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Daily Newsletter, Tuesday, 10/22/2002

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The Option Investor Newsletter                 Tuesday 10-22-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Is this Round 10 for Bulls?
Futures Markets: An "Inside Day" Tuesday
Index Trader Wrap: Too much info?
Market Sentiment: Cross Eyed
Weekly Fund Screen: Large-Cap Funds Up Over 10% in Past Week


Updated on the site tonight:
Swing Trader Game Plan: Help Me I Am Seeing Red


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
10-22-2002                  High    Low     Volume Advance/Decl
DJIA     8450.16 - 88.08  8534.08 8376.15   1518 mln  1038/2198
NASDAQ   1292.80 - 16.87  1307.60 1280.66   1510 mln  1322/1904
S&P 100   452.59 -  3.65   455.20  447.96    totals   2360/4102
S&P 500   890.16 -  9.56   899.72  882.40
RUS 2000  362.66 -  5.97   368.63  362.49
DJ TRANS 2312.43 - 26.10  2354.99 2284.73
VIX        39.34 +  1.10    40.44   38.95
VIXN       53.61 +  1.27    54.41   50.98
Put/Call Ratio 0.78
************************************************************

Is this Round 10 for Bulls?
By John Seckinger
jseckinger@OptionInvestor.com

The Dow and the S&P 500 have set higher lows for eight
consecutive daily sessions, while the 30-year bond has failed to
take out a previous session's high since October 10th.  Relative
Strength in the Dow is currently at 58.98 on a daily basis,
higher than when the blue chips were at 9077 on August 22nd.
Furthermore, both contracts seem comfortable above their 50 DMA's
and are beginning to eye the 200 DMA for the first time in quite
awhile.  Of course, there are some caveats that will be explained
later.

After Texas Instruments (TXN) warned that revenue and profit for
the current quarter will miss expectations due to decreased
demand for chips used in personal computers, traders were
certainly prepared for an early morning retreat.  However, even
as shares of TXN fell $3.12, or 18.22%, to 14.00 and hurt the
overall Oil sector (XOI down 3.45%), the overall equity markets
kept the recent bullish sentiment relatively intact.  Other
developments on traders’ minds before the market opened included
59 companies issuing quarterly earnings.  The results were as
followed: 61% better than expectations, 24% in-line with
estimates, and 15% were below forecasts.  Let's spend a moment
and look at a few notable names.

Taiwan Semiconductor (TSM) was one of the companies failing to
meet analyst expectations, and as a result fell seven percent to
6.95.  Even though TSM is not part of the Semiconductor Index
(Sox), Tuesday's weakness coupled with Texas Instrument's
miss clearly gave investors one more reason to book profits in
semis after a solid run-up beginning on October 8th (209 to
Monday's high of 283).  Speaking of the Sox, this highly-watched
index fell six percent, or 17.22 points, to 265 on moderate
activity.  However, Monday's low of 260 remained intact.  HmmmIs
this a pattern?

Other stocks making headlines included AT&T (T) beating earnings
estimates but coming under pressure after the opening bell.
Shares did manage to recover, rising from 12.05 to 13.24 before
traders took profits during the last few minutes.  Shares still
closed higher by 0.52 at 13.05.  Speaking of volatility, shares
of McDonald's (MCD) announced in-line 3Q earnings and gapped
higher (18.33 to 18.95).  Also fortunate for bulls was the fact
that MCD noted that it will continue to target EPS of $1.43 "or
better" for all of 2002, excluding special charges.  After the
gap higher, shares traded almost vertical to 19.95.  Since then,
shares formed an aggressive bearish channel and closed at 18.90.
Closing underneath its opening level may not be a good sign going
forward.  Note:  This Dow component just missed its 50 DMA
(exponential) by about six cents.

Other securities reaching the spot light included UPS, G, and
BUD.  United Parcel Service (UPS) fell three percent after lower-
than-expected 3Q earnings and guidance that was underneath
analysts' estimates.  Shares of UPS settled at 62.26 and
underneath both its 22 and 50 DMA's (62.61 and 62.71,
respectively).  Gillette also fell under both moving averages,
losing a solid 5% to 29.90 after reporting in-line net income
for its 3Q.  Anheuser-Busch (BUD) lost ground as well, closing
lower by 1.8% to 53.97 after Morgan Stanley downgraded shares to
"equal-weight" from "overweight."  It was interesting that shares
of BUD managed to close 17 cents above its opening level and
didn't even test its 22 DMA to the downside.  Of course, it was
just yesterday when shares hit a new all-time high.  I don't want
to over simplify things, but it does make sense for companies
such as BUD to do well when the economy is falling apart.
However, shares have managed to remain resilient as the major
equity markets recovered.  Interesting.

Speaking of the economy, there were no economic reports to digest
on Tuesday.  Tomorrow is light as well, with only the Fed's Beige
Book due out.  This report will hopefully outline economic
conditions in the Fed's 12 districts.  Moreover, it might give
insight (possibly encrypt) into November 6th's FOMC Meeting.
Economists currently expect no change in the fed funds rate on
November 6th, and fed funds are now only 40% sure that the Fed
will cut rates by 25 bps before year's end.  Later this week,
September durable goods orders, September new and existing home
sales and the University of Michigan's consumer sentiment index
are scheduled to be released.

Not only does the economic calendar look better over the few
days, but I would not be surprised to see market activity
increase as well.  Tuesday's 88 point shaving in the Dow
came on volume of 1.5 billion and down volume out surpassing up
volume by a 2:1 margin.  Decliners beat advancers 2:1 as well,
while new lows outpaced new highs 89-17.  This may not be
something to write home about; however, bulls certainly are not
letting profit-taking turn into short selling and long
liquidation.  Turning to the tech-laden Nasdaq, the 16.87 point
loss came also on volume of 1.5 billion shares exchanging
hands.  Down volume beat up volume by an 8:7 margin, while
decliners outnumbered advancers 19:13.  New lows beat new highs
by a score of 70-35.  Checking the other major indices, the S&P
500 contract fell 9.5 points to 890, OEX lost 3.65 to 452.59, and
the Dow Transports fell 26 points to close at 2,312.

What about the other markets that occasionally trade either in-
step or inversely to equities?  The dollar index (DX00Y) fell
0.17 percent to 108.04, gaining ground against the Yen and losing
against the euro.  Comments from Kuroda, Japan's vice finance
minister for international affairs, that the Yen is declining
from "excessive strength" handicapped the Yen as short players
took over.  I am glad we don’t talk down our currency like that.
As far as the euro is concerned, strength in the overseas
currency seemed to be more technical in nature, as the EUR/USD
spread fell to 0.97.  The August 4th low of 0.9647 should be an
objective for traders.  Note: A weaker dollar should not be
good for equities.

Also not good for equities are higher Gold prices.  The XAU index
rose a significant 5.79% on Tuesday to close at 63.36.  This
index was poised to fall under 59 and break a possible bullish
intermediate trend; however, buyers clearly stepped in today and
closed the index at its highest level since October 7th.  The 22
DMA is above at 64.53.  Other indices most likely pressuring
stocks included the Utility Index (UTY) and Oil (XOI).  The
Utility Index did rise above its 22 DMA on Tuesday (234.4 versus
and intra-day high of 237), but failed to attract buyers and
ended up losing 2% to 229 and back below this moving average.
The range I would watch in the UTY index is from 219 to 234.
Turning to Oil, the 3.42% loss now has the index under both its
22 and 50 DMA (453 and 463, respectively) at 446; however, solid
support should be found near 438.

So, what should have been good for equities, but wasn't on
Tuesday?  Yes, lower bond prices (read: higher yields).  The 30-
year bond (TYX.X) saw yields rise to 5.15% on Tuesday, recording
its highest close since August 8th.  Has the inverse relationship
between bonds and stocks dissipated?  I don't think so; however,
a sharp sell-off in stocks coupled with only consolidation in
bonds could make me think otherwise.  Resistance on a yield
basis?  5.24%.  Support?  Look for 5.1% to attract some bids,
while a close back under 5% should have traders wondering if cash
will flow en masse back into the fixed-income arena.

The futures market for bonds (December Bond, ticker: ZB02Z),
which is quoted in price, showed another session of pit selling
and concern over mortgage companies lifting their hedges (read:
closing position, selling bonds) and capping any attempt of a
rally.  The Dec bond fell '15 ticks (Q-charts had the contract
down 31, but I believe that is a bad quote) to 107'19 and closed
lower for the eight consecutive session.

