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Daily Newsletter, Sunday, 10/27/2002

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The Option Investor Newsletter                   Sunday 10-27-2002
Copyright 2002, All rights reserved.                        1 of 5
Redistribution in any form strictly prohibited.


Entire newsletter best viewed in COURIER 10 font for alignment

In Section One:

Wrap: Markets Rally On Bad News, Again
Futures Market: Markets close Green for third week in a row
Index Trader Wrap: Still bullish, but signs of a market decline 
are present
Editor’s Plays: Time To Climb The Ladder Again
Market Sentiment: Waiting for the Break
Ask the Analyst: Percentage Play
Coming Events: Earnings, Splits, Economic Events

Updated on the site tonight:
Swing Trade Game Plan: Fed Rally Coming?


Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
       WE 10-25        WE 10-18        WE 10-11         WE 10-4
DOW     8443.99 +121.59 8322.40 +472.11 7850.29 +321.89 - 63.58
Nasdaq  1331.13 + 43.27 1287.86 + 77.39 1210.47 +774.16 -  9.13
S&P-100  455.65 +  6.63  449.02 + 26.34  422.68 + 19.46 -  4.03
S&P-500  897.65 + 13.26  884.39 + 49.07  835.32 + 35.04 - 14.70
W5000   8450.64 +126.86 8323.78 +450.75 7873.03 +274.41 -175.00
RUT      372.64 +  9.27  363.37 + 18.44  344.93 -  3.05 - 14.29
TRAN    2313.31 + 34.22 2279.09 +124.42 2154.67 + 16.99 - 13.39
VIX       36.27 -  3.55   39.82 -  3.62   43.44 -  2.84 +  3.14
VXN       50.39 -  4.94   55.33 -  3.54   58.87 -  1.41 +  2.42
TRIN       0.89            0.80            0.41            1.98
Put/Call   0.77            0.68            0.93            0.97
******************************************************************


 
Markets Rally On Bad News, Again
by Jim Brown

The headline economic number on Friday was the Durable Goods 
report for September. It was ugly, really ugly with a drop of
-5.9% for the month. This was well over the expected drop of
-2.0%. It is the largest decline since November 2001. 

Dow Chart


 

Nasdaq Chart


 

While that number sounded bad on the surface there was actually 
some good news buried in the facts. A major factor for the 
decline was the nondefense aircraft orders which dropped -46% 
and greatly impacted the headline number. Aircraft is very 
volatile due to timing and dollar volume. There had been two 
months of large gains previously. The good news was a +9.3%
gain in new orders for computer equipment. While this may have
been a light under the door for the tech sector the -52% decline
in communications equipment far overshadowed the gains in PCs.
Nondefense capital goods also fell -12.6%. With computers the
only glimmer of hope in a sea of red there was not much to 
cheer about. That is unless you are a tech bull. 

The bulls took the one positive number out of the report and 
the Nasdaq led the charge on Friday. There was an initial spike
and mandatory dip at 10:AM but the Nasdaq never looked back 
after that. Other good news rescued the chip sector once again.
Micron was upgraded by Merrill and Salomon Smith Barney due to
improved selling price assumptions. They felt below trend 
capacity expansion signified a favorable environment for pricing. 
They felt the top DRAM manufacturers like Micron would benefit. 
A chip upgrade? You mean I don't have to buy bad news? That
appeared to be what bulls were thinking. The SOX closed up +14
at 292 again and closing in on the critical resistance at 300.

Amazon got taken to the woodshed with multiple downgrades from
the constant lack of profit. The stock traded as low as 18.50
before recovering to close at 19.31. This was not as bad as
it could have been considering the number of negative comments
being made. 

Also helping the bulls was the news from Emulex. They beat 
estimates on Thursday night by 3 cents and they raised guidance
for the current quarter. If you remember QLGC also raised
guidance a week ago. They both expect 2% to 5% top line growth.
ELX claimed they were grabbing market share and seeing a strong
ramp of new products. ELX jumped +30% (+4.08) to $17.95 and
QLGC gained about +2.00. Throw another log on that Nasdaq fire.

The health insurance sector was not so lucky. Cigna warned of
serious problems last night and again on Friday for the current
quarters and for all of 2003. The stock got crushed and dropped
-$26.60 to $39.30, a -41% drop. This set the tone for the broader
market in the early morning and only the strength in techs kept
the market from tanking. 

The markets moved sideways with only a slight uptrend until about
2:PM and the announcement of the plane crash and death of Senator
Wellstone. With the election so close and the control of congress
in real doubt any republican win in Minnesota would improve the
republican odds. The market weighed the possibilities and quickly
started putting money in sectors that might benefit from a
republican control win in November. While the accident was tragic
the facts remain and the market acted on it. Wellstone was strongly
liberal and proud of it. He was a critic of big business and a
strong conservationist. The possibility of a pro business, pro
defense, pro tax cut republican senator in Minnesota was not lost 
on traders. In reality the same election confusion continues. There
is a possibility that Governor Jesse Ventura, an independent, could
now pick an independent or green party candidate to replace Wellstone.

In addition to the Durable Goods numbers we also got New Home Sales,
which increased to a new record high. The rate of increase was much
smaller and there were numerous comments about the slowing boom.
Existing home sales also increased very slightly with a +1.9% gain.
Sales in the West (-4%) and Northeast (-2%) actually dropped but
the headline number was helped by a giant +10% gain in the Midwest.
With mortgage rates climbing slightly these numbers are expected
to slow and the drops in those two regions could be a leading
indicator. The revised Consumer Sentiment number for October was
inline with estimates at 80.6 but still showed a decline over Sept.
It is now down five consecutive months. The current conditions
component dropped -3.4 to 92.4 and the lowest level since 1992. 
The expectations fell -6.8 points to 73.1 and the lowest level 
since 1993. Definitely nothing to cheer about here and added to 
the rapidly slowing Durable Goods orders it shows a consumer that
is pulling back into their shell and restricting spending. 

The outlook for next week is good. That might surprise many readers
but there are several factors at work which will keep a bid under
the market until after November 6th. The first is the election.
The big money will want to maintain the market bounce to give
politicians the best chance of reelection. Secondly the Durable
Goods orders and Consumer Sentiment today have peaked hopes for 
a rate cut on the 6th. Next week we will get another Consumer
Confidence on Tuesday, GDP, PMI and ECI on Thursday and Nonfarm
Payrolls, Personal Income and Spending, ISM and Construction 
Spending on Friday. A week full of reports where there is no
wrong answer. Positive reports will be seen as signs of a recovery.
Negative reports will be seen as a guarantee of another rate cut
on Wednesday the 6th. 

Adding to the underlying bid is the extremely high short interest
and high put/call ratios of the QQQ/DIA/SPY securities. The QQQ
has short interest of nearly 180 million shares with volume of 
only 70 million on Friday. This is a huge amount of short interest
and would take at least ten days to work it off on strong bounce. 
Adding to this is the 75 million short interest on the SPY with
volume on Friday of only 43 million. The DIA has 20 million short
with volume of 12 million. The P/C ratio on the DIA is high at 
1.64. What this all means is that a sudden uptrend over Dow 8550
next week could explode if the shorts started covering for real.
If you were heavily short next week and the market was moving up
and there could be a rate cut on the 6th, would you cover? 

Obviously not everyone would since many traders are short from
much higher levels. But, many traders, already nervous about the
gains in the last two weeks, will become even more nervous on 
any rally next week. I think the number one thing traders need
to think about next week is not fundamentals. Fundamentals still
stink. They need to think about a short squeeze reaction "IF" we 
get a bounce over 8550 on Monday. The key is the bounce. We came
to a dead stop at that level twice last week and failed to break 
8450 on Friday. The rally road is not paved with gold just yet. 
There are traders still selling into every bounce and the bulls
will have their work cut out for them. 

The bearish case is still the fundamentals. Many indicators
are pointing to a double dip recession and economic reports next
week could make the case even more clear. Still the bears are not
likely to make a strong charge in front of the Fed meeting. They
may bide their time and wait for the Fed and then sell any bounce.
Also, Walter Mondale could easily step up to the plate and take
Wellstone's place in the election and he would be very tough to
beat. Suddenly the questionable "republican" rally from Friday
could become a republican loss on Monday. The elections in Brazil
will be over the candidate could thumb his nose at the IMF and
take the entire country and continent down with him.

My thoughts for Monday are to stay long over Dow 8550 and short
under Dow 8500. The upside target if we did get a rally would be
strong resistance at 9000-9075. That should draw serious attention
from the bears and without 5:1 or better up volume I doubt it will
fail. Trade what you see, not what you want to see.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

"Wall Street's graveyards are filled with men who were right 
too soon "  - William Hamilton


**************
FUTURES MARKET
**************

Markets close Green for third week in a row
by Alan Hewko

futures@OptionInvestor.com

___________________________________________________

Quotes:
4:00 PM Cash Market Close     ES 897, YM 8427, NQ 996
4:15 PM Future's Market Close ES 898, YM 8435, NQ 992
5:00 PM YM Dow Futures close: YM 8432
Note: ES did print 900.00 trades at approx. 4:13 PM

Dow   8443  + 126
SP500  897  +  15
COMPX 1331  +  32

Advance/Decline by Volume was bullish most of the day.

Abbreviations used by the Futures Market:
                                       Ticker
ES = E-mini SP500 December futures      ES02Z
YM = E-mini Dow $5 December futures     YM02Z
NQ = E-mini NDX 100 December futures    NQ02Z

______________________________________________________

A sub-title for Friday might be "What bad news regarding Iraq?" 
With the Dow closing above the 8320 level, Friday saw the market 
closing Green for the third week in a row on continued tone of 
"Buy the expected bad news" as very bearish pre-open economic 
reports and Cigna (CI)'s warnings did not take the market under 
some very important market support levels.

As written in Thursday's wrap: Wednesday afternoon saw the 
markets continue their tone of buying bad news (the 2 PM bearish 
Beige Book), and Thursday afternoon saw some "odd" selling from a 
CNN report on Iraq kicking out foreign journalists. After reading 
the full text of the news item, that seemed an unlikely reason 
for 200 points of Dow selling. Thursday night the Shorts went to 
bed very happy as the Dow closed under 8300 threatening a break 
of Dow 8250 support and possibly another Dow -200 type day on 
Friday. As we've seen so many times this past week, both for 
bears and bulls; what you expect to happen at 8 PM for the next 
day often has not been happening.



Thursday night saw Japan leak higher in their markets, closing at 
day highs of 8750 after opening at 8500. At the 3 AM open of the 
European market found Europe all opening lower and Red, but each 
index held psychological support levels (France's CAC40 held 
3000, Germany's DAX held 3000, UK's FTSE held 4000). US Futures 
over Thursday night heading into Friday early morning had leaked 
under 880 support but never pierced the 875 support level.

Friday pre-open had two bearish items. Cigna (CI), a large 
healthcare/insurance stock, warned rather badly. Second bearish 
item was the very bearish 8:30 AM Durable Goods report.

You can see in the below chart the ES futures reaction to the 
8:30 AM report.


 

You can also see that while ES came close to piercing its strong 
support at 875, it never traded below it. One very handy aspect 
to ES futures is that a trader can instantly tell if some widely 
watched economic piece of news is bearish or bullish without 
first reading the actual news release.

Friday 9:30 AM market open prices:
ES 877-878, YM 8250-60, NQ 967  * Day Lows

Friday's open (for the first time this week) didn't have a large 
gap up or large gap down. Futures were lower by a small amount 
from their Thursday close levels.

Thursday night truly had many traders wondering if the sentiment 
was actually shifting from a bullish to bearish tone given the 
amount of the selling Thursday afternoon. All eyes turned to 
watch if the Dow would hold its key 8250 support (matching the 
same strong support ES/SPX level of 875.

In a sentence, large support HELD, and the markets "leaked 
higher" the rest of the day.

If you look at the above 9:30 AM prices, you can see how the 
markets basically opened right at key support levels of Dow 8250 
and ES/SPX 875. 

As a trader sitting down on Friday morning, here were all the 
bearish items.

1.  The bearish tone of Thursday's Dow -200 afternoon drop.
2.  A very bearish 8:30 AM Durable Goods report 
3.  It's a Friday which sometimes has seen a reversal of the 
current sentiment as Longs take profit heading into the weekend.
4.  Cigna's warning impacting the healthcare and insurance 
sector.
5.  No "real" Long profit taking of any lasting substance since 
the October 10th rally started.
6.  Markets opening at/near important supports of Dow 8250, 
ES/SPX 875, COMPX 1300

All of these factors "should have" tanked the market right under 
Dow 8250 / SPX 875 and perhaps sent the Dow down to its 8100-8150 
support levels and ES/SPX's level of 850-855 support.

Once again on Friday morning, the markets did NOT do what it 
"should have done".

At 9:45 AM a very slightly bearish Michigan sentiment number was 
released; and at 10:00 AM a rather bullish Housing number came 
out. Until later in the afternoon, no other market news came out.

The Shorts attempted another short-attempt at approximately 11:30 
AM to take ES lower, they were able to take it under the 880 
support level, but not under the key 875 number. The market quite 
simply spent most of the day chopping around between ES 883 and 
888 pivot levels, on very low volume between 10:30 AM and 2:30 
PM, making slightly higher lows in the process.

Near the final 90 minutes of trading, a rally formed. Perhaps 
from Shorts simply decided to cover late on a Friday once it 
became clear they would not pierce those key supports to the 
downside, and perhaps a sad piece of news added to the rally as 
well. 

The late afternoon piece of market news that I referred to 
earlier was the sad news of Senator Wellstone dying in a plane 
crash. Senator Wellstone is a Democrat from the state of 
Minnesota. With the elections coming up very shortly, a thought 
was formed that perhaps the Republicans would now be able to take 
over control of the US Senate. The general market view is that 
Republicans in control of national politics is "market bullish". 
Please note: I'm only reporting on speculation and certainly am 
not forming the view that his sad, sudden death is "good" or 
"bullish". Quite the opposite actually: reflect for a moment on 
how quickly a human life can end. . . A US Senator got on a plane 
to go home for the weekend and died. Perhaps the next time the 
market is going 'sideways' for an hour, take that time to go hug 
your child or share it with someone special in your life, for 
this tragic accident merely once again shows us all how short our 
lives can be, and the markets will always be here when you get 
back. 

Without trying to answer the "Why" question any better, the 
markets continued their bullish tone straight into the close. 
Right near the futures close, ES actually printed 900, and NQ 
came within an inch of printing 1000. The Dow closed right near 
its pivot of 8430.

Dow 8320:
We always talk about this mysterious "THEY".
"They" wanted the market (or stock) to close at X, or "they" 
wanted to run some short stops, etc. The market needed to close 
over Dow 8320 in order to make the statement "this is the third 
week in a row the markets have closed Green, and above their 
prior week. Go look at the below Dow chart and you can see how 
even as late in the day on Friday of 2:30 PM - 3:00 PM, the Dow 
could very easily have closed UNDER this Dow 8320 number. I do 
not know who "they" are [grins], but it seems "they" certainly 
wanted the Dow closing above it, which it did.

Before getting to Friday's charts, NQ - NDX - COMPX - SOX, in 
other words, the tech sector seems to have been leading the 
markets higher the last few days. NQ seems the strongest index, 
with the Dow being the weakest.




FRIDAY'S CHARTS

ES02Z (E-mini SP500 futures) Friday 9:30 AM - 4:15 PM


 


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


 



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


 





In a paragraph: they all opened slightly lower, went sideways 
most of the day in a very choppy fashion, and then moved up quite 
strongly near the 2:30 PM to 3:00 PM area right into the close.

Here are two longer term views:


5 day Chart of ES02Z (E-mini SP500 futures)
     from Monday to Friday
     (this chart only shows the 'day' session of 9:30 AM to
     4:15 PM and does not include any of the overnights)



 

As you can see, the market basically traded in a range from 875 
to 900 without any clear breakout over 900, nor any clear 
breakdown under 875. 

Another word applies of SIDEWAYS. Many days in the last two weeks 
were marked by extremely large gap ups or large gap downs with 
most of the action during the day very "sideways".

Will next week be any different? I do not know.

I can merely point out those two numbers to watch of 875 and 900. 
NQ (NDX 100 futures) printed a week high of 1001.50 on Thursday 
morning and closed right under 1000 on Friday. That also is a 
number to watch - NQ 1000.
Dow had a double top at 8550 on Thursday but never lost 8250 
support.
VIX spent most of the week at the 40 level, but closed at 36.


Taking a longer view of the market,

Here is a 3 Month chart of the SPX (SP500 Cash index)


 

This past week's "sideways" action is even more clear on this 
longer term chart. 
______________________________________________________

THOUGHTS FOR MONDAY and NEXT WEEK

The market remains in "Buy the expected bad news" sentiment. 
October earnings are mostly over; however one continues to get 
the sense that "they" are perhaps keeping the markets higher as 
we head into the November elections. 

What does Monday and this coming week bring?

As traders, we can HOPE there is a clear break in the action; 
either:
breaking higher over the SPX 900 - Dow 8550 - NQ 1000 - SOX 300 
levels
     -or-
breaking lower under SPX 875 - Dow 8250 - NQ 955 level

As traders, we must also be prepared for a continuation of this 
"sideway" chop we have seen the entire last week.

ES closed right under the psychological level of 900.
NQ closed right under the psychological level of 1000.
NQ has been "leading" the way higher.

For Monday morning, I would use the ES 895-900 number to signal a 
break higher, or a break lower to indicate a sense of market 
direction.

ES spent very little time above the 900 level last week, so 
expect a great deal of chop trading near it before a clearer 
sense of direction is established. 

After looking at charts, it seems two possibilities occur, yet 
another failure to break out over the ES 900-905 level and that 
sends the market lower again on the double-top failure, or they 
break through cleanly forming a breakout on the daily chart.



FRIDAY FUTURES TRADE SIGNALS

I would like this chance to make a comment regarding the Futures 
Trade Signals given each day in the Market Monitor. The intent 
has been to slowly introduce trade signals. For the last week, I 
have not provided any at the 9:30 AM market open time period, 
instead waiting until after the 10 AM time-frame. Very often, 
there are great trade signals within the first few minutes of the 
open, the downside to them is they normally carry a wider stop-
loss than the ones I've given so far. 

The technical staff at OI has been working on a newer version of 
the Market Monitor, one that shall allow more of a real-time 
streaming input on trade signals vs. the current auto-refresh 
time of five minutes. This new version could be ready this week, 
or it could take weeks to beta test all the bugs out.

With the eventual release of this new version in mind, next week 
I plan to provide (using the existing Market Monitor application) 
futures trade signals near the open, with corresponding wider 
stops as well. Naturally, not all days shall have a trade signal 
right at the open. 

A very good example of this type trade was on Friday at the open 
which found YM (Dow $5 futures) opening at 8260-80 level. I had 
considered posting right near 9:30 AM a signal of "Go LONG YM at 
MARKET, currently YM is 8270; when filled, use a very wide stop 
of Dow Cash 8230". The reason for that stop would have been that 
if the Dow lost 8250 it likely was heading for 8100-8150, but 
wished some cushion if near 8250, hence the 8230 stop. That 
signal was not given as I wished to first talk about the risk of 
such a large stop, as well as talk about the large risk of 
putting down a futures trade right at the open BEFORE its more 
clear which direction the market is going from the open.

These type trades can be either very good or very bad for the 
stop-loss must be larger than normal given the nature of the 
market usually not being very clear what it wants to do at 9:31 
AM. On the positive side, they can be the best type trades, for 
you are already in the trade BEFORE it becomes clearer 2 hours 
later what it did at 9:31 AM.

It's not a 'coin-toss' trade, in the "oh, lets just guess" 
mindset. It's an viable trade signal using the best data 
available, but not one that always works. Also, the fact this 
LONG YM at/near 8270 level would have actually gained 150 Dow 
points is not the point, for it could just have easily been 
stopped out for a 40 YM point loss if the market had gone down.


FRIDAY FUTURES TRADE SIGNALS GIVEN

After deciding to wait until the last of Friday's economic 
reports was out at 10 AM to provide any Trade Signals, none 
presented until later in the day:

Signal 1:
12:22 PM   Short NQ at 985.50
1:35 PM    Covered 1/2 size position at 980.00 for + 5.50 NQ pts
2:04 PM    Covered 1/2 size position at 985.00 for breakeven + 0

Signal 2:
2:59 PM   Short ES at 986.00 with target of 3 point gain
3:13 PM   Cover ES at 983.00 for + 3 target hitting on 1/2 Size
3:32 PM   Cover ES at 985.00 for + 1 gain as the trailing Profit 
stop hit at 985.00 as the signal had wanted ES to lose 892 which 
would have resulted in selling to close vs the buying to close 
that actually occurred.

I have received many reader emails regarding margin and possible 
profit/loss gains from futures, so shall use the above example to 
answer those of you that have asked questions of that type.

As most of you are familiar with OEX Equity Options, I'll use 
that with my example:

With OEX strike price XYZ trading at 11.50 x 12.00
you could buy 5 of them for $6000.00

Futures margin varies greatly from one broker to another, but I 
shall continue to use $1000 margin per each futures contract as 
an average figure.

The same $6000 will allow you to daytrade up to 6 futures 
contracts at one time.

Using the two above signals:
NQ = NDX 100 futures, and is worth $20 for each 1 point move.
                                                 Total
                                                 Profit/Loss


Short 6 NQ at 985.00
Cover 3 NQ at 980.00 for + 5 NQ points = + $100   + $300
     (3 contracts x 5 NQ points x $20 per point = $300)
Cover 3 NQ at 985.00 for + 0 NQ points = + $ 0    + $  0
     (3 contracts x 0 NQ points x $20 per point = $0)
TOTAL on this Trade is + $ 300


ES = SP500 futures, and is worth $50 for each 1 point move.
                                                 Total
                                                 Profit/Loss
Short 6 ES at 896.00
Cover 3 ES at 893.00 for + 3 ES points = + $100   + $450
     (3 contracts x 3 ES points x $50 per point = $450)
Cover 3 ES at 895.00 for + 1 ES points = + $150   + $150
     (3 contracts x 1 ES points x $50 per point = $150)
TOTAL on this Trade is + $ 600

TOTAL on both trades is a Gain of + $ 900
Using the $6000 margin figure, this is Total gain of 15% in this 
example.



Alan Hewko

As always, any questions or comments, please email them to
futures@OptionInvestor.com


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

Still bullish, but signs of a market decline are present

Stocks finished the week in positive territory on Friday, which 
had the major indexes showing gains for a third consecutive week.  
However, bulls are on the lookout for potential weakness in 
equities as Treasuries found buying this week after three 
consecutive weeks of selling.

It was back in our weekend wrap on Sunday, October 6th 
http://members.OptionInvestor.com/itrader/marketwrap/100602_1.asp
that the DIVERGENCE between the major market indexes and 
Treasuries served as an alert for a turn higher.  It is this 
week's divergence between Treasuries and equities which now 
warrants attention.

Here's a quick look at this week's percentage gains and losses 
for the major indexes and various sectors.  I've also left in 
place our "flow" diagram from the October 6th update on where we 
thought cash might have been flowing.  I've placed "green Xs" by 
those indexes that "beat" the S&P 500 Index (SPX.X), which is 
generally called "the market."  The two "red Xs" mark incorrect 
analysis on where cash from Treasury selling would have rotated 
to.

I do think that the bearishness or at least drastic 
underperformance of the Oil (OIX.X) and Oil Service (OSX.X) 
sectors the past several weeks has been my inability and perhaps 
the MARKET'S inability to accurately predict what unfolds in the 
Middle East.  As such, I usually try and AVOID trading in those 
sectors.

My major point of focus after the conclusion of this week is the 
DIVERGENCE I see with the benchmark 10-year YIELD turning lower, 
which is caused by buying in Treasuries.  It becomes rather 
apparent that equities benefited the week FOLLOWING 10/04/02 
selling in Treasuries, and its this week's renewed buying in 
Treasuries, that has us on the alert for potential weakness in 
equities.

Weekly Index/Sector Changes


 

There wasn't a HUGE rush back into the benchmark 10-year Treasury 
this week.  It is not accurate to actually try and calculate a 
percentage gain/loss from the YIELD figures, but it does serve as 
an observation of money flows.  On price, the December 10-year 
Treasury futures (ty02z) 113'045 rose +0.73% this week.  The 
shorter-term and "less risky" 5-year Treasury futures (fv02z) 
112'125 rose 0.75% this week, while the longer-term and "riskier" 
30-year Treasury futures (us02z) 109'00 gained rose 0.72%.  This 
shows rather broad buying in the Treasuries and has me thinking, 
"something's got to give."

