Option Investor
Newsletter

Daily Newsletter, Thursday, 10/17/2002

HAVING TROUBLE PRINTING?
Printer friendly version
The Option Investor Newsletter                Thursday 10-17-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Earnings Shell Game Continues
Futures Markets: Suffering From Gap Fever
Index Trader Wrap: (See Note)
Market Sentiment: Catching A Wave
Weekly Manager Microscope: Kellner/English: FMI Common Stock (FMIMX)

Updated on the site tonight:
Swing Trader Game Plan: Gap, Gaps and More Gaps


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      10-17-2002           High     Low     Volume Advance/Decline
DJIA     8274.89 +238.90  8318.45  8038.24 2.09 bln   2235/1000
NASDAQ   1272.29 + 39.90  1283.21  1263.46 1.77 bln   2467/ 956
S&P 100   446.21 + 10.02   450.28   436.19   Totals   4702/1956
S&P 500   879.20 + 19.18   885.35   860.02
RUS 2000  362.57 + 11.72   362.57   350.85
DJ TRANS 2279.53 + 78.20  2283.36  2203.97
VIX        40.16 -  1.81    41.37    39.74
VXN        56.22 -  0.65    58.39    54.00
Total Vol   4,111M
Total UpVol 3,223M
Total DnVol   861M
52wk Highs    91
52wk Lows    239
TRIN        0.88
PUT/CALL    0.66
************************************************************

Earnings Shell Game Continues

Winners, losers and snoozers were the standard of the day. The
IBM earnings last night set the stage for a nine-minute rally
but the impact of its +7.30 gain lasted all day. Microsoft
announced a huge earnings win after the bell and traded up
+2.50 in after hours. SUNW beat estimates by two cents but
warned that another -4000 would lose their jobs.

Dow Chart




Nasdaq Chart




The big news was no news at all from IBM. They beat the street
and did not warn going forward. They were not positive but they
were not very negative either. Traders had been expecting some
trouble at IBM and there was obviously a lot of short positions.
IBM roared to a +7.30 point gain and powered the Dow to +285
numbers at the open.

The rally lasted all of nine minutes. We went from zero to +285
and crashed into the resistance wall at Dow 8300, OEX 450. The
Dow dropped back to 8250 by 9:54 and then traded in a very
narrow 50 point range for the rest of the day.

Dow Intraday Chart




The hot news after the bell was the huge earnings win from
Microsoft. Their 50 cent earnings beat estimates of 43 cents by
a mile. The reason was a one time last chance sale of software
licenses. Their old license plan changed as of June 30th and
there was a rush to buy software at the old terms. They
beat the revenue number of $7.1 billion with $7.75 billion as
well. The key point here is that this is not a repeatable event.
MSFT lowered their guidance for the 4Q to 45-46 cents and the
street was expecting 50. That was ignored. The MSFT CFO said
on the conference call that the "tech spending environment
remains tough". The stock did bounce in after hours but only
about $2.50 as traders realized that it was not from new
business as much as just a change in sales methods.

Another tech heavyweight on a diet, SUNW, beat the street by two
cents but announced another round of layoffs. The company posted
a loss only one quarter after returning to a profit. They declined
to give expectations for the current quarter saying business had
"unexpectedly" failed to improve in September. CEO Scott McNealy
said "I am so far out of the forecasting game it does not even
make sense" when asked about his take on the business outlook.
The CFO said they were not seeing the normal seasonal uptick in
purchases. SUNW said it would cut -4400 more jobs and take a $300
million charge in the next quarter. They said they were considering
cutting capex spending from $2 billion in 2002 to $500 million.
Sounds like there is still trouble in tech land.

Adding to this consensus was an earnings miss by SEBL. They posted
earnings of 3 cents compared to estimates of 5 cents and guided
analysts lower. It appears the software sector is still tough if
you are not Microsoft. CHKP warned that earnings would fall below
estimates for the quarter. PSFT guided analysts to 14-15 cents when
analysts had expected 14 cents. They qualified it by saying it was
still very challenging to make predictions. Even EBAY guided
analysts lower to 1.12-1.15 from analyst's estimates of 1.17.
Gateway lowered its guidance for the next quarter to a loss of
-10 to -13 cents when analysts were expecting only -9 cents.

There was also a guidance warning from Broadcom. They are a major
supplier to Cisco and the immediate thought was that Cisco was in
trouble. In the conference call they said their networking chip
business was stable but weakness in the sales of set top boxes
was going to hold their sales flat in the 4Q. So Cisco may not be
in serious trouble but consumers are slowing down on TV equipment.
That touches an entirely different cord for the 4Q.

The lowered guidance from BRCM as well as numerous other chip stocks
over the last several weeks was borne out in the book-to-bill number.
The headline number came out at only .84 with a drop of -19% in the
orders for September. This was the second month of decline after
seven months of increases. August bookings were also revised down.
Getting to be a habit on the number circuit lately. In reality the
headline number of .84 is significantly wrong when painting the real
picture. The number is a three-month moving average and considering
the last four months were 1.27 (May), 1.26, 1.22, 1.02 (Aug) to get
a three month average of .84 the current real number has got to be
much lower. Since we do not know the real numbers for any month it
is hard to decipher how bad it was. I heard one analyst speculating
that the September number may have been as low as 50. Here is the
source: http://www.semi.org/web/wpress.nsf/url/booktobill

The book-to-bill means for every $1.00 of orders shipped only 84 cents
of new orders (actually significantly less) were received in Sept.
This would mean that excess capacity is stacking up and more capex
spending cuts are imminent. Excess capacity cost money and produces
no revenue and that impacts earnings. With the Intel warning, the
SUNW admission that there was no business at the end of the quarter
the economy is not improving despite how bad everyone wants it.

The Jobless Claims rose again this morning with the continuing
claims rising to a 20 year high. There was an explosion of housing
starts, the highest since 1986, but there is not going to be anybody
with a job to buy the houses. Sears shocked everyone this morning
by missing numbers by 21 cents. These were the numbers they affirmed
just ten days ago. The problem was a larger than expected default
rate from their credit card customers. They had to take a much
larger reserve charge due to a rapidly rising rate of consumer
bankruptcies. Capital One Financial said yesterday that they were
abandoning the sub prime credit market because of the rapidly
increasing credit risk. Think the consumer is going to rush to the
rescue in the 4Q?
http://www.northerntrust.com/library/econ_research/weekly/us/020918.html

Need more proof? The Philadelphia Fed Survey came in with a drop to
-13.1 compared to estimates of a gain of 2.3. This indicates a rapid
contraction in the manufacturing sector. How many times do we have
to take the patients temperature before we agree that they are still
sick? The airline sector was represented by earnings from NWAC, CAL
and LUV and it was not a pretty picture. Tomorrow DAL announces
earnings and they announced today they were cutting -8000 more jobs.

What will Friday bring? The futures are up +9.50 as I write this
but the semi stocks will not be impacted from the late book-to-bill
report until tomorrow. Still I expect the markets to open up on
the strength of the Microsoft numbers as retail investors rush to
buy this huge win, oblivious to the fact that it is a one time event
and they lowered guidance for the 4Q. The Dow closed at 8271 and has
very strong resistance at 8300, 8350 and 8400. With MSFT in the Dow
we should get the mandatory morning gap which will be completely
impossible to trade and then another pause for a direction check.
With over 35% of the S&P announcing earnings this week and almost
all the major players there will not be the high visibility targets
of opportunity next week. This could pose a problem for traders
looking for new hope. Don't get me wrong. The October madness is
in full control. Fundamentals and economics don't count. The majority
of tech stocks are trading at nearly twice the PE that they had as
of Oct-2000 yet the economy is extremely worse.

Surprised? QCOM at 236, MSFT at 40, INTC 49, and that is for
companies that still have earnings. Something you might want to
think about is that Oct-19th, 1987 the Dow dropped -22.6% in one
day. This is not 1987 and the chart comparisons are not even close
but I bring it up to note that sudden changes in altitude tend to
occur in the 2nd and 3rd weeks of October. Rebounds tend to occur
in the last week. We are 2.5 weeks into the month with two weeks
to go and we got zero follow through from the opening bounce this
morning. That does not paint a pretty picture.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Suffering From Gap Fever
by Alan Hewko
futures@OptionInvestor.com

As the title suggests, the last week of trading has been plagued
with serious overnight or after-hours moves that have caused very
large Gap Ups and Gap Downs.  This has made trading more than a
little frustrating in the process.

As this is also Equity Option expiry week; that fact has only
added to the extreme volatility.

As previously done, I shall use these abbreviations for this
article:

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

Quotes:
4:15 PM ES 879, YM 8253, NQ 944 (pre MSFT)
8:00 PM ES 887, YM 8341, NQ 961 (post MSFT)


In the last six trading days, we have seen five positive days.
The only down day was Wednesday after Tuesday nights terrible
Intel earnings.

Last night's IBM earnings was the catalyst for the large gap up
we saw Thursday morning, evidence of which can be seen in the
below ES overnight chart.