Ever since October 10th, I have been worried about a particular
hedge fund liquidating a position that was entered in hopes of a
rate cut by the ECB (which didn't happen).  I am starting to
think of another strategy:  This same hedge fund is now selling
bonds short in an attempt to offset the massive losses sustained
over the last few weeks.  As is usually the case, the bond market
loves to trade directionally.  Therefore, since it would take a
ton of energy to turn things around and get prices back towards
113, why not maintain the pattern of lower prices.  Until prices
prove us wrong, least resistance remains lower and this should
help intermediate-term equity bulls.  What would change the
picture?  How above a move back above 109'13.

Time for an after-hours look.  KLA-Tencor beat earnings by three
cents and began to erase part of Tuesday's 10.2% collapse;
however, the conference call did not go well (guided Dec EPS to
0.14 versus expectations of 0.24) and shares are currently at
28.90 and underneath Tuesday's close of 30.53.  This will
undoubtedly affect the Semiconductor Sector (Sox) during trading
on Wednesday.  Other after-market developments included Metro One
(MTON) announcing that Sprint (PCS) will not sign a new contract
with the company, as well as Abgenix beating earning estimates by
six cents with a (0.39) report.  Since Sprint represents roughly
32% of MTON's revenue, it should not be surprising that shares
are lower in after hours.  On Tuesday, MTON closed 5.34% lower at
9.03, and shares appear to be currently trading near 5.20
following the announcement.  Seems hard to believe.

Turning to ABGX, shares closed at 6.54 on Tuesday and appear to
be up fractionally after the better than expected results.
Additionally, Computer Associates reported earnings of 0.04 and
beat estimates for a rise in profits of 0.02.  Revenues also
increased by 5.3%.  Shares closed on Tuesday at 12.10 and appear
to be higher at 13.01 in after-hours activity.  Overall, the
December Nasdaq futures are lower by 8 points, or 0.82%.
The S&P 500 futures contract is lower by 0.50 at 891.

Time for some illustrations.  Beginning with a weekly chart of
the Dow, it seems as though bears might begin to get confident
and scare bulls into initiating positions.  Why?  There is a
bearish trend line, 38.2% retracement from March’s high to
October’s low, and the 22 weekly moving average.  Before we sell
the house and buy puts, let us look at a daily chart as well.
Note:  The red line comes in at 8605.

Chart of Dow Jones, Weekly




A daily chart shows a less bearish look, and actually used a
38.2% retracement as support.  Furthermore, the 50% retracement
at 8774 seems to correlate with many traders’ thoughts when
predicting resistance.

So, which chart do I put more weight in?  Well, the weekly chart
should have more psychological weight (8605), and if that level
is penetrated it would make sense to turn to the daily and expect
a move to 8774.  Support should be harder to determine, and I
would look at the daily chart for insight.  8400, the 22 and 50
DMA’s, and then 8000.

Chart of Dow Jones, Daily




Of course, the bond market might have something to say about
equity direction.  As stated earlier, I would focus more on
support than resistance levels.

Chart of the 30-year, Daily




Also noted earlier is the Gold Index, outperforming during
trading on Tuesday and sending the index 5.79% higher and above a
solid pivot area (62.96).  I would definitely place the XAU index
on the radar screen going forward.

Chart of Gold and Silver Sector (XAU), Daily




Good luck.


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

An "Inside Day" Tuesday
by Alan Hewko
futures@OptionInvestor.com

---------------------.-----------------------
Quotes:
4:00 PM Cash Market Close     ES 889, YM 8427, NQ 967
4:15 PM Future's Market Close ES 892, YM 8445, NQ 973
5:00 PM YM Dow Futures close : 8438
7:00 PM ES 891.50, NQ 970

Dow   8450 - 88
SP500  890 - 10
COMPX 1293 - 17
Advance/Decline by Volume was Bearish for entire day.

As previously done, I shall use these abbreviations for this
article, and the same "ES, YM, NQ" is used in the intra-day Market
Monitor commentary:
                                         Ticker
ES     E-mini SP500 December futures      ES02Z
YM     E-mini Dow $5 December futures     YM02Z
NQ     E-mini NDX 100 December futures    NQ02Z

______________________________________________________

Monday continued last week's market rally, and when Texas
Instruments (TXN) warned last night after-hours followed by
Japan's Nikkei taking a 300 point dive overnight off of Japan
banking worries, Bears likely thought "finally we get some selling
and broke out their pots of honey."

For the third day in a row, the market opened with the same 10 to
12 ES points gap-down lower open.

Also, for the third day in a row, the markets sold off lower from
the open to a 10 AM reversal period where (once-again) Dip Buyers
appeared.

Once again, this 10 AM period of buying was not based on any news
or specific event.

However, Bears were denied a total victory as Tuesday became an
"Inside Day" where Tuesday's low and high were contained within
the prior day's low/high range.

Chart below illustrates this rather well.
ES02Z (E-mini SP500 futures) Monday and Tuesday




As you can see, Tuesday was spent well within Monday's Low of 875
area, and Monday's 902 High; thus forming an "Inside Day"


RECAP OF TODAY

At 10 AM, ES found support at the 885-887 support area, and buyers
came in for an hour before hitting ES 895-96 level (the top band
of 892-895 pivot. This 11 AM ES resistance also matched the
failure for the Dow to take out the psych level of 8500.

Also at 11 AM brought forth a rumor there was a very large SP
futures sell order being worked.

From 11 AM until 3:30 PM, the markets "leaked lower" and rally
attempts were sold into vs. having dips being bought.

3:30 PM     ES double bottom 883, Dow cash at 8375.
Shorts tried pushing ES under 880 and the Dow under 8350 and once
that attempt failed, buying occurred from 3:30 PM to the close.

Here's a chart of
ES (Emini SP500 futures) Tuesday 9:30 AM to 4:15 PM Close





Below is a Chart of:
Dow Industrials (Dow 30) for Tuesday 9:30 AM to 4 PM




Here is a chart of:
NQ (NDX futures) from Tuesday 9:30 AM to 4:15 PM





______________________________________________________

TUESDAY AFTER-HOURS EARNINGS / WARNS

Last Tuesday, Intel reported earnings and warned.

Tonight, another Tuesday, found KLAC (a key semi stock) reporting
earnings and warning providing the same terrible forward looking
guidance as given by Intel last Tuesday. KLAC traded $31 to $32
during the day, and saw a low of $29 after-hours. MSFT closed at
$52 and saw lows of $51.30 after-hours.

In one week, we have warnings from 3 key semi stocks: INTC, TXU
and KLAC.

THOUGHTS FOR WEDNESDAY

Given all this terrible tech news, one might find it surprising
that at 7:30 PM; futures are roughly the same exact levels they
were at prior to the KLAC warning.

Futures "should have" sold off after-hours but so far, have not.

One can almost hear Bears throwing their jars of honey up in the
air and yelling, "What on earth will tank this market?"

Removing news and sentiment for a moment, and only looking at
charts; Tuesday being an Inside Day doesn't really help provide
clues for Wednesday.

On the bullish side,
     ES 880 and Dow 8350 held firm support.
On the bearish side,
     ES 895 and Dow 8500 remained firm resistance.

For Wednesday, I would suggest watching ES 890 for a sense of
direction; and watching how the market treats KLAC tomorrow
morning (that is, whether KLAC gets bought on the concept of "Buy
the Bad news")

There are times where Wednesdays become a 'reversal' period. Some
traders also have found that Full Moons and New Moons also are
reversal periods (proven with some degree of market history).
Merely as a piece of data, there's a full moon currently.

ES at 7:30 PM 891
ES supports: 872, 877, 879.50, 883, 887
ES resistance: 892, 895, 897-98, psych 900, 902, 905

Until proven otherwise, this market remains in
"Buy any and all dips - along with 'ignore all bad news' "

One last thought, a week ago, I had made the comment that at
times, it almost 'felt' the market was being held up to support
the upcoming the November elections. With those elections now so
close, one can only wonder what happens after the elections are
over.

_________________________________________________________


Alan Hewko

futures@OptionInvestor.com


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

Too much info?

A rough count shows 61 companies reported earnings before the
opening of trading, 3 during and 54 after the closing bell.
Tomorrow morning will be little different with approximately 53
more companies scheduled to report.