While I don't focus on the very short-term 2-year Note, I'll make 
mention that today's action saw the 2-year Note December futures 
(tu02z) 107'007 +0.69% jumped sharply today.  Again, the shorter-
term treasuries are considered "less risky" and today's action 
hints of money moving to safety, either to park there for the 
weekend, or perhaps a little longer.

My major market index prediction from last weekend was that the 
smaller cap Russell-2000 Index (RUT.X) 372.64 +1.80 would be this 
weeks best risk/reward trade for a bull.  While the Russell-2000 
Index iShares (AMEX:IWM) 74.44 +2.18% gained 2.8% on the week, 
they didn't "outperform" the larger capitalized NASDAQ-100 Index 
(NDX.X) nor the broader NASDAQ Composite.

This has me thinking two things.  There is still a heck of a lot 
of institutional short covering taking place in the NASDAQ-100 
and MARKET bulls just were not very aggressive and willing to 
take on further risk in the small-caps this week.

One reason I feel that short-covering is still taking place is 
that in recent weeks, the more institutional Dow Industrials and 
S&Ps kept pace with the NASDAQ-100.  This weeks "lag" in gains by 
the Dow Industrials and S&Ps hints to me that bullish 
institutions just aren't in a chasing mode right now.

The above spreadsheet shows a trader/investor where the gains are 
heaviest and the need to be raising some snug stops under bullish 
positions.  If cash flows into Treasuries for a second week, and 
I'm correct in my thinking that bulls are getting a little more 
conservative and lack aggression, then we would expect a pullback 
in the coming week.

Since we're monitoring the supply/demand relationship between 
stocks and bonds, lets look at the point and figure charts of the 
various indexes.  Just remember, Xs are up (demand) and Os are 
down (supply).  These may well be charts that the institutions 
are monitoring as they tend to view things on a larger scale and 
more fundamental basis.  

Dow Industrials Chart - $50 box


 

Today's action had the Dow dipping back to 8,258.52, but that 
wasn't enough to have the point and figure chart giving a double-
bottom sell signal at 8,250.00.  By session's end, the Dow had 
rallied to close near its session high of 8,445.30.  As such, the 
Dow still looks strong, but first sign of weakness would be a 
trade at 8,250.  It would take a trade at 8,450 (3-box reversal) 
to have the Dow's chart back in a column of X.

One thing I'll be monitoring this week is a pattern similar to 
that found back in August at the 8,750 level where the Dow's p/f 
chart gave a triple-bottom sell signal, when was the beginning of 
the eventual decline to the 7,200 level.

Today's action had the Dow Industrials Bullish % ($BPINDU) 
remaining unchanged at 53.33% for a fourth-straight session.  
This can be compared to last Friday's reading of 43.33% and 
relative low reading of 6.66% in early October.  While this 
bullish % only contains 30 stocks, the "no change" in bullish % 
gives the observation that the internals are still strong, but 
perhaps "stalling out a bit."  Maybe some of the cash that 
rotated back toward Treasuries this week has something to do with 
that.

S&P 500 Index Chart - $5 box


 

From an institutional perspective, the SPX took a little rest 
recently, but the pullback near 880 was just too much for buyers 
to resist.  By the close, the SPX had rallied to close at 897.65 
+1.71%.  The p/f charting discipline only allows a chartist to 
make one directional chart entry per day.  However, I've placed 3 
question marks on the chart to reflect today's intra-day reversal 
higher.  Should the SPX open at 895 or higher on Monday and NOT 
trade 875, which would have the chart simply extending the 
current column of O, then bears that are short/put the SPX had 
better see resistance come in below 905.  Should the SPX trade 
905, that would be a triple-top buy signal and have a bear 
immediately assessing risk to 920-925 at a minimum.  The 900 
level has been tested twice and if cash continues to rotate back 
toward treasuries, it will be difficult to push the SPX higher 
from here.

The first sign of weakness currently would come with a trade at 
870.

We can also look at a p/f chart of the SPDRS (AMEX:SPY) $90.20 
+2.08%.  Instead of looking at the SPY on conventional scale of 
$1.00, the p/f charts at www.stockcharts.com allows a trader to 
change the box size to his/her liking.  Let's introduce a little 
"noise" into the chart of the SPY and change the box scale to 
$0.50 increments.  This may help a SPY trader get a better grasp 
of supply/demand as well as risk/reward.  When we do this, you 
begin to see the similarities between the SPX and SPY.

SPDRS Chart (AMEX:SPY) - $0.50 box


 

With the SPY chart set at $0.50 box scale, it looks similar to 
the SPX chart.  It is at least interesting to notice from a bar 
chart that the 50-day SMA of $87.92 matches the support that 
shows up on the p/f chart at that level.  You know and I know 
there were some shorts that actually anticipated a break lower 
today at the open, right at a current support level.  Hey, I 
bought a small put position on a 1-lettered stock today at the 
open.  It finished down 3-cents from its open!!!!

While every bear has his/her convictions on future price action, 
don't shrug things off if the SPY were to trade $91.00, 
especially if short a FULL POSITION.  Look back at a past triple-
top that I marked on 08/14/02.  The only "positive" a bear may 
have going for him/her is that at that time, the bullish % was 
just getting bullish at 36%.

Today's action had the S&P 500 Bullish % ($BPSPX) showing a net 
gain of 3 stocks to p/f buy signals and has the bullish % inching 
up at 48.8% and status remains "bull alert."  This compares to 
last Friday's reading of 37.6%.

Should the SPY eventually give a sell signal on the above chart, 
I'd look for near-term support to be found near SPY $85.50-
$86.00.  That's right where a triple-top buy signal was given and 
I'm thinking that some bears shorting the rallies to $85.50 may 
be looking to get squared up a little.

And now.... perhaps the most interesting chart of all!  The S&P-
100 Index (OEX.X).  

S&P 100 Index Chart - $5 box scale


 

Here's something that I hadn't noticed until tonight (Friday).  
The OEX has rallied to challenge its bearish resistance trend, 
which is considered the longer-term bearish trend.  Also note 
that we've got crisscrossing resistance coming in from our 
bullish resistance (blue dashed) trend.  What's interesting is 
that for the first time since the rally off the bottom, the OEX 
bullish % saw a net loss of 1 stock to a sell signal.  That 1 
stock only accounts for 1% of the bullish %, but I find it 
interesting, if not a slight tad bearish, that we see some buying 
in bonds this week, the OEX rallies to bearish trends, and an 
ever so slight amount of internal weakening is found.  From a 
risk/reward perspective, bear would short here, stop 465, and 
target a pullback near 430, where the recent double-top buy 
signal was generated.

Note that in July, the OEX reached a bottom at 385, when the 
bullish % at that time fell to just 8%.  Remember just recently 
that the bullish % for the OEX ($BPOEX) fell to 18% before 
reversing up?  See the long column of X from 390-455 and how it 
saw a little pullback into O from 450 to 420?  That was kind of 
like the OEX taking a little rest after a nice move off the 
bottom.  With some cash moving back into Treasuries this week, it 
might be time for the OEX and other indexes to also take a rest. 

I don't know about you, but I'll be watching Treasuries closely 
next week!

Again, the OEX Bullish % ($BPOEX) saw a net LOSS of 1 stock to a 
sell signal on Friday.  This still has the S&P 100 in "bull 
alert" status at 53%.  It would take a decline to 48% to have the 
OEX reversing back into "bear confirmed" status, but further 
gains to 60% would have the OEX in "bull confirmed" status.

Do you see how the current bearish resistance trend (red +) and 
the bullish percent levels play in with each other?  If the OEX 
bullish % falls back into "bear confirmed" status, guess what the 
OEX chart will be doing?  It would most likely deflect lower from 
current trend wouldn't it?  Conversely, if the OEX bullish % 
continues higher as internals strengthen, I'd expect the OEX to 
break ABOVE the downward trend and 465 level.

Now, for you bar chartist's, remember our discussions of how the 
OEX was holding ABOVE our "old" longer-term downward trend.  One 
thing we wanted to monitor on the OEX was that for WEAKNESS, it 
would fall back below that trend at about the 440 level.

From a risk/reward basis, if a bear is going to short 440, where 
is his/her stop on the point and figure chart?  It's still up at 
460 or 465 right?

Watch those bond's closely next week.  If we see buying in bonds 
Monday morning and the OEX gets a little pop higher on some 
continuation bullishness from Friday, don't be afraid to ease in 
with a 1/4 or 1/2 short in the OEX, or other indexes.  Just 
understand that doing so has you trading bearish with a tight 
stop on a smaller position.  Then, in a couple of days, if the 
trade begins working in your favor and we see any deterioration 
in the bullish %, a bear can always leg in further.

Now for the NASDAQ-100 Index (NDX.X) 995 +3.17%.  Here's the 
conventional chart of the NDX that most institutions look at.  
Big rally in the NDX in recent weeks right?

NASDAQ-100 Index (NDX.X) - $50 box


 

This is a "scary" chart for bull's that are certain a bottom has 
been found in big technology.  Sometimes it helps to look at a 
chart like this and understand why we are seeing such 
"bullishness" in the NASDAQ-100.  It seems crazy to think that 
there could possibly be short-covering taking place at current 
levels of NDX 995 after a 195 point move off the bottom, which 
represents about a 24% rebound.  When will the short-covering 
end?  I'm thinking it ends when it has in the past couple of 
years.  When Treasuries see buying and bears begin to understand 
that the only ones they're battling are the bears themselves.

However, if the NASDAQ-100 and big tech have found their bottom, 
then I'm thinking SMART bears from the 1,900 levels will continue 
to cover, especially if bonds see SELLING.

Just as we introduced some "noise" into the SPDRS chart by 
reducing the box size, lets try and do the same thing with the 
NDX.  NDX traders will better understand now how important the 
bullish % charts become when trying to assess MARKET RISK as the 
NDX is quite volatile.  While the $50 box does a very good job of 
taking out noise and giving very accurate "sell" signals and 
limiting the number of "buy" signals, when we change box size to 
smaller increments, we're introducing noise into the chart, but 
also trying to get a different perspective on things.

Let's cut the box size in 1/2 to $25.  Take note that the first 
level of resistance on the $50 box where the NDX would give a 
"buy signal" is at 1,100.

NASDAQ-100 Index (NDX.X) - $25 box


 

While the NASDAQ-100 Bullish % ($BPNDX) was rising in July and 
August (red7 and red8) the NASDAQ-100 Index was falling during 
that time!  Why?  Because MSFT was falling.

Was MSFT falling because something was wrong with it while other 
NASDAQ-100 stocks were more fundamentally strong and therefore 
attracting bullish capital?  Heck no!  MSFT was falling because 
every mom and pop was calling their equity mutual funds and 
redeeming their shares, then turning around and buying bonds!  
What was left for the fund managers to do after they'd already 
locked in 20-30% losses in their weak technology stocks?  They 
had to sell their BIG LIQUID STOCK MSFT that was actually putting 
numbers to the bottom line, unlike about 90% of other tech 
stocks.

Friday's action saw no net change in the NASDAQ-100 Bullish % 
($BPNDX) and it still reads "bull alert" at 55% bullish.  It 
would take a reading of 62% to reach "bull confirmed" status, 
while a reversal lower to 48% is currently needed to have this 
index back in "bear confirmed" status.  Last Friday's reading was 
42%.

While I (Jeff Bailey) may perceived MSFT as THE tech stock to 
own, the only way MSFT will go up and take the NASDAQ-100 with 
it, would be for the MARKET to stop buying bonds and leave cash 
available to buy the NASDAQ-100 stocks!

I've tried to show various price levels where MSFT has traded in 
relation to the NASDAQ-100.  YOU can pull up a FREE point and 
figure chart of MSFT at this link 
http://www.stockcharts.com/webcgi/Pnf.asp?S=MSFT&N=A&T=off
and look at a point and figure chart of MSFT on conventional $1 
box scale.  

In my mind, it DOES NOT matter how bullish MSFT's earnings are if 
the MARKET puts its money into bonds.  It takes CASH to buy 
stocks in order for them to go up.  

Thinking about SHORTING or PUTTING MSFT in an attempt to 
outperform the NASDAQ-100 on a downward move?  DON'T DO IT!!!  
Here's a relative strength chart of MSFT versus the NASDAQ-100 
Index (NDX.X) 
http://www.stockcharts.com/webcgi/Pnf.asp?S=MSFT&N=A&RS=on&M=$ndx&T=off
 .  You will note that it tends to go HIGHER longer-term than it 
does lower.

This week, MSFT fell 0.88%, while the NASDAQ-100 rose 4.1%.  I 
still think the bulk of the NASDAQ-100 rally has been short-
covering and not necessarily "bullish" buying.  MSFT just can't 
seem to bust a move above $54.  In my opinion, if the index 
heavyweight can't bust a move above $54, then the NASDAQ-100 
becomes susceptible to the downside.  Give me $1,000 and I place 
a bullish $500 bet on MSFT, and a $500 bearish bet on the NASDAQ-
100.  Even if Treasuries do find buying, I think a 50/50 split on 
MSFT versus the NASDAQ-100 would be a winning bet.  At least it 
has been since October of 2000.

Final note.  Think of what "SMART" money has been shorting the 
past two years and where those shorts have made the best money.  
It hasn't been with MSFT.  As such, it may make sense that MSFT 
isn't necessarily leading the move higher with 10% gains in a 
day.  Why?  Because there aren't as many shorts in MSFT as there 
is in INTC, CSCO, CIEN, etc.  

Early this next week, I'll not be too eager to put on a trade.  I 
want to monitor bonds closely on Monday and Tuesday.  If I see 
any type of "pop" on Monday and don't see SELLING in Treasuries, 
then be on the lookout for any type of "quick" reversal lower in 
the indexes.  

Remember past "traps" we've noted in prior commentaries.  I'm 
eye-balling Thursday's little SPIKE in the SPX above 900, with a 
trade at 902.94 (just above a nice round number) and then quick 
reversal lower as somewhat suspicious.  Combine that with 
Friday's rebound in the indexes, which was NOT confirmed with 
selling in Treasuries, and we might be ripe for a move lower this 
coming week.

As always, Friday's bond market action may well have been just a 
"defensive" move toward safety before the weekend, just in case 
something took place with Iraq.  We could well see renewed 
selling in Treasuries next week and have the indexes move higher.  
This is why I want to try and make Monday an "observation" day.  
I think we know what to look for

Jeff Bailey


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**************
Editor's Plays
**************

Time To Climb The Ladder Again

Here we are nearing the last two weeks of the option month and 
a major event in our future. The major event is the possibility
of a pre-Fed rally based on expectations of a rate cut on Nov-6th.
There is also a good chance that we will see some positive impact
from the pre-election hoopla. 

The strategy I am suggesting this Sunday is a laddered put entry
on the Semiconductor holders. (SMH) The SOX rallied +42% since 
October 10th. There is a good chance that the sector, which is
heavily shorted will see another run to the 300 level and above
between now and the Fed meeting. After the Fed meeting, regardless
of the outcome the chances are very good that the sector will
collapse on profit taking and poor fundamentals.

We are going to hedge this PUT position with CALLS on the QQQ 
because they are cheaper and the strikes are closer together. 

The basic concept is to acquire a 50 contract PUT position on 
the SMH for an estimated average cost of $.75 cents per share. 
If the profit taking happens as anticipated the puts would have 
an estimated value of $1.75 per share at the SMH target of $22. 
That would be a profit of $5,000 on a $3,750 investment. 

There are always two challenges with this type of investment.
First, the sector could just keep rising and make the entire
investment worthless. We will deal with that by hedging with 
QQQ calls. 

Secondly, the SMH may not rally all the way to our upside target
of $25.00. That is the reason for the ladder play. If you KNEW
in advance that it would hit the $25 level then there would be
no reason to ladder the entry and you would just wait for $25 
and buy 50 contracts. By using the ladder concept we will always
have a put position in place and can profit from any post Fed
crash.

Game Plan:

We are going to buy put contracts at 24, 24.50, 24.75 and 25.
We will buy 10 contracts at every price point except $25 and 
we will buy 20 contracts at that level. 

It looks like this:

Buy 10 NOV $22.50 PUTS if SMH hits $24.00 (est price $.93)
Buy 10 NOV $22.50 PUTS if SMH hits $24.50 (est price $.80)
Buy 10 NOV $22.50 PUTS if SMH hits $24.75 (est price $.73)
Buy 20 NOV $22.50 PUTS if SMH hits $25.00 (est price $.66)

If every point was hit your estimated cost of the puts would
be $3,750. 

The target exit point is $22.50 on a roll over. Here are the
price estimates by price point on a drop.

SMH 23.00 NOV $22.50 PUT = $1.32 Estimated profit = $2,850  
SMH 22.50 NOV $22.50 PUT = $1.52 Estimated profit = $3,850  
SMH 22.00 NOV $22.50 PUT = $1.78 Estimated profit = $5,150   
SMH 21.50 NOV $22.50 PUT = $2.05 Estimated profit = $6,500    
SMH 21.00 NOV $22.50 PUT = $2.34 Estimated profit = $7,950    


The challenge is what happens if the sector just keeps going up.
We are going to hedge this challenge by purchasing 40 contracts
of the QQQ NOV $26 CALLS at the open on Monday. Estimated price
is $.50 cents making the total outflow of $2,000.

If the SMH hits $25 the QQQ should hit $26. The prices do
not correlate exactly as the QQQ is already trading above the 
SMH levels we are targeting but they should match exactly on
the repeat. The QQQ cannot rise without the semis and either
should help pull the other up. 

If the QQQ does hit $26 next week the NOV $26 CALLS should be 
worth $1.50 or a total of $6,000. Subtract the $2,000 you paid
for them and you have a $4,000 profit and your SMH puts are
now free.  

If the SMH rolls over before the top number is hit then the
increase in value in the SMH puts will offset any loss in 
the QQQ calls. The decision will have to be made to sell the
calls when you see the top appear and not let them roll back 
to a loss. This trade needs some management and baby-sitting
but if the rally/crash scenario plays out it would be very 
profitable. 

SMH Chart


 

SOX Chart


 

QQQ Chart


 


Remember, all these prices are estimates and I make no claims
of specific profits. This is an example only and actual results
will never match the example exactly. 

This is a very profitable way to enter a directional play as
long as things are going in your direction. Once the market
decides to go against you it will require a decision on when
and what to liquidate. Do not get caught thinking the market
will only go up or down next week and simply react to what
happens and profit from it. 

I will recap this trade in the newsletter next Sunday and we
will see how the forecast went. 


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

Remember, these are high risk plays and should only be made
with risk capital.

Good Luck

Jim Brown  


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

Waiting for the Break
by Steven Price

The feel good vibes of the week made their way into Friday's 
close, with the Dow up 126.65, the Nasdaq Composite up 32.42 and 
the S&P 500 up 15.15 on the day.  While today's rally left 
investors confident heading into the weekend, we have yet to take 
out the next significant levels of resistance to the upside. The 
Dow was unable to crack 8450; the S&P was unable to crack 900; 
and the Nasdaq has yet to break 1350.  Of course, we also found 
support at the 50-dma once again in the Dow (8241) and the S&P 
(875), so the market appears rangebound for the moment. With 
another heavy week of earnings ahead, that range is unlikely to 
contain the market, but so far has at least given us some 
guidance as to when a breakout is taking place. 

The fact that we have not yet broken through to the upside may 
actually be a piece of a puzzle that looks somewhat bearish when 
we involve the bond market.  During the rally of the last two 
weeks, we have seen a sell-off in bonds, indicating an asset 
allocation as firms shift dollars from treasuries to equities.  
However, the last two days have seen a buying of bonds once 
again, indicating that there may not be the cash flow to boost 
the equities through resistance. 

This morning's economic data showed Consumer Sentiment at a nine-
year low, after falling for the fifth straight month.  The index 
fell to a reading of 80.6 and seems to be foreshadowing a rough 
holiday shopping season.  According to the survey, consumers are 
worried that the stock market drop will make businesses reluctant 
to invest and hire and more than half expect the economy to 
worsen in the next year. Researchers also said that more 
consumers mentioned a decline in wealth than at any time in the 
last 50 years. With consumers expecting the worst, it is hard to 
imagine much splurging in the next few months. 

New orders for durable goods were down 5.6% in September, 
highlighting business cutbacks in capital spending.  The drop was 
far worse than the consensus of -1.8%. This was the biggest drop 
since last November, and included a 12.6% decline in orders for 
new capital goods.   

The only positive data out this morning was in the housing 
sector, which showed a record number of new home sales.  Existing 
home sales also showed an increase.  However, the overall numbers 
didn't really tell the story.  Almost the entire increase in new 
homes was located in the Northeast part of the country. There was 
weakness in the South and Midwest and an increase in the number 
of new homes on the market.  While housing still remains strong, 
it is starting to show signs of a slowdown. 

The semiconductor stocks bounced back from yesterday's drop, with 
the Semiconductor Index (SOX) finding support at the 50-dma.  The 
index closed at 292.48 and now appears stuck between the 50-dma 
of 276 and a ceiling of 300.  This actually appears bullish, 
since the group is finding support on pullbacks and setting 
higher lows. While a vast majority of the news in the sector 
continues to be bad, shorts should wait for a 50-dma breakdown, 
and those looking to speculate to the long side should look for a 
breakout above 300.  

One interesting observation is the action in the Market 
Volatility Index (VIX). The index reflects the premium in the OEX 
at the money options and can be used to gauge fear of the 
downside.  The VIX has remained close to 40, in spite of previous 
market rallies this week.  This morning, the VIX headed lower 
ahead of the rally and continued downward all day. Friday usually 
brings out premium sellers looking to capture time decay over the 
weekend. However, the past few weeks have still had enough fear 
built in that option sellers have had little conviction to go 
short over the weekend, worrying that Monday could bring a sell-
off. That fear appears to be subsiding, as the VIX has reached 
its lowest close since August.  If nothing else, it appears we 
are returning to normal Friday behavior. 

While the tone of this column is bearish, I will once again 
repeat the mantra of trading what you see.  I would like to just 
go blindly short, seeing nothing but questionable results and 
resistance holding its line. However, until we get a breakdown in 
support, I will be selective and remember that the market will 
provide many opportunities over time, as long as I can come back 
and play tomorrow. 


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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7286
Current     :  8443

Moving Averages:
(Simple)

 10-dma: 8301
 50-dma: 8241
200-dma: 9329



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  897

Moving Averages:
(Simple)

 10-dma:  881
 50-dma:  875
200-dma: 1008



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     :  995

Moving Averages:
(Simple)

 10-dma:  955
 50-dma:  918
200-dma: 1178



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


Dow Jones Home Construction Index (DJUSHB): The homebuilders got 
mixed news this morning.  New home sales reached record levels, 
but the increase was concentrated almost entirely in the 
northeast region.  The housing market appears to be cooling in 
the South and Midwest.  The index has run into resistance at its 
third straight lower level, indicating investors are not as 
enamored with the homebuilding stocks now that mortgage rates are 
on the rise. If the overall number of new home sales begins to 
drop, this sector could hold some good short opportunities. 

52-week High: 394
52-week Low : 214
Current     : 318

Moving Averages:
(Simple)

 10-dma: 312
 50-dma: 314
200-dma: 339

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

Market Volatility

The VIX is at its lowest point since the end of August.  With a 
week of heavy earnings reports still ahead, this is curious.  
However, with most of the big reports behind us, apparently the 
weekend sellers are back, less fearful and trying to capture the 
3-day time decay. Support levels having held in the Dow, S&P and 
SOX may be contributing to the sense of safety, as well. 


CBOE Market Volatility Index (VIX) = 36.27 –3.63
Nasdaq-100 Volatility Index  (VXN) = 50.39 –4.19

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.77        440,849       340,664
Equity Only    0.65        339,527       218,993
OEX            1.06         17,506        18,588
QQQ            1.25         31,702        39,630

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

Bullish Percent Data

           Current   Change   Status
NYSE          36      + 0     Bull Confirmed
NASDAQ-100    55      + 0     Bull Alert
Dow Indust.   53      + 0     Bull Confirmed
S&P 500       49      + 1     Bull Alert
S&P 100       53      - 1     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   0.85
10-Day Arms Index  0.89
21-Day Arms Index  1.10
55-Day Arms Index  1.26


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       1894          1996
NASDAQ      859          1101

        New Highs      New Lows
NYSE         24              57
NASDAQ       42              74

        Volume (in millions)
NYSE     1,584
NASDAQ   1,461


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

Commitments Of Traders Report: 10/22/02

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 added to both long and short positions, however 
increased shorts by an additional 11,000 contracts.  Small 
traders left long positions virtually unchanged, but reduced the 
short side by 11,000, taking the opposite approach. 