Chart: ES02Z After-hours action





Other reasons besides IBM's earnings were some very bullish
housing numbers, good earnings from United Technologies (UTX) $60
+6 and Eastman Kodak (EK) $32.50 +2.50. All 3 of these stocks are
Dow 30 stocks. Some bad news came from Sears (S) $23.20 - 10.
This continued bad news from the Retail sector had the RLX index,
as well as WMT red for the day. There was news on North Korea
having nuclear weapons, and President Bush's concerns over this -
some periods in the market, that news also would have been a
reason to sell; but it wasn't. Making observations such as this,
at times, can help establish a feel for what the market wants to
do: go up - or - go down.

The market tone remains "ignore any bad news and focus on any
good (or inline) news.

Almost two-thirds of the companies in the Standard & Poor's 500
Index that have published quarterly results have exceeded
estimates.

The morning gap quickly faded during the first 30 minutes of
trading, sending ES down 10 points in 30 minutes from 888 to 876-
878.

From 10 AM to the Close, ES traded in a sideways 6 point range
between 876 to 882. In a similar fashion, Dow saw opening levels
of 8300, had 30 minutes of profiting to the 8230-8250 level and
remained sideways the rest of the day. NQ spent the majority of
the day at the 950 level, trading no more than 10 points above
and below that level.

As the 2 below charts of Thursday's market day shows, unless you
either came into the day long, or shorted the open and took
profits 30 minutes later; frankly, there wasn't many other
trading available.

Chart:
ES (E-mini SP500 futures) Thursday 9:15 AM to 4:15 PM




Chart:
NQ (E-mini NDX 100 futures Thursday 9:15 AM to 4:15 PM





This is a chart of YM (Dow $5 Futures and NOT the regular Dow
(cash index) chart you may be used to seeing.

It shows Wednesday night overnights move higher off IBM, the
total sideway Thursday rangebound area, and then Thursday after-
hours reaction to MSFT earnings.

Chart:
Dow Futures (YM02Z) Afterhours-regular session-afterhours




And then came MSFT...

The afternoon futures volume was extremely thin as everyone was
waiting for the big-gun tonight: Microsoft (MSFT)'s earnings. As
you likely know by now, MSFT had impressive earnings of 50 cents,
beating the expected number of 43 cents, and even the whisper
number of 45 cents. Revenues were higher as well.

One might even say "past 10 AM, the real trading day didn't start
up again until MSFT came out with earnings about 4:18 PM

One important comment, ES and NQ futures were closed when MSFT
reported; however Dow futures don't close until 5 PM, so it was
possible to take a Long Dow futures trade once MSFT's beating by
7 cents came out at 4:18 PM. As a FYI, Dow futures Ask prices
after MSFT came out were 8270 to 8290 area, and with them trading
at 8330-8350 before they closed at 5 PM, a trade was possible.

The big 3 tech earnings this week were INTC, IBM, and MSFT.
INTC - terrible - maker of chips (hardware)
IBM  - good     - tech services and software were strong
MSFT - good     - software
One might say that a company who is only making tech chips is
hurting, and the software and computer services business is
better.

This week also saw good earnings from Banks, Insurance sector,
manufacturing companies such as UTX and EK.

Thursday futures overnights

Off of MSFT earnings, futures continued their rally in the
overnight markets, the below chart shows ES futures reaction once
they re-open at 4:45 PM.

Chart:
ES02Z - afterhours action after MSFT's earnings.




Thoughts for Friday:

ES is 888 at 8 PM EST, its next higher level of resistance is
892-895, followed by the psych level of 900, then 902-905. As
perspective, ES opened Sep 11 2002 at 930, and saw year lows at
767 on October 10th.

Friday is option expiration for October Equity options.

Option Fridays are often either very boring with all the action
over by 10 AM, or are sometimes extremely volatile.

Friday pre-open has earnings from : Biogen (BGEN), Merck (MRK),
Tellabs (TLAB) and about 20 lesser companies.

Friday pre-open economic data of : Trade Balance, CPI, Core CPI
all at 8:30 AM

Once again, traders Friday morning will have a large Gap Up and
futures traders must focus on where key large-cap stocks may
close at for the usual option Friday expiry "games" as they often
close at strike prices, or right in-between.

MSFT $53.15 tonight; so will it close at $50, $52.15, or $55 as
one example.

One must consider the possibility of "Sell the News"

I wrote this Sunday about how October options are very popular
with "smart money" as they put down positions in the springtime.

Once those October option positions all come off tomorrow, might
next week become a "Sell the News" situation as Longs finally get
to take profits ? - or - are there still Shorts "trapped" in
currently losing positions as they continue to add to their
shorts as that as worked for 2 years.

For a Futures Trader - option Fridays are sometimes a good day to
try and put down a good trade early in the morning, take profit;
and then come back this coming Monday to see if it does indeed
become "Sell the News" or not.

So far this year : 10/10 remains "the bottom"; meaningless
observation, but consider the 9/11 number : add 1 to 9 to get 10,
subtract 1 from 11 to get 10 and there you have 10/10.


Alan Hewko
futures@OptionInvestor.com


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

Dow 8,700?

Despite mixed economic data the major market indexes gained back
yesterday's losses and then some as bulls cheered a stronger than
expected housing starts number for September along with a rising
building permits indication and an upside earning's surprise from
IBM (NYSE:IBM) $72.20 +11.24%.

Even a much weaker than expected Philly Fed report of -13.1 for
October, which was well below consensus estimates of +1.9 didn't
appear to squash intra-day bullish enthusiasm.

Stock futures built gains after the close of the regular session
when Dow components and NASDAQ-100 heavyweight Microsoft
(NASDAQ:MSFT) $50.75 +0.67% added $2.39 from its close when the
company reported earnings of $0.55 per share, blowing away
analyst's estimates of $0.43 per share.

Dow Jones Chart - Daily Interval




The Dow didn't close above my 8,280 level today and that made it
tough to hold any large positions overnight, especially with
Microsoft (MSFT) earnings in the balance.  While I've never
considered "after hours" trading really indicative of a true
market response, trading in both the futures markets and MSFT in
extended hours hints of a higher open.  For bulls, the main thing
to be looking for into tomorrow's close is any type of "sell the
news" reversal like I pointed to in the above chart.  Any type of
reversal and close at a session low tomorrow would be viewed as a
near-term negative.  The best way to protect a bullish trade
initiated at tomorrow's open would be to follow with a stop just
under 8,170.  I currently think the Dow trades 8700 before
month's end.  Tonight's Dow Bullish % ($BPINDU) reading shows a
net gain of 2 stocks to point and figure buy signals as the
bullish % grows to 43.33%.

SPDRS Chart - Daily Interval




Index options expired today and SPY options expire tomorrow.
Trading should be brisk and I wouldn't be surprised to see SPY 90
tested tomorrow.  Just as I'd be on the alert for any type of
"sell the news" reversal in the Dow, same goes for the S&Ps.  If
we would see that type of reversal take place, then I think bulls
that have been looking for a pullback near 83.77 might just get
it.  A nice tight stop for new bullish trades would be just under
the 88.16 level.

The S&P 500 Bullish % ($BPSPX) saw a net gain of 16 stocks to
point and figure buy signals today, raising the bullish % to
36.6%.  In late August, the bullish % reached 58% before
reversing lower to 20% in early October.

The narrower S&P 100 Bullish % ($BPOEX) saw a net gain of 4
stocks to point and figure buy signals, raising the bullish % to
41%.  In late August, the bullish % reached 58%, before reversing
down to a low of 18% in early October.

NASDAQ-100 Trust Index (QQQ) - Daily Interval




You'd better have some stick-um on your hairpiece if you're going
to trade the Q's as they've been gapping up and down with wild
abandon.  With MSFT being the most heavily weighted stock in the
Q's, I think its going to take a MSFT trade above $55 to get the
Q's up to $24.21.  I'm still assessing downside risk to $22.21.
Why?  Tonight... Sun Microsystems (NASDAQ:SUNW) $2.99 +6.78% said
it was cutting its own capital expenditures for FY03 to $500
million, which is down from FY02 spending of $2 billion.  While
SUNW has a lot of "stock specific" problems they are dealing
with, those cuts in capital expenditure are alarming and will
most likely bring further volatility and uncertainty to the
group.

The NASDAQ-100 Bullish % ($BPNDX) saw a net gain of 4 stocks to point
and figure buy signals, raising the bullish % to 40%.  As a benchmark,
the relative high reading in August was 60% before its reversal down to
14% in early October.

Jeff Bailey


************************Advertisement*************************
Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!

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


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

Catching A Wave
by Steven Price

The Dow rebound, on the heels of IBM's earning's surprise last
night, stopped dead at the plethora of resistance between 8277
and 8400.  These resistance levels included the 50-dma, two
Fibonacci retracement levels (one from the previous rally) and a
previous level of significant support (8305).  The bears got
their meat, when it appeared there was a ceiling in place, but it
looks like they may have to go back into hibernation after
Microsoft (MSFT) blew away earnings estimates after the bell.