For the most part, it seemed like 2 earnings disappointments and
cautious comments from Intel (NASDAQ:INTC) $15.10 -2.26%,
Motorola (NYSE:MOT) $8.14 +4.22% in recent sessions long with
yesterday's earnings from Texas Instruments (NYSE:TXN) $14.00
-18.2% was perhaps a good excuse for the major market averages to
post their first decline in the past four sessions, and just
their second decline in the past nine.

Of the major indexes, only the shallowly followed Amex Composite
(XAX.X) 811.88 -0.62% broke below Monday's lows on an intra-day
basis.

Strength from Dow components with a telecom flavor, SBC
Communications (NYSE:SBC) $27.05 +5.04% and AT&T (NYSE:T) $13.05
+4.15%, helped hold the Dow Industrials (INDU) 8,450 -1.03 to an
88 point decline, and offset losses in General Motors (NYSE:GM)
$35.80 -3.24% and United Technologies (NYSE:UTX) $61.29 -3.63%.

While investors and traders may want to know for certain if a
bottom was seen earlier this month, the only way to ever find out
is to get some type of pullback and see how far the "fanny" of
the bull sinks into the couch.  Over time, the bullish % will
tell us how firm the cushions are and how much spring the recent
rally will have in it.

After Monday's close, the very broad NYSE Bullish % ($BPNYA) from
www.stockcharts.com reversed up into "bull confirmed" status.
This follows Dorsey/Wright and Associates alert from 10/17/02 as
their NYSE Composite Bullish % (BPNYSE) reversed up into "bull
alert" status.  The lag/difference between the two is most likely
attributed to stockcharts.com adjusting the various point and
figure charts of all the stocks they chart, for the affect of
paid dividends, while Dorsey's systems simply measures prices
paid.

While the internals of the NYSE just begin to show some internal
bullishness, the NYSE Composite ($NYA.X) 476.35 -1.1% edged lower
today, with the Broker/Dealer sector (XBD.X) 397.27 -3.5% and
energy sectors like oil (OIX.X) 262 -3.3%, oil service (OSX.X)
82.18 -2.3% and natural gas (XNG.X) 126.78 -2.2%

Dow Industrials Chart - Daily Interval




Today was an "inside day" as today's trading range was "inside"
of yesterday's range.  This can sometimes be a short-term
trader's signal that the MARKET is reaching near-term agreement
on price and digesting a move.  A break outside of today's range
can find a continuation move in the direction of the break.
Aggressive bulls will play a break on a move ABOVE today's high,
with a stop just below today's low, while aggressive bears will
trade a break BELOW today's low, with a stop just above today's
high.  I would currently maintain a bullish stance toward the Dow
Industrials above the 7,962 level.

S&P 500 Index Chart - Daily Interval Chart




The SPX has found resistance for 2-day's now near the
"psychologically" round number of 900.  I'd expect some
aggressive bears to try and leverage off that level, with a stop
just above 900 as further risk becomes 914.  With two deep
cyclicals in International Paper (NYSE:IP) $38.10 -1.8% and
DuPont (NYSE:DD) $41.75 -1.06% reporting earnings, traders should
at least monitor both of these stocks near-term.  Traders will
note that DD is trading just BELOW downward trend from its
03/20/02 high of $49.80.  A break above that trend has its 200-
day SMA in play $43.37.  Such a move could plant a seed of
bullishness into the economically sensitive Cyclicals.  Another
cyclical we talked about yesterday had shares of 3M (NYSE:MMM)
$128.79 -0.16% trading tough and holding onto the bulk of
yesterday's gains.  Again... 3M is just $2 away from trading a
52-week high and overhead supply is limited.

The S&P 500 Bullish % ($BPSPX) was a net gain of 9 stocks to
point and figure buy signals today, with the bullish % growing to
45% from Monday's 43.2%.

S&P 100 Index Chart - Daily Interval




Hmmmmm.... the OEX continues to trade tough, but tonight I'm on
the lookout for a potential "trap" above longer-term downward
trend.  The only reason that I'm on the lookout is that a company
I like to follow that tends to LEAD a broader market advance and
LAG a broader market decline had conglomerate SPX Corporation
(NYSE:SPW) $92.08 -17% getting clobbered today after reporting
"in line" earnings, but said core growth in 3 of its 4 core
business units was slowing.  This is some DIVERGENCE that I want
to note.  One way for a bull to protect against a potential trap
is to see it first, follow with a tight stop (under the 50-day
SMA of 441 would be fine).

The OEX saw a net gain of 2 stocks to point and figure buy
signals today as bullishness grows to 49%.  In simplistic terms,
49 of the 100 stocks currently show a point and figure buy signal
associated with their chart.

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




The QQQ and the NASDAQ-100 (NDX.X) are perhaps the "toughest
trade around."  Somehow, this group has so-far been able to
navigate around the land-mines of tech earnings disappointments
and hasn't really gotten clobbered.  About all a bull can do that
hasn't taken some profits at $24.21 is hold on tight and follow
with a stop under the 50-day SMA.  Volume had been drying up a
bit after the reversal volume of 124.8 million on 10/11/02.
Volume picked up a bit and the Q's really didn't budge.  Here too
we see an inside day and should volume continue to build, but the
Q's continue to consolidate, hold onto your hat and get ready for
a break.

Shares of Cisco Systems (NASDAQ:CSCO) $11.22 +2.46% traded strong
today.  Traders cited past history of a Cisco earning's warning
coming well before when an earning's warning should have come by
now with Cisco scheduled to report November 6th.  The bullish
action in Cisco was said to have been short-covering by bears
that may have been trying to front-run a possible quarterly
earnings warning.

Tonight, semiconductor equipment maker and NASDAQ-100 component
KLA-Tencor (NASDAQ:KLAC) $30.55 -10.14% reported EPS (excluding
one-time gain) of $0.23, which was in line with consensus.
However, the company did give December quarter guidance for
revenues of $330 million and EPS of $0.14.  This would be below
current consensus of $381 million and $0.24.  Shares of KLAC fell
$1.50 from their close to $29.45.

Other semiconductor equipment makers and NASDAQ-100 components
had Applied Materials (NASDAQ:AMAT) $13.09 -6.7% sliding lower to
$12.69 in after-hours trading, while Novellus (NASDAQ:NVLS)
$26.84 -5.98% edged lower from their close at $26.00.

If I'm BEARISH on any index right now, it would be the NASDAQ-
100.  For those familiar with the "inside day" trading technique,
I'd look to use it tomorrow with a bearish trade in the Q's on a
break below $23.65, stop $24.40 and target $22.95 near-term.

For a NASDAQ-100 Index trader, the trigger would be a break below
950, target 905 (50-day is at 916, but 900 also psychological)
and stop above 980.

The NASDAQ-100 Bullish % ($BPNDX) saw a net gain of 3 stocks to
point and figure buy signals today and bullishness builds to 49%.

Even if you're just a technology stock/index trader, MONITOR both
IP and DD tomorrow.  Both of these companies will have BIG IT
spending budgets someday when earnings hit the bottom line.

Jeff Bailey


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

Cross Eyed
by Steven Price

When the Dow began sinking this morning, it looked as though it
had finally run out of steam.  The news from Texas Instruments
last night got us rolling downhill, and there wasn't much good
news to slow the descent.  Then a funny thing happened on the way
down.  We set another higher low.  In fact, we bounced right at
the 61.8% retracement level of the July-October drop. While a
continued Dow rally still has quite a few resistance levels to
get through in the 8700-8750 range, it does seem to be building
some legs with the series of higher intraday lows.  We still
finished down on the day by 88 points, but the pullback was
certainly not catastrophic, and stayed within the current
ascending trend.

Also in the plus column, the bullish percentages in the major
indices continue to climb.  The NYSE bullish percentage (which
reflects the number of stocks in the NYSE currently giving point
and figure buy signals) has bounced from a low of 26% for the
third straight time and is now in bull-confirmed status. The last
two bounces have taken the percentage to 64% in March and 46% in
August.  It now stands at 32%, so it would imply that NYSE stocks
still have some room to run.  Of course, the bears would claim a
trend toward lower extensions on the bounce. The NDX has been on
a bullish percentage run from 16% to 46%.  It is beginning to
look extended, but still has a little room to the bearish
resistance line at 58%.  The Dow has rebounded from 8% to 50%,
and is also looking extended, with only a few percentage points
left to bearish resistance at 58%.