Commercials   Long      Short      Net     % Of OI 
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%)
10/22/02      432,775   463,827   (31,052)   (3.5%)

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
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     23.3%
10/22/02      134,641    72,681    61,960     29.8%

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 their long contract positions by 3,400 
contracts, while increasing shorts by 2,100.  Small traders left 
longs unchanged, while reducing shorts by 3,600.


Commercials   Long      Short      Net     % of OI 
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%)
10/22/02       48,954     54,088    (5,134) ( 4.9%)

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
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%
10/22/02       10,202     8,892     1,310    11.8%

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

DOW JONES INDUSTRIAL

In a continuing trend with other markets, commercials increased 
short positions by 2,000 more contracts than they increased 
longs.  Small traders reduced longs positions by 1,600 and shorts 
by 1,000.


Commercials   Long      Short      Net     % of OI
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%
10/22/02       22,189    13,448    8,741      24.5%

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
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%)
10/22/02        4,445     9,270    (4,825)   (35.1%)

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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***************
ASK THE ANALYST
***************

Percentage Play
by Steven Price

Question:

Hello,

I would like to know your thoughts on SBUX. Looks like it is 
coming out of a long base..."A REAL business" in this weak 
economy...Moving nicely in the past few months. Looks like if it 
breaks out of this basing, the move upside could be significant. 
Thanks.

Cheers, Padhu

Answer:

Starbucks (SBUX) is an example of a stock that is definitely in 
an upward trend, although a look at almost every street corner in 
America leaves me wondering where the company can grow.  In spite 
of that casual observation, SBUX is planning an expansion of 
1,200 stores in 2003 and planning to boost revenues by 20%.  
These plans were revealed at a recent analyst meeting, where the 
company also said it expected same store sales growth of 3-7%, a 
key to profitability with such aggressive expansion plans.  SBUX 
also raised earnings guidance for 2003 to 0.65-0.66 per share.  
The company is aiming at 20-25% earnings growth over the next 5 
years, along with 20% sales growth.  It plans on expanding from 
its current total of almost 6,000 stores, to 10,000 by the end of 
2005.

CIBC World Markets Analyst John Glass, who attending the analyst 
meeting, said "Though it provided little new news, it did re-
enforce what we'd believed for a long time about the business: 
that it is an exceptionally well-run business with substantial 
growth opportunities and strong near-term momentum."  He also 
wrote, "Starbucks is clearly one of the few consumer brands in 
the world today with significant global unit growth still ahead 
of it."  Glass raised his 12-month price target from $22 to $24.  

A look at the charts shows a stock that has experienced a slow, 
upward trend, ever since the stock was listed.  While it did pull 
back from $25 to $15 during the recent market swoon, that was 
still a higher low on the monthly chart and did not break the 
trend. The stock has made up that loss and sits close to $25, 
finishing the week at $23.87. The other bullish signal I see on 
the chart is that is has now broken back above its 200-dma.  SBUX 
has pulled back to that level (22.41) and found new support 
there. New long entries on the following plays who are looking 
for a less expensive entry point can target a pullback to that 
level. 

Because SBUX does move slowly and time decay is a factor in a 
slow uptrend, I prefer a vertical call spread.  While it does 
limit upside potential, the sale of an out of the money call 
helps pay the price of the lower strike call that is purchased. 
Two of the spreads I see that would be more of a percentage play 
than an outright long play, with the goal of doubling your 
investment, are the Jan 2004 25-30 call debit spread, offered at 
$2.45, which could max out in value at $5.00.  The other one I 
see is the April 25-30 call spread, offered at $1.50, which can 
also max out at $5.00.

Because the stock has run into resistance at $25, there may be 
another pullback.  However, the long term prospects still look 
good and by investing less and looking for a reasonable profit, a 
trader protects the downside by reducing the initial investment.  
The maximum loss on either of these spreads is the initial 
investment.  Also these plays allow plenty of time for a pullback 
and surge forward again, since they do not expire until April 
2003, or January 2004.  Obviously you pay more for more time. 

Those traders simply looking to go long SBUX, without initiating 
a spread, should wait for a move above $25 and then support at 
that level.  So far, $25 has been a resistance level in both 200o 
and 2002, and although the stock has broken through on occasion, 
it has yet to finish a month above that level.  Therefore, I 
would wait for support after a breakthrough if investing in a 
higher priced call. 

Monthly Chart of SBUX


 

Daily Chart of SBUX


 

Thanks for all of your suggestions.  For those I didn't address 
in today's column, look for my comments on the Market Monitor.

Please send your questions and suggestions to: 
Contact Support


*************
COMING EVENTS
*************

=========================================
Market Watch for the week of October 28th
=========================================

------------------------
Major Earnings This Week
------------------------

Symbol  Company               Date           Comment      EPS Est

------------------------- MONDAY -------------------------------

ADVP   AdvancePCS            Mon, Oct 28  After the Bell      0.38
AXP    American Express      Mon, Oct 28  -----N/A-----       0.51
AWK    American Water Works  Mon, Oct 28  Before the Bell     0.60
ARI    Arden Realty          Mon, Oct 28  After the Bell      0.65
SAN    Banco Santander-Chile Mon, Oct 28  -----N/A-----       0.34
CX     Cemex, S.A. de C.V.   Mon, Oct 28  After the Bell      0.40
CUZ    Cousins Properties    Mon, Oct 28  After the Bell      0.56
GGP    General Growth Prop   Mon, Oct 28  After the Bell      1.41
HIG    Hartford Finl Srvcs   Mon, Oct 28  After the Bell      1.11
HUM    Humana                Mon, Oct 28  05:00 am ET         0.31
ICST   Integrated Crcut Sys  Mon, Oct 28  Before the Bell     0.20
K      Kellogg               Mon, Oct 28  Before the Bell     0.48
KIM    Kimco Realty          Mon, Oct 28  After the Bell      0.75
KG     King Pharmaceuticals  Mon, Oct 28  Before the Bell     0.34
WFR    MEMC Elec Materials   Mon, Oct 28  After the Bell     -0.19
MCY    Mercury General       Mon, Oct 28  -----N/A-----       0.64
NFS    Nationwide Finl Serv  Mon, Oct 28  After the Bell      0.79
NWL    Newell Rubbermaid     Mon, Oct 28  Before the Bell     0.45
IX     Orix Corporation      Mon, Oct 28  Before the Bell      N/A
PNW    Pinnacle West         Mon, Oct 28  Before the Bell     1.45
PVN    Providian Financial   Mon, Oct 28  After the Bell      0.04
IQW    Quebecor World        Mon, Oct 28  -----N/A-----       0.62
RCII   Rent-A-Center         Mon, Oct 28  After the Bell      1.12
RSG    Republic Services     Mon, Oct 28  After the Bell      0.37
RHA    Rhodia S.A.           Mon, Oct 28  -----N/A-----        N/A
RSE    Rouse                 Mon, Oct 28  -----N/A-----       0.97
SAFC   SAFECO                Mon, Oct 28  Before the Bell     0.44
SHR    Schering A G          Mon, Oct 28  -----N/A-----        N/A
SNE    Sony Corporation      Mon, Oct 28  Before the Bell      N/A
TP     TPG NV                Mon, Oct 28  -----N/A-----       0.22
UDR    United Dominion Rlty  Mon, Oct 28  After the Bell      0.40
WRI    Weingarten Realty     Mon, Oct 28  Before the Bell     0.82


------------------------- TUESDAY ------------------------------


ATVI   Activision            Tue, Oct 29  -----N/A-----       0.10
ASX    Adv Semicon Eng       Tue, Oct 29  Before the Bell     0.01
AGU    Agrium                Tue, Oct 29  After the Bell     -0.01
AMLN   Amylin Pharm          Tue, Oct 29  Before the Bell    -0.30
AVE    Aventis               Tue, Oct 29  -----N/A-----        N/A
BVF    Biovail Corporation   Tue, Oct 29  Before the Bell     0.46
BOW    Bowater               Tue, Oct 29  Before the Bell    -0.88
BP     BP plc                Tue, Oct 29  05:00 am ET         0.64
BTI    British American Tob  Tue, Oct 29  Before the Bell      N/A
BPO    Brookfield Properties Tue, Oct 29  -----N/A-----       0.59
CAJ    Canon                 Tue, Oct 29  -----N/A-----        N/A
CBL    CBL & Ass Properties  Tue, Oct 29  After the Bell      1.01
CRL    Charles River Lab     Tue, Oct 29  After the Bell      0.36
CSB    CIBA SPEC CHEM HLDG   Tue, Oct 29  01:00 am ET         0.63
CIT    CIT Group             Tue, Oct 29  Before the Bell     0.73
CCU    Clear Channel Comm    Tue, Oct 29  Before the Bell     0.32
CTC    Comp Tele de Chile    Tue, Oct 29  After the Bell      0.02
CEFT   Concord EFS           Tue, Oct 29  Before the Bell     0.17
CAM    Cooper Cameron        Tue, Oct 29  Before the Bell     0.37
CVH    Coventry Health Care  Tue, Oct 29  Before the Bell     0.63
COX    Cox Communication     Tue, Oct 29  Before the Bell    -0.04
ELE    Endesa, S.A.          Tue, Oct 29  -----N/A-----        N/A
ENR    Energizer, Inc.       Tue, Oct 29  -----N/A-----       0.42
EOP    Eq Office Prop Trust  Tue, Oct 29  Before the Bell     0.77
FOE    Ferro                 Tue, Oct 29  Before the Bell     0.37
FMC    FMC                   Tue, Oct 29  After the Bell      0.78
FTE    France Telecom        Tue, Oct 29  -----N/A-----        N/A
FMS    Fresenius Med Care    Tue, Oct 29  -----N/A-----       0.24
FDP    Fresh Del Monte Prod  Tue, Oct 29  Before the Bell     0.41
HGSI   Human Genome Sciences Tue, Oct 29  Before the Bell    -0.38
IM     Ingram Micro          Tue, Oct 29  -----N/A-----       0.11
IVX    Ivax                  Tue, Oct 29  Before the Bell     0.16
JP     Jefferson-Pilot       Tue, Oct 29  After the Bell      0.85
LAF    Lafarge North America Tue, Oct 29  -----N/A-----       1.87
MXIM   Maxim Integ Products  Tue, Oct 29  After the Bell      0.22
MUR    Murphy Oil            Tue, Oct 29  After the Bell      0.62
MYL    Mylan Laboratories    Tue, Oct 29  Before the Bell     0.50
NXTP   Nextel Partners       Tue, Oct 29  -----N/A-----      -0.29
GAS    Nicor                 Tue, Oct 29  After the Bell      0.41
NVO    Novo-Nordisk          Tue, Oct 29  -----N/A-----        N/A
OMC    Omnicom Group         Tue, Oct 29  Before the Bell     0.68
OHP    Oxford Health Plans   Tue, Oct 29  Before the Bell     1.02
PFGC   Performance Food      Tue, Oct 29  Before the Bell     0.40
PER    Perot Systems         Tue, Oct 29  Before the Bell     0.17
PAA    Plains All Am Pplne   Tue, Oct 29  Before the Bell     0.38
PDS    Prec Drill Corp       Tue, Oct 29  -----N/A-----       0.12
PG     Procter & Gamble Comp Tue, Oct 29  -----N/A-----       1.10
PEG    Public Serv Enter Grp Tue, Oct 29  08:30 am ET         1.08
RGIS   Regis Corporation     Tue, Oct 29  Before the Bell     0.43
SANM   Sanmina-SCI Corp.     Tue, Oct 29  After the Bell      0.02
SVM    ServiceMaster         Tue, Oct 29  Before the Bell     0.18
TEVA   Teva Pharmaceutical   Tue, Oct 29  -----N/A-----       0.68
EL     Estée Lauder Co Inc.  Tue, Oct 29  Before the Bell     0.26
TRP    TransCanada Pipelines Tue, Oct 29  -----N/A-----       0.23
RIG    Transocean Inc.       Tue, Oct 29  Before the Bell     0.27
BER    W.R. Berkley          Tue, Oct 29  After the Bell      0.77
WSH    Willis Grp Hldng Lmtd Tue, Oct 29  Before the Bell     0.28


-----------------------  WEDNESDAY -----------------------------

AW     Allied Waste Ind      Wed, Oct 30  After the Bell      0.27
APCC   Am Power Conversion   Wed, Oct 30  After the Bell      0.17
APPB   Applebee`s Intl       Wed, Oct 30  After the Bell      0.36
BLDP   Ballard Power Systems Wed, Oct 30  Before the Bell    -0.38
BE     BearingPoint, Inc.    Wed, Oct 30  Before the Bell     0.09
BHP    BHP Billiton Ltd      Wed, Oct 30  4:30 pm ET          0.10
CDX    Catellus Development  Wed, Oct 30  Before the Bell     0.41
CB     Chubb                 Wed, Oct 30  Before the Bell     1.11
CLX    Clorox                Wed, Oct 30  Before the Bell     0.54
COCO   Corinthian Colleges   Wed, Oct 30  Before the Bell     0.23
GLW    Corning               Wed, Oct 30  Before the Bell    -0.08
CXR    Cox Radio             Wed, Oct 30  Before the Bell     0.15
CVS    CVS                   Wed, Oct 30  Before the Bell     0.38
DRE    Duke Realty Corp      Wed, Oct 30  -----N/A-----       0.60
EDMC   Education Management  Wed, Oct 30  Before the Bell     0.07
EDS    Electronic Data Sys   Wed, Oct 30  After the Bell      0.12
ETR    Entergy               Wed, Oct 30  -----N/A-----       1.45
EXC    Exelon Corporation    Wed, Oct 30  Before the Bell     1.56
FIC    Fair Isaac &Co        Wed, Oct 30  After the Bell      0.43
FRT    Fed Rlty Invest Trst  Wed, Oct 30  -----N/A-----       0.64
GRMN   Garmin Ltd.           Wed, Oct 30  Before the Bell     0.24
GT     Goodyear Tire Rubber  Wed, Oct 30  -----N/A-----       0.08
GXP    Grt Plains Energy     Wed, Oct 30  After the Bell       N/A
HAR    Harman Intl Ind       Wed, Oct 30  -----N/A-----       0.24
HTV    Hearst-Argyle TV      Wed, Oct 30  Before the Bell     0.23
KMG    Kerr-McGee            Wed, Oct 30  Before the Bell     0.73
LH     Laboratory Corp.      Wed, Oct 30  After the Bell      0.44
LVLT   Level 3 Comm          Wed, Oct 30  Before the Bell    -0.79
LNC    Lincoln National      Wed, Oct 30  Before the Bell     0.55
LUX    Luxottica Group       Wed, Oct 30  -----N/A-----        N/A
MKL    Markel                Wed, Oct 30  Before the Bell     2.05
MC     Matsushita El Ind     Wed, Oct 30  -----N/A-----        N/A
MDP    Meredith Corporation  Wed, Oct 30  Before the Bell     0.31
MX     Metso Corporation     Wed, Oct 30  05:00 am ET          N/A
MON    Monsanto Co.          Wed, Oct 30  Before the Bell    -0.57
NBL    Noble Energy, Inc.    Wed, Oct 30  Before the Bell     0.09
OCAS   Ohio Casualty         Wed, Oct 30  -----N/A-----       0.23
OKE    ONEOK Inc.            Wed, Oct 30  After the Bell      0.15
PIO    Pioneer Corporation   Wed, Oct 30  -----N/A-----        N/A
PT     Portugal Telecom      Wed, Oct 30  -----N/A-----        N/A
PLD    ProLogis Trust        Wed, Oct 30  After the Bell      0.61
STR    Questar               Wed, Oct 30  After the Bell      0.25
O      Realty Income Corp    Wed, Oct 30  -----N/A-----       0.70
RCI    Renal Care Group      Wed, Oct 30  After the Bell      0.46
RMD    ResMed                Wed, Oct 30  After the Bell      0.28
COL    Rockwell Collins,     Wed, Oct 30  Before the Bell     0.36
SO     Southern Company      Wed, Oct 30  Before the Bell     0.79
SV     Stilwell Financial    Wed, Oct 30  -----N/A-----       0.15
TXU    TXU Corp.             Wed, Oct 30  Before the Bell     0.90
UN     Unilever N.V.         Wed, Oct 30  -----N/A-----       1.02
UL     Unilever PLC          Wed, Oct 30  Before the Bell     0.61
UMC    United Micro Corp     Wed, Oct 30  -----N/A-----       0.02
VLO    Valero Energy         Wed, Oct 30  Before the Bell     0.23
VSH    Vishay Intertech      Wed, Oct 30  Before the Bell     0.13
WBK    Westpac Banking       Wed, Oct 30  After the Bell       N/A
WGL    WGL Holdings Inc      Wed, Oct 30  After the Bell     -0.43
XL     XL Capital            Wed, Oct 30  After the Bell      1.60


------------------------- THURSDAY -----------------------------

AET    Aetna                 Thu, Oct 31  Before the Bell     0.70
AC     All Cap Mana Holding  Thu, Oct 31  -----N/A-----       0.50
ATK    Alliant Techsystems   Thu, Oct 31  Before the Bell     0.72
APC    Anadarko Petroleum    Thu, Oct 31  -----N/A-----       0.69
AU     Anglogold Limited     Thu, Oct 31  -----N/A-----       0.44
CPT    Camden Property Trust Thu, Oct 31  After the Bell      0.82
CCJ    Cameco                Thu, Oct 31  -----N/A-----        N/A
CVX    ChevronTexaco Corp.   Thu, Oct 31  Before the Bell     1.30
CEG    Cnstlation Enrgy Grp  Thu, Oct 31  Before the Bell     1.05
DTC    Domtar                Thu, Oct 31  -----N/A-----       0.12
DQE    DQE                   Thu, Oct 31  After the Bell      0.48
ETM    Entercom Comm         Thu, Oct 31  Before the Bell     0.27
EPD    Enterprise Pr Prtnrs  Thu, Oct 31  Before the Bell     0.24
XOM    Exxon Mobil Corp      Thu, Oct 31  Before the Bell     0.43
FIA    Fiat S.p.A.           Thu, Oct 31  Before the Bell      N/A
GILD   Gilead Sciences       Thu, Oct 31  After the Bell      0.07
GR     Goodrich Corporation  Thu, Oct 31  Before the Bell     0.64
HPC    Hercules              Thu, Oct 31  Before the Bell     0.18
ICI    Imperial Chem Ind Plc Thu, Oct 31  -----N/A-----        N/A
NDE    IndyMac Bancorp Inc.  Thu, Oct 31  Before the Bell     0.64
IRM    Iron Mountain         Thu, Oct 31  Before the Bell     0.17
JEC    Jacobs Engin Grp Inc  Thu, Oct 31  Before the Bell     0.52
JHF    Jhn Hancock Finl Serv Thu, Oct 31  After the Bell      0.71
JNY    Jones Apparel         Thu, Oct 31  Before the Bell     0.96
LR     Lafarge               Thu, Oct 31  -----N/A-----        N/A
LYO    Lyondell Chemical     Thu, Oct 31  -----N/A-----      -0.01
MLM    Martin Marietta Mat   Thu, Oct 31  Before the Bell     0.81
NFX    Newfield Exploration  Thu, Oct 31  -----N/A-----       0.37
NMR    Nomura Holdings, Inc. Thu, Oct 31  Before the Bell      N/A
OCR    Omnicare              Thu, Oct 31  Before the Bell     0.38
PNP    Pan Pacific Retail    Thu, Oct 31  -----N/A-----       0.74
PCZ    Petro-Canada          Thu, Oct 31  -----N/A-----       0.75
PD     Phelps Dodge          Thu, Oct 31  Before the Bell    -0.37
RD     Royal Dutch Petroleum Thu, Oct 31  05:00 am ET         0.69
SMG    Scotts                Thu, Oct 31  Before the Bell    -0.41
SC     Shl Trnsprt Trdng Co  Thu, Oct 31  04:00 am ET         0.57
SPG    Simon Property Group  Thu, Oct 31  Before the Bell     0.93
SRCL   Stericycle            Thu, Oct 31  After the Bell      0.26
TDK    TDK                   Thu, Oct 31  -----N/A-----        N/A
PZB    The Pittston Company  Thu, Oct 31  Before the Bell     0.43
WMI    Waste Management      Thu, Oct 31  -----N/A-----       0.38
WON    Westwood One          Thu, Oct 31  Before the Bell     0.24


------------------------- FRIDAY -------------------------------

LNT    Alliant Energy        Fri, Oct 25  Before the Bell     0.68
CI     CIGNA                 Fri, Nov 01  Before the Bell     1.99
DDR    Devel Diver Realty    Fri, Nov 01  Before the Bell     0.61
HSP    Hisp Brdcstng Company Fri, Nov 01  Before the Bell     0.11


----------------------------------------------
Upcoming Stock Splits In The Next Two Weeks...
----------------------------------------------

Symbol  Company Name              Ratio    Payable     Executable

CPBI    CPB Inc.                  2:1      10/25       10/28
EASI    Engineered Support Sys.   3:2      10/31       11/01


--------------------------
Economic Reports This Week
--------------------------

The economic calendar is a bit more packed this week with
GDP, PMI, the ECI report on Thursday and vehicle sales and
payroll data on Friday.  However, 3Q earnings will remain the
spotlight aside from any Iraqi developments.

==============================================================
                       -For-           

Monday, 10/28/02
----------------
None

Tuesday, 10/29/02
-----------------
Consumer Confidence(DM) Sep  Forecast:   90.2  Previous:     93.3


Wednesday, 10/30/02
-------------------
None


Thursday, 10/31/02
------------------
Initial Claims (BB)   10/26  Forecast:     NA  Previous:     389K
GDP-Adv. (BB)            Q3  Forecast:   3.6%  Previous:     1.3%
Chain Deflator-Adv.(BB)  Q3  Forecast:   1.3%  Previous:     1.2%
Employment Cost Index(BB)Q3  Forecast:   0.9%  Previous:     1.0%
Chicago PMI (DM)        Oct  Forecast:   50.0  Previous:     48.1
Help Wanted Index (DM)  Sep  Forecast:    N/A  Previous:       41


Friday, 11/01/02
----------------
Auto Sales (NA)         Sep  Forecast:   5.7M  Previous:     5.5M
Truck Sales (NA)        Oct  Forecast:   7.6M  Previous:     7.3M
Nonfarm Payrolls (BB)   Oct  Forecast:   -10K  Previous:     -43K
Unemployment Rate (BB)  Oct  Forecast:   5.8%  Previous:     5.6%
Hourly Earnings (BB)    Oct  Forecast:   0.3%  Previous:     0.3%
Average Workweek (BB)   Oct  Forecast:   34.2  Previous:     34.3
Personal Income (BB)    Sep  Forecast:   0.4%  Previous:     0.3%
Personal Spending (BB)  Sep  Forecast:  -0.2%  Previous:     0.3%
ISM Index (DM)          Oct  Forecast:   49.0  Previous:     49.5
Construction Spnding(DM)Sep  Forecast:  -0.3%  Previous:    -0.4%

Definitions:
DM=  During the Market
BB=  Before the Bell
AB=  After the Bell
NA=  Not Available


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The Option Investor Newsletter                   Sunday 10-27-2002
Sunday                                                      2 of 5


In Section Two:

Stock Pick: Hottest Sector
Daily Results
Call Play of the Day: AZO
Put Play of the Day: IP
Dropped Calls: CTAS, UNH
Dropped Puts: None

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**********
Stock Pick
**********

BRCD - Brocade Communications - $8.25 
Strategy: Long stock with put insurance 

The Storage Networking sector was one of the hottest when IT
spending and Internet growth seemed to have no limits.  Since
then, a tremendous amount of air has been let out of the
speculative NASDAQ balloon, and the eventual winners in this
war of attrition are starting to appear.

BRCD is a leading provider of storage area networks (SANs),
offering a product family of Fibre Channel fabric switches that
provide an intelligent networking foundation for SANs.  While
that may sound like so much technology marketing mumbo-jumbo,
the company's balance sheet certainly gives us a rosy picture
in a weak IT spending environment.  While nothing like the huge
growth seen a few short years ago, revenues have been steadily
advancing in each of the past 3 quarters, and earnings are
growing again.

The sharp selloff in anything Technology-related earlier this
month drove the stock down to just above $5, which is
interestingly, just above the level (split-adjusted) at which
it IPO'ed back in 1999.  That level seems to be providing
significant support and the stock is in the middle of a pretty
impressive rally right here, having gained more than 55% from
its recent lows.  Clearly, BRCD will need to back off a bit
after such a strong run, but the next dip ought to provide a
solid entry into the stock in anticipation of growing revenues
driving the stock even higher.