There are some significant barriers overhead, but with Microsoft
already up over $2 after hours, there is a good chance we will
get through those levels.  I will be watching 8359 closely, as
that is the last level of the significant resistance I see
between where we closed and 8600. That is not to say my long-term
market prognosis is rosy.  Lost among the bull stampede was this
morning's weekly employment data, which showed an increase of
22,000 jobless claims to 411,000 and was higher than estimates of
398,000.  That number won't be helped any in the future by Delta
Airlines, which announced plans to lay off up to 8,000 more
workers, due to "dramatically lower demand for air travel" and
"unprecedented financial losses."  Sun Microsystems is also
laying of 4,400 workers, but more about that later.

The airlines are still reeling, without much of a light at the
end of the tunnel. Southwest Airlines actually reported a profit
today, but said it could not predict whether it will earn a
profit in the fourth quarter.  Continental, which lost 55 cents
per share, said it had no prediction on when it could return to
profitability.  Several airlines did get a boost today, but only
because losses were narrower than expected.  For those flyers
concerned with a possible United bankruptcy, I was assured today
by a nameless, faceless voice at customer service that frequent
flier miles would not be affected, for whatever that's worth.

Additional economic data released this morning showed industrial
output fell 0.1% in September, reflecting a drop in production of
business equipment.  Businesses continue to cut spending to make
up for lost revenue and that hasn't changed simply because
companies are beating lowered earnings expectations. Drops in
capacity utilization, manufacturing output, and mining output
accompanied that decline. In August, total output dropped 0.3%,
while manufacturing output fell 0.2%.

Sun Microsystems (SUNW) beat expectations after the bell, by
losing only 2 cents per share.  The company also announced job
cuts of up to 4,400 workers, or 11% of its workforce. Sun said it
would be lowering its capital expenditures for 2003 from
approximately $2 billion in 2002, to under $500 million - a
staggering 75% decline.  It appears that the host of companies
complaining about IT spending are right on target when they say
they don't see a turnaround any time soon.  However, what this
tells me is that it will be at least 2004 before that turnaround
occurs, as companies slash next year's budgets following this
year's losses.

There was some positive economic data, as housing starts jumped
13% to the highest level in 16 years, and the highest percentage
gain in 7 years.  The number of single-family homes started rose
18% to 1.48 million, the highest level in 24 years.

EBay beat earnings forecasts and showed listings up 47% over last
year.  It also raised sales projections for the current quarter.
However, its online transaction revenue increase was tempered by
a 40% decline in revenue and the stock traded down $1.40 after
hours.

Earnings season tends to hide internal economic data. That's not
to say that no one is paying attention, but the "stories" are
generally focused on who beat and who missed.  Don't lose sight
of what's behind the curtain, as many companies are "beating"
severely reduced forecasts. That doesn't mean the market won't
swing higher on positive earnings reports.  As traders, all we
really care about is making a profit, not being "right."  So
catch the wave, but be ready to bail out when the music stops and
basic economics kick back in.


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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7286
Current     :  8275

Moving Averages:
(Simple)

 10-dma: 7754
 50-dma: 8270
200-dma: 9380



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  879

Moving Averages:
(Simple)

 10-dma:  825
 50-dma:  877
200-dma: 1016



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     :  945

Moving Averages:
(Simple)

 10-dma:  868
 50-dma:  914
200-dma: 1199



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


The Semiconductor Index (SOX.X): I'm getting whiplash watching
this group bounce around the last few days.  First we get bad
news from Intel, then good news from QLogic.  The good news from
IBM was really more about services making up for the drop in
hardware, so I'll out that factor in the negative bin. I keep
thinking back to Intel's cautious comments about the fourth
quarter.  It will be awfully tough to overcome a rough quarter
for the world's biggest chipmaker. Sun Micro said it was cutting
cap ex by 75% next year, but Microsoft beat earnings and traded
up over $2 after hours. While this may help lift the sector,
MSFT's profits have come partially from long-term licensing
agreements, rather than PC sales.  I can see the sector getting a
lift tomorrow, but my long-term outlook is still negative until
we see positive growth in PC sales or cap ex.

52-week High: 657
52-week Low : 263
Current     : 266

Moving Averages:
(Simple)

 10-dma: 237
 50-dma: 280
200-dma: 443


-----------------------------------------------------------------
Market Volatility

Today's rally still didn't push the VIX below 40.  While another
rally on the Microsoft earnings may do the trick, it's obvious
that OEX traders still haven't completely bought into the rally.
When that happens, we'll see a diving VIX, but with earnings
season in full swing, expect to see some premium support for a
while.  Even a VIX in the 35 range is considered on the high end,
so it could be a while before we return to "normal" levels in the
20s.


CBOE Market Volatility Index (VIX) = 40.16 –1.81
Nasdaq-100 Volatility Index  (VXN) = 56.22 –0.65

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.66      1,103,799       729,719
Equity Only    0.52        781,618       409,163
OEX            1.14         58,139        66,199
QQQ            0.75        137,981       103,643

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

Bullish Percent Data

           Current   Change   Status
NYSE          31      + 1     Bull Correction
NASDAQ-100    41      + 3     Bull Alert
Dow Indust.   43      + 6     Bull Confirmed
S&P 500       37      + 4     Bull Alert
S&P 100       41      + 5     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   0.86
10-Day Arms Index  1.07
21-Day Arms Index  1.29
55-Day Arms Index  1.33

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       2048           713
NASDAQ     2363           894

        New Highs      New Lows
NYSE         35              74
NASDAQ       46             100

        Volume (in millions)
NYSE     2,073
NASDAQ   1,806


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

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

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


************************Advertisement*************************
”If you haven’t traded options online – you haven’t really
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
**************************************************************


*************************
WEEKLY MANAGER MICROSCOPE
*************************

Kellner/English: FMI Common Stock (FMIMX)

Ted Kellner is the founder, chairman and chief executive officer
of Fiduciary Management Inc. of Milwaukee, Wisconsin, investment
advisor to the flagship FMI Common Stock Fund (FMIMX).  The fund
reflects FMI's core philosophy, buying good businesses at "value"
prices and emphasizing small/mid-cap companies with above-average
growth or improving profitability prospects.

Kellner has 32 years of investment experience.  The University of
Wisconsin graduate is a former vice president at Nicholas Company
Inc. (1973-1980) and Brittingham Inc. (1969-1973).  Further, he's
a member and former president of the Milwaukee Investment Analyst
Society.  In 1980, Kellner founded FMI, an independent investment
firm managing $1.4 billion in assets today for pension and profit
sharing trusts, Taft-Hartley funds, insurance company portfolios,
endowments and personal trusts, and mutual funds.

Assisting Ted Kellner with the day-to-day management of the fund
since October 1997 has been Patrick J. English, FMI's director of
equity research.  English, a graduate of Stanford University, has
16 years of investment experience.  Prior to joining FMI, English
was a research analyst with Dodge & Cox Inc. (1985-1986).  He's a
member of the Milwaukee Investment Analyst Society.  Both Kellner
and English are certified financial analysts (CFA's), an industry
designation for investment management professionals.

Kellner has been associated with the day-to-day management of the
FMI Common Stock Fund since its December 1981 inception.  In this
charge, he emphasizes fundamentals in his "bottom-up" approach to
investing, producing an average annual total return of nearly 13%
since inception.  The fund's 3-year average total return of 12.1%
through October 16, 2002 ranks in the "top 1%" of the Morningstar
mid-value category, outperforming the S&P 500 index by 22.7%/year
and the S&P Midcap 400 index by 6.9%/year on average.

FMI Common Stock Fund (FMIMX) is available on a no-load basis and
has a low minimum initial investment of $1,000.  You can purchase
shares directly or through one of several fund marketplaces, such
as Charles Schwab's OneSource service, which offers the fund on a
no-load, no-transaction fee (NTF) basis.  Despite its solid track
record, FMI Common Stock Fund is still relatively unknown to most
investors, with just $92.8 million in net assets.

Complete fund information is available at www.fiduciarymgt.com.

Management Approach

The investment philosophy that guides the FMI Common Stock Fund
is simple.  FMI's objective is to buy good businesses at "value"
prices with the goal of achieving outstanding investment results
over a three to four year time horizon.  Kellner and FMI believe
this goal is best achieved through investing in a limited number
(35-45) of small/mid-cap stocks.

The website indicates some of the characteristics that Kellner's
firm looks for in a good business.  These include a strong niche
which is defendable and difficult to replicate, a high recurring
revenue stream, modestly priced products or services, attractive
return-on-investment (ROI) economics, and above-average earnings
growth or improving profitability prospects.

To isolate these companies, Kellner and English use a "bottom-up"
research process that includes visits with management, customers,
suppliers, etc.  This bottom-up research process is combined with
detailed fundamental analysis of financial statements.  Valuation
is studied from both an absolute and relative (versus the market)
standpoint, the website states, and encompasses both a historical
and prospective view.