The Nasdaq Composite also gave something back today. However, it
held over its 50-dma, in spite of the Texas Instruments (TXN)
stating it expects a 10% revenue decline in the current quarter.
It will be interesting to see whether the market can shake off
more bad news in the semis, after Cymer (CYMI) missed
expectations after the bell and had some ominous statements
regarding the chip sector.  The company said, "The semiconductor
industry has apparently entered the second decline of a double-
dip downturn, which will have a negative impact on our fourth
quarter operating results."  it expects 4th quarter revenues to
decline by 20-25%.  CYMI had given up over $2 in after hours
trading.  KLA-Tencor (KLAC) also reported after the bell, and
initial enthusiasm that the company had beat earnings wore off
quickly when it was revealed that there was a one-time gain of $9
million included in the earnings.  KLAC was off almost $2 after
hours.  The reason these companies may be important to the
overall market rally is the effect they will have on the action
of the semiconductor sector.  I pointed out in last night's
market Wrap that the chart of the Semiconductor Sector Index
(SOX.X) looked eerily similar to the way it did in August, when
its rally was unable to hold a break above its 50-dma for more
than a day.  The index was trading in large percentage moves,
similar to its current action.  The failure at the 50-dma seemed
to foreshadow a failed market rally at that point, as the
semiconductor sector reflects technology demand and spending.
The SOX closed above this average on Monday, but once again was
unable to hold that level for more than a day.  This evening's
news from CYMI and KLAC should send the SOX lower in the morning,
in what could be another sign of a failed rally in the broader
markets.

Telecoms got a boost after AT&T and Bell South both posted better
than expected earnings.  However, even though AT&T posted its
first profit in a year, revenue was still down 8.3%.  This was
due in part  to a decrease in long-distance sales, data services
and cable television customers.   BellSouth saw a 5.7% decline in
revenue, as the Baby Bells have been hurt by a shift to email and
corporate customers have delayed technology spending.

There are an awful lot of reasons the market should not be going
up.  Therefore it is hard to "buy into" this rally.  However, the
current trend is up, and if the SOX can't manage to derail that
trend, then we won't stand in its way.  The fact that the NYSE
bullish percentage has so much room to run seems in contrast with
the extension of the NDX and Dow. So, what can we make of it? We
will no doubt continue to see wild swings as earnings are dumped
on us each day during the month of October. Conservative
investors may want to sit out "whipsaw" season, and aggressive
investors playing with risk capital may want to widen their stops
to allow for the swings. It is getting harder to predict the next
day's action, but we will try to surf the wave the best we can.
I normally advocate letting profits run and cutting losses, but
in this environment, it seems that taking profits when you can
may be the more prudent action.


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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7286
Current     :  8450

Moving Averages:
(Simple)

 10-dma: 8042
 50-dma: 8256
200-dma: 9355



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  890

Moving Averages:
(Simple)

 10-dma:  855
 50-dma:  877
200-dma: 1012



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     :  963

Moving Averages:
(Simple)

 10-dma:  915
 50-dma:  916
200-dma: 1189




The Semiconductor Index (SOX.X): Back in August, the SOX was
unable to hold its gain over the 50-dma for more than a day after
a massive rally.  That was the first domino to fall, as the
broader markets gave back their gains and more after the July-
August rally. It seems history is repeating itself. yesterday the
SOX broke through its 50-dma for the first time since August,
only to be met with a big disappointment after the bell. Texas
Instruments warned last night that it was expecting a 10% revenue
decline this quarter and sent the SOX down 17.22 points, or 6%.
After the bell today, Cymer, which makes lasers for use in the
production of chips, said it expects a 20-25% decline in fourth
quarter revenue, which should send the index even lower in the
morning. Chip equipment maker KLA-Tencor also reported earnings
after the bell that met expectations, but it wasn't enough for
investors who drove the stock down after hours, along with Cymer.

52-week High: 657
52-week Low : 214
Current     : 265

Moving Averages:
(Simple)

 10-dma: 253
 50-dma: 278
200-dma: 438


Market Volatility

The VIX has closed under 40 for the last three days, indicating
some of the fear in the market place is starting to evaporate,
but just slightly.  However, it is staying close to 40 and most
likely will do so until we see a settling down of the current
whipsaw activity.  While volatility stays high with big intraday
moves, I see it as more a measure of fear of the downside, since
triple digit gains actually bring it down. With earnings season
still in bloom, it may be a while before we get to the other side
of 35. Anything over 30 is still historically high, and it
appears traders are fully aware that we are not out of the woods
yet.


CBOE Market Volatility Index (VIX) = 39.34 +0.43
Nasdaq-100 Volatility Index  (VXN) = 53.61 +1.27

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.83        502,085       416,553
Equity Only    0.66        408,794       269,690
OEX            1.46         13,086        19,100
QQQ            0.67         50,553        33,894

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

Bullish Percent Data

           Current   Change   Status
NYSE          34      + 2     Bull Confirmed
NASDAQ-100    49      + 7     Bull Alert
Dow Indust.   53      +10     Bull Confirmed
S&P 500       45      + 7     Bull Alert
S&P 100       49      + 7     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   0.98
10-Day Arms Index  0.78
21-Day Arms Index  1.14
55-Day Arms Index  1.25

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        875          1853
NASDAQ     1271          1857

        New Highs      New Lows
NYSE         19              40
NASDAQ       54              77

        Volume (in millions)
NYSE     1,784
NASDAQ   1,714


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

Commitments Of Traders Report: 10/15/02

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

Not much change for the commercials, who added 2,000 long
contracts and 4,000 shorts, for a net increase of 1600 short
contracts, but not much % change. Small traders increased both
positions for a net overall increase of only 300 long contracts.


Commercials   Long      Short      Net     % Of OI
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%)
10/15/02      429,448   449,138   (19,690)   (2.2%)

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
09/24/02      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%
10/15/02      134,507    83,714    50,793     23.37%

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 made little change to the long side, but reduced
shorts by almost 4,000 contracts.  Small traders, on the other
hand, left long positions virtually unchanged, while more than
doubling their short contract positions; adding a total of almost
7,000 short contracts.


Commercials   Long      Short      Net     % of OI
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%)
10/15/02       45,578     51,969    (6,391) ( 6.6%)

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
09/24/02       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%
10/15/02       10,185    12,478     2,293    10.1%

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 by 1,400 contracts, reducing
shorts by 2,000.  Small traders reduced the long side by 1,800
contracts, while slightly increasing shorts.


Commercials   Long      Short      Net     % of OI
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%
10/15/02       20,914     9,630   11,284      36.9%

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
09/24/02        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%)
10/15/02        6,040    10,329    (4.289)   (26.2%)

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

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


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

Large-Cap Funds Up Over 10% in Past Week

These large-cap funds have returned more than 10% for investors
in the recent rally and have done well compared with their fund
category peers over longer time periods.  Our objective here is
to identify some funds that have performed well recently and as
such may offer strong potential in the next advance.  We'll use
data through October 21, 2002 as provided by Morningstar.

Screening Process

We began our fund search using the "Top 25 Funds" tool available
online at www.smartmoney.com.  The tool quickly ranks the top 25
funds in each Morningstar category by 1-week, 4-week and 13-week
performance as well as longer time periods.  We simply asked the
tool to give us the top 25 funds in the large-value, large-blend
and large-growth categories for the trailing 1-week period as of
October 21, 2002.

The stock funds with returns in excess of 10% in the last 5 days
are shown below, excluding those that focus on a specific sector
or industry.  For example, ProFunds Ultra Basic Materials (BMPIX)
is categorized by Morningstar as large-cap value but focuses its
investments in the basic materials sector.

 1-Week Return: Large Cap Value Funds
 11.1% Dreyfus Premier Strategic Value A (DAGVX)
 11.0% Gabelli Blue Chip Value AAA (GABBX)
 10.4% Dean Large Cap Value C (DCLCX)
 10.4% Potomac Dow 30 Plus Inv (PDOWX)
 10.3% Dean Large Cap Value A (DALCX)
 10.1% Hartford Value Opportunities Y (HVOYX)

 1-Week Return: Large Cap Blend Funds
 13.9% Rydex Titan 500 (RYTNX)
 13.7% ProFunds UltraBull (ULPIX/ULPSX)
 11.6% Neuberger Berman Focus (NBSSX/NBFAX/NBFCX)
 10.5% Legg Mason Focus (FOCTX)
 10.5% Rydex Nova Inv (RYNVX)
 10.5% Midas Special Equities (MISEX)
 10.4% Rydex Nova Adv (RYNAX)
 10.3% Potomac U.S. Plus Inv (PSPLX)

 1-Week Return: Large Cap Growth Funds
 13.7% Martin Capital U.S. Opportunity (MCUSX)
 12.1% New York Equity (NYSAX)
 11.4% Pin Oak Aggressive Stock (POGSX)
 10.4% Jundt Opportunity C (JOPCX)
 10.4% Fidelity Advisor Dynamic Cap App (FARAX/FRMBX/FRECX)
 10.3% Conseco 20 (CTWBX/CTWAX)
 10.2% Conseco 20 (CTWCX/CTWYX)

There were several large-cap growth funds that invested solely in
NASDAQ (OTC) stocks.  They were excluded as well since the NASDAQ
market is dominated by tech stocks and behaves more like a sector
fund than a diversified equity fund.  If you seek that particular
exposure great but our target markets this week are the Dow Jones
30 index of blue-chip stocks and the more broadly diversified S&P
500 index of large company stocks.