While a dip back to the $7 level might hold as support, we'd
feel better about holding out for a retreat back near the $6.50
level, before opening new positions.  That dip should allow the
stock to build a floor for a run at its first really serious
resistance level up at $10.50.  Once the bulls manage to crest
that level, they'll be setting their sights on a push up to the
$14 level, the site of the stock's major breakdown in early
September.

The play is to go long BRCD stock in the $6.50-7.00 range
and go long one contract of the Jan-2003 $5.00 puts BQB-MA at
$0.50 for each 100 shares you are long.  There is no requirement
to go long the put but it does prevent all but a very minimal
loss should something unexpected happen to BRCD or the rest of
the Network Storage industry. 

Option 1: If BRCD is not above $9.00 by Jan 2nd, close both
positions and exit the play.

Option 2: If BRCD is below $6.00 on Jan 2nd then you have the
option of closing the put for a slight profit and lowering your
basis in the long stock play by the amount of the put premium
received or closing both positions and exiting the play. 

Option 3: If BRCD is above $9.00 by Jan 2nd then close the put
position for any remaining premium and set a stop loss on the
stock at your entry point of $6.50-7.00 plus any short fall on
the put premium.

Brocade Communications (BRCD) Daily Chart


 


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

For Best Alignment view in Courier Ten Font
*******************************************

CALLS              Mon    Tue    Wed   Thu  Week

AZO      85.95    2.11  –1.06   1.17 –3.47  0.30  New, Entry 
CI       37.00    0.98   2.19  -2.74 –1.40–25.80  New, Bounce 
JNJ      57.76    1.61  -0.98  -0.87 –0.24  0.20  Holding Up
MEL      28.88    0.77   0.10   0.85 –0.34  2.07  New, breakout
PNRA     32.85   -1.36  -0.39  -0.48  0.55  1.85  Still rising
QCOM     35.39    0.95   0.07   0.02 –1.13  0.58  $35 support
TRMS     51.24    1.51  -0.03  -0.13 –1.00  1.22  Bounced at $50
UNH      97.09   -0.58  -0.38   1.39 –2.09 –2.81  Drop, ranging


PUTS               

CTAS     50.10    1.70  -0.11   1.38  1.79  2.00  Drop, no entry
IBM      74.56    1.90  -0.01   0.20 –2.50  0.91  Look for break
IP       36.50    1.45  -0.25  -0.36 –0.15 –0.85  New, deep debts
NTRS     36.56    0.71   0.04   0.52 –0.98 –0.91  entry point


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********************
THE PLAYS OF THE DAY
********************

Call Play of the Day:
*********************

AZO – AutoZone, Inc. $85.95 (+0.16 last week)

See details in play list




Put Play of the Day:
********************

IP - International Paper - $36.50 -0.34 (-1.30 for the week)

See details in play list




**************************
PICKS WE DROPPED THIS WEEK
**************************

Remember that historically, when we drop a pick it will go up
10 to 15% the very next week. It is part of Murphy's Law.
Just because we drop a stock as a pick does not mean we are
advocating a "sell" on any position you have. We are simply
dropping our recommendation as a new play. Existing plays
can and do continue on and are usually profitable.


CALLS
^^^^^

CTAS $50.10 +1.35 (+1.95 for the week) In our write-up of this 
put play, we suggested traders wait for intraday resistance under 
$50 and the Dow to breakdown below 8300 and show resistance 
there, as well.  We also stated that we were concerned about a 
pullback above the 200-dma and move higher.  Those concerns were 
well founded, as the stock pulled back and then found legs to 
rally back through $50.  Rather than wish and hope for the play 
to go our way, we will simply close it, since we didn't get the 
entry point that we were looking for. If CTAS can break below the 
$47.45 200-dma, then we will re-visit the play as a possible 
short. 

---

UNH $97.09 -1.19 (-2.64 for the week) Unitedhealth dropped as 
fellow HMO Cigna sold off 42% on news that it missed earnings and 
lowered guidance.  The difference is that Cigna had not managed 
their premium risk well enough to cover rising health care costs. 
UNH, on the other hand, has done a good job of keeping up with 
cost increases.  Regardless of the fundamentals, UNH was sold off 
in sympathy and we will close the play, rather than fight what 
appears to be a range between $101 and $95, we will close the 
play and wait for a breakout above $101.00 to reconsider a long 
play.


PUTS
^^^^

None


***********
DEFINITIONS
***********

SL  = Suggested stop loss. Sell if bid breaks this price.
OI  = Open Interest - the number of open contracts outstanding.
ITM = In the money
ATM = At the money
OTM = Out of the money
ADV = Average Daily Volume

The options with a "*" by the strike price are our choices from the
group. If the stock moves as expected we feel they have the best
chance to substantially increase or double in price with the best
risk/reward ratio compared to the other options for the same stock.
You must determine if they fit your risk profile for time and price.

Analysts ratings: 1-2-3-4-5
Analysts who follow each stock rate it and these rating are
accumulated and displayed as follows;

Position 1 = number of analysts recommending "strong buy"
Position 2 = number of analysts recommending "moderate buy"
Position 3 = number of analysts recommending "hold" or "neutral"
Position 4 = number of analysts recommending "moderate sell"
Position 5 = number of analysts recommending "strong sell"

Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys",
1 "hold" recommendation.

RISKS of SELLING PUTS:
The risk of selling naked puts is always the possibility
of a catastrophic event that drops the stock below the
strike price and could result in the stock being PUT to you.
Always protect yourself with a "buy to cover" limit order
to take you out before this can happen.


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

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


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Contact Support
The Option Investor Newsletter                   Sunday 10-27-2002
Sunday                                                      3 of 5


In Section Three:

New Calls: CI, AZO, MEL
Current Calls: TRMS, PNRA, QCOM, JNJ
New Puts: IP


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

CI - Cigna - $37.00 -26.60 (-26.20 for the week) 

Company Summary: 
CIGNA Corporation, headquartered in Philadelphia, and its 
subsidiaries constitute one of the largest publicly owned 
employee benefits organizations in the United States. Its 
subsidiaries are major providers of employee benefits offered 
through the workplace, including health care products and 
services; group life, accident and disability insurance; 
retirement products and services; and investment management. As 
of December 31, 2001, CIGNA Corporation had consolidated assets 
of $91.6 billion and shareholders' equity of $5.1 billion. Full-
year 2001 revenues totaled $19.1 billion.

Why We Like It:
Cigna was today's big loser, dropping $26 after missing earnings 
and revising its outlook. Yes, this is the call section and no, 
we are not crazy. The company lowered its forecasts to $1.47 per 
share from the previous forecast of $1.90 to $2.05 per share. It 
also lowered 2003 estimates to $6.25-$6.50 per share, which had 
been forecast at $8.84.  That's a decrease of 22-26%, which we 
feel may not justify a loss of 42% on the stock.  Considering 
that the losses were due in part to CI's failure to manage its 
premium risk, not raising them fast enough to cover health care 
cost increases, there is a light at the end of the tunnel. One 
thing they do have the ability to do is raise premiums more 
aggressively in the future, which should help take away some of 
the pain. Most health insurers that have posted impressive 
numbers this year, such as Unitedhealth and Wellpoint, have 
estimated rising health care costs more effectively, and CI will 
simply have to adjust how it forecasts the future. There are also 
issues regarding higher spending in relation to subscriber levels 
and performance of the equity markets, as they relate to pension 
liability. CI also indicated it may be cutting staff to help trim 
costs  

We are not playing Cigna as a call because it has wonderful 
fundamentals; we simply feel the selling was overdone and the 
stock is due for a bounce. This should be considered an elevated 
risk play, however we will wait for the right technical signals 
to enter. The stock bounced today at $34.70 and another pullback 
to the $35 area, with support, could be considered a possible 
entry point.  If the stock does re-test $35, we will not jump the 
gun - we will wait for support before going long.  We also would 
like entry on a trade of $38.00, which would be a 3-box reversal 
on the point and figure chart. The bounce may be good for a move 
to the mid 40s; however, we will close the play if we sense a 
rollover. If the stock gaps up on Monday by more than $2, wait to 
enter on a pullback, as we don't want to chase it. Traders should 
also be aware of high premiums in CI options, as implied 
volatility is extremely high after such a big drop.  Expect 
implied volatility to drop precipitously if the stock settles in, 
so more conservative traders may want to stay on the sidelines, 
as waiting for premiums to settle will most likely miss the move.  
Place stops at $34, as this would suggest a new round of sellers 
and we don't want to try and catch a falling knife. Earnings are 
released next Friday, so we will be closing the play before then, 
even though the company already warned.  We have provided a list 
of both November and December options, but we will be looking at 
November ourselves because of earnings. 

BUY CALL NOV-30 CI-KF OI=  12 at $10.20 SL=6.00
BUY CALL NOV-35*CI-KG OI= 306 at $ 5.70 SL=2.80
BUY CALL DEC-30 CI-LF OI= N/A at $10.80 SL=6.00
BUY CALL DEC-35 CI-LG OI= 155 at $ 7.20 SL=3.60

Average Daily Volume = 1.12 mln


---

AZO – AutoZone, Inc. $85.95 (+0.16 last week)

Company Summary:
AutoZone is a retailer of automotive parts and accessories,
primarily focusing on do-it-yourself customers.  Each of its
more than 2900 stores in 42 states and Mexico carries an
extensive product line for cars, vans and light trucks,
including new and re-manufactured automotive hard parts,
maintenance items and accessories.  Approximately half of its
domestic stores also have a commercial sales program, which
provides commercial credit and prompt delivery of parts and
other products to local repair garages, dealers and service
stations.

Why We Like It:
Consistency is a wonderful thing, especially in a volatile
market like we have seen over the past several months.  So when
we find a stock that continues to behave in a predictable manner,
we tend to keep going back to the well.  While the Retail sector
has been a mixed bag over the past year, shares of auto parts
retailer AZO have been a refreshing bullish story.  In reality,
AZO has provided proof that earnings DO matter, as the company
has absolutely annihilated earnings estimates the past 3 quarters.
Most recently, the company bested quarterly estimates of $1.41
with $1.73 on September 25th, clearly surprising even the most
bullish investors, as the stock tacked on better than a $6 gain
that day.  Since then, AZO has continued its 3-month trend of
posting higher highs and higher lows, obediently rebounding every
time it encounters the ascending trendline connecting the lows.
That trendline currently rests at $81.50, which just happens to
be the site of the previous price peak in early October.  As long
as the company continues to deliver on the earnings front,
investors will likely keep rewarding it with a higher stock
price.  Along with the rest of the market, AZO started showing
signs of weakness on Thursday, dropping back near the $84 level
before finding support and rebounding into the close of trading
on Friday.  While that is encouraging, we think we've got a fair
chance at getting an even better entry point next week.  Look for
a dip into the $82-83 area, where the stock found a top in May
and June, also the site of the 20-dma ($82.74) to provide for a
great entry opportunity into the play before the bulls take a
fresh run at new highs.  Take a look at the AZO chart, and you
can see how each push to new highs put in place a near term top,
followed by a mild decline leading to the next solid entry point.
For this reason, we don't want to target entries on breakout
moves.  Rather, a breakout to new highs will be a signal to lock
in gains on existing positions and then wait for the next entry.
Our stop is initially set at $81.50.

BUY CALL NOV-85*AZO-KQ OI=1187 at $4.10 SL=2.50
BUY CALL NOV-90 AZO-KR OI= 745 at $1.45 SL=0.75
BUY CALL DEC-85 AZO-LQ OI=1331 at $6.60 SL=4.50
BUY CALL DEC-90 AZO-LR OI= 737 at $4.10 SL=2.50

Average Daily Volume = 1.26 mln


---

MEL – Mellon Financial Corporation $28.88 (+1.93 last week)

Company Summary:
Mellon Financial Corporation is a provider of financial products
and services in domestic and selected international markets.
For companies and institutions, the company provides asset
management, trust and custody, securities lending, foreign
exchange, defined contribution and defined benefit services.
Additionally, MEL provides fund administration, human resources
consulting, outsourcing services, investor services and cash
management.  For relationship customers, MEL also provides credit
and capital market services.  For individual investors, the
company provides mutual funds, separately managed accounts,
annuities, private wealth management and private banking.

Why We Like It:
One widely-accepted premise related to the broad markets is that
any substantial rally needs to have the participation of the
Financial stocks.  Preferably, the Financials would actually lead
the rally.  The Banking index (BKX.X) got pummeled in early
October, as several large banks announced significant increases
to their reserves to cover bad loans.  Fear of the news getting
even worse dragged the good stocks down with the bad, but the
strong stocks are starting to make their presence known again.
This can first of all be seen in the BKX index, which after
putting in a strong double-bottom near 600-610, rocketed back
up near resistance.  MEL appears to be one of the stronger stocks
in the Financial sector right now, as it has really posted a
successful double bottom.  While it did slightly undercut the
July lows, the subsequent rally took a turn for the better on
Friday, as the stock pushed above the August highs, closing just
below $29.  If the BKX can now follow suit with a breakout over
its August highs near 800, MEL will have the benefit of sector
strength working in its favor.  While MEL hasn't yet gone on a
PnF Buy signal, it only needs to print $29 to do so, and that
resulting Buy signal will generate a bullish price target of
$39.  A pullback near $28 or even stronger support at $27 could
make for a solid entry into the play.  But if the market (and
MEL) takes off next week, then momentum traders will want to
take advantage of a breakout over $29 to initiate new
positions.  Initial stops are in place at $26.

BUY CALL NOV-27 MEL-KY OI= 832 at $2.05 SL=1.00
BUY CALL NOV-30*MEL-KF OI= 355 at $0.75 SL=0.25
BUY CALL DEC-27 MEL-LY OI= 974 at $2.80 SL=1.50
BUY CALL DEC-30 MEL-LF OI=1442 at $1.45 SL=0.75

Average Daily Volume = 2.28 mln



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******************
CURRENT CALL PLAYS
******************

TRMS -Trimeris - $51.24 -0.03 (+1.33 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 has pulled back to support and then rallied 
impressively.  As we get closer to March, investors are no doubt 
looking forward to FDA approval of Fuzeon.  The company recently 
received priority review status from the FDA for the drug, which 
is the first in a new class of HIV drugs called fusion 
inhibitors.  The company recently presented results at the ICAAC 
conference in San Diego at the end of September, which showed the 
effectiveness of the drug when combined with current HIV 
therapies.  Many patients develop resistance to HIV therapy and 
the results of the trials showed twice as many patients achieved 
a reduction of HIV in their blood to undetectable levels when 
taking Fuzeon, in addition to older drugs, as those given 
conventional therapy alone.  The most recent data showed that 
patients did better across all of the studied subgroups - gender, 
race, age and severity of infection.  Fuzeon provided a benefit, 
no matter how resistant the virus had become to the patient's 
current regimen. The company also has another drug of the same 
class in the pipeline, T-1249, which has also showed promising 
results in HIV therapy. Because Fuzeon will be the first drug of 
its kind to be approved, it will most likely capture a 
significant portion of market share in the industry.  Projections 
have been for as much as $1 billion per year in revenue. After 
closing above $50 for the first time since may, the stock pulled 
back and tested that level, now finding support there. The next 
level to be tested on the upside is $52.00, which provided 
resistance on Tuesday.  Conservative traders can wait for a break 
above $52 to enter the play, or a pullback to $50 to maximize 
profits. 

BUY CALL NOV-50*RQM-KJ OI= 1127 at $3.70 SL=2.00
BUY CALL NOV-55 RQM-KK OI=  337 at $1.35 SL=0.75
BUY CALL DEC-50 RQM-LJ OI=   20 at $5.80 SL=2.90
BUY CALL DEC-55 RQM-LK OI=    7 at $3.20 SL=1.60

Average Daily Volume = 523 k


---

PNRA - Panera Bread - $32.85 +0.55 (+1.90 for the week)

Company Summary:
Panera Bread Company owns and franchises bakery-cafes under the 
Panera Bread and Saint Louis Bread Co. names. The company is a 
leader in the emerging specialty bread/cafe category due to its 
unique bread combined with a quick, casual dining experience. 
(source: company release)

Why We Like It:
Panera once again continued its steady climb and appears to have 
found another higher intraday support level. $32 now appears as 
though it will be the pullback level if we get any more of them.  
The stock struggled to break $33 once again, but put in a series 
of higher highs and higher lows intraday, as well as its highest 
closing level since August.  Our initial target remains $35 and 
we would certainly like to see a breakthrough of $33, and support 
there, for the next leg up.  The recent pullback to $31.50 
established a new support level, which conservative traders can 
use as an alternate stop loss. That pullback also stopped short 
of a PnF reversal, showing a lack of conviction on the part of 
sellers.  The stock broke out through its 200-dma of $30.58 on 
October 21, pulled back slightly, and has taken off since then.  
PNRA continues to post same store sales increases, and those 
increases are growing percentage-wise. The August increase was 
4.4% and the September increase was 5.5%.  Total third quarter 
same store sales increased 5.1%.   We don't recommend new entries 
at this level, because of the initial target looming just $2.15 
above.  However, a break through $35 would certainly be a reason 
to add to the position. New entries can look for that breakout or 
a pullback to $32, if traders are comfortable with a possible $3 
gain in the stock.  While we are listing several calls, the 30 
strike is preferred because of resistance at $35.

BUY CALL NOV-27.50*UPA-KY OI= 234 at $5.90 SL=3.00
BUY CALL NOV-30    UPA-KF OI=1427 at $3.80 SL=1.90
BUY CALL FEB-27.50 UPA-BY OI=  84 at $7.40 SL=3.70
BUY CALL FEB-30    UPA-BF OI= 145 at $5.80 SL=3.00

Average Daily Volume = 983 k


---

QCOM – Qualcomm, Inc. $36.52 (+0.32 last 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:
The past two weeks have certainly marked a sharp contrast to
the incessant selling of September and early October.  Instead
of the sellers piling on at the first sign of price weakness,
each dip is proving to be just another entry point on the way
up the chart.  After breaking out of its 5-month consolidation,
QCOM blasted higher a couple weeks ago and hasn't looked back
yet.  The move through the 200-dma brought in a fresh wave of
buyers, propelling the stock through the $34 resistance level,
and even yesterday's dip only dropped the price back to the
10-dma (currently $35.67).  When the bears couldn't push QCOM
below that level, the buyers came back in today, resulting in
a more than 3% advance.  Dueling analysts were in the news the
past 2 days, with CSFB downgrading it from Neutral to
Underperform yesterday.  Lehman responded this morning, by
raising their estimates for the company, citing solid demand
and growth in China and India.  The intraday chart shows how
the volatility of the past week has support building near $35,
and resistance looming near $37.  With dips being bought on a
consistent basis, any rebound from above the $35 level continues
to be an opportunity to enter the play, keeping stops set at
$33.50, just below the intraday lows on October 16th.  More
conservative traders will want to wait for a solid breakout
above $37.25, which is just above last week's intraday highs.
Speculation that QCOM could have a strong quarter, and more
importantly, have good things to say about the future in their
earnings report on November 7th should have the stock continuing
to rally as that date approaches.

BUY CALL NOV-35 AAW-KG OI=19348 at $2.95 SL=1.50
BUY CALL NOV-37*AAW-KU OI=10269 at $1.55 SL=0.75
BUY CALL NOV-40 AAW-KH OI= 4954 at $0.70 SL=0.25
BUY CALL DEC-37 AAW-LU OI=  560 at $2.95 SL=1.50
BUY CALL DEC-40 AAW-LH OI=  763 at $1.80 SL=1.00

Average Daily Volume = 15.4 mln


---

JNJ – Johnson & Johnson $57.76 (-1.59 last week)

Company Summary:
Johnson & Johnson is engaged in the manufacture and sale of a
broad range of products in the healthcare field.  The company
conducts business in virtually every corner of the globe.
JNJ's activities are divided into three primary business
segments; Consumer, Pharmaceutical and Professional.  The
Consumer division is focused on personal care and hygiene
products, while the Professional segment provides a wide range
of products used by the healthcare profession.  The
Pharmaceutical group provides a broad range of over-the-counter
and prescription medications for the treatment of afflictions
ranging from antifungal to dermatological to pain management
conditions.  In June of 2001, the company merged with ALZA Corp,
a research-based pharmaceutical company which became a direct,
wholly owned subsidiary of JNJ.  

Why We Like It:
For the third day in a row, JNJ gyrated around the 200-dma
(currently $57.76) as the tug of war between the bulls and the
bears continued.  The stock is still showing some weakness
following Wednesday's downgrade from CIBC World Markets analyst,
Mara Goldstein.  It is interesting that the downgrade came the
day after JNJ won FDA approval for its new drug-coated stent.
Despite this analyst's negative view on the stock, the chart
presents a picture of strength.  JNJ has been posting a series
of higher highs and higher lows for the past month, and is now
finding support from the combination of the ascending trendline
connecting those lows (now $57.50) and the 200-dma.  And there is
even stronger support just a little lower, with historical
resistance turned support at $56, which is just above the rising
50-dma ($55.84).  The PnF chart is bullish too, after generating
its most recent Buy signal with the breakout over $57 late last
month.  The current vertical projects up to $74, so the stock
definitely has some room to run in a cooperative market
environment.  Aggressive bulls can take advantage of intraday
dips and rebounds from the $56-57 area to initiate new positions,
while more conservative players will want to wait for a decisive
rally back above the $59 level (just above Thursday's intraday
high) before entering new positions.  Due to the recent volatile
nature of the stock (and broad market), we're keeping a wide
stop, currently set at $54.50.

BUY CALL NOV-55 JNJ-KK OI= 6440 at $3.90 SL=2.50
BUY CALL NOV-60 JNJ-KL OI=17455 at $0.85 SL=0.40
BUY CALL DEC-55 JNJ-LK OI=  183 at $4.90 SL=3.00
BUY CALL DEC-60 JNJ-LL OI= 2324 at $1.90 SL=1.00

Average Daily Volume = 8.89 mln



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

IP - International Paper - $36.50 -0.34 (-1.30 for the week) 

Company Summary:
International Paper is the world's largest paper and forest 
products company. Businesses include paper, packaging, and forest 
products. As one of the largest private forest landowners in the 
world, the company manages its forests under the principles of 
the Sustainable Forestry Initiative (R) (SFI(SM)) program, a 
system that ensures the continual planting, growing and 
harvesting of trees while protecting wildlife, plants, soil, air 
and water quality. Headquartered in the United States, 
International Paper has operations in over 40 countries and sells 
its products in more than 120 nations.

Why We Like It:
IP hasn't been very popular with analysts recently. The stock has 
received several downgrades recently, with its only upgrade being 
from a sell to a hold.  Not exactly a ringing endorsement.  The 
company released earnings on Wednesday and although it posted a 
profit, after losses in the year ago period, the news was met 
with another downgrade, from Prudential.  The firm lowered its 
price target to $31 and downgraded the stock to a "sell."  
Prudential said it was concerned about a drop in GAAP net worth 
to about $2 billion and increase in debt-equivalent liabilities 
to $16.2 billion.  This ratio alone does not look promising, 
however Prudential also cited seasonal slowdowns in box, wood and 
catalogue paper demands. IP said it expects more substantial 
earnings improvement once a consistent and broad based U.S. 
economic recovery kicks in.  Judging by recent reductions in 
corporate spending, that recovery may still be a ways off. The 
company also said it is expecting to take a $1.1-$1.4 billion 
goodwill charge at the end of the year and a pension charge.   

IP said it would offer $750 million worth of debt on Wednesday 
and then increased that amount to $1 billion on Thursday.  It is 
attempting to retire part of its $1.2 billion in 8% notes due 
next July.  Moody's currently gives IP's senior unsecured debt 
"Baa2," its second lowest investment grade. It receives an 
equivalent rating from Standard and Poor's.   

IP attempted to rebound from recent lows, as the Dow rallied and 
the stock followed along.  However, the party appears over for 
IP, after its recent earnings release. The stock bottomed out on 
Friday at $35.88 and is one box shy of a 3-box PnF reversal down. 
Prudential's target of $31 looks like a possibility, as it would 
match recent lows, just before the Dow put on its rally cap.  
Even with the Dow continuing its rally, IP has reversed direction 
the last several days and is finding support only from its 50-dma 
of $35.86. We will look for a break below that 50-dma as a signal 
to go short. There may be some support at $35, as that level has 
acted as previous resistance in late September and early October. 
A break below $35 could get us to our objective quickly. The 
Forest & Paper Product Index (FPP.X) has also begun to rollover, 
an important factor when looking at the sector.  The FPP has 
found resistance at its own 50-dma and put together a series of 
lower lows. Look to initiate a short below the 50-dma and then 
place stops at $39, above the recent high. 