In making investment decisions, Kellner and English strive to buy
stocks at valuations that do not adequately reflect future growth
(earnings) prospects.  It's the combination of these fundamentals
(good business and value price) that drive the investment process
at FMI.  They strongly believe that both conditions must be there
to achieve superior long-term investment performance (and provide
protection against adverse developments).

The firm's sell discipline is relatively simple as well.  Kellner
and English will sell stocks when they become "overvalued."  They
recognize that in an euphoric market, like the 1990's, overvalued
stocks can rise further but that there is a "greater fool" theory
to contend with, the part of the market cycle they say is fraught
with risk.  They'll also sell when they determine they were wrong
in the fundamentals story as they put it.  They'll trim positions
that have become too large through dramatic appreciation as well.

Because FMI believes that timing the market is very difficult and
valuation parameters of individual securities change, the fund's
cash levels may vary.  Overvalued securities may be sold without
an immediate replacement, resulting in a "temporary build-up" of
cash reserves.  Morningstar's report indicates a 9.1% cash stake
at July 31, 2002.

In terms of diversification, FMI portfolios will generally hold
around 35 to 45 stocks, less than half the typical institutional
account or mutual fund, the website reports.  FMI believes that
the benefits of diversification diminish greatly after about 20
stocks.  Ideally they'd like to concentrate assets in 20 stocks,
but since FMI Common Stock Fund has a small/mid-cap focus which
creates some liquidity constraints, they will typically hold 20
additional smaller-sized positions.

FMI doesn't feel that all industrial classifications need to be
represented in the portfolios they manage.  Accordingly, Kellner
and English may weigh some sectors well above the market.  At
July 31, 2002, the fund was significantly overweighted to the
business services sector (3.8x to the S&P 500 and 1.6x to the
mid-blend category average) as an example.

Morningstar's fund report indicates the FMI Common Stock Fund
portfolio had a median market cap of $1.57 billion at July 31,
2002, with 58% of stocks held in the mid-cap sector and 41% in
the small-cap sector.  True to its core investment philosophy,
the fund's average growth rates were higher than the market as
measured by the S&P 500 index, while maintaining below average
valuations relative to the market.  Overall, this results in a
mid-cap blend (core) style.

Returns and Ratings

On a YTD basis through October 16, 2002, FMI Common Stock Fund
has lost 11.6%, ranking in the top decile of the mid-cap value
category per Morningstar.  While a negative figure, Kellner and
English have preserved capital considerably better than similar
funds and index benchmarks.  The S&P 500 large-cap index is off
24.2% since December 31, while the S&P Midcap 400 index is down
20 percent.




FMI Common Stock Fund is down just 1.4% over the past 12 months,
ranking in the category's top 3 percent.  And, over the trailing
3-year period through October 16, 2002, the fund sports a 12.1%
average annual total return, ranking in the mid-blend category's
top 1 percent.

For this 3-year period, Morningstar grades the fund's returns as
"high" relative to other mid-blend funds and its risk as "below
average," for an overall star rating of "5 stars," their highest
rating.  For the trailing 5-year and 10-year periods, FMI Common
Stock Fund has had "above average" returns, with "below average"
risk, relative to its category peer group, for an overall rating
of "4 stars."

Below is a summary of the fund's trailing 3-year, 5-year and 10-
year returns (10-year numbers are as of September 30, 2002), per
Morningstar:

 3-Year Annualized:
 FMIMX +12.1% (+22.6% to S&P 500) (+6.9% to S&P 400)
 Percentile Rank in Category: 1

 5-Year Annualized:
 FMIMX +5.0% (+5.7% to S&P 500) (-0.2% to S&P 400)
 Percentile Rank in Category: 14

 10-Year Annualized:
 FMIMX +11.9% (+2.9% to S&P 500) (-0.7% to S&P 400)
 Percentile Rank in Category: 25

So, Kellner has delivered top quartile performance or better over
the past decade within the mid-blend category.  Lipper recognizes
the fund's achievement also.  It awards FMI Common Stock Fund its
highest ratings for "total return" performance and "preservation"
over the trailing 36-month period through September 30, 2002.  In
the Lipper Leaders system, Lipper rates funds against their broad
peer group (in this case, all equity funds).  The fund has "above
average" ratings for "consistency" of returns and "expense".  The
fund's 1.20% expense ratio is 20 basis points below the mid-blend
category average (1.40%).

In the last three years, Kellner and English have held volatility
in check as evidenced by its 16.4% average standard deviation per
Morningstar.  That compares with 21.3% for the average U.S. stock
fund and 20.0% for the average mid-cap blend fund.  The fund also
sports a relatively high "alpha" of 16.3 versus the S&P 500 index
and 6.3 versus the S&P Midcap 400 index.  A high positive "alpha"
is an indication of how well the fund manager(s) has done in risk
adjusted terms versus the market (i.e. index benchmarks).

Conclusion

Because the FMI Common Stock Fund is less diversified than other
mid-cap blend funds and its portfolio turnover is relatively low,
its return may sometimes lag the market and other types of funds.
For example, the fund lagged in 1998-1999 when growth stock funds
led the way.  However, FMI Common Stock Fund has generated "above
average" returns with "below average" risk over the longer period
under Kellner's direction.

Long-term, risk-conscious investors seeking a small/mid-cap blend
fund have a fine choice here.  It would make a nice compliment to
a portfolio consisting of large-cap stocks and funds.


Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


************************Advertisement*************************
If you trade options online, then you need an online broker
that:
offers true direct access to each option exchange
offers stop and stop loss online option orders
offers contingent option orders based on the price of the
option or stock
offers online spread order entry for net debit or credit
offers fast option executions

PreferredTrade offers these online option trading features and
more; call 1-888-889-9178 or click for more information.

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


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

Gap, Gaps and More Gaps

We appear doomed to yet another impossible to trade gap but after
the zero follow through today there may be quite a few less
traders willing to go long. With the multitude of warnings after
the close being overshadowed by the Microsoft earnings, Friday
morning could be the last one in this series.


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


FREE TRIAL READERS
******************
If you like the results you have been receiving we
would welcome you as a permanent subscriber.

The monthly subscription price is 39.95. The quarterly
price is 99.95 which is $20 off the monthly rate.


We would like to have you as a subscriber. You may
subscribe at any time but your subscription will not
start until your free trial is over.

To subscribe you may go to our website at

www.OptionInvestor.com

and click on "subscribe" to use our secure credit
card server or you may simply send an email to

 "Contact Support"

with your credit card information,(number, exp date, name)
or you may call us at 303-797-0200 and give us the
information over the phone.

You may also fax the information to: 303-797-1333


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

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


**************************************************************
ADVERTISING INFORMATION

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

Contact Support
The Option Investor Newsletter                 Thursday 10-17-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: LLY, MME
Dropped Puts: DIA
Daily Results
Call Play Updates: ITMN, NPSP
New Calls Plays: None
Put Play Updates: C, GIS
New Put Plays: OMC, EBAY, KSS


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

LLY $63.00 -0.66 (+1.00 for the week) this call play, originally 
entered at $62.00, showed great promise, setting higher levels of 
daily support on the round numbers for the last several days.  It 
also showed gains in 6 of the previous 7 trading sessions.  
Unfortunately, the stock seems to have run out of steam, finding 
resistance at $64 the last two days, with recent highs of $64.00 
and $64.01. There is also the 200-dma of $65.45 looming above.  
We would have expected a push through the $64 barrier on a big up 
day, but instead we got a pullback. We are closing the play for a 
small profit, however, if the stock were to take out the $64 
level on the open, we would not argue with investors who wanted 
to remain long.

---

MME $41.06 -0.56 (+0.81) Increasing volatility is not the recipe
for a successful option trade, and MME has been getting wilder by
the day, as volume has remained very heavy over the past week.
While the heavy volume was useful for raising the stock up above
$43 both Tuesday and today, in both occasions, the stock dropped
back very quickly, on correspondingly heavy volume.  MME's
inability to hold onto its intraday gains this week in the face
of a rising market is not encouraging, prompting us to drop the
play tonight.  The intraday lows have been coming in near $40.50,
and if holding open positions, we would recommend using any
rebound off that level in the morning to exit the play.  A
breakdown below $40 will likely have the stock dropping back
down to the $38 level in short order.  If you elect to keep
positions open, we would recommend raising your stop to $40.


PUTS:
*****

DIA $82.84 +2.52 (+3.85 for the week) The Diamonds, which are 
based on the Dow Jones, rebounded right back up to resistance 
today, following IBM's positive earnings. They felt short of the 
50-dma of $82.94, after trading above it briefly.  There is 
plenty of resistance between $83 and $84, corresponding with the 
61.8% Dow retracement bracket of the recent drop from August to 
October, the 50-dma and previous Dow support at 8305.  However, 
after seeing support hold at 8000 yesterday, we don't want to get 
caught bouncing in a tight range while premiums decay.  We will 
close the play and wait for evidence of another breakdown.  If we 
get that breakdown, we may be "diamond shopping" again.