You can see that some "load" funds making the top 25 list had one
or more class shares.  If you are interested in one of these load
funds and use a financial advisor, you may want to ask him/her to
help you determine which share class may be right for you.  Class
A shares have front loads but typically have the lowest operating
expenses.

Next, we entered the symbols into Morningstar's Fund Compare tool
online (www.morningstar.com) to allow us to compare these choices
on their portfolio characteristics and relative returns, risk and
expense.  We found only two "3-star" rated funds and two "2-star"
rated funds in this group, with the remaining funds receiving one
star or not in Morningstar's system yet.  So, this fund group has
had a rough time through the market downswing but may be bouncing
back strongly in the short-term.

In the next section, we tell you which two funds we like the best
out of this group of 1-week top performers.

Fidelity Advisor Dynamic Capital Appreciation Fund

Fidelity Advisor Dynamic Capital Appreciation Fund seeks capital
appreciation by investing primarily in domestic stocks, but also
may invest in foreign securities.  It's targeted to investors in
"tax-qualified" retirement plans and non-profit organizations so
its management approach may result in the realization of capital
gains without consideration of tax consequences to shareholders.

While the fund does not have a particular investment style, it
typically invests in both value and growth stocks, giving it a
blend/core style.  J. Fergus Shiel joined Fidelity in 1989 and
since then has served as an analyst, portfolio assistant and a
portfolio manager.  He has run the Dynamic Capital Appreciation
Fund since January 1, 1999.





Above is a chart for the Class B shares indicating strong returns
over the past week.  Through October 21, 2002, the Class B shares
are up 10.4% for the trailing 1-week period, 3.5% better than the
S&P 500 index return and ranking it in the top 2% of its category
(large-cap growth funds).  Again, it may be best to think of this
fund as a blend fund that sometimes leans towards value and other
at times towards growth.

Over the last three years, the Dynamic Capital Appreciation Fund,
Class B shares have produced a negative annualized return of 5.5%
for investors, compared to a 10% annualized decline by the market
as measured by the S&P 500 index.  Although a negative number, it
was good enough to rank the fund in the top 6% of the Morningstar
large-cap growth category.  So, by dynamically altering the style
(value to growth) of the fund, Shiel has done a good relative job
of preserving capital.

As the fund's 64.5% return in 1999 indicates, Shiel is capable of
running with the pack in bull markets.  The fund's 10.4% gain for
the trailing 1-week period suggests he'll do it again in the next
advance.  He may be one to bet on if you feel we are in the early
stages of the next bull market and want this dynamic style drift.

For more information or a fund prospectus, call 1-800-522-7297 or
go to Fidelity's website at www.fidelity.com.

Legg Mason Focus Trust

Legg Mason Focus Trust (FOCTX) seeks long-term growth of capital
by investing primarily in common stocks and securities that are
convertible into common stocks.  Robert G. Hagstrom, CFA has run
the Focus Trust since its inception date, April 17, 1995.  He is
a portfolio manager and senior VP with Legg Mason Fund Adviser,
his employer since April 1995.  Previously, Hagstrom was general
partner with Focus Capital Advisory.  Collectively, Hagstrom has
14 years of investment experience.

In stock selection, Hagstrom looks for companies with promising
long-term prospects, strong financial positions and shareholder-
oriented management.  He only invests in companies deemed to be
undervalued at the time of purchase but that may include growth
stocks at value prices, giving it more of blend/core fund style.
Morningstar rates the fund against other large-cap blend styles.




Above is a chart for the no-load shares indicating strong returns
over the past week.  Thru October 21, 2002, the Focus Trust has a
10.5% weekly return, 3.6% more than the S&P 500 index and ranking
it in the top 1% of the large-cap blend category per Morningstar.

Hagstrom stumbled in 2000 pulling down the fund's trailing 3-year
returns and ratings, but his positive 2.4% annualized return over
the trailing 5-year period through October 21, 2002 was 2.6% more
than the market (S&P 500 index).  That was good enough to rank it
in the top decile of the large-blend category.  The fund's strong
relative performance over the past five years has been associated
with high volatility, however.

When Hagstrom gets it right, as he did in 1998, Legg Mason Focus
Trust can run with the bulls.  The fund's 41.5% return that year
ranked it in the category's top 1%.  However, when Hagstrom gets
it wrong as he did in 2000, the fund can rank among the laggards.
The fund's 22.5% loss that year ranked in the 99th percentile of
the large-cap growth category per Morningstar.  The fund is only
for those investors who can tolerate those types of fluctuations
in pursuit of above-average returns over time.

For more information or a fund prospectus, call 1-800-822-5544 or
go to Legg Mason's website at www.leggmason.com.

Conclusion

Investors looking for a fund that owns the "blue-chip" stocks
comprising the Dow 30 index may want to have a look at Potomac
Dow 30 Plus Fund (PDOWX).  It seeks to provide daily investment
returns that correspond to 125% of the performance of the Dow
Jones Industrial Average.  It is up 10.4% over the past week.

If you prefer a fund that seeks to provide investment results
corresponding to 150%-200% of the performance of the S&P 500
index, there are other funds to consider, such as the Potomac
U.S. Plus Fund (PSPLX) and Rydex Titan 500 (RYTNX).  Potomac's
fund leverages the S&P 500 by 150%, while Rydex's fund seeks a
return that is twice that (200%) of the S&P 500 index.  These
funds use futures and options to obtain the desired "leverage."

For complete information or fund prospectus, go to the Potomac
Funds or Rydex Funds websites.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

Help Me I Am Seeing Red

The TXN earnings warning knock that smile of the face of the bulls
but the impact was only temporary. The Dow slipped to -153
intraday but managed a heroic bounce just before the close. It was
a good fight but it still left all the indexes showing red for the
day.


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


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The Option Investor Newsletter                  Tuesday 10-22-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: ERTS
Dropped Puts: C
Daily Results
Call Play Updates: PNRA, UNH, FNM
New Calls Plays: TRMS, QCOM
Put Play Updates: GM, KSS
New Put Plays: HD


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

ERTS $66.60 -5.54 (-3.54 for the week) Electronic Arts took it on 
the chin today after fellow game maker THQ Inc. (THQI) cut its 
2003 sales and earnings guidance, due to "macroeconomic 
conditions" affecting holiday sales of its games.  The company 
said it expects sales growth of 10-15%, as opposed to previous 
estimates of 20-25%.  Soundview defended ERTS, saying THQ's 
weakness was more due to its lineup of games than general sales 
trends. It also said that THQ's problems should not affect ERTS's 
fundamental strength.   Banc of America echoed the same 
sentiment, saying it still expected top games to sell well this 
holiday season.  Still, the warning spooked investors, who dumped 
stocks in the sector, including ERTS.  We would have been closing 
the play ahead of earnings on Thursday, anyway.  The stock did 
find buyers above our stop loss of $66 and could rebound if it 
posts decent earnings, and its comments are not as bearish as 
THQ's.  For those readers wanting to give it a chance, there is 
plenty of bounce room, but keep in mind that there were also some 
sector downgrades following THQ's guidance.


PUTS:
*****

C $35.53 +0.01 (+0.55) Investors seem to have digested all the
bad news C dished out with its earnings report last week, and the
stock seems to have stabilized near the $35 level.  Even with the
broader Brokerage sector off by more than 3.5% on Tuesday, C
managed to actually inch higher by a penny.  Certainly, the stock
ought to fall on a fundamental basis, but the lack of selling
pressure hints that there is still more upside, simply awaiting
the next broad market rally.  Rather than wait for our $36.50
stop to be violated, we're pulling the plug tonight.  Use any
weakness in the morning as an opportunity to close open 
positions.