BUY PUT NOV-37.50 IP-WU OI=2422 at $2.05 SL=1.00
BUY PUT DEC-37.50 IP-XU OI=2422 at $2.90 SL=1.50

Average Daily Volume = 3.31 mil



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The Option Investor Newsletter                   Sunday 10-27-2002
Sunday                                                      4 of 5


In Section Four:

Current Put Plays: IBM, NTRS
Leaps: 4 Days And Counting
Traders Corner: The Couch Potato Portfolio – Let The Games Begin!
Traders Corner: Reversal Patterns: Bull and Bear Traps
Traders Corner: The Fed's Open Market Operations-  Daily Tides 
in the Financial Sea


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*****************
CURRENT PUT PLAYS
*****************


Company Summary:
International Business Machines uses advanced information
technology to provide customer solutions.  The company provides
value to its customers through a variety of solutions including
technologies, systems, products, services, software and
financing.  IBM's three hardware product segments are comprised
of Technology, Personal Systems and Enterprise Systems.  Other
major operations consist of a Global Services segment, a
Software segment, a Global Financing segment and an Enterprise
Investments segment.

Why We Like It:
Aggressive bears watched IBM carefully on Friday as the stock
led the broad market rally, gapping higher and then going on to
gain nearly 3.5% by the close.  Is this the stuff winning put
plays are made of?  Perhaps.  Recall the premise of our play,
which is that IBM has run much too far, too fast, on the heels
of an earnings report that just wasn't as bad as many investors
had expected.  Early last week, the stock ran smack into the $76
resistance level and after posting a lower high on Thursday
morning, it looks like the early stages of the rollover that we
want to play.  The closer IBM gets to the $76 resistance level
(without breaking through it, of course), the better the entry
point gets, as we can better manage risk with our $76 stop.  IBM
has essentially traded flat over the past week, as volume has
continued to dry up.  Daily Stochastics are starting to roll
over, and once the southbound train gets moving, IBM should take
out $70 support on its way back to filling in a few of those gaps
down below.  Strong support in the $66-67 area looks like a good
initial bearish target.  More conservative traders that want to
see evidence of the stock's weakness can wait for IBM to fall
back under its 10-dma ($71.46) and intraday support at $71 before
entering the play.

BUY PUT NOV-75*IBM-WO OI= 4411 at $3.40 SL=1.75
BUY PUT NOV-70 IBM-WN OI=16235 at $1.45 SL=0.75

Average Daily Volume = 9.92 mln


---

NTRS – Northern Trust Corp. $36.57 (-1.52 last week)

Company Summary:
Northern Trust Corporation is the holding company of The Northern
Trust Company (Bank).  The company also owns national bank
subsidiaries with offices in Arizona, California, Colorado,
Florida and Texas; a federal savings bank with offices in
Michigan, Missouri, Nevada, Ohio, Washington and Wisconsin; a
trust company in New York.  Additionally, NTRS has various other
non-bank subsidiaries, including an investment management
company, a securities brokerage firm, an international
investment consulting firm and a retirement services company.

Why We Like It:
Following the sharp selloff on Thursday afternoon, it looked
like Friday could turn into a real bearish party.  But when they
couldn't take the markets down (even with the significant buying
in the Bond market), they turned around and drove them up ahead
of the weekend.  A solid performance from the Banking index
(BKX.X) set the tone for the afternoon, as the index rebounded
from critical support near $736, ending right below the $762
resistance level.  While this solid performance was encouraging
to the bulls, our NTRS play demonstrated its relative weakness
by gaining only 1%, only reclaiming about half of Thursday's
losses.  This relative weakness likely stems from the company's
recent disappointing earnings report, largely due to a sharp
increase in allowances for loan losses.  After dipping near the
$35 support level early in the session, the stock managed to
gradually grind up the chart, topping out just below $37 before
weakening a bit in the final hour.  The afternoon rally moved the
stock that much closer to an ideal entry point, as there is
significant resistance near the $37.25 level.  This is the site
of broken support (now resistance) from recent weeks, as well as
the location of the descending trendline connecting the lower
highs beginning on October 17th.  While the combination of the
bottom of the October 15th gap and the 20-dma (currently $35.74)
provided support on Friday, when that support level gives way,
NTRS should continue down until finding solid support near
$31-32.  Traders that want to see the fledgling weakness
confirmed before playing, will want to look for a decline under
the $35 level on solid volume before entering the play.  Should
the broad market rally again on Monday, we could get an even
better aggressive entry point on a failed rally up near the $38,
but keep in mind that our stop is set at $39.  If NTRS is able
to claw through that firm resistance level, we'll definitely want
to be out of the play.

BUY PUT NOV-40 NRQ-WH OI=110 at $4.10 SL=2.50
BUY PUT NOV-35*NRQ-WG OI=646 at $1.20 SL=0.50

Average Daily Volume = 1.76 mln



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*****
LEAPS
*****

4 Days And Counting
By Mark Phillips
mphillips@OptionInvestor.com

That's right, there are only 4 more trading days in the month of
October.  So what, you might wonder, is significant about the
first of November.  Besides moving into a new month, it brings
into focus the inane prediction of Dick Hoey on CNBC a few weeks
ago. (Yes, Dick.  Some of us are watching and keeping score.)
As I reported here on the week that it happened, Mr. Hoey
predicted a new SECULAR BULL market by the first of November.
Not a little cyclical bull market, but a secular one like we
had from 1982-2000.  Here's a hint.  It ain't gonna happen, Dick.
Do you like your crow baked, or deep fried?  GRIN

Back when that ridiculous prediction came out, I fired off an
email to CNBC, challenging them to have Mr. Hoey back on after
November 1st to explain why he was wrong.  Needless to say, I'm
resending that email again on November 1st.  I wonder if anything
will come of it?  SLY GRIN

Enough of that, let's get to what is going on in these crazy
markets.  We had another volatile week, but in the end, the bulls
won with all of the major market averages posting their third
consecutive weekly gain.  Before you go getting too excited, keep
in mind that we got 5 consecutive weeks to the upside in late
July and most of August before the bottom fell out yet again.
The bulls will have something to crow about when they can push
the major averages above the August highs.  That means the S&P 500
needs to push through 965, the DOW needs to clear 9100 and the
NASDAQ-100 has the 1055 area to contend with.  While those levels
are certainly within reach for those indices, we need to ask how
much gas is left in the tank?  My method of answering that
question is to go back and look at the Bullish Percent figures,
like we've been doing these past several weeks.

Bullish Percent:

Index         July Low    October Low    Current
S&P 500       12%         19%            48% -- Bull Alert
DOW            3%          7%            53% -- Bull Confirmed
NASDAQ-100     8%         13%            55% -- Bull Alert

These bullish percent readings have come an awfully long way in
less than 3 weeks, working off the majority of the deep oversold
condition in the process.  But we really haven't changed anything
about the overall trend of the market (it's down) and the
majority of the risk is now to the downside again.  Don't get me
wrong.  This rebound has been encouraging, and I think it
actually might have another week or two left in it (maybe even a
bit more).  But I haven't seen the kind of conviction from
long-term buyers that will be necessary to extend this rally
into the end of the year.

The institutions have been notably absent from this latest rally,
with the majority of buying volume coming from short-covering and
the hedge funds.  There has been no dramatic upsurge in buying
volume to confirm momentum building to the upside.  Traders have
been buying into a string of pretty abysmal news that indicates
any economic recovery has yet to make its presence known.  But
apparently earnings have not been as bad as expected, and so we
get a relief rally.

Just to recap, we're likely going to war with Iraq by the end of
the year, there is no recovery in the IT spending environment,
Auto sales are falling, there is no recovery in the employment
picture, and if the economy IS recovering, you need a tunneling
electron microscope to see it.  And don't forget about the
looming underfunded pension problem.  Make no mistake, this is
a HUGE problem, and it is not getting anywhere near the attention
in the press that it deserves.  

Here are a couple of recent examples to put the problem in
perspective.  For fiscal year 2001, Deere & Co. (NYSE:DE) (you
know, the tractor guys), expected its pension plan to produce
gains of just over $650 million.  In reality, they posted a loss
of about $1.4 billion, for a net difference between the
expectation and the reality of more than $2 billion!  With the
broad market down again over the past 12 months, I can't imagine
the picture at DE has gotten any better.  How about mighty
General Motors?  The world's largest car maker warned earlier
this month that its 2003 earnings will be cut by $1 billion or
more due to the cost of funneling extra cash into its $67 billion
pension find, which has shrunk by 3% in just the last 9 months.
The company had assumed a growth rate of -- get this -- 10%!
Hello, McFly.  It's a bear market.  Where are you going to get
that kind of return on investment?  Earlier this month, S&P cut
GM's credit rating to a couple notches above junk, saying the
company's pension obligations may be underfunded by a whopping
$28 billion.  I wonder how many cars GM will have to sell at
0-down, 0% financing to recoup that loss?  I'm betting it is a
lot more than they are going to sell.

My point here is not to beat up on GM and DE.  It is to point
out that they are likely the tip of the iceberg, which is just
now approaching the Titanic (the stock market).  According to
CSFB, 325 of the 360 companies with defined pension funds will
have shortfalls this year.  In a sign that nothing has really
changed in financial reporting, UBS Warburg points out that 118
companies in the S&P 500 continue to report a pension surplus
on their balance sheet (which by the way can legally be used to
pad earnings results), even after they are in fact running a
deficit in the wake of the market's third consecutive year in
the red.  This problem is hazy and has not yet been brought
into focus.

But mark my words, it will become more and more important to
balance sheet analysis in the next year.  Ask yourself this
question.  If a company with free cash flow of $1 billion has
a cumulative pension fund shortfall of $5 billion, how long
will it take the company to make up that shortfall (which by
law, they must)?  If you guessed 5 years, you're on the right
track.  But that would only be accurate if you assumed ALL of
the operating cashflow would be channeled into the pension
funds.  Call me crazy, but I don't think any of the corporate
chieftains would be willing to commit professional suicide in
such an obvious manner.  The bottom line is that this is a HUGE
problem, and it isn't going to go away overnight.

Alright, coming back to the markets, there is really only one
important development in the past week that I think is meaningful
to the short-term direction of the market, and that is the VIX.
Recall that it has been finding solid support near the 39 level
for weeks now.  That came to an end on Friday, when it absolutely
collapsed, losing more than 9% to end the day at 36.27.  With the
broad markets all up on Friday, we would have expected some
downside action in the VIX, but the magnitude hints that there
was something funny (Funny, strange.  Not funny, ha ha.) going
on.  In fact, if you look at the intraday charts, you can see
that the vast majority of the decline in the VIX took place
BEFORE the market started on its strong rally in the final 2
hours of the day.



 

By the time the market took out its morning highs (and held
the breakout) around 2:20pm ET, the VIX had already fallen to
around 37, 3 full points below where it ended on Thursday.  My
read on this development is that whatever factor (or factors)
was keeping investors nervous and option writers demanding
high premiums, it changed significantly on Friday morning.
While we don't know what that change was, it will likely become
better known in the days and weeks ahead.  I'd like to spend
some more time on the topic of the VIX, continuing with the
discussion of last Wednesday, but there obviously isn't time or
space to do so here this weekend.  I'll delve into both more
analysis of what is happening with the VIX relative to the
market currently, as well as look at the indicator from more of
a historical perspective.  But that will have to wait until my
Options 101 time slot on Wednesday.  Be sure to tune in then.

And without further ado, let's take a look at our current list
of plays.


Portfolio:

LEN - Wow, that was close!  Ahead of Tuesday's earnings reports
from the likes of CTX, PHM and RYL, LEN rocketed higher on
Monday, closing at $59.90, just a dime below our stop.  Since
then, the sector has reverted into sell the news mode and LEN
fortunately bell back from that formidable resistance level.  I
still like the prospects for this play, and expect it will start
to perform in the weeks ahead.  Additional failed rallies near
the $59-60 area still look good for initiating new positions.

JNJ - There was lots of news in the market this week pertaining
to JNJ, from FDA approval for their new drug-coated stent, along
with the resultant analyst downgrade, claiming that the financial
impact of the new stent was already factored into the stock
price.  No matter, JNJ technically is still looking strong, with
another bounce right at the 200-dma.  Traders still looking to
enter the play can use a rebound from the $56-57 area to enter
the play.  Note that the bullish price target is up at $74, so
the stock has plenty of room to run.  Be patient and give this
slow mover time to perform.

Watch List:

MO - It appears that the first leg of the rebound off the lows
near $35 has just about run its course.  On this pullback, we'll
get to see just how strong or weak shares of MO are.  The $42-43
level had been major support, and now it will likely be
significant resistance.  Any significant selling should send the
stock down near the $38 level and that should provide an
attractive opportunity to initiate the play.  Once filled, we can
manage the play with a stop at $35, which is the site of major
support going back to 1998-1999.

MSFT - This is simple.  We are currently experiencing a bear
market rally, and MSFT has been pinned under the $53 resistance
level since the middle of July.  There is no way I'm crazy enough
to chase the stock higher until the stock (and the rest of the
market) can provide some proof that it is serious about charging
higher.  Until I see a close over the 200-dma (currently just
below $54), we're going to leave our entry target down in the
$48-49 area.  If we get a dip into that area, the rebound could
very likely be the one that gives us a solid breakout.  But it
is too difficult to control risk without getting that pullback
first.

NEM - And the range continues to build.  After almost tripping
us into the play the prior week on the low side, NEM rallied
right to $25 on Tuesday.  Not enough to get us into the play,
and it looks like the next downward leg is underway.  I still
favor entries down at the $22.50 level (the site of the gradually
ascending trendline), but will accept a breakout over $25 as
well.

QQQ - The QQQ is similar to MSFT.  While we have had a nice
rally off the lows, I'm not convinced of its intentions of
heading significantly higher without a decent pullback.  I'm just
not willing to chase the NASDAQ higher, especially when a large
part of the rally has come from the Chip stocks amidst a
continuous stream of abysmal news.  Keep the entry target in
place and wait for a pullback to allow us in.  If we don't get
what we're asking for, then we'll just let it go.  That is far
preferable to chasing an entry, catching it and then wishing we
hadn't.

DJX - I know it may sound like a broken record, but our DJX play
is stubbornly refusing to come back to our desired entry target.
Could the DJX break out and just plow higher for 600-800 points
from here?  Sure, but I think the odds of that happening are
pretty slim.  While the developments on the VIX front on Friday
are definitely encouraging, I'm not interested in chasing the
DOW higher any more than I am interested in chasing the NASDAQ
higher.  I'm content to wait for the fat pitch, knowing that if
I miss this one, another one will be along shortly.

While I like the fact that the markets are holding onto the
lion's share of their recent gains, I am concerned by the lack
of profit taking and the fact that the internals really haven't
shown much strength.  New highs are still running well below new
lows on a daily basis.  Volume is not showing me any conviction,
yet the Bullish Percent figures are already almost back to where
they were when the August rally ran out of steam.  All these
things are classic signs of a bear market short-covering rally.
The lone factor that looks bullish to me right now is the action
of the VIX on Friday, but I certainly wouldn't enter trades right
here just on the basis of the VIX.

My advice is to have your action plan in place and stick to it.
If you get the entry setup you want, then take it.  Otherwise let
it go and wait for the next one.  There are new opportunities
every week, and our primary job is to make sure that we (and our
accounts) are around to take advantage of them.

One final note:  Last week I teased you with the question of
where the saying "Close, but no cigar" comes from.  I had lots
of interesting suggestions, but I have to say that nobody got it
right.  So until I get the right answer, I'm going to keep you
all in suspense.  Just kidding!!  Remember the 'good old' days,
when the extent of a man's involvement in childbirth was
providing the initial genetic material, and then waiting in the
waiting room for the announcement of whether the new bundle of
joy had arrived?  Do you remember the ritual that would commence
after the glorious event?  The proud father would pass out cigars
to all of his friends and family.  So when anyone would ask if
the baby had arrived, the expectant father would respond with
"close, but no cigar".  At least that's the way I heard it from
dear old dad.

Have a great week!

Mark


LEAPS Portfolio

Current Open Plays

SYMBOL OPENED     LEAPS    SYMBOL  ENTRY   CURRENT  CHANGE  STOP

Calls:
None
JNJ    10/10/02  '04 $ 60  LJN-AL  $ 6.50  $ 7.00  + 7.69%  $54
                 '05 $ 60  ZJN-AL  $ 9.10  $10.10  +10.99%  $54


Puts:
LEN    10/02/02  '04 $ 50  KJM-MJ  $ 8.60  $ 9.20  + 6.97%  $60
                 '05 $ 50  XFF-MJ  $11.20  $12.30  + 9.82%  $60



LEAPS Watchlist

Current Possibles

SYMBOL  SINCE    TARGET PRICE  TARGETED LEAP  SYMBOL

CALLS:
MO     08/25/02  $38           JAN-2004 $ 40  LMO-AH
                            CC JAN-2004 $ 35  LMO-AG
                               JAN-2005 $ 50  ZMO-AJ
                            CC JAN-2005 $ 40  ZMO-AH
MSFT   09/29/02  $48-49        JAN-2004 $ 50  LMF-AJ
                            CC JAN-2004 $ 45  LMF-AI
                               JAN-2005 $ 50  ZMF-AJ
                            CC JAN-2005 $ 40  ZMF-AH
NEM    09/29/02  $22.50, 25    JAN-2004 $ 30  LIE-AF
                            CC JAN-2004 $ 25  LIE-AE
                               JAN-2005 $ 30  ZIE-AF
                            CC JAN-2005 $ 25  ZIE-AE
QQQ    10/13/02  $22-22.50     JAN-2004 $ 24  KLF-AX
                            CC JAN-2004 $ 21  KLF-AT
                               JAN-2005 $ 24  ZWQ-AX
                            CC JAN-2005 $ 21  ZWQ-AT
DJX    10/20/02  $79-80        DEC-2003 $ 84  ZDJ-LF
                            CC DEC-2003 $ 80  ZDJ-LB
                               DEC-2004 $ 84  YDJ-LF
                            CC DEC-2004 $ 80  YDJ-LB



PUTS:
GM     10/27/02  $40-41        JAN-2004 $ 35  LGM-MG
                 $37-38        JAN-2005 $ 30  ZGM-MF



New Portfolio Plays

None


New Watchlist Plays

GM - General Motors $35.54  **Put Play**

Isn't it interesting how the stocks of the major auto
manufacturers have really failed to participate in the most
recent rebound in the broad markets?  Could it be that the
investing public is finally coming to terms with the dismal
outlook for this group for the next couple years?  Following
the terrorist attacks of last September, free financing was
taken to a new level, and while touted as a temporary incentive,
it has really taken on an air of permanency.  The bottom line
is that the cheap financing has stolen buyers from the future
to keep sales numbers high.  But anecdotal evidences is pointing
to the likelihood that the October sales numbers are going to be
dismal, and there is little else GM can do to boost sales, other
than give the cars away for free.  Add in the debt recent debt
downgrade from S&P as well as the HUGE and growing pension
funding issues that are referenced in my commentary tonight, and
you can see why the stock remains near its multi-year lows.
Look for any near-term market strength to give GM a bit of a
lift, with first resistance coming into play in the $37-38 area,
and then really stiff resistance at $40-41.  With weekly
Stochastics just emerging from oversold territory, we don't need
to be in a hurry to enter the play.  Let the oversold rebound
continue, and look to enter on a rollover up near the $40 level.
Then use a stop at $42, to protect against the unexpected.
Aggressive traders that are concerned about missing out on the
play, can consider initiating half positions on a rollover near
the $37-38 area and then add to those positions on a drop back
under $34.

BUY LEAP JAN-2004 $35 LGM-MG
BUY LEAP JAN-2005 $30 ZGM-MF


Drops

None


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

The Couch Potato Portfolio – Let The Games Begin!
By Mike Parnos, Investing With Attitude

Last week I had a long talk with the dean of the Couch Potato 
Trading Institute. It wasn’t a pretty sight. Soda cans were 
crushed, Pringles were broken, and my Taco Bell mouse pad was 
nearly destroyed. Fortunately, I’m insured.

I maintained that the CPTI student body was ready for action.  He 
was more concerned about the student “head.”  They have, as a 
whole (both head and body), performed admirably on the Option IQ 
Quiz.  Plus, the email questions have become increasingly astute.  
With apologies to Rex Harrison, “By George, I think they’re 
getting it!!”

Due to the popularity of the QQQ Strangle and the BBH Iron Condor 
trades we tracked over the past several weeks, we decided that 
it’s time to start a “CPTI Portfolio.”  We’ll use some of the 
strategies discussed in previous columns -- updating progress on 
Thursdays and Sundays and noting any necessary adjustments.

If you adhere to the Warren Buffet school of thought, the 
portfolio should be full of stocks you understand.  If that were 
the case, I’d be investing in TV makers, cable operators, pizza 
chains and phone companion companies.  We should probably broaden 
our horizons a bit.  Sorry Warren, nothing personal.

We’ll use a hypothetical trading account valued at $50,000.  If 
it sounds like small potatoes, it’s because it is.  Remember, 
option trading should be done with risk capital.  Don’t put your 
ass on the line unless you have a spare cheek in the bedroom 
closet.

Folks out there with deeper pockets can adjust their hypothetical 
portfolios accordingly.  

There are three weeks left until November expiration.  Let’s see 
how much pizza money we can generate before Thanksgiving.  I’ve 
even included a few equities for our “stock” (as opposed to 
“index”) traders out there.
_____________________________________________________________

Position #1: Iron Condor – Back By Popular Demand!
An Iron Condor is a credit position consisting of both a bull put 
spread and a bear call spread.  The objective is that the 
underlying, at expiration, finish anywhere within the spread.

Since it worked reasonably well last time around, let’s use BBH 
(Biotech Index) again.  It’s currently trading at $87.35.  
Looking at the chart, the range is still intact, but we’re going 
to narrow it slightly.  The support at $80 once again seems 
strong enough and resistance at $95 should give BBH enough room 
(15 points) to bounce around for three weeks.  So we will:

Sell 10 contracts of the BBH Nov. $80 puts @ $1.35
Buy 10 contracts of the BBH Nov. $75 puts @ $ .75

Sell 10 contracts of the BBH Nov. $95 calls @ $ 1.00
Buy 10 contracts of the BBH Nov. $100 calls @ $.35

The credit for our bull put spread is $.65 and for the bear call 
spread is $.60.  Total credit (and potential profit) for the 
position is $1.25.  Risk is $3.75 ($5.00 - $1.25). Total margin 
requirement is $10,000 ($5,000 for each credit spread).  The 
return on risk is 33.3%.  Pretty damn good for three weeks.

The Iron Condor strategy was originally discussed at the 
following link, in the second part of the column: 
http://www.OptionInvestor.com/traderscorner/070702_1.asp
_________________________________________________________________

Position #2:  Short Strangle – Taking A Chance
A Short Strangle is an unhedged position consisting of a short 
put and a short call with the same expiration month at different 
strike prices.

TTWO is trading at $26.76 and has been in a trading range between 
about $22.50 and $30.  We’re going to see if it will stay in that 
range for the next three weeks.  It has 7½ points to bounce 
around in for us to make maximum profits.  So we will:

Sell 10 contracts of the TTWO Nov. $30 calls @ $ .80
Sell 10 contracts of the TTWO Nov. $22.50 puts @  $.70

The credit for our short strangle is a total of $1.50.  The $1.50 
will be in our account on Monday and is the maximum amount of 
profit we can make.  The risk is (are you ready?) unlimited.  
We’re going to keep a close eye on the position and will be 
prepared adjust in case of any dramatic movement in either 
direction.  Our profit range is from $21.00 to $31.50.  The 
margin requirement will be about $4,000.  If you read Thursdays 
discussion on margin calculation, you remember that most broker’s 
software will recognize short strangle (and straddle) positions 
and normally only require maintenance on one side of the 
position.  The return on risk is $37.5%.
_________________________________________________________________

Position #3:  Iron Condor – Comfortable Risk Reward
Once again, an Iron Condor is a credit position consisting of 
both a bull put spread and a bear call spread.  The objective is 
that the underlying, at expiration, finish anywhere within the 
spread.