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

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

CALLS              Mon    Tue    Wed   Thu   Week

ITMN     36.10    1.88   1.29  -0.52  0.89  higher lows
LLY      63.00   -0.02   2.02  -0.25 –0.66  Drop,$64 tough
MME      41.06    1.53  -0.31  -0.45 –0.56  Drop, Big Red Candle
NPSP     27.00    0.40   2.02  -0.23  0.67  Room Above


PUTS               

DIA      82.84    0.99   3.86  -1.95  2.04  Drop, ranging
EBAY     58.13    2.00   0.45  -0.08  0.15  New, lots to give
GIS      42.40    1.33  -0.02  -0.17 –0.25  careful with entry
KSS      55.11    0.99  -0.81  -1.34 –2.16  New, bounce over
OMC      57.84    1.54  -0.46  -0.54 –2.94  New, industry sympathy


************************Advertisement*************************
Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!

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


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

ITMN  $36.10 +0.89  (+3.87 for the week)   ITMN has just gone 
about its business of climbing slowly higher since the pullback 
to its 200-dma on October 7.  The company has been rising on the 
strength of several products, with Actimmune the most prominent.  
The drug, which is currently used for two life-threatening 
congenital diseases in children - chronic granulomatous disease 
and malignant osteopetrosis, has also shown promise in the 
treatment of idiopathic pulmonary fibrosis, a usually fatal 
disease for which there are no effective treatment options.  
According to CEO Scott Harkonen," Actimmune is the only available 
treatment demonstrated to have clinical benefit in IPF, with 
improved survival data in two controlled clinical trials. We 
believe these results will support use of Actimmune and lead to 
peak sales in the range of $400 - $500 million per year, enabling 
us to achieve profitability in 2004 as planned." The stock was 
recently initiated with a "strong buy" recommendation from Banc 
of America Securities and has announced progress on a new once 
weekly Actimmune dosing therapy.  This morning Priority 
Healthcare made positive comments about the drug in its own 
earnings call, giving ITMN another boost. The stock has traded 
over $37.00 on each of the last three days, but found resistance 
at $37.50.  We would look for a trade above that level for new 
entries.  The stock also seems to have found a new floor around 
$34.50, so a pullback to that level would be an alternative entry 
point.

---

NPSP $27.00 +0.67 (+2.80) Biotechnology bulls may be disappointed
to see the BTK index only advance 1.8% on a day that saw the
NASDAQ-100 vault higher by 3.8%.  But believe it or not, this is
an encouraging sign for our NPSP play.  This huge moves in the
broad markets are largely being fueled by shorts covering, and
that indicates a lack of sustained buying.  The fact that the
Biotechs aren't seeing such heavy short-covering, lends credence
to the idea that the current rally in the sector still has some
room to run.    Reflecting the lack of enthusiasm for either
buying or selling during the day on Thursday, shares of NPSP
traded in a very narrow range after the opening volatility settled
out.  That is actually encouraging, after the sharp pullback that
followed Wednesday morning's moon-shot rally.  NPSP held its
ground, and appears to be trying to build some support above the
200-dma before the next upward leg.  Intraday dips that rebound
from either the $26 level or even down near $24.75 both look
attractive for new entries.  Wednesday's price action is a
perfect example of why we would recommend extreme caution for
those attempting to buy a breakout.  Raise stops to $24 tonight.


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

None


************************Advertisement*************************
”If you haven’t traded options online – you haven’t really 
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
**************************************************************


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

C $35.75 +1.90 (+5.35) Following IBM's better than expected
earnings report last night, the broad market got a fresh shot
of adrenaline and rallied hard at the open today.  Financial
stocks were among the best performers, with the Broker/Dealer
index (XBD.X) vaulting higher by more than 5%.  C performed
in-line with the group, tacking on close to $2, making its gains
since reporting earnings a whopping $5.44 (17.9%).  Sure it was
oversold heading into the earnings report and most of this rise
is simply shorts covering.  But it is interesting how the stock
topped out today right at the $36 resistance.  MSFT beat
earnings tonight and that is likely to have C opening with
another solid gain in the morning, so the key will be to watch
how it behaves in the $36.00-36.50 area.  If the rally tops out
and fails there, then we can look to enter new positions on the
rollover.  A more conservative approach will be to wait for the
stock to drop under $34.50 (just below Thursday's intraday lows)
in conjunction with the XBD index falling back under the $380
support level.  Remember that our stop is set at $36.50.  If the
stock rallies through that level tomorrow and holds, then clearly
we'll drop the play this weekend.

---

GIS $42.40 -0.25 (+0.90) As encouraging as it has been to see
GIS refuse to participate in the recent market rally, it has
been equally frustrating to see that it just won't break down.
The intraday range this week has been wild, to say the least.
While a $1.00-1.50 range may not seem like much, it represents
big moves for GIS, which normally tends to keep its intraday
moves to less than $1.  Pivotal in the recent price action is the
$41.50 level, which is both significant historical support, as
well as the site of the ascending trendline connecting the higher
lows since late July.  The 10-dma (currently $43.03) is keeping a
lid on the intraday rallies and aggressive traders can consider
new entries on a rally failure near this level.  In the wake of
their recent debt downgrade, GIS is clearly being propped up by
the broad market strength.  If that supportive factor is removed,
then GIS bulls should have the rug yanked out from under them.
The safer entry strategy will be to enter the play on a decisive
break of the $41.25 level, which is just below last Friday's
intraday low.  Keep stops in place at $43.50.


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

OMC - Omnicom - $57.84 -2.94 (+1.77 for the week) 

Company Summary:
Omnicom Group Inc. is a leading global marketing and corporate 
communications company. Omnicom's branded networks and numerous 
specialty firms provide advertising, strategic media planning and 
buying, direct and promotional marketing, public relations, and 
other specialty communications services to more than 5,000 
clients in more than 100 countries

Why We Like It:
OMC rebounded strongly in the last week, riding the rising tide. 
The stock traded as low as $48.25 on October 8, before topping 
out just over $61 on Wednesday.  The stock was unable to hold 
that level Wednesday and began to give back its gains today.  It 
failed to find support from its 50-dma of $58.23 after fellow 
advertising giant Interpublic (IPG) issued another warning just a 
couple of months after the warning it issued in August. IPG said 
that the issues that had led to the previous warning had worsened 
further.  Its new projections for the third quarter were only a 
third of what analysts had predicted and saw its full year 25% 
below expectations.  IPG also predicted a revenue drop of 7-9%, 
partially due to poor results in Latin America and Japan.  CEO 
John Dooner said the "new guidance reflects the difficult 
economic conditions we are facing around the world.

Investors wanted no part of OMC after the warning, as it appears 
advertising revenues are dropping worldwide. If ad revenues are 
dropping, the company that has become famous for characters from 
Tony the Tiger, to Steven, the Dell "dude," has plenty of 
exposure.  The OMC drop led to a break back below $60 support, in 
addition the 50-dma.  A look at the point and figure shows a very 
extended column of "X"s which fell short below the bearish 
resistance line of $63 and ended in a four-box reversal downward. 
There is some PnF support around $56; however, we can see the 
stock re-testing $50 again if it breaks through that level.   
There is some support at $55 on the daily chart, as well, so 
traders will have to be weary of a bounce from that level.  New 
entries can look for a failed rebound under $60. We may get a 
look at that level Friday morning, after Microsoft's earnings 
release beat earnings after hours today. If the stock manages to 
get through that level, then we will step aside and wait for a 
failure below it before going short.  More conservative traders 
can wait for a break below PnF support at $56 or daily support at 
$55. Place stops at $62, above Wednesday's high. 

BUY PUT NOV-60 LLY-AL OI= 620 at $6.10 SL=3.00
BUY PUT NOV-55 LLY-AL OI= 620 at $3.80 SL=1.90

Average Daily Volume = 2.60 MIL


---

EBAY – eBay, Inc. $58.13 +0.15 (+1.83 this week)

Company Summary:
After developing a Web-based community in which buyers and
sellers are brought together in an efficient format, EBAY has
emerged as the dominant online auction site.  The eBay dynamic
pricing format permits sellers to list items for sale, buyers to
bid on items of interest and all eBay users to browse through
listed items.  Items listed on eBay include collectibles,
automobiles, art objects, jewelry, consumer electronics and a
host of practical and miscellaneous items.  Although based in
the United States, through its subsidiaries, EBAY also operates
trading platforms in Germany, the United Kingdom, Australia,
Japan, Canada, France, Austria, Italy and South Korea.