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

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

CALLS              Mon    Tue

ERTS     66.60    2.01  -5.54  Drop, earnings Thursday
FNM      70.00   -2.04   0.14  strong on down day
PNRA     32.32   -1.36  -0.39  Still rising
QCOM     36.96    0.95   0.07  New, cell chips strong
TRMS     51.50    1.51  -0.03  New, Got the breakout
UNH      98.94   -0.58  -0.38  Gathering steam


PUTS               

C        35.53    1.08   0.01  Drop, sideways movement
GM       35.80    2.82  -1.20  rejected at resistance
HD       35.80   -0.53  -1.20  New, run is over
KSS      54.35    0.15  -0.80  retail cut backs


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

PNRA $32.39 +0.03 (+1.44 for the week)  Panera has continued its 
climb, in spite of the broader market pullback.  The company 
continues to show improved same store sales and expand its 
business.  Ever since PNRA broke through the $30 barrier, it has 
put together a series of daily higher highs and higher lows.   On 
Friday the stock broke the $30 barrier and then found intraday 
support at that level.  Monday found a break above $31 and then 
intraday support there, as well. By the end of the day on Monday, 
PNRA had also broken the $32 barrier.  On Tuesday, the stock 
continued its run, testing $32 and then finding resistance at 
$33. The intraday chart suggests new support at $32.  A look at 
the point and figure shows each of the stocks recent pullbacks 
bouncing two boxes higher than the previous rebound.  In this 
case, that would put PNRA at $37, which would be a fresh double 
top buy signal.  After four straight days of gains, including a 
break through of the 200-dma of $30.52, a pullback can be 
expected at some point.  New entries should look for a pullback 
above that 200-dma to initiate long positions.  The alternative 
entry from this level would be a break above resistance on the 
daily chart at $35. Conservative traders can wait for a break 
above resistance at $36, which is resistance on the point and 
figure chart. 

---

UNH $98.94 -0.38 (-0.79 for the week)  United Healthcare has been 
riding the coattails of its recent earnings release to trade over 
$100 the last four trading sessions.  The stock has been unable 
to achieve a close above that level, but has also been resistant 
to the market pullbacks as the Dow has run into resistance 
following its recent run.  UNH has set a new 52-week intraday 
high with its trade of $101.00 the last two days  The stock has 
found resistance at that level, but the recent consolidation 
around $100 appears as though the stock is forming a new base $10 
higher than its last consolidation point.  With a recent 53% 
increase in third quarter profits and raised guidance, the stock 
is still one of the strongest in a market that has seen lower 
year over year earnings for many sectors. The current point and 
figure bullish vertical count is $110, which would be our 
eventual target on the play.  Our initial target is $105 and we 
would now look for a close over $100 as a signal that the stock 
has found support at that level.  If we get that close then new 
long entries can be initiated at that time. Significant intraday 
support over $100 can be used as an indicator as well. We 
expected some type of pullback after the recent $10 surge over 
the last two weeks, but the stock appears too strong to give us a 
better entry point above the $97 support level. The HMO Index has 
also run into resistance around the 600 level and traders can 
look at a break above 605.02 (recent high) in the HMO.X for 
confirmation of long entry in UNH.

---

FNM $70.00 +0.14 (-1.89) After marching as high as $72 early
on Monday, shares of FNM weakened into the close, ahead of some
important earnings results out of the housing sector this
morning.  As expected, profits were up strongly for the Home
Builders in the last quarter, as predicted by the huge rise in
Housing Starts last month.  While the Housing stocks sold off on
profit-taking on Tuesday following those strong earnings reports,
FNM managed to hold its ground, finding strong support near
$69.50.  Recall that we have a strong breakout in progress on
the PnF chart, which is currently pointing to an upside target
of $76 (also the site of the 200-dma).  The pullback to support
over the past 2 days looks like a solid entry point ahead of the
next move higher.  Aggressive traders can continue to use intraday
dips into the $68-69 area as new entry points.  Alternatively,
look to enter the play on a successful breakout over the $72
resistance level.  Keep stops set at $67.50.


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

TRMS -Trimeris - $51.50 -0.03 (+1.59 for the week)

Company Summary:
Trimeris, Inc. is a biopharmaceutical company engaged in the 
discovery and development of novel therapeutic agents for the 
treatment of viral disease. The core technology platform of 
fusion inhibition is based on blocking viral entry into host 
cells. Trimeris has two anti-HIV drug candidates in clinical 
development. FUZEON, currently in Phase III clinical trials, is 
the most advanced compound in development. A New Drug Application 
(NDA) and Marketing Authorisation Application (MAA) have been 
submitted for FUZEON with the US FDA and the EU EMEA, 
respectively. Trimeris' second fusion inhibitor product 
candidate, T-1249, has received fast track status from the FDA 
and is in Phase I/II clinical testing. Trimeris is developing 
FUZEON and T-1249 in collaboration with F. Hoffmann-La Roche. 
(source: company release)

Why We Like It:
Trimeris is not new to OI, but the breakout above $50 is.  We 
have played the stock long before, only to watch the sinking tide 
keep it anchored. Recent developments, however, have moved it 
from our Watch List to the official call play list. The stock had 
bumped its head up against $50 numerous times since May, without 
being able to hold above that level. It most recently tested that 
level in August, and since then it formed a spread triple top on 
the point and figure chart, which required a trade of $51 for a 
breakout. We got that breakout on Monday, with the stock trading 
as high as $51.99 intraday on Tuesday.  

Trimeris is currently working on two HIV drugs called fusion 
inhibitors.  The first of the two, Fuzeon, is on schedule for 
release in 2003 and is the first drug of its kind. There is 
already a tremendous amount of pent up demand for the drug, which 
can be used on patients that have developed resistance to current 
therapies. In fact, some of the issues faced by Trimeris and its 
partner, Roche, involve whether the companies can produce enough 
of the drug to meet demand.  Fuzeon has been estimated to have 
the potential for $1 billion per year in revenue.  The drug has 
also been shown to reduce HIV in those patients already taking 
other therapies.

Trimeris announced on Friday that the FDA had granted priority 
review status for the new Drug Application for Fuzeon.  The 
priority review designation establishes a target six-month review 
period for the drug, which was submitted for review on September 
16.  That would indicate a decision by March, 2003.  Priority 
designation is granted to drugs that address unmet medical needs, 
offering a significant improvement in the safety or effectiveness 
of the treatment, diagnosis or prevention of a serious or life-
threatening disease.  Fuzeon acts to prevent HIV from entering 
cells, unlike current therapies that interrupt its duplication. 

The stock does have some resistance up at $53.20 from the middle 
of May, but as the flagship drug is now close to production, that 
resistance may no longer be a factor. We like the pullback to, 
and show of support at $50 after the breakthrough, as evidence 
that the stock has now found a higher range. While OI will enter 
the play at the current level, traders can also look for a 
pullback above $50 to initiate a call purchase. Conservative 
traders can wait on the sidelines until the stock trades $53.25, 
in order to avoid the chance of resistance at the May levels. 
Place stops at $48.00.

BUY CALL NOV-50*RQM-KJ OI= 1127 at $4.70 SL=2.35
BUY CALL NOV-55 RQM-KK OI=  337 at $2.00 SL=1.00
BUY CALL DEC-50 RQM-LJ OI=   20 at $6.40 SL=3.70
BUY CALL DEC-55 RQM-LK OI=    7 at $3.80 SL=1.90

Average Daily Volume = 523 k


---

QCOM – Qualcomm, Inc. $36.96 +0.07 (+0.76 this week)

Company Summary:
Based on its proprietary CDMA technology, QCOM is engaged in
developing and delivering digital wireless communications
services.  The company's business areas include integrated
CDMA chipsets and system software and technology licensing.
QCOM owns patents that are essential to all of the CDMA
wireless telecommunications standards that have been adopted
or proposed for adoption by the worldwide standards-setting
bodies.  Currently, QCOM has licensed its CDMA patent portfolio
to more than 80 telecommunications equipment manufacturers
around the world.