MMM (3M), trading at $127.73, seems nice and comfortable trading 
in the $120 to $130 range.  It recently came out with earnings, 
but still couldn’t penetrate the resistance at $130.  Although it 
traded down below $120 when the marked tanked in July and 
September, it has since recovered and returned to the range.

Sell 10 contracts of the MMM Nov. $120 puts @ $1.35
Buy 10 contracts of the MMM Nov. $115 puts @ $ .75

Sell 10 contracts of the MMM Nov. $130 calls @ $2.35
Buy 10 contracts of the MMM Nov. $135 calls @ $ .75

The credit for our bull put spread is $.60 and for the bear call 
spread is $1.60.  Total credit (and potential profit) for the 
position is $2.20.  Risk is $2.80 ($5.00 - $2.20).  Our profit 
range is from $117.80 to $132.20. Total margin requirement is 
$10,000 ($5,000 for each $5 credit spread).  The return on risk 
is 78.6%.  Wow!
_________________________________________________________________

Position #4:  In-The-Money Strangle – The QQQs – One More Time!
The QQQ In-The-Money (ITM) Strangle we used so successfully a few 
months ago seems ripe for a return engagement.  The ITM Strangle 
we used consists of buying a put and a call about two months out, 
each about $1 in the money.  We have three weeks left until 
November expiration and December is a five-week expiration 
months.  That gives us a full eight weeks for the QQQs to work 
their magic.

Our objective is to anticipate the somewhat predictable $3 moves 
in the QQQs.  Once the stock moves sufficiently in one direction, 
its value should come close to paying for the entire trade.  That 
leaves a long position that is essentially free in anticipation 
of a reversal and a substantial (hopefully at least $3) move.

The QQQs finished Friday at $24.62.  Since $24.62 is not near a 
round number ($24 or $25), we have to make a major decision.  Do 
we have a bullish or bearish bias?  If we’re bullish, we buy the 
$23 call and buy the $25 put.  If we’re bearish, we buy the $24 
call and the $26 put.  What’s the difference?  In a bearish 
position, the $26 is preferable because it is an additional $1 in 
the money.  Thus, the delta is slightly higher.  As the QQQs go 
down, the $26 put would appreciate in value faster than the $25.  
Since I am still slightly bearish, that will be my choice.  So we 
will:

Buy 10 contracts of the QQQ Dec. 26 puts @ $2.40
Buy 10 contracts of the QQQ Dec. 24 calls @ $2.05

Our out-of-pocket cost is $4.45.  However, there is $2 of 
intrinsic value that will always be there, so our risk is only 
$2.45.  There is no margin requirement on this trade because we 
are long both options.

For your review, the QQQ ITM Strangle strategy was initially 
discussed at: 
http://members.OptionInvestor.com/options101/082502_1.asp.  There 
were at least two follow-up columns that addressed specific 
questions on this strategy (August 22 & 29 in Traders Corner).
_________________________________________________________________

Out of our initial $50,000 account we’ve used:
BBH Position:	$10,000 maint. - $1,250 credit = $8,750.
TTWO Position:	$4,000 maint. =			   $4,000.	
MMM Position:	$10,000 maint. - $2,200 credit = $7,800.
QQQ ITM Strangle:	$4,450 cost =			   $4,450.
Total:							  $25,000.
We’ll keep some of our powder dry for adjustments, emergency 
meals and extra batteries.

I realize there will be a lot of questions.  No problem.  Send 
them along.  Hopefully, we’ll all learn as we track these four 
trades.  If you are a more conservative trader, you can move 
another strike price out of the money in Positions 1-3.  The 
return will be less, but the sleep will be more.

We’re going to keep a close watch as we track these positions.  
As Mark Twain said, “If you place all your eggs into one basket, 
WATCH THAT BASKET!!”

And so we shall – during the commercials, of course.
____________________________________________________________

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: Bull & Bear traps 
By Leigh Stevens
lstevens@OptionInvestor.com

I’ve noticed that there is a lot of bearish “sentiment” on this 
recent rebound in the market and doubt relating to the staying 
power of a rally.  If we are at the end of the bear market, this 
would be a typical or an expected point of view. A major bear 
market would not typically end until or only after there is LOT 
of bearish conviction.  Certainly, there is reason to anticipate 
possible further economic troubles ahead and to question whether 
some of the recent earning’s reports that were better than 
expected were the start of a turnaround - or, just a temporary 
respite. The play of market “sentiment” and strong and widespread 
conviction on the future price trend and direction of the market 
is one of things that “sets up” or precedes trend reversals.    

I may have heard the term elsewhere, but technical analyst Jack 
Schwager, during the time that we worked together at PaineWebber 
especially, drummed into me the terms bull and bear traps – 
describing, in the case of a bull trap, a rally that goes to a 
new high after which the advance then collapses.  A bear trap is 
the reverse situation where a decline exceeds or takes out a 
prior low and then is followed by a strong rebound in prices. 

While it was not a dramatic new low, the recent upside reversal 
in the indices has the flavor and look of a bear trap reversal 
pattern.  The bears are “trapped” so to speak as they just don’t 
believe that any substantial and sustained rally will develop.  

In bull trap reversals, as in 2000, many stocks went to new highs 
and then started to fall or the bull market basically started 
collapsing – it seemed that the bull “trap” developed after the 
“last” bullish investors were lured into the market. There was 
this friend I remember who had only ever invested in Real Estate 
who finally bought some stocks only to see them go down for the 
next year – this was an example of how even unlikely investors 
are eventually caught up in bull fever.

Recent price action in the S&P 100 (OEX) Index is an example of a 
bear trap reversal as outlined in the chart below – 



 

The move to a new low followed by a close ABOVE the prior day’s 
HIGH also could be described as a “key” reversal – a key upside 
reversal. However, here I am describing a chart pattern (also) 
“classified” as a bear trap reversal.  

Prices would not have to rebound to above the prior bar’s high to 
classify it as a bear trap, just that there is a fairly immediate 
rebound after a new low and that the rally keeps going. After a 
time, “confirmation” of a trend reversal is provided by other 
technical factors like a breakout above/below a significant 
trendline or channel or an upside or downside chart “gap” – both 
are seen after the Bear Trap example in the chart above; i.e., 
there is both an upside chart gap and a breakout above the daily 
chart downtrend channel. 

For more on chart GAPS, see –
http://www.OptionInvestor.com/traderscorner/092602_2.asp

And, for more on price CHANNELS you can go to –
http://www.OptionInvestor.com/traderscorner/092202_2.asp

I would emphasize that it’s best to think of a bear or bull trap 
as applying to any time frame; e.g., on an hourly, daily, or 
weekly chart basis.            

In a bull trap, the rally that takes out a prior high tends to 
bring in new buying because this so often signals a new up “leg” 
– another wave or price movement of intermediate proportions.  
Otherwise, the new high serves to convince those long a stock or 
other security that they are on the right side of the market.  If 
this rally then “fails”, by reversing to the downside, it has the 
effect of “trapping” the bulls or those with the conviction that 
prices will keep rising – hence the term, bull trap or bull trap 
reversal.  An example is shown in the McDonald’s Corp. (MCD) 
chart below – 



   


Another example is provided below of the hourly chart below of 
the Nasdaq Composite (COMPX) this past August (2002). The 
collapse in the COMPX started in the next trading session, which 
was the next day.  However, as the reversal occurred on the next 
bar, the downside reversal is also of the bull trap variety as 
the next bar is within an “immediate” time frame – immediate here 
refers to what happens in the next bar or bars.   



  

You can find other examples in the same chart above of a move to 
new high followed by a pullback – so, how do you tell if a 
correction is temporary or a reversal of the trend?  Often, the 
tip off is a related technical event like the break of a 
trendline or the downside chart gap also seen in the COMPX hourly 
chart above. 

You can find many examples of bull and bear traps in stocks and 
indices, often on the same chart.  Examples of both Bear and Bull 
Trap reversals are seen in the chart below, which is also a 
weekly chart example – 



 


In the case of the bear trap above: after a sideways to lower 
trend has been underway for some time, there is a sharp fall 
which exceeds the prior weeks’ lows by a comfortable margin – 
however this time the lower low was followed by a rapid and good-
sized advance.  Renewed selling had no doubt come in as there was 
a move well below the prior (trading) range. Sellers, or buyers 
who had finally liquidated their positions, would have had 
expectations of another downswing or another down “leg”. 

In the example above with the IP chart, many of the bears and 
short sellers are trapped by the rapid upside move. Of course, 
they are only “trapped” as long as they don’t cover short or put 
positions - but there is often a considerable period of disbelief 
that a trend reversal is actually occurring.  To confirm a trend 
reversal, the index or stock has to exceed its prior swing high 
or low and prices may have to travel some distance before this 
occurs. 

Of course in the chart above, IP did manage to apparently break 
out of its trading range and the stock looked like it was going 
to perhaps see another up leg – NOT! Instead the apparent 
“breakout” move to a new high was followed by a lengthily decline 
after the Bull Trap reversal. 

The lesson provided in the concept of bull and bear traps is that 
it pays to be leery of situations when prices correct sharply (go 
the other way) after a series of higher highs or lower lows. 

There are implications of the trend reversals, of the type 
described here as bull and bear traps, that go beyond the 
significance of affirming that market trends can reverse 
suddenly, even after exceeding prior lows and highs.  

Very often, such trend failures and reversals after a lengthy 
trend, offer excellent opportunities to take a position in the 
direction of a new trend, as there is a good chance for a good-
sized move. Price moves reach a point of exhaustion, where the 
forces driving prices in the direction of the trend “exhaust” 
themselves. 

After almost everyone who is a potential buyer, or potential 
seller as the case may be, has bought or sold, there are few 
traders or investors not already with a position (already 
committed) that can keep the trend going.  In a downtrend, when 
there are few or no sellers left, only a modest amount of buying 
can drive prices back up sharply. When there are few or no buyers 
left, just a modest amount of selling can drive prices sharply 
lower.  This is what is meant in the saying that “bull markets 
die of their own weight” – a market that has few left to buy 
stocks can fall simply due to the removal of new buying.     

As seen in the examples provided and you can find more, these 
price swing “failures” have a record of offering some major 
profit opportunities.  If you are long puts for example, after a 
possible bear trap (upside) reversal and you don’t want to 
reverse positions and buy calls, you can at least exit at a point 
that protects some or most of your profit. 

Moreover, I take this and every opportunity to caution against 
the intent or a “intent” to exit versus actually having a index 
or stock price “trigger” that you will definitely use to take 
action; e.g., after an apparent bear trap (where you hold puts), 
a following move that goes above the prior hourly or weekly rally 
high. In other words have a specific plan – not that you are 
going to “watch” the market and make up your mind at some point. 

After you get “habituated” to a trend and there is some 
unexpected strong reversal, the effect can be like a deer caught 
in the headlights -- paralysis – I’ve been in that position 
enough times to know.  Don’t get caught up in a point of view so 
much as observing what the technical action of the market is 
telling you. 


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

The Fed's Open Market Operations-  Daily Tides in the Financial Sea
By Jonathan Levinson
 
From the New York Fed's website:

"Seeing the Federal Reserve Bank of New York, visitors' first 
impressions are of the building's formidable architecture. Stored 
inside the vaults of this imposing structure is hundreds of 
billions of dollars of gold and securities. But what is most 
significant about the Bank is its broad policy responsibilities 
and the effects of its operations on the nation's economy."

It would be more accurate to say "on the world's economy," as the 
Fed is arguably the single most influential presence in the 
financial world.  There is a debate as to who owns and controls 
the Fed, whether it is the US Congress or the world's largest 
banks.  For traders, particularly small or non-institutional 
traders such as ourselves, it's an irrelevant issue, as the Fed 
acts as a primary force in the financial markets.  The Federal 
Reserve's primary role for us small traders is as the controller 
of liquidity in financial markets across most timeframes.  Prior 
to Chairman Greenspan's tenure, the Fed's focus was domestic 
monetary conditions, but it has since become a commonplace that 
the Federal Reserve concerns itself with global financial 
liquidity and stability, acting in all markets just as the US 
asserts its will in the world political arena.

In order to understand the importance of the Fed, one must 
consider the impact of liquidity on financial markets.   My 
favorite analogy is of the markets as a liquidity meter- they 
rise or fall depending on the availability or scarcity of money.  
The Fed seeks to achieve financial stability by controlling the 
availability of money in different markets.  Like sailor holding 
a course by making continuous corrections at the helm, the Fed is 
continuously using subtle and not-so-subtle mechanisms to manage 
liquidity as it sees fit.  We have all seen the short-term impact 
of interest rate hikes and cuts, which I would characterize as an 
example of not-so-subtle liquidity management.  By raising rates, 
the Fed increases the cost of money to banks, thus restricting 
liquidity and, theoretically, deflating financial markets.  More 
subtle, however, is its ongoing Open Market Operations (OMO), 
which are done on a daily basis.  During the past months, I have 
been following the Fed's OMOs, and have found this to be an 
indispensable tool in predicting short term market bias.  The 
Fed's Open Market Operations will be the focus of this 
discussion.
 
Before looking under the hood of the Fed's OMO procedures, an 
example from our favorite book, Reminiscences of a Stock Operator 
by the legendary Jesse Livermore, published under the pen name 
Edwin Lefèvre in 1923.  Livermore tells the story of the crash of 
October 1907 during which lenders had run out of cash.
 
Reports from the money crowd early indicated that borrowers would 
have to pay whatever the lenders saw fit to ask.  There wouldn't 
be enough to go around.  That day the money crowd was much larger 
than usual.   When delivery time came that afternoon there must 
have been a hundred brokers around the Money Post, each hoping to 
borrow the money that his firm urgently needed.  Without money 
they must sell what stocks they were carrying on margin - sell at 
any price they could get in a market where buyers were as scarce 
as money - and just then there was not a dollar in sight.
 
Livermore was, of course, short the entire market.
 
The president of the Stock Exchange, Mr. R. H. Thomas, so I heard 
later in the day, knowing that every house in the Street was 
headed for disaster, went out in search of succor. He called on 
James Stillman, president of the National City Bank, the richest 
bank in the United States. Its boast was that it never loaned 
money at a higher rate than 6 per cent. Stillman heard what the 
president of the New York Stock Exchange had to say. Then he 
said, "Mr. Thomas, we'll have to go and see Mr. Morgan about 
this."

The two men, hoping to stave off the most disastrous panic in our 
financial history, went together to the office of J. P. Morgan & 
Co. and saw Mr. Morgan. Mr. Thomas laid the case before him. The 
moment he got through speaking Mr. Morgan said, "Go back to the 
Exchange and tell them that there will be money forthem."

"Where?"
 
"At the banks!"
 
So strong was the faith of all men in Mr. Morgan in those 
critical times that Thomas didn't wait for further details but 
rushed back to the floor of the Exchange to announce the reprieve 
to his death-sentenced fellow members. Then, before half past two 
in the afternoon, J. P. Morgan sent John T. Atterbury, of Van 
Emburgh & Atterbury, who was known to have close relations with 
J. P. Morgan & Co., into the money crowd. My friend said that the 
old broker walked quickly to the Money Post. He raised his hand 
like an exhorter at a revival meeting. The crowd, that at first 
had been calmed down somewhat by President Thomas' announcement, 
was beginning to fear that the relief plans had miscarried and 
the worst was still to come. But when they looked at Mr. 
Atterbury's face and saw him raise his hand they promptly 
petrified themselves.  In the dead silence that followed, Mr. 
Atterbury said, "I am authorized to lend ten million dollars. 
Take it easy !  There will be enough for everybody!" Then he 
began. Instead of giving to each borrower the name of the lender 
he simply jotted down the name of the borrower and the amount of 
the loan and told the borrower, "You will be told where your 
money is." He meant the name of the bank from which the borrower 
would get the money later.  I heard a day or two later that Mr. 
Morgan simply sent word to the frightened bankers of New York 
that they must provide the money the Stock Exchange needed.

"But we haven't got any. We're loaned up to the hilt," the banks 
protested.

"You've got your reserves," snapped J. P.

 "But we're already below the legal limit," they howled.

"Use them! That's what reserves are for!" And the banks obeyed 
and invaded the reserves to the extent of about twenty million 
dollars. It saved the stock market. The bank panic didn't come 
until the following week. He was a man, J. P. Morgan was. They 
don't come much bigger.
 
Livermore's story is one, which we've seen repeated several times 
this year, except that the entire has become automated through 
the Federal Reserve System.  Sometimes these operations rescue 
the market, but they are now used as more subtle preemptive 
measures as well.  

Back to the Fed's Open Market Operations.

The staff of the New York Fed's Trading Desk continuously 
monitors global financial conditions and the state of banking 
reserves each day.   After extensive deliberation beginning early 
each morning and a conference call with all of the regional feds, 
it determines whether or not it will add to, drain from, or leave 
unchanged the level of banking reserves.  This is carried out on 
a daily basis.  A plan of action is established for the day, and 
the Fed executes it by moving huge amounts of money through its 
network of 22 primary dealers, which are banks and securities 
brokerages that deal in US government securities.  To give you an 
idea of the money flows being executed, these 22 dealers averaged 
$375B per day in trading volume of US government securities in 
March, 2002, according to the New York Fed website.

The most frequent transactions are called "repurchase agreements" 
or repos (RP) for short, which are described as short term 
transactions whereby the Fed purchases securities from the 
dealers, who agree to repurchase them from the Fed by a specified 
date at the specified price.  When the repos mature, the added 
reserves are automatically drained.  The Fed pays for the 
securities and takes delivery thereof simultaneously.  When they 
mature, often the next day as we've seen in the Market Monitor 
(known as "overnight repos"), the securities are returned and the 
funds reimbursed by the dealers to the Fed.

The reverse of a repo is called a matched sale-purchase 
transactions (MSP's), whereby securities are sold to the dealers 
for cash, and then repurchased from the dealers upon maturity.  

Both Repos (RP's) and matched sale-purchase transactions (MSP's) 
are temporary open market operations.  Sometimes the Fed will 
sell securities to or purchase securities from the dealers 
outright, which affects the dealers' reserves on a permanent 
basis.

If you're all still awake, or haven't yet dashed off to apply for 
jobs with the Fed, here's the kicker.  The effect of these OMO's 
on the 22 dealers' reserves has a direct influence on the level 
of liquidity in the markets, just as we saw in Livermore's 1907 
example.  When the dealers have excess reserves, they are free to 
play with those funds until such time as the funds must be 
returned.  This liquidity finds its way into the markets, 
purchasing securities.  On days when reserves are drained, the 
liquidity finds its way out of the market.  During the past 
months, there has been a tendency to see market strength on days 
when large repos of 5-10B have been announced.  When these repos 
expire, if they are not replaced with new repos, we often see 
market weakness.  This year, because we are in the grip of a bear 
market, the tendency has been to see repos.  I have only seen one 
instance of an MSP this year, although I've only been following 
the Fed for the past few months.

The trouble for traders is in knowing which markets will be 
affected by each Open Market Operation, and within each market, 
which securities. Repo money can go into equities or fixed income 
securities, currencies, or whatever else the dealers wish on that 
day.   I have read arguments to the effect that companies such as 
MSFT are prime targets for Fed money because they are listed on 
multiple indices, and so buying or selling in MSFT gives the 
Fed's dealers the greatest bang for their buck.  Remember that 
the Fed's goal is to encourage the stability of financial 
markets.  When these markets are in jeopardy, smart traders watch 
for the Fed's morning announcement and consider which markets 
need it most.  When the SPX broke 775 this month, an overnight 
repo of $4.5B was announced, which is at the upper end of 
modestly sized for repos this year, and equities bounced off 
their lows, which then triggered a selloff in the extremely toppy 
bond market, more money flowed into equities, and the rest we 
know well.  During the summer, I watched large orders that would 
show up like a battalion at critical support levels on QQQ – 
30,000 to 50,000 share bids that would line up 5 deep all at 
once, and the subsequent matches would protect the support level 
that had been in jeopardy.  So what?  We'd also see more such 
bids that would line up just below key resistance levels after an 
extended runup and the orders would power the index above them.  
I'd always thought that the goal of traders seeking a profit is 
to buy low and sell high, though perhaps buying high to sell a 
little higher works as well.  In any event, none of us would 
think of using our own money to put on bullish positions just 
below key resistance levels after significant runups.  This is 
the action of participants manipulating the markets using OPM 
(other people's money) in the interest of protecting those 
markets from what are deemed to be critical breakdowns.
 
Tracking the Fed's Open Market Operations gives the trader a 
window on how much money will be available to the markets that 
day relative to past days.  Experience will permit you to assess 
the impact of different sums-  is a $1B drain substantial?  Might 
the markets tank or just drift?  Generally, all that one can know 
is how the Fed's daily activity will bias the markets, and so it 
is far from a magic indicator.  Many traders I know and respect 
will not put on bearish positions on a day in which the Fed has 
announced a repo for more than a few billion dollars.  Follow us 
in the Market Monitor each day and start to get a feel for the 
impact of the Fed's Open Market Operations.  Like most other 
indicators, it will eventually help to fill in your overall 
market picture in its own particular way.
 
I have been posting the Fed's daily Open Market Operations in the 
Market Monitor and will continue to do so.  To follow along 
yourself, bookmark the following link:
 
http://app.ny.frb.org/dmm/mkt.cfm


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The Option Investor Newsletter                   Sunday 10-27-2002
Sunday                                                      5 of 5


In Section Five:

Covered Calls: Trading Basics: Understanding Human Nature In The 
Market
Naked Puts: Options 101: Limiting Risk With Trading Stops
Spreads/Straddles/Combos: Market Bulls Firmly In Control!

Updated In The Site Tonight:
Market Watch
Market Posture


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Trading Basics: Understanding Human Nature In The Market
By Mark Wnetrzak

Anyone who has invested money in the stock market knows that a
person's judgment can be affected by emotions.

Unfortunately, human nature is just one of the many obstacles that
traders must overcome before they can be successful in the market.
Each and every position has the potential to be affected by some
emotion and the influence of these feelings is the biggest single
factor one must understand if he expects to profit on a consistent
basis.

It is common knowledge that psychological biases often interfere
with the decision-making process, however investors who understand
these biases can prevent them from influencing their own choices,
and they can profit from the biases in others.  One approach that
seeks to benefit from misjudgments by the investing public is the
"contrarian" method; going against mainstream opinion and opposing
the crowd mentality.  A popular expert frequently associated with
this unique approach is David Dreman, author of "The New Contrarian
Investment Strategy."  In his book, Mr. Dreman suggests that many
of the psychological biases occur because of way humans are taught
to process information in their daily lives.  Apparently, we focus
heavily on mental short-cuts and intuitive reactions and when these
methods are applied to the stock market, the results are less than
stellar.  Some of the examples he offers include: basing investing
decisions on information that is insufficient and drawn from an
unrepresentative sample, misreading probabilities and putting too
much emphasis on recent or emotional events, ignoring the outcomes
of prior situations that are similar (hindsight blindness), and
avoiding the proper assessment of past errors, which prevents the
investor from learning from his mistakes.  Mr. Dreman also points
out that institutional investors and brokerage research analysts
are particularly prone to "running with the crowd" and this type of
confirmation and agreement simply contributes to the herd mentality.

Not surprisingly, market overreactions tend to occur when many of
these factors are combined and some experts would say the recent
recovery rally is a good example of this effect.  The latest data
from the Investors Intelligence Advisors' Sentiment Survey reflects
a pronounced reversal from the recent bearish outlook.  Last week,
before the October rally began, the number of market bulls dropped
to an eight-year low at only 28.4%, versus 43.2% market bears.  In
the last few days the bulls have decisively overwhelmed the bears,
putting the new ratio at 38.9% bullish, compared to 35.6% bearish.
In addition, over 80% of the market's technicians, strategists and
economists are now identifying October 2002 as the "turning point"
for the three-year decline in U.S. stocks.  Steven Hochberg, chief
market analyst at Elliott Wave International and a student of the
contrarian approach, says the bull-bear debate reveals a lot about
investor psychology.  Rather than side with the popular majority,
he suggests that those who defy conventional thinking, especially
in light of the recent rally, will eventually benefit from eroding
value of stocks.  Indeed, a large number of contrarian analysts
believe the current "irrational" optimism is a sign of impending
market meltdown.  As well, many economists agree with that view
based on the opinion that the recent share-price activity does not
accurately represent the true value of equities.

Those who promote the Efficient Market Hypothesis believe that at
any given time, stock prices fully and completely reflect all the
information available to the market's participants.  However, the
amount of information available to the retail trader is incredibly
vast and when all of this data is reviewed and evaluated, the most
important decision remains: Will you simply join the masses or be
an independent investor -- one who utilizes proven indicators, both
technical and fundamental, rather than the opinion of the majority,
to determine what stocks to buy and sell.

