the stock, which even after a 12.6% short-covering
rally, is resting right near strong resistance between
$34.00-34.50.  And above that, the resistance gets even more
formidable in the $36.00-36.50 zone, the site of the mid-August
highs.  And let's not forget that the entire Brokerage sector has
the pall of investigations and litigation hanging over it, due to
increased scrutiny of the interaction between the Brokerage and
Investment Banking sides of the business.  Aggressive traders will
want to take advantage of any further price strength that fails
to penetrate the $36 level.  Any rollover below that level will
likely set the stage for the stock filling today's gap down near
the $30 level.  The more conservative approach will be to initiate
new positions on a decline under $32.50, just below Tuesday's
intraday low.  Set stops at $36.50.

BUY PUT NOV-35 C-WG OI= 370 at $2.55 SL=1.25
BUY PUT NOV-32*C-WZ OI=1081 at $1.40 SL=0.75
BUY PUT NOV-30 C-WF OI=3516 at $0.80 SL=0.40

Average Daily Volume = 26.0 mln



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

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http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


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The Option Investor Newsletter                  Tuesday 10-15-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Play of the Day: PUT - DIA
Traders Corner: Confusion to Clarity

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

DIA - Diamonds (based on the Dow Industrial Average) - $82.80
+3.86 (+3.81 for the week)

Company Summary:
The Diamonds is a tracking stock that is derived from the value
of the Dow Jones Industrial Average, trading at a multiplier of
approximately 1/100 of the index value.

Why We Like It:
The Dow has experienced a furious rally of over 1000 points from
the low of the day on Thursday morning.  While there have been
some positive earnings reports, there has been nothing earth
shattering to lend fundamentals to such a furious rally.   There
are a number of factors that lead us to the belief that the rally
was a technical bounce, combined with some short covering.  The
rally did not take place until the S&P 500 broke the July 24
intraday low on Thursday morning, after which the market took
off, screaming upward on no real news.  The rally continued as
those investors playing short to that level, got out of the way
and covered positions more aggressively.  After posting
incredible gains, the Dow has now run into overhead resistance
around 8300.  On the way down, 8305 was the 50% retracement of
gains from July 24 to August 22.  It served as support repeatedly
and also served as the bottom of the right shoulder of a head and
shoulders formation.  That formation was eventually broken, with
the Dow fulfilling its downside measuring objective just under
7200.  Now, on the way up, the 8300 area has quite a few factors
which lead us to believe it act as resistance and turn the Dow
back. First, it is a significant previous support area, which is
likely to act as resistance.  Second, the 50-dma of 8282 closely
coincides with this level and should provide a barrier, as well.
Third, the 61.8% Fibonnaci retracement level, of the August 22
intraday high to the October 10 intraday low, a decline of almost
2000 points, lies just above at 8359.03.  Intel missed earnings
after the close and should start the ball rolling back down hill.
There are a number of other major companies reporting this week,
but so far, the biggest upside surprises have been tempered with
cautious comments. We expect a drop tomorrow morning and new
entries can look at a break below $82.00 to initiate short
entries.  In the case we get some continuation of the rally, look
for a failed rally below our stop loss of $83.75 for a better
entry point.  If the Dow can manage to break above 8375, we do
not recommend entry, as this will stop the play out.

BUY PUT  NOV-83 DAV-WE OI= 5075 at $3.40 SL=2.00
BUY PUT  NOV-81 DAV-WC OI=  793 at $2.55 SL=1.25

Average Daily Volume = n/a



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


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

Confusion to Clarity
By John Seckinger
jseckinger@OptionInvestor.com

Trading can definitely be at times more of an art than a science,
but there are a few things a trader can do to increase his odds
of not being caught in either a bull or bear trap.

The title easily could have been “Confusing,” because the point
of this article is to show how trading sometimes needs more than
just moving averages, trend lines, retracement analysis, etc.  As
a trader, sometimes “experienced speculative analysis” has to be
used.  Also helpful is the ability to read a possible shift in
long-term psychology, which seemed to have taken place last
Thursday after a significant asset allocation shift out of
Treasuries and into stocks.

Ok, let us start with some illustrations.  Beginning with a daily
chart of the OEX, notice how the trend line from late-April
doesn’t exactly give us the clarity needed for trading.  This
line may be off by just a few points; however, most likely that
could be the difference from a profitable and losing trade.  Even
on a closing basis, price action would have told us to short the
market as Friday’s trading came to a close.  As far as
retracement analysis is concerned, it also would have had traders
either flat or short heading into Tuesday.  We know now that such
a strategy would not have returned the desired results.