Why We Like It:
While Semiconductor stocks got slammed on Tuesday following the
disappointing earnings report from TXN.  But there was actually
a bright spot in all the carnage, and that was the company's
comments that they like the future prospects for its wireless
business, as growth in this area was better than expected.  That
was enough to keep the buyers active in shares of QCOM, which
has already had one heck of a run in the past 2 weeks.
Languishing down near $28 in early October, the stock blasted out
of its 6-month consolidation pattern on robust volume.  After
gapping over the 200-dma near $33.50 last week, QCOM pushed
through the important $35 resistance level and just kept on
going.  The current vertical count from the PnF chart is pointing
to an upside target of $60, but let's just take it one step at a
time.  Our first upside target will be a bit more modest, first
at $40 and then near $44.  After such a strong rise, we will
likely see QCOM take a bit of a breather, and watching how the
stock performs on that pullback will give us confidence to buy
that dip.  Look for a dip to intraday support at $35 or even down
to the $34 (top of the gap from last Tuesday) to find strong
buying interest.  So long as the buyers appear, then a rebound
from those levels would make for a great entry into the play
ahead of QCOM's earnings report, currently scheduled for November
7th.  Set stops initially at $33.50.

BUY CALL NOV-35 AAW-KG OI=19788 at $3.50 SL=1.75
BUY CALL NOV-37*AAW-KU OI= 8724 at $1.95 SL=1.00
BUY CALL NOV-40 AAW-KH OI= 3779 at $0.95 SL=0.50
BUY CALL DEC-37 AAW-LU OI=   88 at $3.30 SL=1.75
BUY CALL DEC-40 AAW-LH OI=  181 at $2.15 SL=1.00

Average Daily Volume = 15.4 mln



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

GM $35.80 -1.20 (+1.49) In the surreal market environment we
find ourselves in, it seems like bad news is being ignored,
while any good news (however rare) is greeted warmly by the
bulls as an excuse to buy.  That certainly seemed to be the case
with shares of GM on Monday, as the stock blasted higher by
nearly 8%.  This was in response to comments made by GM officials
where they expressed doubts about achieving their goal of
capturing 29% of the US market for new cars this year, citing
heavy competition from Japanese and Korean auto makers.  Sounds
strange, doesn't it?  That sharp rally had us considering a drop
for the play last night, but the drop to close under our $37.25
stop kept it alive for one more day.  It's a good thing too, as
selling pressure today had GM falling back under the $36 level
and still looking top-heavy.  While failed rallies below our stop
still make for solid entries, what we really want to see is a
drop under support to give us confidence that there is solid
downside available.  Traders looking to enter on a breakdown can
target a break under today's intraday lows ($35.50) or else more
significant support down at $34.  Until the $34 level breaks,
we'll leave our stop at $37.25.

---

KSS $54.35 -0.80 (-0.80) The waiting game continues, as shares
of KSS continue to vacillate around the $55 level.  In just the
past 2 days, shares of the midWest-based Retailer have traded
below $53 and above $56, only to keep gravitating back near $55.
That's three consecutive Doji candlesticks, reflecting investors'
indecision.  While support has so far held up near the $52.60
level, the current chart pattern appears to be pressuring the
stock for a breakdown soon.  Over the past week, the highs have
been dropping, and this is likely due (at least in part) to the
looming resistance provided by the descending 20-dma (currently
$57.44).  The $292 level in the Retail index (RLX.X) is
continuing to provide resistance for the entire group, which
appears ready to roll over on the next piece of bad news.  Failed
rallies in the $55-56 area will make for the best entries on a
risk/reward basis.  Traders looking to enter the trade on a
breakdown below support will want to wait for a drop under $52.50
(just below Monday's intraday low) before taking a position.
Lower stops to $57.50 tonight, just above the 20-dma.


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

HD – The Home Depot $29.57 -0.28 (-0.84 this week)

Company Summary:
A home improvement retailer, The Home Depot operates more than
1100 stores throughout the United States.  The do-it-yourself
warehouse retail stores offer building materials, home
improvement products and related furnishings.  Additionally,
the company provides lawn and garden products and an assortment
of services to both individual home-owners and independent
contractors.

Why We Like It:
One of the biggest stories on Tuesday was the stellar earnings
reports from some of the major Home Builders, such as CTX, PHM
and RYL.  Following the strong Housing numbers that came out last
week, these strong earnings were really no surprise, and
investors responded by taking profits.  Could this be an
indication that this quarter represented the best for the Housing
sector?  While we don't know the answer to that question, the
continuing deterioration in the economy is going to continue to
keep a limit on consumer spending.  Falling interest rates have
led to a surge in home refinancing, and with interest rates
starting to tick upwards, we could see a significant decline in
this refinancing, which has been one of the key sources of
consumer funds in an environment of persistent economic and
equity market weakness.  Add the possible slowing in the housing
market and less available consumer funds, and the fundamental
picture doesn't look promising for the Home Improvement Retailers
like HD.  The stock has been in a sharp downtrend since May, with
brief pauses for short-covering.  The latest short-covering rally
appears to have run its course, with the stock starting to roll
over again, this time from the vicinity of $30.  Once again, the
rollover is taking place right at the descending trendline.  HD
is still on a PnF Sell signal, with the vertical count pointing
to an eventual downside target of $13.  That may be more than we
should reasonably hope for, but at a minimum, the stock appears
destined to test its October lows in the $23-24 area.  Use failed
rallies in the $30-31 area as aggressive entry points, or else
initiate momentum entries on a breakdown under the $29 intraday
support level.  We are starting the play with our stop set at $32.

BUY PUT NOV-32 HD-WZ OI=1201 at $3.40 SL=1.75
BUY PUT NOV-30*HD-WF OI=6459 at $1.70 SL=0.75
BUY PUT NOV-27 HD-WY OI=4133 at $0.70 SL=0.25

Average Daily Volume = 14.5 mln



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The Option Investor Newsletter                  Tuesday 10-22-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: CALL - TRMS
Traders Corner: It's your Option

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

TRMS -Trimeris - $51.50 -0.03 (+1.59 for the week)

Company Summary:
Trimeris, Inc. is a biopharmaceutical company engaged in the 
discovery and development of novel therapeutic agents for the 
treatment of viral disease. The core technology platform of 
fusion inhibition is based on blocking viral entry into host 
cells. Trimeris has two anti-HIV drug candidates in clinical 
development. FUZEON, currently in Phase III clinical trials, is 
the most advanced compound in development. A New Drug Application 
(NDA) and Marketing Authorisation Application (MAA) have been 
submitted for FUZEON with the US FDA and the EU EMEA, 
respectively. Trimeris' second fusion inhibitor product 
candidate, T-1249, has received fast track status from the FDA 
and is in Phase I/II clinical testing. Trimeris is developing 
FUZEON and T-1249 in collaboration with F. Hoffmann-La Roche. 
(source: company release)

Why We Like It:
Trimeris is not new to OI, but the breakout above $50 is.  We 
have played the stock long before, only to watch the sinking tide 
keep it anchored. Recent developments, however, have moved it 
from our Watch List to the official call play list. The stock had 
bumped its head up against $50 numerous times since May, without 
being able to hold above that level. It most recently tested that 
level in August, and since then it formed a spread triple top on 
the point and figure chart, which required a trade of $51 for a 
breakout. We got that breakout on Monday, with the stock trading 
as high as $51.99 intraday on Tuesday.  

Trimeris is currently working on two HIV drugs called fusion 
inhibitors.  The first of the two, Fuzeon, is on schedule for 
release in 2003 and is the first drug of its kind. There is 
already a tremendous amount of pent up demand for the drug, which 
can be used on patients that have developed resistance to current 
therapies. In fact, some of the issues faced by Trimeris and its 
partner, Roche, involve whether the companies can produce enough 
of the drug to meet demand.  Fuzeon has been estimated to have 
the potential for $1 billion per year in revenue.  The drug has 
also been shown to reduce HIV in those patients already taking 
other therapies.

Trimeris announced on Friday that the FDA had granted priority 
review status for the new Drug Application for Fuzeon.  The 
priority review designation establishes a target six-month review 
period for the drug, which was submitted for review on September 
16.  That would indicate a decision by March, 2003.  Priority 
designation is granted to drugs that address unmet medical needs, 
offering a significant improvement in the safety or effectiveness 
of the treatment, diagnosis or prevention of a serious or life-
threatening disease.  Fuzeon acts to prevent HIV from entering 
cells, unlike current therapies that interrupt its duplication. 

The stock does have some resistance up at $53.20 from the middle 
of May, but as the flagship drug is now close to production, that 
resistance may no longer be a factor. We like the pullback to, 
and show of support at $50 after the breakthrough, as evidence 
that the stock has now found a higher range. While OI will enter 
the play at the current level, traders can also look for a 
pullback above $50 to initiate a call purchase. Conservative 
traders can wait on the sidelines until the stock trades $53.25, 
in order to avoid the chance of resistance at the May levels. 
Place stops at $48.00.