Trade Wisely!


SUMMARY OF PREVIOUS CANDIDATES
*****

The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of actual traders, due to the variety of ways
in which each play can be opened, closed and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The play commentary (when provided) is simply a service to help
new traders understand when positions might be opened and closed.
In most cases, actions taken based on the commentary would be far
too late to be effective, thus it is not intended as a substitute
for personal trade management nor does it replace your duty to
diligently monitor and manage the positions in your portfolio.

Note:  Margin not used in calculations.

Stock  Price  Last   Call  Strike Price   Gain   Potential
Symbol Picked Price  Month Sold   Picked  /Loss  Mon. Yield

WWCA    2.71   2.94   NOV   2.50  0.50  *$  0.29   9.5%
PCS     2.82   3.49   NOV   2.50  0.50  *$  0.18   8.4%
SNDK   14.30  20.77   NOV  12.50  2.75  *$  0.95   7.1%
VOXX    7.40   8.43   NOV   7.50  0.45  *$  0.55   6.9%
VSAT    8.47   8.69   NOV   7.50  1.40  *$  0.43   6.6%
BCGI   10.30  12.49   NOV  10.00  1.10  *$  0.80   6.3%
TMCS   18.14  23.40   NOV  17.50  1.80  *$  1.16   6.2%
MACR    9.15   9.70   NOV   7.50  2.00  *$  0.35   5.3%
GNSS   12.29  10.29   NOV  10.00  2.75  *$  0.46   5.2%
FDRY    6.02   7.71   NOV   5.00  1.35  *$  0.33   5.1%
MEDI   24.95  25.16   NOV  22.50  3.70  *$  1.25   5.1%
MCHP   23.18  24.04   NOV  20.00  4.20  *$  1.02   4.7%
CVH    37.55  36.02   NOV  35.00  3.90  *$  1.35   4.4%
CPB    22.59  22.63   NOV  22.50  1.05  *$  0.96   3.9%
BCGI   11.26  12.49   NOV  10.00  1.60  *$  0.34   3.8%
CREE   14.98  17.14   NOV  12.50  2.90  *$  0.42   3.8%
MENT    7.50   7.93   NOV   5.00  2.70  *$  0.20   3.6%

*$ = Stock price is above the sold striking price.

Comments:

The major averages managed to eek out another positive week as
we move into the end of October, now isn't that scary!  Is the
rally just end-of-year fund manipulation, a most sadistic bear-
trap rally?  Or is it the beginning of the end of a bear market?
Time will tell as each week will continue to offer clues to the
long-term picture.  The key is to remain disciplined and keep
emotion (bullish euphoria?) in check.  The covered-call portfolio
continues to benefit from the bullish momentum though there are a
couple issues on the early-exit (adjustment) watch list that are
acting a bit weak:  Genesis Microchip (NASDAQ:GNSS), MedImmune
(NASDAQ:MEDI), and Microchip Technology (NASDAQ:MCHP).



NEW CANDIDATES
*********

Sequenced by Company
*****
Stock  Last  Call Strike  Option  Last Open  Cost   Days  Target 
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

IMCL    8.16  NOV  7.50   QCI KU  1.25 1341   6.91   21   12.4%
IVX    12.95  NOV 12.50   IVX KV  0.80 1491  12.15   21    4.2%
MANU    3.17  NOV  2.50   ZUQ KZ  0.85 176    2.32   21   11.2%
MU     17.30  NOV 15.00    MU KC  2.85 18351 14.45   21    5.5%
REGN   15.21  NOV 15.00   RQP KC  1.25 94    13.96   21   10.8%
SEPR    8.72  NOV  7.50   ERQ KU  1.55 597    7.17   21    6.7%
UAL     2.59  NOV  2.50   UAL KZ  0.35 16377  2.24   21   16.8%

Sequenced by Target Yield (monthly basis)
*****
Stock  Last  Call Strike  Option  Last Open  Cost   Days  Target 
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

UAL     2.59  NOV  2.50   UAL KZ  0.35 16377  2.24   21   16.8%
IMCL    8.16  NOV  7.50   QCI KU  1.25 1341   6.91   21   12.4%
MANU    3.17  NOV  2.50   ZUQ KZ  0.85 176    2.32   21   11.2%
REGN   15.21  NOV 15.00   RQP KC  1.25 94    13.96   21   10.8%
SEPR    8.72  NOV  7.50   ERQ KU  1.55 597    7.17   21    6.7%
MU     17.30  NOV 15.00    MU KC  2.85 18351 14.45   21    5.5%
IVX    12.95  NOV 12.50   IVX KV  0.80 1491  12.15   21    4.2%


Company Descriptions

LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even 
point, DE-Days to Expiry, TY-Target Yield (monthly basis).

*****
IMCL - ImClone  $8.16  *** Martha's Bane Still In A Range ***

ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company 
whose mission is to advance oncology care by developing a 
portfolio of targeted biologic treatments designed to address
the medical needs of patients with a variety of cancers.  The 
company's lead product candidate, Erbitux (cetuximab), is a 
therapeutic monoclonal antibody that inhibits stimulation of 
epidermal growth factor receptor upon which certain solid 
tumors depend in order to grow. ImClone's next most advanced
product candidate, BEC2, is a cancer vaccine.  In addition to 
the development of its lead product candidates, the company 
conducts research, both independently and in collaboration 
with academic and corporate partners, in a number of areas 
related to its core focus of growth factor blockers, cancer 
vaccines and angiogenesis inhibitors.  IMCL has also developed
diagnostic products and vaccines for certain infectious diseases.
Recently, ImClone announced that they and Bristol-Myers Squibb
(NYSE:BMY) are beginning a new round of clinical tests of Erbitux.
With all the "bad" news surrounding ImClone, traders have been
speculating on an eventual recovery in the stock.  This position
takes advantage of the over-priced options and the short-term
trading range of an issue that shows support at our cost basis.

NOV 7.50 QCI KU LB=1.25 OI=1341 CB=6.91 DE=21 TY=12.4%


*****
IVX - IVAX   $12.95  *** Stage I Base ***

IVAX (AMEX:IVX) is a multinational company engaged in the research,
development, manufacture and marketing of pharmaceutical products.
IVAX manufactures and/or markets several brand name pharmaceutical
products and a variety of brand equivalent and over-the-counter 
pharmaceutical products, primarily in the U.S. and the United 
Kingdom.  The company also has subsidiaries located throughout the
world, some of which are significant pharmaceutical companies in
their markets.  IVAX has been forming a Stage I base for the last
several months with strong support around $11.00.  With earnings
due October 29, we simply favor the bullish technical indications
and our conservative position offers a method to participate in the
future movement of the issue with relatively low risk.

NOV 12.50 IVX KV LB=0.80 OI=1491 CB=12.15 DE=21 TY=4.2%


*****
MANU - Manugistics  $3.17  *** Takeover Target? ***

Manugistics Group (NASDAQ:MANU) is a global provider of enterprise
profit optimization solutions.  The company provides solutions for
supply chain management, supplier relationship management, pricing
and revenue optimization and service and parts management.  The
Manugistics NetWORKS family of products is designed to coordinate,
optimize, measure and analyze across each of the key business 
processes: design, source, buy, make, store, move, price, market,
sell and service.  The company also provides strategic consulting,
implementation and customer support services.  Manugistics' shares
climbed Friday after the company announced Warburg Pincus will gain
a seat on its board of directors, and suggested the investment firm
may acquire more shares of the company's stock.  There were also 
some rumors that the company could be a potential takeover target
for PeopleSoft (NASDAQ:PSFT).  We favor the recent rally on heavy
volume that suggests further upside potential.  Cheap speculation
in a rebounding stock: try target shooting a lower net-debit to
lower the cost basis and improve the target yield.

NOV 2.50 ZUQ KZ LB=0.85 OI=176 CB=2.32 DE=21 TY=11.2%


*****
MU - Micron  $17.30 *** Riding The Bullish Wave ***

Micron Technology (NYSE:MU) and its subsidiaries are principally
engaged in the design, development, manufacturing and marketing
of semiconductor memory products.  The company offers products 
that include dynamic random access memory, synchronous dynamic
random access memory, double data rate dynamic access memory,
legacy dynamic random access memory products, static random 
access memory products and Flash products.  Like them or hate
them, the semiconductor issues are on fire.  Is it the bottom?
We don't know but that is why we offer this position as a way 
to profit conservatively on the current bullish momentum in the 
sector with a cost basis closer to support.  

NOV 15.00 MU KC LB=2.85 OI=18351 CB=14.45 DE=21 TY=5.5%


*****
REGN - Regeneron  $15.21  *** Bottom Fishing: Part II ***

Regeneron Pharmaceuticals (NASDAQ:REGN) is a biopharmaceutical
company that discovers, develops and intends to commercialize 
therapeutic drugs for the treatment of major medical conditions.
The company's product pipeline includes product candidates for
the treatment of obesity, rheumatoid arthritis and other 
inflammatory conditions, cancer and related disorders, allergies,
asthma and other diseases and disorders.  Regeneron is another
stock that has been forming a Stage I base for the last several
months.  Make sure you do your "due diligence" as this position
offer a favorable cost basis near support for those interested
in adding Regeneron to their long-term portfolio.

NOV 15.00 RQP KC LB=1.25 OI=94 CB=13.96 DE=21 TY=10.8%


*****
SEPR - Sepracor  $8.72  *** Post-Earnings Rally ***

Sepracor (NASDAQ:SEPR) is a research-based pharmaceutical company
dedicated to treating and preventing human disease through the
discovery, development and commercialization of pharmaceutical 
compounds, including product candidates directed toward serving
unmet medical needs.  The company's proprietary compounds are 
either single-isomer or active metabolite forms of existing drugs,
which the company refers to as improved chemical entities, or 
new chemical entity compounds, which are unrelated to currently 
marketed products.  Sepracor's shares rallied sharply over the
last few days after the company reported a narrower 3rd-quarter
loss on increased sales of its allergy and asthma treatments.
The bullish change of character is encouraging and this position
allows investors to obtain a low risk cost basis with a reasonable
expectation of profit.

NOV 7.50 ERQ KU LB=1.55 OI=597 CB=7.17 DE=21 TY=6.7%


*****
UAL - United Air Lines  $2.59  *** Cheap Speculation ***

UAL (NYSE:UAL) is a holding company, the principal subsidiary of
which is United Air Lines, Inc. (United), which is wholly owned.
United accounted for most of the company's revenues and expenses
in 2001.  United is a major commercial air transportation company
throughout the United States and abroad.  United's network provides
transportation service within its North America segment and to 
international destinations within its Pacific, Atlantic, and Latin
America segments.  This position offers a favorable entry point in
the issue with reasonable reward potential for those who want to
speculate on UAL's recovery and their attempt to avoid bankruptcy.

NOV 2.50 UAL KZ LB=0.35 OI=16377 CB=2.24 DE=21 TY=16.8%


*****

*****************
SUPPLEMENTAL COVERED CALL CANDIDATES
*****************

The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary. 

Sequenced by Target Yield (monthly basis)
*****
Stock  Last  Call Strike  Option  Last Open  Cost   Days  Target 
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

NVDA   11.10  NOV 10.00   UVA KB  1.75 8939   9.35   21   10.1%
MDCO   12.90  NOV 12.50   MQL KV  1.10 83    11.80   21    8.6%
OSUR    5.63  NOV  5.00   QTP KA  0.90 118    4.73   21    8.3%
DLTR   26.35  NOV 25.00   DQO KE  2.50 1073  23.85   21    7.0%
RMBS    5.65  NOV  5.00   BNQ KA  0.85 3351   4.80   21    6.0%
RSTO    5.98  NOV  5.00   URF KA  1.15 1116   4.83   21    5.1%
GENZ   27.52  NOV 25.00   GZQ KE  3.20 2144  24.32   21    4.0%
WBSN   17.50  NOV 15.00   DQH KC  2.90 5     14.60   21    4.0%
BBY    22.78  NOV 20.00   BBY KD  3.30 1610  19.48   21    3.9%


*****************
NAKED PUT SECTION
*****************

Options 101: Limiting Risk With Trading Stops
By Ray Cummins

One of our readers asked that we review the use of trading stops
with option selling strategies such as writing "naked" puts.

The need for a system to limit losses in any trading strategy is
obvious but with a limited-profit/unlimited-loss technique such
as selling "naked" puts, the requirement is even more critical.
Before you can choose the most appropriate technique for your
portfolio, it is necessary to be familiar with the basic forms of
trading stops: mental and mechanical.  A "mechanical" stop order
is a posted request to close a specific position any time it moves
beyond a specified price.  This type of order is placed with your
online brokerage or a through a personal broker, but the physical
execution of the trade generally goes through a floor specialist
at one of the major exchanges.  A stop order to "buy" becomes a
market order when the option contract trades, or is bid at or
above, the stop price.  A stop order to "sell" becomes a market
order when the contract trades, or is offered at or below, the
stop price.  Regardless of what method you employ to select the
stop-loss price, using a mechanical order is generally the best
means to limit losses or protect profits as it does not require
the position to be monitored on a continuous basis.  In contrast,
using a "mental" stop loss places all the responsibility on the
trader.  The investor determines a specific stop loss and closes
the position if the option trades beyond that price.  Considering
the market activity we have experienced over the past few months,
it's obvious a trader using mental stops would need to constantly
oversee the position.

There is an alternative for traders whose brokers use proprietary
systems, such as the one at Preferred Trade, that allow option
orders to be triggered by the price of the underlying issue.  In
that type of system, the guidelines for establishing protective
stops suggest that the initial or opening limit should be placed
at a point where important technical support (or a recent trading
range bottom) is evident.  Most often, this will be a relatively
small range reflecting the low of a basing pattern, a trend-line,
or a moving average established prior to entering the position.
Due to the increasing number of traders using mechanical systems
on a regular basis, the functionality of the stop-loss order has
improved dramatically in recent years.  However, there are still
many short-term strategies that are better suited to manual order
executions.  Just keep in mind these techniques require almost
continuous monitoring of the position to make sure the entry and
exit trades are executed in a timely manner.  In all cases, the
first and foremost objective of any stop-loss technique is to
preserve capital if the play goes badly and yet provide every
opportunity for the position to achieve its profit potential.

Learning to correctly manage portfolio positions -- maximizing
gains while limiting losses -- is probably the most important
aspect of successful trading.  In fact, the need to establish a
pre-planned exit strategy before opening a position is critical
to the success of any trade.  The logic behind this approach is
simple: the most common reason for losing money in the market is
failing to close a position in a timely manner, regardless of
whether the action is to limit losses or lock-in gains.  A large
percentage of new traders achieve favorable profits, but end up
giving most (or all) of them back because they don't establish a
sensible plan to manage each position.  As you would expect, the
majority of market professionals use limit orders in conjunction
with profit targets and protective stops to curb losses.  Yet,
even with this knowledge, the retail trader continues to be far
less proficient in this practice and the difference in results
is overwhelmingly apparent.  Those who survive the market long
enough to "learn the ropes" find that using stop orders and other
common loss-limiting techniques eliminates the risk of emotional
or reaction-based judgments in difficult situations and removes
human nature from the trading equation.  Indeed, a mechanical and
disciplined method for achieving profit is the key to consistent
success and allowing the market to make the exit decision is much
more precise than relying on our complex human intuition.

Good Luck! 

                        *** WARNING!!! ***

Occasionally a company will experience catastrophic news causing
a severe drop in the stock price.  This may cause a devastatingly
large loss which may wipe out all of your smaller gains.  There is
one very important rule: Don't sell naked puts on stocks that you
don't want to own!  It is also important that you consider using
trading STOPS on naked option positions to help limit losses when
the stock price drops.  Many professional traders suggest closing
the position when the stock price falls below the sold strike or
using a "buy-to-close" STOP at a price that is no more than twice
the original premium from the sold option.


SUMMARY OF PREVIOUS CANDIDATES 
*****

The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of actual traders, due to the variety of ways
in which each play can be opened, closed and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The play commentary (when provided) is simply a service to help
new traders understand when positions might be opened and closed.
In most cases, actions taken based on the commentary would be far
too late to be effective, thus it is not intended as a substitute
for personal trade management nor does it replace your duty to
diligently monitor and manage the positions in your portfolio.

Stock  Price  Last   Call  Strike Price   Gain   Potential
Symbol Picked Price  Month Sold   Picked  /Loss  Mon. Yield

VXGN   10.40  11.77   NOV   7.50  0.35  *$  0.35  15.6%
AMZN   19.04  19.30   NOV  15.00  0.50  *$  0.50  12.6%
AMLN   16.95  17.68   NOV  15.00  0.75  *$  0.75  11.7%
AMZN   18.46  19.30   NOV  15.00  0.55  *$  0.55  10.7%
HOLX   11.74  12.70   NOV  10.00  0.50  *$  0.50  10.5%
TMCS   20.33  23.40   NOV  17.50  0.55  *$  0.55  10.2%
HLYW   17.20  19.96   NOV  15.00  0.60  *$  0.60   8.2%
NOK    14.44  16.89   NOV  12.50  0.40  *$  0.40   8.2%
QCOM   31.37  36.52   NOV  25.00  0.65  *$  0.65   8.2%
AMLN   15.80  17.68   NOV  12.50  0.40  *$  0.40   8.1%
QCOM   36.20  36.52   NOV  30.00  0.65  *$  0.65   7.9%
KDE    23.77  28.80   NOV  20.00  0.70  *$  0.70   7.9%
COCO   37.75  37.05   NOV  30.00  0.75  *$  0.75   7.9%
OVER   30.07  28.18   NOV  22.50  0.45  *$  0.45   7.6%
PPDI   26.99  28.95   NOV  22.50  0.45  *$  0.45   7.2%
AFFX   23.99  24.79   NOV  17.50  0.30  *$  0.30   6.4%
VZ     35.19  36.57   NOV  30.00  0.70  *$  0.70   6.3%
GENZ   23.57  27.52   NOV  17.50  0.35  *$  0.35   6.0%
SYMC   39.00  39.75   NOV  30.00  0.45  *$  0.45   5.9%
OVER   27.51  28.18   NOV  20.00  0.40  *$  0.40   5.9%
INVN   35.05  33.70   NOV  25.00  0.40  *$  0.40   5.9%

*$ = Stock price is above the sold striking price.

Comments:

The bullish theme in the stock market is becoming readily apparent
as more traders "buy the dip" rather than "sell the rally."  In
fact, buyers seem to emerge whenever the market retreats to a
short-term moving average and the current outlook is for a test
of the August highs near 950 (SPX).  However, the first area of
resistance is slightly above Friday's closing levels and any
negative news could be a catalyst for retreat from this price
range.  With a cautiously optimistic forecast in mind, traders
are reminded to remain vigilant in position management and exit
or adjust any positions on issues with less than outstanding
technical indications.



NEW CANDIDATES
*********

Sequenced by Company
*****
Stock  Last  Call Strike  Option  Last Open  Cost   Days  Target 
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

AFCO   13.19  NOV 10.00   UOF WB  0.25 40     9.75   21   12.5%
DRD    19.70  NOV 17.50   DRD WW  0.30 125   17.20   21    7.3%
GETY   26.41  NOV 22.50   QGT WX  0.40 300   22.10   21    8.2%
JWN    20.98  NOV 17.50   JWN WW  0.35 718   17.15   21    9.6%
KOSP   15.25  NOV 12.50   KQW WV  0.30 35    12.20   21   11.9%
QCOM   36.52  NOV 30.00   AAW WF  0.40 9403  29.60   21    6.8%
QLGC   33.15  NOV 22.50   QLQ WX  0.25 1887  22.25   21    5.3%
TMPW   17.68  NOV 15.00   BSQ WC  0.30 497   14.70   21    9.3%

Sequenced by Target Yield (monthly basis)
******
Stock  Last  Call Strike  Option  Last Open  Cost   Days  Target 
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

AFCO   13.19  NOV 10.00   UOF WB  0.25 40     9.75   21   12.5%
KOSP   15.25  NOV 12.50   KQW WV  0.30 35    12.20   21   11.9%
JWN    20.98  NOV 17.50   JWN WW  0.35 718   17.15   21    9.6%
TMPW   17.68  NOV 15.00   BSQ WC  0.30 497   14.70   21    9.3%
GETY   26.41  NOV 22.50   QGT WX  0.40 300   22.10   21    8.2%
DRD    19.70  NOV 17.50   DRD WW  0.30 125   17.20   21    7.3%
QCOM   36.52  NOV 30.00   AAW WF  0.40 9403  29.60   21    6.8%
QLGC   33.15  NOV 22.50   QLQ WX  0.25 1887  22.25   21    5.3%


Company Descriptions

LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even 
point, DE-Days to Expiry, TY-Target Yield (monthly basis).

*****
AFCO - Applied Films  $13.19  *** Stage II Underway? ***

Applied Films Corporation (NASDAQ:AFCO) is a provider of thin
film deposition equipment to the flat panel display (FPD), the
architectural, automotive and solar glass, and the consumer
products packaging and electronics industries.  The company has
also developed a barrier coating solution technology for the
plastic beverage bottle industry.  Its deposition systems are
used to deposit thin films that enhance the characteristics of
a base substrate, such as glass, plastic, paper or foil.  These
thin films provide conductive, electronic, reflective, filter,
barrier and other properties that are critical elements of its
customers' products.  Applied's thin film deposition systems
provide its customers with high yield and throughput, flexible
modular configurations and coating and process technologies.
The company also processes and sells thin film coated glass to
the FPD industry.  AFCO shares have recently moved out of an
intermediate-term base and the increasing volume suggests there
is good potential for further upside activity.

NOV 10.00 UOF WB LB=0.25 OI=40 CB=9.75 DE=21 TY=12.5%


*****
DRD - Duane Reade  $19.70  *** Rally Mode! ***

Founded in 1960, Duane Reade (NYSE:DRD) is the largest drug store
chain in the metropolitan New York City area, offering a variety
of prescription and over-the-counter drugs, health and beauty
care items, cosmetics, hosiery, greeting cards, photo supplies
and photo finishing.  As of September 28, 2002, DRD operated 221
stores.  On Friday, DRD reported higher third-quarter profit as a
rise in prescription sales offset higher costs to open new stores
and expenses to cut debt.  The company also forecast that fourth
quarter profits would fall within consensus expectations, and the
news drove its stock price 15% higher on heavy volume.  The recent
technical support near the cost basis makes this a viable position
for investors who wouldn't mind owning the stock.

NOV 17.50 DRD WW LB=0.30 OI=125 CB=17.20 DE=21 TY=7.3%


*****
GETY - Getty Images  $24.61  *** Entry Point! ***

Getty Images (NASDAQ:GETY) is the world's leading imagery company
and markets the largest collection of contemporary and historical
photography and film footage available.  Every day, Getty Images
collaborates with some of the most talented photographers and
cinematographers to provide creative professionals and industries
with unique, current and striking imagery for inclusion in a wide
range of visual communications; advertising, motion pictures and
television, books and the Web.  Getty Images is a global business,
with headquarters in Seattle and customers in over 50 countries.
Getty recently announced it generated net profit and revenue well
above forecasts in the third quarter and was "on track" for its
first full-year profit in five years.  The company also said its
board of directors approved a share buyback of up to $50 million
of its common stock over the next six months.  Investors who want
to own GETY can establish a low risk cost basis in the issue with
this position.

NOV 22.50 QGT WX LB=0.40 OI=300 CB=22.10 DE=21 TY=8.2%


*****
JWN - Nordstrom  $20.98  *** Sector Rally! ***

Nordstrom (NASDAQ:JWN) is a specialty store that sells a selection
of apparel, shoes, and accessories for women, men, and children.
The parent firm operates approximately 80 large specialty stores
across the United States.  Nordstrom also operates 45 stores under
the name Nordstrom Rack, one clearance store under the name Last
Chance, two freestanding shoe stores under the Nordstrom name in
Hawaii, and four specialty boutiques in California, New York and
Texas under the name Façonnable.  Analysts say high-end and luxury
merchants have been outperforming the retail segment, due in part
to easy comparisons to last year's sales, when the 9/11 attacks
emptied the shopping malls, as well as favorable demographics in
the current economy.  Nordstrom is one of the leaders in the group
and traders who think the recent really will continue can profit
from that outcome with this position.