Why We Like It:
With the bear market grinding along in its third year, the vast
majority of stocks have had their once-lofty valuations
dramatically compressed.  Despite this pattern throughout most
of the market, there are still a few stocks trading with lofty
valuations, which still need to come down significantly.  EBAY
is one such stock, with its PE ratio still north of 110.
Investors have continued to be willing to assign such a high
valuation to EBAY due to the fact that the company has
consistently delivered on the earnings front, and the company
kept that trend intact tonight by reporting 22 cents vs. the
consensus estimate of 20 cents.  But there are cracks beginning
to show in the superstructure, as the company guided revenues
higher tonight, while slightly reducing its EPS estimate.  EBAY
has a high valuation due to the fact that it has continued to grow
both revenues and earnings at a brisk clip throughout this
economic downturn, and if that pattern changes, then we can
expect investors to take their money and run.  Judging by the
extended hours session, that's precisely what they did, selling
the stock down to just above $55 vs. the 4pm close above $58.
Should this behavior continue on Friday, look for a breakdown
below the $56 level as a trigger for initiating new positions.
In addition to disappointment over earnings (and forward
guidance), we have a long-term descending trendline working in
our favor.  Connect the highs over the past 10 months, and you
have a trendline that rests at $60, which is also the site of
significant historical resistance.  EBAY has tested (and failed
at) this level twice in the past week, giving us conviction in
our bearish thesis.  Should a MSFT-induced broad-market rally
lift EBAY back into the $58-59 region tomorrow, a rollover from
that region would make for a high-odds, if aggressive entry.
Our stop is initially in place at $60.50, just above the August
high.

BUY PUT NOV-60 QXB-WL OI= 938 at $5.60 SL=3.50
BUY PUT NOV-55*QXB-WK OI=8429 at $3.40 SL=1.75
BUY PUT NOV-50 QXB-WJ OI=9171 at $2.00 SL=1.00

Average Daily Volume = 8.66 mln


---

KSS - Kohl's Corporation $55.11 2.16 (+2.71 this week)

Company Summary:
Kohl's Corporation operates family-oriented, specialty department
stores, primarily in the Midwest.  The company's stores sell
moderately priced apparel, shoes, accessories and home products
targeted to middle-income customers shopping for their families
and homes.  Kohl's stores have fewer departments than full-line
department stores, but offer customers assortments of merchandise
displayed in complete selections of styles, colors and sizes.  Of
the 420 stores the company operates, 116 are takeover locations,
which have facilitated the entry into several new markets,
including Chicago, Illinois; Detroit, Michigan; Ohio; Boston,
Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri,
and the New York region.  

Why We Like It:
Poor projections from many Retailers, including the mighty
Walmart, hammered the Retail index (RLX.X) to fresh multi-year
lows late last week.  While the sector has been lifted this week
by the bullish action in the broad market, there are clearly some
serious problems to be dealt with.  Concerns still remain that
the American consumer is pulling in his/her horns, and as we
found out from Sears this morning, while consumers may have been
willing to spend, they haven't been as willing to actually pay
their bill when it comes due.  Sears missed its earnings target
this morning by a whopping 23-cents, citing a sharp increase in
uncollectibles.  That's not encouraging, especially when you
consider that it was only 10 days ago that the company updated
its guidance for the quarter.  In the past week, KSS has lagged
the RLX index, failing to even challenge its 20-dma (currently
$59.32) before rolling over the past 2 days.  Today's weakness
dropped the stock back to where it went out on Monday,
successfully closing Tuesday's gap.  With daily Stochastics just
starting to roll over from overbought territory and bad news in
the sector causing the RLX index to do the same (also falling
back under the 50-dma today), KSS bulls are going to have a rough
go of things in the near term.  Look for KSS to get a lift from
the broad market on Friday, and use that strength to establish
new positions as the rally fails near resistance, either at
$56.50 or possibly as high as $58.  Should the bounce fail to
materialize, look to enter the play on a drop under $54, so long
as the RLX index remains below its 50-dma, which is currently at
$284.  Our initial target will be for a drop back near the recent
closing low near $50.  Use a stop at $59 to control risk in the
play.

BUY PUT NOV-60 KSS-WL OI=1152 at $6.30 SL=4.25
BUY PUT NOV-55*KSS-WK OI=3873 at $3.40 SL=1.75
BUY PUT NOV-50 KSS-WJ OI=2129 at $1.75 SL=1.00

Average Daily Volume = 3.66 mln



************************Advertisement*************************
If you trade options online, then you need an online broker 
that:
offers true direct access to each option exchange
offers stop and stop loss online option orders
offers contingent option orders based on the price of the 
option or stock
offers online spread order entry for net debit or credit
offers fast option executions

PreferredTrade offers these online option trading features and 
more; call 1-888-889-9178 or click for more information.

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


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

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


**************************************************************
ADVERTISING INFORMATION

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

Contact Support
The Option Investor Newsletter                 Thursday 10-17-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three: 

Play of the Day: Put - EBAY
Traders Corner: Ready to Try A New Position?
Traders Corner: Reversal patterns: Double and Triple Tops & 
Bottoms
Traders Corner: (Un)Comfortable  

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

EBAY – eBay, Inc. $58.13 +0.15 (+1.83 this week)

Company Summary:
After developing a Web-based community in which buyers and
sellers are brought together in an efficient format, EBAY has
emerged as the dominant online auction site.  The eBay dynamic
pricing format permits sellers to list items for sale, buyers to
bid on items of interest and all eBay users to browse through
listed items.  Items listed on eBay include collectibles,
automobiles, art objects, jewelry, consumer electronics and a
host of practical and miscellaneous items.  Although based in
the United States, through its subsidiaries, EBAY also operates
trading platforms in Germany, the United Kingdom, Australia,
Japan, Canada, France, Austria, Italy and South Korea.

Why We Like It:
With the bear market grinding along in its third year, the vast
majority of stocks have had their once-lofty valuations
dramatically compressed.  Despite this pattern throughout most
of the market, there are still a few stocks trading with lofty
valuations, which still need to come down significantly.  EBAY
is one such stock, with its PE ratio still north of 110.
Investors have continued to be willing to assign such a high
valuation to EBAY due to the fact that the company has
consistently delivered on the earnings front, and the company
kept that trend intact tonight by reporting 22 cents vs. the
consensus estimate of 20 cents.  But there are cracks beginning
to show in the superstructure, as the company guided revenues
higher tonight, while slightly reducing its EPS estimate.  EBAY
has a high valuation due to the fact that it has continued to grow
both revenues and earnings at a brisk clip throughout this
economic downturn, and if that pattern changes, then we can
expect investors to take their money and run.  Judging by the
extended hours session, that's precisely what they did, selling
the stock down to just above $55 vs. the 4pm close above $58.
Should this behavior continue on Friday, look for a breakdown
below the $56 level as a trigger for initiating new positions.
In addition to disappointment over earnings (and forward
guidance), we have a long-term descending trendline working in
our favor.  Connect the highs over the past 10 months, and you
have a trendline that rests at $60, which is also the site of
significant historical resistance.  EBAY has tested (and failed
at) this level twice in the past week, giving us conviction in
our bearish thesis.  Should a MSFT-induced broad-market rally
lift EBAY back into the $58-59 region tomorrow, a rollover from
that region would make for a high-odds, if aggressive entry.
Our stop is initially in place at $60.50, just above the August
high.

BUY PUT NOV-60 QXB-WL OI= 938 at $5.60 SL=3.50
BUY PUT NOV-55*QXB-WK OI=8429 at $3.40 SL=1.75
BUY PUT NOV-50 QXB-WJ OI=9171 at $2.00 SL=1.00

Average Daily Volume = 8.66 mln



************************Advertisement*************************
Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!

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


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

Ready to Try A New Position?
By Mike Parnos, Investing With Attitude

CPTI students love to learn new positions.  Today we'll analyze 
how to select a new position?  It’s not like love potion #9.  You 
can’t just mix it up right here in the sink.  It doesn't smell 
like turpentine and look like India ink.  This is serious.  Will 
your new position be vertical or horizontal? There is much 
research to do, questions to answer . . . and “miles to go before 
I sleep.”

Robert Frost said you’ll be “Stopping by woods on a snowy 
evening.”  We don’t have woods and we don’t have snow (yet).  But 
we have a computer, a mouse, a high-speed connection, and a 
willingness to learn.  That’s all we need to get started.

Step #1:  What kind of equity/index do you want to trade?
If your favorite strategies involve selling options, and you 
prefer some degree of stability, you should choose an index.  
Because indexes consist of multiple stocks, there is less 
likelihood that it will move dramatically if one CEO is caught 
coming out of a motel with Michael Jackson and a chimpanzee.  The 
diversification of the index will go a long way towards 
neutralizing these disturbing albeit not unusual occurrences.

If you like playing straddles and strangles, you're looking for 
large movements.  Individual stocks, that have a history of big 
moves, might be your best bet.  Upcoming earnings announcements 
and/or stock splits often result in major moves.  Look at 
industries like biotech that are always at the mercy of FDA 
approvals or rejections.  That's when the mierde is going to hit 
the fan -- and that's when you want to be there.  