BUY CALL NOV-50*RQM-KJ OI= 1127 at $4.70 SL=2.35
BUY CALL NOV-55 RQM-KK OI=  337 at $2.00 SL=1.00
BUY CALL DEC-50 RQM-LJ OI=   20 at $6.40 SL=3.70
BUY CALL DEC-55 RQM-LK OI=    7 at $3.80 SL=1.90

Average Daily Volume = 523 k



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

It's your Option 
By John Seckinger
jseckinger@OptionInvestor.com  

Hedging, Investing, Trading, Speculating, and Leveraging.  All 
of these can describe options on futures.  With interest rates 
significantly climbing, the recent environment seems perfect to 
introduce trading options on bond futures.  As a retail trader, I 
have used the bond options pit for trading purposes on a variety 
of occasions, and this contract could be just the trading vehicle 
you were looking for.  

First, let us give the specifications of options on U.S. Treasury 
Bond Futures.  The underlying instrument is a Chicago Board of 
Trade (CBOT) Treasury bond futures contract, having a face value 
of 100,000 for one contract.  The tick size of option contracts 
are 1/64 of a point ($15.625/contract), and the exchange uses 
1-point strikes ($1,000) for the nearby contract month; 
consisting of at-the-money, four strikes above (example: 110, 
111, 112, 113), and 4 strikes below.  2-point strikes ($2,000) 
are listed outside this band.  Back months are also listed in 
2-point strike price intervals.  Note:  The daily price limit is 
3 points ($3,000/contract) above or below the previous day's 
settlement premium (expandable to 4 1/2 points). Limits are 
lifted on the last trading day. 

The front month (which is usually the most actively traded 
contract) plus the next three contracts of the quarterly cycle 
(Mar, Jun, Sep, Dec) is used for option contracts.  If the front 
month is a quarterly contract month, no monthly contract will be 
listed.  The monthly option contract exercises into the current 
quarterly futures contract.  Options cease trading in the month  
prior to the delivery month of the underlying futures contract.  
Options cease trading at noon on the last Friday preceding by at 
least five business days the last business day of the month 
preceding the option contract month. 

Last, but not least, trading hours are as follows: 7:20 a.m. to 
2:00 p.m. Chicago time, Monday through Friday, with evening 
trading hours of 5:20 - 8:05 p.m. (CST) Sunday through Thursday. 
Project A Afternoon session hours are 2:30 - 4:30 p.m. Chicago 
time, Mon-Thu and the Project A Overnight* session hours are from 
10:30 p.m. - 6:00 a.m., Sunday through Thursday.  Trading in 
expiring contracts closes at noon on the last trading day. 

The nice thing is that options on futures contracts can be 
purchased and sold through regular brokers (most stock brokers 
can handle these).  Contract trading is done for a fixed fee 
(commission) per contract ranging somewhere between $25 and $100 
per contract (in and out). 

To offset this risk, a trader can "hedge" by buying or selling a 
futures contract or options on the futures contract.  Whatever 
they make or lose in the spot (actual, current market), they can 
lose or make up in the financial market to offset the difference. 
People who do not hedge, but play in the market for profit, are 
speculators.  The ratio of hedgers to speculator is approximately 
3:1. Speculators are very useful in ensuring that active, liquid 
markets exist.

Ok, enough of the specifications.  The real question is, Does it 
make sense to trade options on bond futures?  As an option 
trader, one has to be intrigued with a contract that has (1) good 
liquidity, (2) increase in volatility, and (3) can be traded at 
more times during the day (or night) than options on equities.  
Another nice feature of trading bond options is that prices tend 
to become more directional than most equity options.  What does 
this mean?  It has been my impression that options on bond 
futures have a tendency to maintain a trend for a longer period 
of time than equity options.  This can be seen on a day-to-day 
basis (read: less "noise" to stop out traders) or when assets 
begin to shift in/out of stocks and out/into bonds.

Chart of 30-year bond, Daily


 

Looking at a chart of the 30-year bond (ZB02Z), odds are that 
prices do fall towards 107 or slightly below before finding 
support.  With that said, the November 107 puts are trading near 
'21 (21/64ths) and are set to expire at 6:00 p.m. this Friday.  
The 108 puts last traded at 45 as of 2:09 p.m. on Monday, October 
21st.  Going out into December, the 107 puts are at 125 while the 
108 puts are currently priced near 154.  

Here is another thought.  How about a neutral options position 
that involves selling one or more out-of-the-money call options 
and selling one or more out-of-the-money put options.  For 
example, with the Dec T-bond futures at 108, you could sell the 
112 call and the 102 put.  If the price of December T-bond 
futures is anywhere between 102 and 112 when the futures contract 
expires, you get to keep the entire premium you collected from 
the options you sold.  Using December Options, this position 
would cost roughly 17 plus 33, for 50 ticks.  Note: The ticker 
symbol for calls is CG, while PG is used for puts.  Also, if you
cannot find option quotes, please check www.cbot.com for more 
information.

What risk is involved?  Well, if bond prices begin to rise, a 
trader could sell an additional put option at a higher strike 
price (example, sell 108 puts, then possibly 109 puts, etc.).  If 
the price of T-bond futures gets close to 112, you would buy back 
the 112 call option, because you don't want to take a chance that 
it might go in-the-money. 
 
What about if bond prices continue to fall?  If T-bond futures 
moves from 107 down to 106, you could sell an additional call 
option at one strike price lower than before.  If prices fall to 
104, traders might want to think about buying back the 102 puts 
just in case.  The key is to allow time decay to eat away at the 
options you sold (so you can keep the premium you collected).

If a trader was more aggressive, the 112 calls and 106 puts could 
be used for the above example.  That would cost approximately 33 
plus 102, for 135 ticks.  

With the Dec T-bond right at the 38.2 percent retracement level 
and underneath a regression line that began back in mid-March, 
maybe it makes sense to buy volatility?  With the contract at 
107'27, I would first look at buying the Dec 108 straddle (108 
puts/calls).  This straddle is priced at 154 (puts) + 158 (calls) 
for 312 ticks.  

What would be the objective on the straddle?  I would use 110 and 
106 as first resistance and support levels, with 112 and 102 as 
the main objective.  Of course, it will all depend on how fast 
the contract makes it to these levels.  If the Dec T-Bond trades 
110 or 106 and uses these levels as psychological resistance or 
support, look to roll out of the position.

There are a few things to note about the current asset allocation 
out of bonds and into stocks.  One includes the steep yield curve 
(five year versus 30 year) which has not begun to fall back 
towards more historical levels.  Currently 190 basis points wide, 
the 200 daily moving average is 142.1 basis points wide.  If you 
are wondering what 190 bps wide means, a glance at the current 
cash yields makes it easier to understand.  The 30-year is 
yielding 5.14%, while the five-year is at a 3.24% yield.  514 
minus 324 is 190.  Note:  The 5-year high is 209, set recently.  
I do expect support at 180 and 160, but that doesn't necessarily 
have to mean lower bond prices.  It should mean higher 
volatility, however.  

The next point centers around the 1,341-point rise in the Dow.  
This obviously cannot, and has not, been ignored by bond holders.  
Assets are clearly rolling out of bonds and into equities, 
creating the possibility of a fundamental shift for traders of 
fixed-income securities.  Does this mean that buying the straddle 
makes more sense than a more neutral strategy?  I would believe 
it would make more sense to buy a straddle; however, the 312 
premium does get a tad pricey.  When I trade bond options, I 
don't have price profit objectives (example: 400, etc.); 
instead, I prefer to use prices in the underlying contract as 
reason to exit.  However, I do use option prices when exiting via 
stop losses.  

So, what about yield options?  Using the 30 Year Treasury Yield 
Index (^TYX), the option chain really isn't that interesting.  
Volume is almost non-existent, and Open Interest is too limited 
to really gauge investor sentiment.  On the other hand, volume on 
Ten-Year Treasury Note options (open auction) set a daily volume 
record on August 14 at 332,996, and set a daily open interest 
record on August 23 at 2,040,367.  I could not find daily overall 
volume for 30-year options.  

If a trader wanted to, he/she could use the Flexible Treasury 
Option Series.  The minimum size to initiate a Request for Quote 
(RFQ) in an unopened Flexible Treasury Option series (currently 
without open interest) is 100 contracts, each having a face value 
at maturity of $100,000 ($200,000 for 2-Year T-Note Flexible 
Options).  I don’t have that kind of capital.  

Good luck.  Questions are welcomed.  


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