NOV 17.50 JWN WW LB=0.35 OI=718 CB=17.15 DE=21 TY=9.6%


*****
KOSP - KOS Pharmaceuticals  $15.25  *** New Deal With Merck! ***

KOS Pharmaceuticals (NASDAQ:KOS) is a fully integrated specialty
pharmaceutical company engaged in the development of proprietary
prescription products for the treatment of chronic cardiovascular
and respiratory diseases.  The company manufactures its marketed
products, Niaspan and Advicor, and markets such products directly
through its own specialty sales force and through a sales force
provided by a contract sales organization.  Their cardiovascular
products are based on controlled-release, once-a-day, oral dosage
formulations.  The company's respiratory products in development
consist of aerosolized inhalation formulations to be used mainly
with its proprietary inhalation devices.  Shares of KOS rocketed
Friday after the company agreed to license two of its cholesterol
treatments to Germany's Merck KGaA (G.MRK) in a deal worth up to
$61 million, including upfront and milestone payments.  Merck will
pay KOS $15 million up front for exclusive international rights to
Niaspan and Advicor outside North America and Japan, and KOS will
also receive 25% of net sales of the products, which the company
will manufacture and supply to Merck.

NOV 12.50 KQW WV LB=0.30 OI=35 CB=12.20 DE=21 TY=11.9%


*****
QCOM - Qualcomm  $36.52  *** Entry Point! ***

Qualcomm (NASDAQ:QCOM) is a developer and supplier of code 
division multiple access (CDMA)-based integrated circuits 
and system software for wireless voice and data communications
and global positioning system (GPS) products.  The company 
offers complete system solutions, including software and 
integrated circuits for wireless handsets and infrastructure 
equipment.  This complete system solution approach provides 
customers with advanced wireless technology, enhanced component
integration and interoperability, as well as reduced time to 
market.  Qualcomm recently announced that strong demand for
next-generation chips for wireless phones prompted it to raise
its shipment guidance for the fiscal fourth quarter.  The news
helped the issue break out of a 4-month trading range and move
to a 6-month high.  Now the stock is comfortably established
in a new range near $35 and this position offers investors
reasonable reward potential at the risk of owning the company
at a cost basis of $29.60.

NOV 30.00 AAW WF LB=0.40 OI=9403 CB=29.60 DE=21 TY=6.8%


*****
QLGC - Qlogic  $33.15  *** On The Rebound! ***

QLogic (NASDAQ:QLGC) designs and supplies unique storage network
infrastructure components and software for server and storage
subsystem manufacturers.  The company's products are based on
SCSI, iSCSI, Fibre Channel and Infiniband standards.  The firm is
an end-to-end supplier of Fibre Channel network infrastructure
components that aid in the transfer and acquisition of data within
the SAN.  Products include its SANblade HBAs, SANbox Fibre Channel
Switches and SANsurfer Tool Kit management software.  QLogic is
the only HBA vendor to support SCSI, Internet Protocol, Virtual
Interface and FICON protocols with the same Fibre Channel HBA.  In
addition, the company designs and supplies controller chips used
in hard drives and tape drives as well as enclosure management and
baseboard management chip solutions that monitor the health of the
physical environment within a server or storage enclosure.  Shares
of Emulex (NYSE:ELX) enjoyed a sharp rally after the firm guided
up revenue for the fourth quarter and the news boosted a number of
other issues in the group.  Qlogic was a beneficiary of Emulex's
announcement and traders who believe QLGC's stock will continue to
recover can speculate conservatively on that outcome with this
position.

NOV 22.50 QLQ WX LB=0.25 OI=1887 CB=22.25 DE=21 TY=5.3%


*****
TMPW - TMP Worldwide  $17.68  *** Spin-Off Announcement! ***

TMP Worldwide (NASDAQ:TMPW) is a recruitment-advertising agency
and executive search and selection agency.  The company also
operates Monster (www.monster.com), an Internet-based global
career management Website.  Job seekers look to manage their
careers through the company by posting their resumes on Monster,
by searching Monster's database of job postings, either directly
or through the use of customized job searches, and by utilizing
its extensive career, education and relocation resources.  Many
employers and professional recruiters, who are TMP's clients,
look to it to help them find the right employee at all levels,
from an entry-level candidate to a chief executive officer.  The
company is also a yellow pages advertising agency, and operates
under six major product lines, including Monster, Advertising &
Communications, eResourcing, Executive Search, Directional
Marketing and Monstermoving.com.  Shares of TMP Worldwide soared
last week on news that it will spin off two staffing businesses
in a move expected to bolster the prospects of its online job
site, Monster.com.  The news prompted Banc of America Securities
to raise their rating on the stock and traders who believe the
bullish activity will continue should consider this speculative
position.

NOV 15.00 BSQ WC LB=0.30 OI=497 CB=14.70 DE=21 TY=9.3%


*****

*****************
SUPPLEMENTAL NAKED PUT CANDIDATES
*****************

The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary. 

Sequenced by Target Yield (monthly basis)
******
Stock  Last  Call Strike  Option  Last Open  Cost   Days  Target 
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

JDEC   12.26  NOV 10.00   QJD WB  0.30 340    9.70   21   14.8%
WEBX   15.91  NOV 12.50   UWB WV  0.30 373   12.20   21   12.5%
SNDK   20.77  NOV 17.50   SWQ WW  0.45 337   17.05   21   11.9%
GYMB   19.80  NOV 17.50   GQU WW  0.50 112   17.00   21   11.8%
VSEA   22.65  NOV 17.50   UES WW  0.40 118   17.10   21   11.8%
ELX    17.88  NOV 15.00   ELX WC  0.35 607   14.65   21   11.0%
CMX    18.91  NOV 17.50   CMX WW  0.40 926   17.10   21    8.8%
CPKI   26.92  NOV 25.00   CUH WE  0.55 27    24.45   21    8.5%
PPD    21.58  NOV 15.00   PPD WC  0.25 1809  14.75   21    7.9%


SEE DISCLAIMER IN SECTION ONE
*****************************


************************
SPREADS/STRADDLES/COMBOS
************************

Market Bulls Firmly In Control!
By Ray Cummins

Stocks rallied again today, lifting the major equity averages
to another week of solid gains as hopes of a long-term recovery
continued to circulate among investors.

The Dow Jones Industrial Average soared 126 points to 8,443 amid
strength in semiconductor giant Intel (NASDAQ:INTC) and drug maker
Merck (NYSE:MRK).  Cigna (NYSE:CI) was the only sore spot among
blue-chip stocks, losing a third of its value after the health
insurer slashed profit estimates.  The technology-laden NASDAQ
Composite index climbed 32 points to 1,331 with computer hardware
stocks leading the way.  The broader Standard & Poor's 500-stock
index rose 15 points to 897 as buying emerged in biotech, drug,
consumer, retail and financial shares while oil service issues
were snubbed.  Trading volume was 1.33 billion on the Big Board
and 1.47 billion on the technology exchange.  Advancers sailed
past decliners by roughly 2 to 1 on both the NYSE and the NASDAQ.
Bonds were higher as well with the 10-year Treasury note adding
7/32 to yield 4.09% while the 30-year government bond edged up
1/32 to yield 5.08%.  On the fund flow front, Trim Tabs estimated
that all equity funds had outflows of $1.8 billion in the week
ending October 16 compared with outflows of $9.7 billion in the
prior week.  Equity funds that invest primarily in U.S. companies
had outflows of $900 million versus outflows of $9.3 billion the
prior week.

*****************
PORTFOLIO SUMMARY
*****************

The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of actual traders, due to the variety of ways
in which each play can be opened, closed and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The play commentary (when provided) is simply a service to help
new traders understand when positions might be opened and closed.
In most cases, actions taken based on the commentary would be far
too late to be effective, thus it is not intended as a substitute
for personal trade management nor does it replace your duty to
diligently monitor and manage the positions in your portfolio.


PUT CREDIT SPREADS
******************

Symbol  Pick   Last  Month L/P S/P Credit   C/B   (G/L)  Status

SLM     96.58 106.16  NOV   80  85  0.50   84.50  $0.50   Open
UNH     93.49  97.09  NOV   80  85  0.60   84.40  $0.60   Open
WTW     45.40  49.00  NOV   35  40  0.50   39.50  $0.50   Open
ABK     63.21  64.30  NOV   50  55  0.60   54.40  $0.60   Open
CHIR    42.51  39.59  NOV   35  38  0.30   37.20  $0.30   Open

Chiron shares tumbled midweek, despite reporting strong quarterly
profits, after Analyst Eric Schmidt at SG Cowen expressed concerns
about "a lack of near-term product candidates" at the company.
Goldman Sachs followed suit with a downgrade to "market perform"
and based on the current uncertain outlook, conservative traders
may consider an early exit from the position.


CALL CREDIT SPREADS
*******************

Symbol  Pick   Last  Month L/C S/C Credit   C/B   (G/L)  Status

FITB    57.47  65.72  NOV   70  65  0.65   65.65 ($0.07)  Open?
LEN     53.67  57.14  NOV   65  60  0.80   60.80  $0.80   Open
LMT     62.45  56.63  NOV   75  70  0.55   70.55  $0.55   Open
MMM    120.60 127.73  NOV  140 135  0.50  135.50  $0.50   Open
AIG     63.71  65.41  NOV   75  70  0.60   70.60  $0.60   Open
GD      76.58  79.80  NOV   90  85  0.55   85.55  $0.55   Open

Fifth Third Bancorp (NYSE:FITB) cycled lower during the week but
rebounded to close above $65 during Friday's session.  However,
the overhead supply near the current price provides reasonable
opposition to further upside activity and traders with a more
aggressive outlook can monitor the issue for a move above $67,
on increasing volume, before exiting or adjusting the position.


SYNTHETIC (BULLISH)
*******************

Symbol  Pick   Last  Month L/C S/P Credit  M/V   (G/L)  Status

ERTS   67.73  67.61   NOV  75  60   0.40   0.50   0.90   Open
SCHL   47.43  45.89   NOV  55  40   0.25   0.60   0.85   Open
DLTR   25.12  26.35   NOV  30  20   0.00   0.30   0.30   Open
NXTL    9.69  10.23   JAN  12   7   0.10   0.20   0.30   Open

The recent rally in Electronic Arts (NYSE:ERTS) ended with its
earnings report however, there is some potential for renewed
upside activity in the position.  Scholastic (NASDAQ:SCHL) has
already offered a favorable "early-exit" opportunity and both
Nextel (NASDAQ:NXTL) and Dollar Tree Stores (NASDAQ:DLTR) have
achieved small profits.


SYNTHETIC (BEARISH)
*******************

No Open Positions


BULL CALL SPREADS
*****************

Symbol  Pick   Last  Month  L/C S/C  Debit  M/V   B/E   Status

LUME    5.80   3.07   JAN    5   7   1.00   0.90  6.00  Closed
CHTT   42.99  45.47   NOV   35  40   4.20   4.40  39.20  Open

Lumenis (NASDAQ:LUME) announced Tuesday that it now expects lower
third-quarter revenues and a net loss, due in part to foreign
exchange losses and the costs of a U.S. Securities and Exchange
Commission investigation.  The issue in unlikely to recover from
this news in the near-term, thus the position should probably be
closed to limit losses.


CALENDAR SPREADS
****************

Symbol  Pick   Last   Long-Opt  Short-Opt  Debit  M/V   Status

LPNT   33.04  37.00   FEB-35C   NOV-35C    1.25   2.00   Open
WAT    26.61  24.81   MAY-30C   NOV-30C    2.20   2.00  Closed
CREE   14.98  17.14   JAN-17C   NOV-17C    1.00   1.25   Open
HNT    25.75  26.00   JAN-30C   NOV-30C    0.75   0.60   Open

Shares of Waters (NYSE:WAT) tumbled last week after reporting that
quarterly earnings rose less than analysts expected.  Waters said
the shortfall was caused by fewer shipments of mass-spectrometers,
machines that can identify unknown compounds and analyze material
that is known.  A timely exit in the long option (MAY-30C) allowed
a minimal loss in the position, provided the issue remains below
$30 for the next three weeks.


SHORT-PUT COMBOS
****************

Symbol  Pick   Last  Short-Opt  Long-Opt  Credit  M/V   Status

AES     2.92   1.18   J04-7.5P  J03-2.5P   4.50   4.25   Open
IMCL    7.77   8.16   J04-15P   JO3-5P     8.00   7.75   Open


CREDIT STRANGLES
****************

No Open Positions


Questions & comments on spreads/combos to Contact Support
*************
NEW POSITIONS
*************

This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your skill level, risk-reward tolerance and
portfolio outlook.  In addition, we recommend that you avoid any
strategy or technique in which you are not completely comfortable
with the potential loss, the necessary adjustments and the common
entry-exit strategies.

*****************
SPECULATION PLAYS
*****************

These positions are based on recent increased activity in the
stock and underlying options.  All of these plays offer favorable
risk/reward potential but they should be evaluated for portfolio
suitability and reviewed with regard to your strategic approach
and trading style.

*****
NVDA - Nvidia  $11.10  *** Bottom-Fishing! ***

Nvidia (NASDAQ:NVDA) designs, develops and markets graphics and
media communication processors and related software for personal
computers (PCs), workstations and digital entertainment platforms.
The company provides an architecturally compatible top-to-bottom
family of high performance 3-D graphics processors and graphics
processing units (GPUs) that set the standard for performance,
quality and features for a broad range of desktop PCs.  They range
from professional workstations to low-cost PCs and mobile PCs, and
from performance laptops to thin-and-light notebooks. NVIDIA's 3-D
graphics processors are used for a wide variety of applications,
including games, digital image editing, business productivity, the
Internet and industrial design.  Nvidia's graphics processors are
designed to be architecturally compatible backward and forward
between generations, giving its original equipment manufacturers
(OEMs), customers and end users a low cost of ownership.

This speculative short-put combination utilizes Jim Brown's (OIN
Founder/Chief Editor) popular technique of writing "in-the-money"
Puts to profit from upward movement in the underlying issue.  A
near-term Put is also purchased to limit downside risk in the
position, if the recovery does not begin in the next few months.

More information on this unique strategy can be found at:

http://members.OptionInvestor.com/archive/editorplays/2001/042201_1.asp

PLAY (speculative - bullish/short-put combination):

SELL PUT  JAN04-20.00  KMF-MD  OI=131  B=$10.70
BUY  PUT  JAN03-7.50   UVA-MU  OI=935  A=$0.70
INITIAL NET CREDIT TARGET=$10.00-$10.20  TARGET PROFIT=$3.50-???

Note:  There is a collateral requirement for the sold (short)
Put, whether it is partially covered in the initial spread or
exists "naked" when the long option expires.  Please review
the terms of the collateral requirements with your broker.


****************
CALENDAR SPREADS
****************

A calendar spread (or time spread) consists of the sale of one
option and the simultaneous purchase of an option of the same
type and strike price, but with a future expiration date.  The
premise in a calendar spread is simple: time erodes the value of
the near-term option at a faster rate than the far-term option.

*****
HGSI - Human Genome Sciences  $11.34  *** Earnings Speculation! ***

Human Genome Sciences (NASDAQ:HGSI) is a unique genomics and
biopharmaceutical firm focused on therapeutic product development
and functional analysis of genes using its proprietary technology
platform.  Human Genome Sciences discovers, develops and intends
to commercialize novel compounds for treating and diagnosing human
disease based on the identification and study of genes.  The firm
focuses its internal product development efforts on therapeutic
proteins, antibodies, peptides and fusion proteins, and other uses
as well as collaborations for the development of gene therapy
products and small-molecule drugs.  The company's earnings are due
on 11/29/02.

Strategy Explanation:

A bullish and more speculative type of calendar or time spread
is initiated when the current value of the underlying issue is
below the strike price of the options.  This type of position is
speculative with low initial cost and large potential profits.
Two favorable outcomes can occur: the underlying stock rallies in
the short-term and the position is closed for a profit as time
value erosion in the short option produces a net gain or; the
underlying stock consolidates, allowing the sold option to expire
and then eventually rallies above the long option's strike price.

PLAY (very speculative - bullish/calendar spread):

BUY  CALL  DEC-15.00  HQI-LC  OI=34    A=$1.00
SELL CALL  NOV-15.00  HQI-KC  OI=2406  B=$0.50
INITIAL NET DEBIT TARGET=$0.40-$0.45  TARGET PROFIT=$0.35-$0.75


**************
CREDIT SPREADS
**************

These candidates are based on the underlying issue's technical
history or trend.  The probability of profit in these positions
may be higher than other plays in the same strategy, due to
small disparities in option pricing.  Current news and market
sentiment will have an effect on these issues, so review each
play individually and make your own decision about its outcome.

*****
CDWC - CDW Computer Centers  $50.61  *** Solid Earnings! ***

CDW (NASDAQ:CDWC), ranked #414 on the Fortune 500, is a leading
provider of technology solutions for businesses, government
agencies and educational institutions nationwide.  CDW is a
principal source of technology products and services including
top name brands such as Cisco, Compaq, Computer Associates,
Hewlett-Packard, IBM, Intel, Microsoft, and Toshiba.  The firm
distributes contracts to various end users for both customized
and standardized on-site services supplied directly by providers
such as HP Services and Unisys and for training programs provided
by firms such as KnowledgeNet and Productivity Point International.
CDWC was founded in 1984 as a home-based business and today employs
2,800 coworkers whose efforts generated net sales of $4 billion in
2001. CDW's direct model offers one-on-one relationships with its
knowledgeable account managers; purchasing by telephone, fax, the
company's award-winning site or customized CDW@work(TM) extranets;
custom solutions and daily shipping; flexible financing solutions;
and pre- and post-sales technical support, with factory-trained and
A+ certified technicians on staff.

PLAY (conservative - bullish/credit spread):

BUY  PUT  NOV-40  DWQ-WH  OI=882   A=$0.55
SELL PUT  NOV-45  DWQ-WI  OI=1270  B=$1.10
INITIAL NET-CREDIT TARGET=$0.60-$0.65
POTENTIAL PROFIT(max)=14% B/E=$44.40


*****
CEPH - Cephalon  $50.58  *** Provogil Results! ***

Cephalon (NASDAQ:CEPH) is an international biopharmaceutical firm
dedicated to the discovery, development and marketing of products
to treat sleep disorders, neurological disorders, cancer and pain.
In addition to conducting a very active research and development
program, the company markets three products in the United States
and a number of products in various countries throughout Europe.
Cephalon's United States products are comprised of Provigil, for
the treatment of excessive daytime sleepiness associated with
narcolepsy, Actiq for cancer pain management, and Gabitril for
the treatment of partial seizures associated with epilepsy.

PLAY (conservative - bullish/credit spread):

BUY  PUT  NOV-40  CQE-WH  OI=5349  A=$0.55
SELL PUT  NOV-45  CQE-WI  OI=2511  B=$1.05
INITIAL NET-CREDIT TARGET=$0.55-$0.60
POTENTIAL PROFIT(max)=12% B/E=$44.45


*****
CTSH - Cognizant  $69.54  *** Solid Quarterly Earnings! ***

Cognizant Technology Solutions Corporation (NASDAQ:CTSH) delivers
full life cycle solutions to complex software development and
maintenance problems that companies face as they transition to
e-business.  These information technology services are delivered
through the use of a seamless on-site and offshore consulting
project team.  The firm's solutions include application development
and integration, application management and re-engineering services.
The company's customers include ACNielsen, ADP, Brinker, Computer
Sciences, Dun & Bradstreet, First Data, IMS Health, Metropolitan
Life Insurance, Nielsen Media Research, PNC Bank, and Royal &
SunAlliance USA.

PLAY (conservative - bullish/credit spread):

BUY  PUT  NOV-55  UPU-WK  OI=565  A=$0.90
SELL PUT  NOV-60  UPU-WL  OI=404  B=$1.40
INITIAL NET-CREDIT TARGET=$0.55-$0.60
POTENTIAL PROFIT(max)=12% B/E=$59.45


*****
AGN - Allergan  $55.27  *** Pharmacia Settlement! ***

Allergan (NYSE:AGN) is a technology-driven, global healthcare firm
that develops and commercializes specialty pharmaceutical products
for ophthalmic, neurological, dermatological and other specialty
markets, as well as ophthalmic surgical devices and contact lens
care solutions.  Its worldwide consolidated revenues are primarily
generated by prescription and non-prescription pharmaceutical
products in the areas of ophthalmology and skin care, neurotoxins,
intraocular lenses and other ophthalmic surgical products, and also
contact lens care products.  The company's products are sold to drug
wholesalers, independent and chain drug stores, pharmacies, optical
store chains, opticians, mass merchandisers, food stores, hospitals,
ambulatory surgery centers and medical practitioners, including
neurologists, dermatologists and plastic surgeons.

PLAY (conservative - bearish/credit spread):

BUY  CALL  NOV-65  AGN-KM  OI=451  A=$0.15
SELL CALL  NOV-60  AGN-KL  OI=447  B=$0.60
INITIAL NET CREDIT TARGET=$0.50-$0.55
POTENTIAL PROFIT(max)=11% B/E=$60.50


*******************
NE - Noble Corporation  $31.45  *** Declining Revenues ***

Noble Corporation (NYSE:NE) is a provider of diversified services
to the oil and gas industry.  The firm performs contract-drilling
services with a fleet of 49 offshore drilling units located in key
markets worldwide.  Its fleet of floating deepwater units consists
of 9 semisubmersibles and 3 dynamically positioned drill-ships, 7
of which are designed to operate in water depths greater than 5,000
feet.  Its premium fleet of 34 independent leg, cantilever jack-up
rigs includes 21 units that operate in water depths of 300 feet and
greater, 4 of which operate in water depths of 360 feet and greater,
and 11 units that operate in water depths up to 250 feet.  Its fleet
also includes 3 submersible drilling units.  Over 60% of the fleet
is deployed in international markets, principally the North Sea,
Brazil, West Africa, the Middle East, India and Mexico.  Noble also
provides labor contract drilling services, well site and project
management services, and engineering services.

PLAY (conservative - bearish/credit spread):

BUY  CALL  NOV-37.50  NE-KU  OI=252  A=$0.20
SELL CALL  NOV-35.00  NE=KG  OI=342  B=$0.50
INITIAL NET CREDIT TARGET=$0.30-$0.35
POTENTIAL PROFIT(max)=14% B/E=$35.30


*******************
SYNTHETIC POSITIONS
*******************

These stocks have established trends and favorable option premiums.
Traders with a directional outlook on the underlying issues may
find the risk-reward outlook in these momentum plays attractive.

*****
CAI - CACI International  $39.21  *** Bullish Outlook! ***

CACI International (NYSE:CAI) delivers information technology and
communications solutions to clients through four areas of expertise
or service offerings: systems integration, managed network services,
knowledge management and engineering services.  Through this range
of service offerings, the company provides comprehensive, practical
information technology and communications solutions by adapting
emerging technologies and continually evolving legacy strengths in
the areas of information assurance and security, reengineering,
logistics and engineering support, automated debt management systems
and services, litigation support systems and services, product data
management, software development and reuse, voice, data and video
communications, simulation and planning, financial and also human
resource systems and geo-demographic and customer data analysis.

PLAY (speculative - bullish/synthetic position):

BUY  CALL  DEC-45  CAI-LI  OI=197  A=$1.35
SELL PUT   DEC-35  CAI-XG  OI=209  B=$1.20
INITIAL NET CREDIT TARGET=$0.00-$0.10  TARGET PROFIT=$0.75-$1.00

Note:  Using options, the position is similar to being long the
stock.  The initial collateral requirement for the sold (short)
put is approximately $1,275 per contract.


***********************
STRADDLES AND STRANGLES
***********************

Based on analysis of the historical option pricing and technical
background, these positions meet the fundamental criteria for
favorable volatility-based plays.

*****
PPD - Pre-Paid Legal  $21.58  *** Premium Selling! ***

Pre-Paid Legal Services (NYSE:PPD) was one of the first companies
in the United States organized solely to design, underwrite and
market legal expense plans.  The company's legal expense plans
(referred to as Memberships) currently provide for a variety of
legal services in a manner similar to medical reimbursement plans.
Plan benefits are provided through a network of independent law
firms, typically one firm per state or province.  Members have
direct, toll-free access to their Provider law firm rather than
having to call for a referral.  Legal services include unlimited
attorney consultation, traffic violation defense, auto-related
criminal charges defense, letter writing/document preparation,
will preparation and review and a general trial defense benefit.

PLAY (very aggressive - neutral/credit strangle):

SELL CALL  NOV-25.00  PPD-KE  OI=4064  B=$0.70
SELL PUT   NOV-17.50  PPD-WW  OI=2147  B=$0.65
INITIAL NET-CREDIT TARGET=$1.30-$1.35
POTENTIAL PROFIT(max)=23%
UPSIDE B/E=$26.30 DOWNSIDE B/E=$16.20


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


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