Be thorough.  You can call the companies and find out when FDA 
decisions are scheduled.  That's what their "investor relations" 
departments are for.  You may be able to find that information on 
the Internet, but confirm it with a call before you put on the 
trade.  

If you want to pick a direction, as they say at my favorite 
Chinese restaurant, "rotsa ruck!"  But, if you insist, you have 
some research to do.  Check the sectors.  If you're bullish, pick 
the best acting stocks in a particular sector.  If you're 
bearish, pick the worst.  It's mind-boggling to see traders buy 
calls on the worst stock in a sector and wonder why it goes down.  
There's one born every minute -- maybe more than one.

Also, don't overlook an examination of an option's volatility.  
At this writing, there's exceptionally high volatility in the 
market.  That's an option seller's paradise.  Why?  Because 
sellers will take in an inflated amount of premium.  We can 
expect the volatility to return to its normal levels -- even if 
the underlying doesn't move.  The more premium that erodes, the 
more premium that remains in your pockets.

On the other hand, option buyers will overpay for those same 
options. As the volatility returns to normal levels, the time 
value element of the purchased option will decrease -- even if 
the underlying doesn't move.  That means the underlying will have 
to move even farther in the predicted direction just to make back 
the additional eroded premium.

Step #2:  What strategy should you use?
There are two schools of thought here.  What comes first, the 
chicken or the egg?  Colonel Sanders or the egg salad? The hotdog 
or the bun? The strategy or the stock?  

There are over 10,000 stocks, indexes etc., but there are only a 
few dozen option strategies.  It might be easier to have your 
favorite strategies and let the market come to you.  In your 
search, you may find stocks/indexes that aren't ready -- they 
don't quite fit the parameters of your favorite strategies.  Put 
them on your watch list and wait.  Resist the temptation.  Put 
those itchy mouse fingers somewhere out of harm's way. (No 
suggestions. I'll leave that to your imaginations.)

To be a consistently successful options trader, you need to play 
favorites -- to have a strategy for every market condition.  One 
that enables you to profit when you are neutral, another for when 
there's anticipated high volatility, and another when you pick a 
direction.  With these strategies in your arsenal, you're ready 
to go to war.

You must know these strategies inside and out.  You can have a 
bazooka in your arsenal, but if you don't know how it works, 
you'll end up shooting yourself in the foot.  And you need your 
feet, just like you need your trading capital.

Know the strategies thoroughly.  Know when to put them on, how to 
get the best prices when entering the trade, and the appropriate 
months and strikes to use.  That's only half the battle.  You 
also have to know your target profit, your maximum risk, when you 
will get out -- both in your favor or otherwise.  Know what 
adjustments you have to make -- and how to make them.

If you don't know the ins and outs of a strategy, don't even 
think about trading.  You're not ready.  Trading is tough enough 
as it is.  Let's put this into perspective.  By trading, you are, 
in essence, making a wager on something over which you have 
absolutely no control.  It's a helpless feeling when things go 
against you, but a euphoric feeling when trades become 
profitable.  All we can do is try to increase our chance of 
success.   We can play blackjack, but if we're card counters, we 
improve are chances.  We have to find a table (strategy) that 
only uses one deck -- so there's only one deck stacked against 
you -- not four.
_____________________________________________________________

Testing Your Option IQ
As promised, here are the answers to Sunday's pop quiz, testing 
your knowledge of options and how they work.  Reader response 
indicated you enjoy this type of challenge – a way of gauging 
your progress.

1. (a & b); 2. ; 3. (b); 4. (c); 5. (b); 6. (a); 7. (a); 8. (b); 
9. (a); 10. (b, c, & d);  11. (b); 12. (a); 13. (a & b); 14. (a & 
b); 16. (a); 17. (b); 18. (b); 19. (b); 20. (d); 21. (b); 22. 
(c); 23. (a); 24. (b); 25. (none); 26. (a); 27. (c); 28. (b); 29. 
(a); 30. (a); 31. (b); 32. (d); 33. (c); 34. (d); 35. (c); 36. 
(d); 37. (b & c); 38. (c); 39. (a).

How did you do?  
20 – 30 Correct:  Not bad, but back to the drawing board.  Too 
many TV reruns and not enough reading and learning.  OI has an 
amazing archive of articles on every aspect of options and option 
trading.  Don’t even think of trading real money – for a while.

30 – 35 Correct:  Respectable, but examine which questions you 
got wrong.  If you don’t understand why they were wrong, contact 
me and I’ll help.  Between myself and other OI columnists, you 
have an excellent resource at your disposal.  Take advantage of 
it.  In the meantime, start paper-trading – taking a position 
from its inception to completion, including adjustments.  After 
each action, including putting on the position, write down all 
the reasons for your action – your entire thought process.  When 
the position is finally closed, your notes will be invaluable to 
you in seeing what you did wrong and/or right.

35 – 38 Correct:  Very impressive.  Options are not an easy 
concept to grasp.  It’s hard enough to know what they do along, 
but knowing how puts and calls can work together is a major 
achievement.  Know you can put this knowledge to the test.  You 
can start trading real money, but begin by using a small number 
of contracts.  When money is on the line, decisions are somewhat 
tougher.  See if you can set your emotions aside and maintain a 
logical approach to trading.

39 Correct:  That’s amazing – especially since there were only 38 
questions.  Who are you kidding?  If you didn’t have the 
awareness to notice there was no question #15, then you’re not 
paying attention.  You can’t afford to be that lax when you trade 
options or you’ll lose a lot more than a question.

Stay tuned.  In a few months we’ll try another quiz with brand 
new questions (and maybe brand new answers, too).
_____________________________________________________________

Happy trading!  Remember the CPTI credo:  May our remote 
batteries and self-discipline last forever, but mierde happens.  
Be prepared!  In trading, as in life, it’s not the cards we’re 
dealt.  It’s how we play them.
 
Your questions and comments are always welcome.  
mparnos@OptionInvestor.com  


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

Reversal patterns: Double and Triple Tops & Bottoms 
By Leigh Stevens
lstevens@OptionInvestor.com

Recently the S&P 500 (SPX), the “leading” stock market index, as 
it is the performance standard for money managers made a 
possible or likely double bottom low, which also coincided with a 
bullish price/oscillator divergence after the index got oversold 
- see http://www.OptionInvestor.com/traderscorner/101302_2.asp

Of the technical signposts mentioned, I put the most stock so to 
speak, in the fact of the double bottom and this Trader’s Corner 
article is about why. The double or triple top or bottom 
formation is, as the name implies, a situation where a high or 
low fails to exceed the price area of a prior significant top or 
bottom, on 2 or 3 occasions. This second or third top or bottom 
does not have to occur at the same exact level as the previous 
high or low, as long as this subsequent high or low is in the 
same general price area as the earlier peak(s) or bottom(s); 
e.g., within 5%. 

In the recent case of the S&P 500(SPX), there was pretty much an 
exact double bottom low as seen in my first chart here – 


   


As always, look for other “confirming” technical indicators that 
might suggest that the market had reached an extreme and was 
reversing its trend at least for a while – for example, in 
above-normal selling pressure as measured by the Arms Index 
(TRIN) being over 1.60 on a 10-day moving average basis. 

When I refer to a “significant” prior high or low - this is the 
high/low that was the extreme point of an advance or decline in 
the most recent market move or trading swing. 

In the 2000-2002 Bear Market, examples of a double top are not 
hard to find such as is shown with the S&P 100 (OEX) below –



 
  
What about the case of a high or low being made in the same area 
repeatedly and more than 2-3 times? - a stock that makes a top or 
bottom in the same approximate area on MORE than 3 occasions is 
considered to be in a trading range between repeated highs and 
lows established in the same price area again and again – a 
subsequent breakout above or below this price range can also 
establish an upside or downside reversal of the trend but this is 
a different pattern than the Double/Triple Top or Bottom. 

What is happening in a double top or bottom (generally more 
common than the triple top or bottom in stocks)from a technical 
perspective? 
- Support is a price area where buying interest is such 
that there are more willing buyers than sellers and this buying 
will drive prices back up.  
- Resistance is a price area where selling interest is strong and 
sellers will overwhelm buyers and drive the price down.  

Double bottoms form in a price area where in the initial bottom 
there was an abundance of willing buyers – for example a group of 
savvy investors and traders view the market as especially cheap.  
If the potential buyers were strongly interested once in a 
particular area and there is no great change in the market 
outlook, they will then tend to be interested again in the same 
price zone, perhaps more strongly so - this buying will cause a 
rebound.  

Double or triple tops form in a price area where the would be 
sellers are in control because of their numbers and willingness 
to sell most or all of what they own of a stock or the overall 
index or sector – this may also be an area where there is 
willingness to take substantial short positions such as by hedge 
funds.  


 


A “confirmation” is also required to determine whether a 
SIGNIFICANT double or triple top or bottom is in place and the 
dominant trend has reversed.  The definition of an uptrend is a 
series of higher highs and higher reaction lows.  It is not the 
failure of prices to exceed a prior peak (this could always 
happen later), but a decline that exceeds a prior reaction low 
that initially confirms that a trend reversal has taken place.  