Chart of S&P 100 Index, Daily




Looking at a five-minute chart of the OEX during trading on
Monday, the trend lines I drew might not be very helpful to
traders.  Looking at the more aggressive of the two trend lines,
the first penetration to the downside (13:30) could have either
triggered an immediate short signal or the opportunity to buy on
a dip.  However, do we buy at the 50 DMA, less aggressive trend
line, or at the descending red line seen in the weekly chart?
The 38.2% retracement area looms just above, so is this just one
day when it makes sense not to trade because risk/reward is not
favorable?

Chart of OEX, 5-minute




To answer that question, a few fundamental observations need to
be taken.  Switching to a chart of the NDX, it is imperative as
a trader to first look at a longer-term chart pattern before
entering a trading session.  Psychology from these longer
timeframes should either provide an underpinning bid or
significant amount of supply heading into the next trading
session.

Chart of the NDX, Weekly




Looking at a weekly chart of the NDX, when drawing trend lines I
am simply trying to enter the mind of a “typical trader”: one who
would connect a couple relative highs and draw a normal trend
line.  However, I do need to take things one step further in
order to find a possible stop level.  How is this accomplished?
By choosing a relative low that is likely the proverbial line in
the sand for bears.  Why only bears?  The intermediate trend is
bearish and what I am trying to do is figure out where a possible
bear trap might exist.  It might exist back under the trend line,
but I prefer to use horizontal support levels, if possible.  The
conclusion when looking at this chart is that there is a bullish
feeling to the market.  Note:  Weekly = Bullish.

Chart of the NDX, Daily




Now it is time to glance at a daily chart and make some simple
observations.  The market is (1) above its descending trend line,
and (2) using the 22 DMA (866) as support.  Resistance should be
seen at the 50 DMA (909); however, that should not change our
initial reading of the chart (since this average has not yet
proved itself).  Conclusion: Daily = Bullish.

Chart of the NDX, five-minute




Now it is time to re-visit a previously confusing five-minute
pattern of the NDX.  First, we need a stop level just in case the
trend is really bearish and our bullish prediction is wrong.
From the weekly chart, the significant relative low was 856.
Should we use it?  Nah, too much risk.  From a daily chart, a
stop can be placed at 866.  That is ten points lower, so it would
depend on your time frame, risk tolerance, and upside objective.
For now, let’s use it.  If a trader was flat going into the
session, I always recommend waiting about an hour before finding
a psychological level in which to place a stop (if one cannot be
found based on daily and weekly analysis).

Looking at the chart, a trader would now begin looking to go long
after the first hour and simply place a stop underneath the low
of the session at 876.  Since we established a bullish bias, it
becomes important to use all relative highs as a possible set up
for a long position to be established during trading on this
light-volume, hard-to-interpret, Monday session.  .

Fortunately, there were a couple of relative highs between the
first hour of trading (green diagonal line).  With that line
drawn, any break out above this line can be used for traders
wanting to take a long position.  The trailing stop at 876 can
then be moved up to near 883, the significant relative low.

Looking once more at the 5-minute chart, a trader could have
entered anywhere between 892 and 889, depending on slippage
during execution.  Now comes the hard part:  Do we day-trade this
contract, or look to keep the position overnight?  That is up to
you.  If aggressive, I almost always recommend using the 22 PMA
(exponential) for an exit level.  If the 22 PMA is not used,
either use the 50 PMA or simply wait until the last minute (if
trailing stop is not triggered, of course) of trading before
exiting and going home flat (nothing wrong with that).

Ok, what happens if the market tanks and our stop level is hit?
Yes, revisit the weekly and daily chart for confirmation of a
possible break in trend and establish a trading bias heading into
the session.  What about looking at the market as neutral heading
into every trading session?  That is fine; however, not every day
the market trades according to some understood pattern’.  Monday
was a good example of that.  Does it make sense to not trade at
all?  If a trader (read: not investor), I think it is fine to
trade on Monday or days when either the bond market is closed or
volume is very anemic.

Ok, since hindsight is 20:20, sure it would have made sense to
keep the position long heading into Tuesday; however, my comfort
level told me to wait until the bond market opens and increase my
odds for a profitable trade.  Good luck.  Hope this helps.


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

“7 Steps to Success – Trading Options Online”.

Order today and save 25% (only $15) by clicking on PreferredTrade
and clicking on the link to the book on its home page.

http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN
**************************************************************


**********
DISCLAIMER
**********

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


**************************************************************
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For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

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