A double bottom is confirmed when a prior significant upswing top 
(in the decline just ended) is also exceeded - after the apparent 
double bottom.  Another related confirming indicator, while 
secondary to exceeding a prior swing low or high, is having 
volume action in synch with price action – if it’s a reversal of 
trend implied by a double bottom or top, the volume will 
typically jump from average daily volume in the recent past.



 

Generally the more time that separates the twin (or triple) tops 
or bottoms the more significant is a subsequent trend reversal.   

A break of any prior significant swing low or high will typically 
see volume expanding significantly relative to before this break.  
The recent low in the Market as measured by the low made last 
week (week of 10/7/02) offered some volume clues - volume was big 
on the first two rebound days, then slackened as the market 
paused for a day, then expanded strongly on subsequent days as 
the market resumed a strong advance. 

Volume offers (frequently, not always) a good secondary 
confirmation for double/triple tops and bottoms and can be looked 
at in addition to price action.  Also, if there was no volume 
“confirmation” to price action and there is only a slight closing 
break of a prior low or high, it’s usually a good idea to wait 
for a second consecutive close above or below the low or 
high in question.
  


   

It’s useful to remember the psychology involved in double/triple 
tops and bottoms that form - they are repeat patterns.  Market 
participants become convinced that a price floor or ceiling has 
been established.  There is then more belief in the staying power 
of the trend after the double top or bottom has formed and more 
people get into the market, stock or other instrument, which then 
helps keep the trend going.  

The pattern of double or triple, tops is a very useful one as a 
guide to getting into or out of the market for traders and 
investors.  I myself like entry at such points as I can then take 
a relatively small risk as liquidating stops can be set just 
above or below the second or third top or bottom.  Because of 
this, I will not necessarily WAIT for confirmation of the double 
top or bottom reversal pattern, which is achieved only when 
prices also go on to exceed a prior upswing high or low as 
described above.  

This strategy assumes the risk of a pattern failure in exchange 
for a more favorable risk to reward ratio, which is especially 
relevant to traders.  Investors looking to take a long-term 
position may wish to wait for the confirming price action. It is 
always important to pull together all aspects of trend analysis.  



 

If long at a possible double top, your risk of giving back a 
substantial portion of any unrealized gain is generally higher 
than the reward potential of a further up leg.  At such a 
juncture, it is not necessary to exit your position, as the old 
top may certainly be exceeded, but raising your exiting stop to 
just under the last prior significant downswing low is warranted.  

You can exit calls at a probable double top, especially if the 
prior peak was a major one – while also being prepared to assume 
new long positions/long calls if prices push through the most 
recent high by a significant amount (e.g., more than 5%) and on 
strong volume.  Conversely, be prepared to exit puts on the first 
signs of a strong upside reversal, especially on a volume jump, 
after prices have moved into the area of a prior significant low.



 


A triple top (above) that was “confirmed” by the subsequent price 
action – for a time - but was a pattern “failure” in terms of 
indicating a reversal in the time frame shown.      


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

(Un)Comfortable  
By John Seckinger
jseckinger@OptionInvestor.com

All we need is a relative low, relative high, and some time.  
This Traders Corner article will focus on price action either 
inside or outside a “comfort” zone (read: channel); testing 
traders’ conviction on whether or not a new range will take over.  

Let us immediately dive into an illustration.  Looking at a chart 
of Alcoa, it is important to clear away all moving averages, 
trend lines, etc. and look at things on a “horizontal” basis.  
Once channels are defined, think about all the traders that 
expect to play shares within a certain range.  Buy low and sell 
high.  It is these expectations that create a strong 
psychological attachment to particular zone(s) either at the 
bottom or top of a range.  

What happens if the bottom of a channel fails?  Believe me, 
traders long do not easily forget what it feels like when prices 
collapse and solid support turns into resistance.  Shorts, on the 
other hand, immediately goes for the jugular and tries to flush 
out all weak longs before allowing a bottom to form.  This is the 
process on how channels form during a bear market.  If a strong 
psychological level is broken to the upside (resistance), bulls 
begin to get more comfortable since it will most likely bring 
back memories of a channel once lost.  Of course, the objective 
is to confirm such a channel by testing the top of its range.  

Chart of Alcoa, 510-minute (Daily) chart 


 

So, what are traders of AA thinking right now?  The 22.75 area 
needs to be tested and we need to know if we should be short or 
long going forward.  If 22.75 is breached to the upside and longs 
control the momentum, most likely shorts will give up and bulls 
will power shares higher.  Ok, here is the caveat:  There really 
is no time objective for when shares might reach 28.  Therefore, 
this might not be the best option strategy.  Nevertheless, once 
22.75 is cleared, a tight stop can be implemented and thoughts of 
28 should certainly be running wild.  

So, what is the story on the green line(s)?  Well, those levels 
can either be trailing stops (once above) or an exit if prices do 
bounce solidly from such an area.  Note:  I would not have too 
many green lines, since that would dilute the importance of this 
possible long-term strategy.  

Chart of 10-year Treasury Note Index, Weekly 


 

Using simple channels for Intermarket relationships also works 
well.  Looking at a weekly (I would recommend only a weekly chart 
or longer) of the 10-year bond, a rise above 40.96 should place 
the contract back into a sizable range encompassing prices back 
up to the 55 (5.5% yield) level.  You might be thinking, “Well, 
the 40.96 level is the head of a Reverse H&S formation.”  Yes, I 
would agree, and it should give an even more psychological 
meaning to a rise back above 40.96.  So, why don’t I just draw in 
the Reverse H&S?  This article is trying to show a trader how 
even simple technical analysis (only horizontal lines) can be 
just as powerful, if not more, than a plethora of lines extending 
throughout the chart.  

Chart of Diamonds (DIA), Weekly 


 

What does a chart of the Dow Diamonds (DIA) tell us?  Since we 
have done a few examples already, I am sure you have caught on by 
now.  The objective is for a move back towards 96.62, but watch 
levels just above 90 to see if the drawn green line holds 
psychological significance as well.  For the skeptical readers 
out there, I do agree that the range appears wide and it could 
take a long time before we ever, if ever, see the DIA contract at 
96.62.  However, I am merely trying to interpret channels and 
trading ranges defined by earlier price action.  Furthermore, 
there is a solid risk/reward trade, since weakness underneath 
79.50 can be reason to exit and head to the sidelines.  

Chart of US Dollar, Weekly 


 

A weekly chart of the US Dollar shows prices recently compressed 
but setting higher lows in the process.  A few attempts above 108 
have been made; however, prices quickly went back below 108 and 
most likely lulled traders to sleep for a period of weeks.  If 
the Greenback does manage to get back above 108, there should be, 
once again, a shift in sentiment in favor of bullish traders.  
Yes, there could be another bull trap in store for traders; 
however, the recent relative strength makes it somewhat unlikely.  
Why am I optimistic?  Because the bottom channel at 104.88 was 
not tested when prices recently trapped longs above 108.  

Another question you might be asking yourself, “Why use simple 
horizontal support/resistance lines when I am comfortable with 
stochastics, moving averages, etc.?”  Point well taken.  Before I 
put on a trade, I clear my chart of all lines and draw a series 
of channels.  These levels are then written down (read: place an 
alert on your computer).  I then draw every conceivable trend 
line and indicator possible (at least the ones I am comfortable 
with).  And, in most cases, the channel(s) work better for long 
term trades.  Because the channels are drawn from relative 
highs/lows, these levels are usually the result of an extended 
move above/below a recognized area found from a ton of 
fundamental and technical points of view, it makes sense to stick 
with what all traders can relate to.  The hard part is the 
execution.

In practice, it is difficult to buy after an extended run up; 
however, a trader should be thinking differently.  Let us use the 
AA example once more.  If prices rise just above 28, thoughts 
should be for a move to 30 as well.  In fact, there could be a 
ton of shorts at 28 that are just getting involved.  Moreover, do 
not assume that all longs entered at the bottom of the range.  

What are some characteristics of a successful trader?  Patience, 
putting on good risk/reward trades, execution, and ability to 
recognize a change in sentiment before others.  When using 
channels, a trader can do all of these.  Have you ever missed the 
first 500 points of a move, only to then watch another 500 points 
take place?  We all have.  In hindsight, we all should have 
gotten out of our shorts and went long DIA contracts once prices 
rose back above 73.87 and re-entered the channel that heads to 
96.  Yes, in theory everything looks so easy.  And yes, it is 
frustrating to watch prices gravitate within a channel for weeks 
without hitting either the top or bottom of its channel.  
However, wouldn’t it be fantastic to capture a solid move and 
avoid all the “noise” that takes places most days of the week?  
By definition, this is investing.  Good luck.  


************************Advertisement*************************
”If you haven’t traded options online – you haven’t really 
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


**************************************************************
ADVERTISING INFORMATION

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

Contact Support

DISCLAIMER

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

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

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives