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Daily Newsletter, Tuesday, 10/29/2002

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The Option Investor Newsletter                 Tuesday 10-29-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Bulls Gain Confidence on Bad News
Futures Markets: Gee, Dow closed at +1 point, must have been a
Boring Day...
Index Trader Wrap: Color it red with lead-based paint
Market Sentiment: What Will it Take?
Weekly Fund Screen: Emerging Market Debt Funds


Updated on the site tonight:
Swing Trader Game Plan: Crisis of Confidence


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      10-29-2002           High     Low     Volume Advance/Decline
DJIA     8368.94 +  0.90  8399.74  8198.04 1.67 bln   1293/1872
NASDAQ   1300.65 - 15.19  1318.93  1279.19 1.52 bln   1485/1780
S&P 100   449.10 -  3.23   452.37   440.90   Totals   2778/3652
S&P 500   882.31 -  8.08   890.64   867.91
RUS 2000  367.70 -  0.40   369.01   362.64
DJ TRANS 2248.18 - 31.25  2282.03  2207.32
VIX        36.80 +  1.13    38.66    35.94
VXN        52.57 +  0.95    54.27    52.14
Total Vol   3,423M
Total UpVol   844M
Total DnVol 2,517M
52wk Highs    53
52wk Lows    177
TRIN        1.93
PUT/CALL    0.73
************************************************************

Bulls Gain Confidence on Bad News

Dell Computer retracted comments made by Michael Dell in Asia
yesterday. The President of Dell said they were taken out of
context and PC demand is steady at the low end of estimates.
GE said it had billions of dollars of exposure to "airlines,
loans and leases" across several sectors and could rake huge
charges for this exposure. Consumer Confidence falls to a nine
year low. Retail Sales falls again. Markets rebound +200 points
from the lows. We are clearly traveling through an alternate
reality.

Nasdaq Chart




Dow Chart





Unbelievable! That is the only way to describe it. Bad news
was breaking out all over but the markets failed to crash.
Sure we fell to 8200 on the knee jerk reaction to the confidence
numbers but selective memory kicked in at 2:30 and the Dow
exploded back to positive territory.

Dell, CSCO and QCOM led the Nasdaq down at the open. Dell
on the retraction of the "we are seeing a pickup in demand"
comments that pumped the Nasdaq yesterday. CSCO on news from
UBS that said they were seeing substantial price cuts on the
major Cisco products. Rumors of desperation were flying and
with CSCO announcing earnings next week there are fears that
things might not be "steady" at Cisco. QCOM took a dive on
news out of China that they would release their own CDMA
technology to avoid paying royalties to QCOM. This negative
tech news was nothing compared to the news to follow.

The economic world cracked open with a rupture equivalent to
the current Mt Aetna eruption. Consumer Confidence numbers
rocked analysts with a drop to 79.4 compared to estimates of
90.0. This was a full five points below last October, the
month after 9/11 and a nine year low. Every internal number
was terrible. The present situation fell to 77.5 from 88.5.
Expectations fell to 80.7 from 97.2. Business conditions and
jobs also took a hit as the continued high unemployment and
falling stock market took its toll. Consumers expecting business
conditions to worsen over the next six months rose +45%.

With confidence the number one indicator for holiday sales it
is painting a bleak picture for this quarter. Retail Sales
fell another -1.9% from last week and was the largest decline
since December 2000. This is also the lowest level since Jan
2002. With consumers still benefiting from the refinancing boom
and sales still dropping it shows how bad conditions really are.
With little pent up demand, high consumer debt levels and market
wealth evaporating it would be real easy for the consumer to
close their wallets and become couch potatoes until things
improve.

There are strong signs that the real estate bubble is bursting
and even if the Fed does cut rates next week the difference in
mortgage rates probably cannot fuel another wave of buying.
Anybody who has not already refinanced is probably not credit
worthy as they have had well over a year to take that step.
The Fed is simply running out of straws to grasp for why the
economy should be growing.

Techs saw more writing on the wall and that writing was from
the World Semiconductor Trade Statistics Committee. They lowered
their estimates for global chip growth for 2003 to +16.6% from
21.7% citing failure of the expected recovery to appear. Even
worse the Americas were projected to see a -11.3% decline in
sales. I said decline, not slower growth. They said the 4Q was
on track to come in well below estimates. The Gartner Group
ridiculed the estimates saying they were way to high and
unachievable. Gartner analyst Richard Gordon said most forecasters
were already down to the low teens or 10% range for global
growth. Whoever you believe the picture is clear. The tech
sector is in trouble and earnings estimates based on unreasonable
expectations are in trouble and more warnings are in our future.

Those warnings should be about a month away since the current
earnings season is drawing to a close. The Cisco earnings on
Nov-6th will be the last major report in this cycle. Dell has
already affirmed and should not be a factor on the 14th. Cisco
is the next problem and then warning season will start around
Thanksgiving. We will have three weeks to coast on the earnings
already reported and speculate on the 4Q results.

The only positive thing from today's confidence report was the
increased possibility of a rate cut next Wednesday. If it did
happen there is almost unanimous agreement that it will have
no real impact. With Fed funds at 1.75% today you have a real
rate of zero after backing out nominal inflation. Cutting rates
again will only impact the sentiment on Wall Street and on Main
Street around the country. Since it takes 6-9 months for any
cut to be seen in the economy it is entirely conceivable that
the Fed could be raising rates again before any cut next week
would be felt. The rate cut may be a no show next week despite
the expectations. With only three real bullets left in the Fed
gun, they would never cut below 1.00%, it means the Fed must be
very careful about using them. If they gave us an "insurance"
cut next week and there was a terrorist attack two weeks later
then they would have even less ammo to combat it. With an Iraq
war almost a certainty they need to save ammo to combat that
event if it goes bad. Consumer Confidence fell to 55 during
Desert Storm. Lastly, there has been no Fedspeak to telegraph
an imminent rate cut. The Fed almost always gives the market
guidance in advance that they are considering a cut. Instead
there has been an abundance of "more than adequate stimulus"
already in the economy. That is Fed shorthand for "we are not
cutting again." A drastically bad nonfarm payrolls report on
Friday is about the only thing that could prompt the Fed to
act. Care to speculate how the market will react with no cut
on Wednesday?

The "rate cut" theory was all Wall Street could talk about today.
Unfortunately this talk resulted in taking any cut out of contention
as a market mover. Whenever Fed funds futures show nearly a 100%
chance of a cut, (85% tonight), THAT CUT IS ALREADY PRICED INTO
THE MARKET! Think about it. Consumer Confidence hit a nine-year
low, GE warned, Dell retracted, CSCO downgraded, chips were
slashed and the Dow closed up on the news. Why?

Glad you asked. My email has been burning up all day with readers
ready to grab the Prozac, shoot their computers or worse. "Why
in the heck" is the basic question. There are multiple answers
to this question. First is the historical seasonality of the
October rally. Much more often than not the end of October brings
an end to bear markets and beginning of new bulls. This sets up
retail and institutional traders who have been sitting on the
sidelines waiting patiently as monster dip buyers. Everyone who
did not buy the bounce off the Oct-10th lows thinks every dip is
their last chance to climb on the train. According to Wall Street
Digest there is $6.5 trillion in cash sitting on the sidelines
and waiting for the signal the recovery is underway. Having that
much cash burning a hole in investors pockets is sure to find
a few willing spenders with every dip.

There is still the year-end for mutual funds on Oct-31st. They
may have completed their tax selling but they have not completed
marking up their portfolios for year end. This means they are
using idle cash to bid up stocks at every opportunity to keep
prices as high as possible until their books close. Every $1 of
gain in a stock price before Thursday's close adds to their
claimed returns for advertising. This was the underlying bid I
was expecting for the week last Sunday. The best way for funds
to make maximum use of their funds is to implement aggressive
buy programs at critical support and resistance points. This is
exactly what we saw today. The Dow was moving sideways to down
at about 8225 at 2:30 and the Nasdaq was setting new lows. At
2:45 several huge futures orders hit and triggered the buy stops
on the S&P. Just when the momentum failed and shorts started
taking new positions they did it a couple more times until the
Dow hit tough resistance at 8400 that they could not break. It
looked like three aggressive futures programs at 3:PM, 3:15 and
3:30. Was it funds? Was it the plunge protection team? Both?
Nobody knows but it was not a million retail traders thinking
that 3:00, 3:15 and 3:30 were suddenly prime dip buying
opportunities because all the bad news was out.

You do have the few retail traders who think a Fed rate cut
is the magic bullet for the markets and will support the market
by nibbling at stocks all week. I get emails every day complaining
that we are not more bullish and don't we know this is a new bull
market. I won't get into that here but the perma bulls are still
alive and kicking. They are counting on October living up to its
reputation as being the bear killer.

This brings us to Wednesday. Earnings are still with us but the
bigger blue chip companies are done. The majority of the earnings
left are second and third tier companies and the quality of the
earnings tends to be lower than the early reporters. The possibility
of major positive surprises are slim. We are faced with the death
by 1000 cuts torture as these smaller companies report. The
bloom is off the rose and we will be left with the battle between
sellers at resistance and funds trying to propel rallies off
support. Since any rate cut is already priced in I would think
Thursday/Friday could be a challenge. This is definitely not a
week for the faint of heart.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Gee, Dow closed at +1 point, must have been a Boring Day...
by Alan Hewko
futures@OptionInvestor.com

___________________________________________________

Quotes:
4:00 PM Cash Market Close     ES 881, YM 8353, NQ 963
4:15 PM Future's Market Close ES 881, YM 8343, NQ 962
5:00 PM YM Dow Futures close: YM 8351
Note: ES printed 880.00 near 4:13 PM but did not dip lower.
7:00 PM Futures: ES 884, NQ 968

Dow   8368  +  0.90 (Day Low 8200) (Strongest index today)
SP500  882  -  8
COMPX 1300  - 15

Advance/Decline by Volume was bearish all day, and closed near
its day lows despite the 2:30 PM market rally.

Abbreviations used by the Futures Market:
                                    Ticker $ move per index pt
ES = E-mini SP500 December futures   ES02Z    $ 50 per ES pt
YM = E-mini Dow $5 December futures  YM02Z    $  5 per YM pt
NQ = E-mini NDX 100 December futures NQ02Z    $ 20 per NQ pt

_____________________________________________________________

First they Sold the Bad News, then late in the afternoon they
Bought More Bad News from GE. Dow closed + 0.90 = Boring. Dow
also sold off 200 points from the open as well as rallying 200
points and that equals NOT Boring.

Tuesday found the market opening with a neutral bias, as PG (a
Dow Stock)'s positive earnings helped offset Monday afternoon's
selling.

9:30 AM Cash Open Futures Quotes:
ES 887, YM 8340, NQ 979

The only important Economic Report was the 10:AM Michigan
Consumer Confidence numbers for October. Sept.'s level was 93.7
and the expected number for Oct. was 90.0.

10:AM Futures quotes (pre Sentiment report) was approximately:
ES 887, YM 8355, NQ 978

The Michigan Consumer Confidence came in at the mega-bearish
number of 79.4, the lowest numbers since 1992.

The market instantly and with tremendous volume SOLD in a flurry
of red. To give you an idea: ES sold off 10 points in 60 seconds
the moment that number came out.

As I've said before, even if your never trade futures, watching
how ES reacts after a key piece of market data can be valuable,
as the SP500 futures pit always seem to have the fastest reaction
to any news of this type.

For 30 "very red" minutes - the market sold as the Bears were
thinking "Finally - we are following logic and selling off on
terrible news"

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




At 10:30 AM the Dow was at 8200.04 and ES 865-858 level where
Bids were found and for the next several hours, the market Leaked
higher.

One might wonder why the markets stopped selling at those 2
levels, here are two charts which might explain it:

Chart: ES02Z (E-mini SP500 futures) 15 day - 5 minute





Chart: SPX (SP500 Cash) Daily Chart:





Chart: Dow Industrials - one month view




You can see in above Dow chart how 8200 is a support level.

At 2:00 PM to 2:30 PM period, there was News of an 18 wheeler
Federal Express truck near St. Louis exploding and thoughts
turned to a possible terrorist action.

2:30 ES made a double bottom in the 867-868 level, matching its
lows from 10:30 AM; and from this double bottom, shorts covering
going into the close (almost seemingly with some "panic short
covering" found the Dow printing 8399.54 (but could not print
above 8400).

Shorts then re-entered at the Dow 8400 level, and before the
close, General Electric (GE) released some more negative news
about $800 million of new losses; along with some scary words
regarding their amount of exposure to the airline industry.

In a somewhat surprising fashion, Dow cash 8350 held during this
selling and closed 'flat' for the day at 8368.

Dow sold off 200 points off the very bad confidence report but
bounced 200 points off its 8200 lows.

There was logic to the morning's selling, there was logic to the
bounce of Dow 8200/ES 868 level; but frankly, I was surprised to
see Dow cash 8350 hold very late in the day moments after that GE
bad news came out.

Chart: Dow Jones Industrials Tuesday 9:30 AM - 4 PM





Chart: NQ02Z (E-mini NASDAQ futures) Friday 9:30 AM - 4:15 PM






Before getting to thoughts for Wednesday, I would like to make a
non-market observation regarding the recent death of a man who
for 20+ years had an impact to the PC industry, and as many
traders are "fans" of computers and technology; and perhaps can
even remember when the very first IBM PC was released.

I read this week's PC Magazine and was saddened to read about the
death of Jim Seymour. Someone I've read for a great many years,
and someone you could always share an email with. I can't imagine
how many emails he would get in a month, but he somehow always
found time to respond.

Image of Jim Seymour:




RIP Jim Seymour, thank you for always explaining new technology
so clearly for 20 years.



THOUGHTS FOR WEDNESDAY

Lately, charts seem to outweigh sentiment.

With that in mind, Dow 8350 and Dow 8400 will likely control
Wednesday's action. If forced to 'guess', I would guess Lower.

Lately, it seems best to approach each day with a fresh eye and
not try to form too strong an opinion at 8:PM at night for what
tomorrow might bring.




TUESDAY TRADES:

There were two trades:

First was a LONG YM Dow $ 5 futures at Dow 8200.
Profits were taken at 3 exits of : +35, +55, +30

Second was a YM Short at 8367 off the Dow 8400 late afternoon
top, and that trade was covered for Profits of +35, +15 and
currently has taken 1/4 size position from that short into the
overnights with a stop at YM 8397.

Alan Hewko

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


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

Color it red with lead-based paint

Aside from the Dow Industrials (INDU) 8,368.94 +0.01% and a 0.9
point gain, the major market indexes finished in the red after a
weaker than expected October consumer confidence reading.

The Dow Industrials rallied late, thanks in part to a hung jury
in a Rhode Island-tried lead-based paint case, which had the
judge declaring a mistrial.

The state was trying to hold eight former manufacturers of lead
paint liable for lead poisoning in 35,000 Rhode Island children
since 1993.  While more than 40 lawsuits have been filed since
1989 by individuals and communities against lead-paint companies,
all have failed, and Rhode Island was the first state to try and
sue the industry under public nuisance law.

The news had chemical giant and Dow component DuPont (NSYE:DD)
$41.20 +1.47% reversing earlier losses, while the world's largest
paint manufacturer Sherwin-Williams (NYSE:SHW) $27.68 +12.7% saw
a more dramatic rise.

Today's disappointing economic news had investors running back
toward the Treasury markets as YIELDS in the 5, 10 and 30-year
maturities fell.  The very short-term 13-week Note saw its YIELD
($IRX.X) fall to 1.472%, which is a 52-week low!!!!

This is perhaps the SAFEST of Treasuries and many investors are
familliar with this note as it is what many banks use to
establish their short-term money-market yields from.

In the spectrum of "risk" it's time to look at the RISKIEST
Treasury bond and the 30-year.  It's one thing to "know" that
Treasuries are seeing buying, and understand the relationship of
supply and demand as to where cash is moving, but the 30-year,
which has the highest YIELD (currently 5.009%) of the Treasury
bonds (this makes sense as the most risky should have the higher
YIELD) gives us the observation of just how the MARKET may view
the relationship of risk/reward when considering a Treasury
bond/stock investment.

Those investors putting money into the 13-week, 2-year and 5-year
aren't necessarily doing it for the "return" those lower YIELDS
offer.

Its the 30-year, or the RISKIEST bond, that is still backed by
the full faith and credit of the United States Government that
would carry the greatest risk of price deterioration under the
scenario of a recovering economy, which would eventually lead to
a tightening Fed in the future.

Let's take a look at the 30-year YIELD.  While we will quote
PRICE in our updates to give us a sense of percentage gain or
loss, it is the YIELD that the MARKETS buy/sell when making their
risk/reward judgments.

Tonight, I'm also going to try and draw some information from a
YIELD trade in the 30-year that I profiled as bullish (bearish on
the bond's price, but bullish on the YIELD calls) from 10/11/02
(market monitor 02:03:20) and then recommended to close out for a
gain on 10/23/02 (market monitor 10:31:45).

It will be those observations that perhaps help you the reader to
understand what to be looking for in the coming sessions.
Today's trade in the 30-year YIELD ($TNX.X) looks to have equity
bulls still in the game right now and how things play out in the
30-year may have dramatic impact on equity prices in the coming
weeks.

30-year YIELD Chart - Daily Interval




I only review a past "bullish" trade in the 30-year YIELD calls
to get us in the mindset of how nice that type of trade treated
some subscribers.  We didn't get the "bottom" and we didn't get
the "top" of the recent move, but did pretty good.  It's
interesting to note that past "sharp" daily declines have seen
some rebounds in YIELD as bond-traders position themselves.
Eventually, supply/demand plays out and a trend unfolds.

It's interesting to me that the Dow Industrials (INDU) reversed
losses by session's end, and the bulk of the move came AFTER the
bond market closed.  However, we'll take note that 30-year bond
bulls were not so aggressive as to buy this "riskier" bond long
and hard enough today to get this YIELD back below this bond's
old downward trend.

Right now, this bond is "telling me" that the MARKET looks to be
near-term defensive, but still looks to be longer-term bullish
toward EQUITIES.  However, just as we will monitor "old" downward
trends in the equity indexes we're trading, for stocks/indexes to
hold above their lowers, then the 30-year YIELD along with
stocks, should not get "back on old downward trend."

Concerning to an equity bull is the "sharp" move lower in this
riskier bond's YIELD.  This does tell us that there was some
aggressive buying.  The FACT that the very short-term 13-week
YIELD ($IRX.X) fell to a new 52-week low is also a negative for
equities near-term, but also reflects a MARKET that is looking
for a Fed rate cut after today's action.  If not next week, then
by December as the December 30-day Fed Funds (ff02z) 98.56 jumped
sharply today and now has MARKET participants predicting a Fed
funds rate of 1.44% by year's end.  We can say this by
subtracting the 30-day Fed Funds rate of 98.56 from base 100 or
(100-98.56= 1.44).

The realization that Fed Funds, which currently stand at 1.75%
can only go to 0%, makes the 30-year Treasury YIELD ($TYX.X)
discussed above of 5.09% begin to look attractive if the MARKET
is thinking no economic growth and prolonged weakness.  It is
perhaps this point that puts the trader in a mindset that he/she
must be prepared for some volatility in the next 5 trading
sessions and why PARTIAL positions should be traded to help a
trader weather some near-term turbulence.

Dow Industrials Chart - $50 box




Today's trade at 8,250 has the Dow Industrials giving a sell
signal and has the chart looking more defensive.  This is the
first sell signal in the upward trend, and often times this will
be bought by institutional bulls that have firm knowledge of the
future.  However, with the Dow Bullish % ($BPINDU) at 56.67% and
very close to August's relative high reading of 60%, I'm now
turning very cautious and more bearish this major market index
and it would take a trade at 8,600 or higher to change my mind
near-term.

If Treasury YIELDS don't move above their recent relative high
YIELDS, then I doubt the major indexes will either.

S&P 500 Index Chart - $5 box




Today's trade at 875 in the SPX has bulls immediately assessing
downside risk to the bearish vertical count of 830 and upward
trend of 825.  Look for bears to begin establishing some bearish
positions with stops just above the recent high of 905.  That
trade at 905 begins to look like a "bull trap," which is a point
and figure pattern which is described as a triple-top buy signal,
which is quickly reversed lower and sell signal is generated.
More times that not though, the "bull trap" is found when the
bullish % charts are move "overbought" and above 70% bullish.

Today's action did see a net loss of 6 stocks to point and figure
sell signals in the S&P 500 as the bullish % edges lower to
48.40%.  It would still take a reading of 42% to have the S&P 500
Bullish % reversing lower into "bear confirmed" status, while it
would take a higher reading of 60% to achieve "bull confirmed"
status.  Current condition here remains "bull alert."  Traders
and investors should be able to begin making some good
correlations between the bullish % levels in the S&P 500 and the
SPX chart itself.  Bears begin assessing risk to 910, while
targeting a bearish count to 830 or upward trend of 825.  Until
the Bullish % chart were to reverse lower, caution for BEARS is
still advised until more internal damage/weakness is found.

S&P 100 Index - $5 box




The OEX Bullish % still shows internals holding strong, but it
becomes apparent that there's some formidable technical
resistance in play just below 465.  Bears will use late-August's
similar bullish % readings of 59% to establish some bearish
trades, with good risk/reward potential with a tight stop just
above at 465.  Any type of decline to 430 in the next couple of
sessions would most likely get a trader's bounce higher and
potential 3-box reversal back up to 445 or even 450.

Again, the OEX Bullish % ($BPOEX) saw a net loss of just 1 stock
to a point and figure sell signal, which has the Bullish %
slipping to 55%, just off Monday evenings 56% reading.  It would
take a reading of 50% to have this index falling back into "bear
confirmed" status, while a reading of 60% is needed to have the
OEX achieving "bull confirmed" status.  One can envision a trade
at 465 combined with a bullish % reading of 60% having the OEX
look further bullish.  As such, no sense in BEARS being FULL
POSITION short/put at this point as it would be deemed VERY EARLY
to be overly bearish right now.

NASDAQ-100 Index Chart - Daily Interval




The point and figure chart shown this weekend for the NDX is
little changed, but the bar chart of the NDX with retracement set
from the August highs to the recent lows gives us the perspective
that a little "trap" may have been sprung yesterday morning.  I
think "tap" only because yesterday morning, Treasuries were
seeing buying, but there may have been some pent up demand by
nervous bears wanting to cover that have held through the rally.
The "perfect" time for market makers in NASDAQ-100 stocks to
implement some traps.  You know... back of the bids, suck in some
longs, then let them have it?  I'm looking for resistance to
begin forming near today's highs today's intra-day violation of a
retracement level may have market makers starting to get a little
more aggressive and willing to sell some inventory at the offers.
With oscillators starting to roll lower, NDX look vulnerable to
922 near-term, close to its 50-day SMA.  This would correlate
with QQQ near $22.81.

Of course, market makers will be keeping an eye on bond market in
order to sense potential order flow and so shall we!  However,
with recent buying in Treasuries, it my best guess that order
flow from the bulls is beginning to dry up.  If bears find out
and stop covering, watch out below for tech.

Today's action saw a net loss of just 1 stock to a point and
figure sell signal in the NASDAQ-100.  This has the NASDAQ-100
Bullish % ($BPNDX) slipping to 54% from Monday's reading of 55%.
Internals still holding up as last week's bullish % readings were
also 55% on Thursday and Friday.

Jeff Bailey


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

What Will it Take?
by Steven Price

Rangebound, rangebound, rangebound.  I almost convinced myself
that we were heading lower and had fallen through the floor.
Then, out of nowhere, came Sir Alan and his rate cut, scooping up
fallen equities and polishing the store display windows for
shoppers during the holiday season.   In one of the truly
confounding days of the year for the market, we got a time bomb
that never went off.  After this morning's Consumer Confidence
number came in more than 10 points below expectations (TEN
POINTS!!!), the markets held for a short period of time and then
began their slide.  Consumers who don't believe in a stock market
recovery and are worried about their jobs, certainly don't spend
money on choo-choo trains and Christmas ornaments.   The man on
the street interviews on CNBC all sounded doom and gloom, as
would be shoppers talked about not having money to spend during
the holidays and having a hard time keeping up with the cost of
living.  The Grinch truly had stolen Christmas, along with a good
chunk of investors 401 (k) plans.  And then the bears' hearts
grew three sizes and scooped the Dow 30 at 8200.

In last night's wrap, I said to look for a break in 8250 for
signs of a breakdown.  Apparently, I was off by 50 points (which
really irritates me since I erased 8200 and upped the support
level before publication). However, it appears I'll have another
chance at playing Nostradamus, as the bulls stepped in and kept
the Dow pinned between 8200 and 8550.  The 170-point gain off the
low of the day (8198) was just forceful enough to underscore the
belief that bad economic news is simply stoking the fire for a
rate cut.

The Retail Index (RLX.X), which looked like it was on its way to
breaking below support at 280, instead bounced just above, at
282, before finishing up on the day.   The index closed at 293,
for a gain of almost 20 points off the low of the day and left
this analyst wondering how holiday sales will recover from the
current declining trend in time to save Christmas. With Consumer
Confidence at its lowest level in nine years, it would seem that
a sell-off is in order.  However, the idea that a rate cut, which
usually takes 6-9 months to work its way through the economy,
will somehow translate into increased holiday sales, apparently
has made its way into the sector, which I wouldn't buy with
monopoly money right now. However, I am also not going to start
shorting a group that is mysteriously rising.  There should be
plenty of opportunity once we get a breakdown here and I'll be
patient and wait for the right entry points. A close below the
50-dma of 286.94 would be the first step and a break below 280
would be the next.

One of these days, the S&P 500 may manage a hold above 900, but
right now it seems to be heading in the opposite direction.  Even
though the Dow glowed green by the close of business, the SPX
lost 8 points to finish at 882.15.  It has been flirting with 900
recently and a close over that level would confirm bullish action
in the Dow.  However, the broad based index has not been able to
hold over 900, and now appears to be confirming the recent
economic data, even if its more famous counterpart is giving the
opposite impression. The two indices generally move in concert,
but the technical developments in the SPX have been more reliable
recently, starting with the bounce from its July 24 low that
ignited the recent rally.

The semiconductor sector has given back some ground after its
astounding 38%, three-week gain.  The Semiconductor Sector Index
(SOX.X) peaked its head over 300 briefly on Monday and has
stalled, falling today to a close of 282.72.  It bounced just
below its 50-dma of 273, reaching an intraday low of 271.  The
50-dma has provided support on several occasions in the last week
and a close below that level would be an indication that short
plays in the sector may be plausible again.   Maxim Integrated
Products (MXIM) released earnings after the bell that met
expectations.  The company, however, made cautious statements
about a decline in orders and suggested that their customers have
limited visibility as to when demand for their products will
increase.  It will lower its capex spending and the CEO will take
no salary beginning next June, along with a 30% pay cut for its
vice presidents.  Doesn't sound good for the sector, however this
mirrors many of the recent announcements during the recent rally.
After an initial dip in the stock, MXIM was trading to the plus
side after hours.

The bad news keeps coming and the bulls keep buying the dips.
While that's not a formula that makes me want to buy out of the
money calls, it does make me weary of shorts. We will get more
data at the end of the week, including 3rd quarter GDP,
unemployment and nonfarm payrolls.  While I would like to think
this will give us a sense of direction, my guess is that we'll
have to wait until next week's FOMC decision on rates before
seeing a long term trend begin to form.  Until then, trade the
swings and don't expect bad news to necessarily drive down the
market.  That news may just be a call to Sir Alan.


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7286
Current     :  8368

Moving Averages:
(Simple)

 10-dma: 8361
 50-dma: 8220
200-dma: 9314



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  882

Moving Averages:
(Simple)

 10-dma:  886
 50-dma:  873
200-dma: 1006



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     :  960

Moving Averages:
(Simple)

 10-dma:  964
 50-dma:  916
200-dma: 1172



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

The Semiconductor Index (SOX.X): The SOX finally managed to clear
resistance at 300 intraday on Monday.  However, it has turned
around and successfully re-tested the 50-dma (573).  This dma
provided support last week and it will now be interesting to see
which direction we will break through.  Although Maxim (MXIM),
which released earnings after the bell, made cautious comments
about the future, the stock traded up and may indicate another
run at 300 for the sector.  We will be looking for the breakdown
below the 50-dma, rather than try to play a sector long that has
shown declining revenues and poor future visibility.

52-week High: 657
52-week Low : 214
Current     : 345

Moving Averages:
(Simple)

 10-dma: 275
 50-dma: 273
200-dma: 431


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

Market Volatility

The VIX crept back up today on the drop in the broader markets.
The end of day rally in the Dow couldn't lift the S&P 500 or OEX
into positive territory and we saw an increase in premiums as
traders got another glimpse of the downside. With a host of
economic data coming out at the end of the week and the FOMC rate
decision due next week, we will most likely see a VIX between 35
and 40, unless we get a breakdown below Dow 8200, or rally above
8600.


CBOE Market Volatility Index (VIX) = 36.80 +1.13
Nasdaq-100 Volatility Index  (VXN) = 52.47 +0.95

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.74        480,667       357,886
Equity Only    0.64        354,334       226,130
OEX            0.91         28,432        25,913
QQQ            0.18         49,429         8,669

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

Bullish Percent Data

           Current   Change   Status
NYSE          36      + 0     Bull Confirmed
NASDAQ-100    54      - 1     Bull Alert
Dow Indust.   57      + 4     Bull Confirmed
S&P 500       48      - 1     Bull Alert
S&P 100       55      + 2     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   1.12
10-Day Arms Index  1.05
21-Day Arms Index  1.02
55-Day Arms Index  1.27


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       1114          1611
NASDAQ     1401          1711

        New Highs      New Lows
NYSE         23              63
NASDAQ       37              77

        Volume (in millions)
NYSE     1,709
NASDAQ   1,590


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

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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******************
Weekly Fund Screen
******************

Emerging Market Debt Funds

These three emerging market bond funds have generated positive
results in 2002 and equity-style returns for the last three to
five years with less volatility than the equity market overall.

Emerging market debt funds seek to provide high current income
and some capital appreciation by investing assets in government
and corporate debt securities of emerging nations.  Most invest
in the lowest-rated bonds, including those in default.  Some of
these developing nations are too small to permit serious equity
investment, but have eurobonds aplenty.

Emerging market debt securities typically carry a much greater
risk of default (and price decline) than higher rated bonds of
developed nations.  Accordingly, emerging market bond funds in
general have greater risk and reward potential than global and
international fixed income funds.

Who should invest?  Emerging market debt funds may be suitable
for long-term investors seeking high current income and capital
appreciation as well as greater diversification for their fixed
income investments.  Such investors should be risk-tolerant and
by that we mean those who can accept the volatility and special
risks inherent in international emerging markets.

Most funds in this category are measured against the JP Morgan
Emerging Markets Bond Index Plus (EMBI+) which tracks the total
returns for traded external debt securities in emerging markets.
The EMBI+ includes "external-currency-denominated" Brady bonds,
loans and Eurobonds, as well as dollar-denominated local market
instruments.

The EMBI+ expands upon Morgan's original Emerging Markets Bond
Index that was introduced in 1992 and covered only Brady bonds.
It is concentrated in instruments from the three leading Latin
American countries (Argentina, Brazil, and Mexico), reflecting
the size and liquidity of those external debt markets.  Russia,
Poland, Bulgaria, Morocco, Nigeria, the Philippines, and South
Africa represent the non-Latin nations in the index.

Morningstar's system compares these funds against Salomon Smith
Barney's Emerging Markets Mutual Fund Debt Index.

Screen Process

As we often do, we used Morningstar's Fund Selector tool online
(www.morningstar.com) to help us quickly identify the best fund
bets in the category on a risk-adjusted performance basis.  Our
initial screen is shown below.

 Morningstar Category = Emerging Market Bond
 Minimum Initial Investment < or = $3,000
 Star Rating = 3 Stars, 4 Stars or 5 Stars

That simple screen produced 16 results, including multiple share
classes of certain load funds.  In reality, we are talking about
two no-load funds plus four load funds with various class shares,
as follows:

 No-Load Funds:
 Fidelity New Markets Income (FNMIX)
 T. Rowe Price Emerging Markets Bond (PREMX)

 Load Funds:
 Alliance Emerging Market Debt (AGDAX, AGDBX, AGDCX)
 Federated International High Income (IHIAX, IHIBX, IHICX)
 Fidelity Advisor Emerging Market Income (FMKAX, FBEMX, FMKCX)
 PIMCO Emerging Markets Bond (PAEMX, PBEMX, PEBCX)

Next, we checked to see which funds have the best risk adjusted
performance ratings from Morningstar.  The group's largest fund,
Fidelity New Markets Income, has produced above average returns
with average risk versus its category peers for an overall star
rating of four stars.  Only the institutional class of Fidelity
Advisor Emerging Market Income Fund is 4-star rated, with other
shares classes carrying an overall 3-star rating by Morningstar.

T. Rowe Price Emerging Markets Bond Fund holds a 3-star overall
rating from Morningstar but is 4-star rated for the trailing 3-
year period.  Over the last three years, the fund has generated
above average returns with average risk compared with its peers.

PIMCO Emerging Markets Bond Fund sports the only 5-star rating
among the six funds.  According to Morningstar, its risk level
within the category has risen from below average to average in
the last three years, but total returns have historically been
high in relation to the category peer group.

Alliance Emerging Markets Bond Fund has produced total returns
that are up there with these three other funds, but the fund's
risk level is much higher, so on a risk-adjusted basis it does
not compare as favorably to them.  Meanwhile, Federated's fund
may be the least volatile of the six offerings, but its 3-year
annualized return trails the category average by a wide margin.

Considering the depth of Fidelity, T. Rowe Price and PIMCO, we
think their emerging market bond funds offer investors the best
return-risk-expense tradeoff.

Fidelity New Markets Income (FNMIX)

 Total Assets: $386 million
 Expense Ratio: 0.99%
 Yield: 9.42%
 Manager: John Carlson (since June 1995)




Fidelity New Markets Income Fund (FNMIX) seeks current income,
with capital appreciation a secondary objective.  It normally
invests at least 65% of assets in debt instruments issued by
governments and companies in emerging markets.  It emphasizes
investment in Latin America, and, to a lesser extent, in Asia,
Africa, and emerging European nations.

Debt instruments held by the fund may be below investment-grade,
and some securities may be in default.   The fund invests in at
least three countries, and it manages the asset allocation with
regard to geographic region and currency denomination.

Manager John Carlson is a seasoned veteran.  He serves as vice
president and portfolio manager with Fidelity Investments, his
employer since June of 1995.  Previously, Carlson was executive
director of emerging markets with Lehman Brothers International
from 1992 to 1995 and before that was vice president of capital
markets with Daiwa Securities of America from 1990 to 1992.  He
also served as president and CEO at Security Pacific Securities,
and as Merrill Lynch Capital Markets' vice president and manager
of hedging and arbitrage.

The fund sports a 3.1% YTD total return as of October 28, 2002,
ahead of the category average by 0.5%.  Its trailing return for
the last 12 months of 6% beat the Salomon Smith Barney Emerging
Markets index by 3.4%, but lagged the category average by 2.1%,
ranking in the category's third quartile.  Still, that was much
better than the 17.1% yearly loss by the stock market (S&P 500).

For the trailing 3-year period through October 28, the fund has
an annualized total return of 12.0%, in line with the benchmark
return and almost a full percentage point better than the group
average, ranking it in the second quartile of the fund category.
The fund's trailing 5-year annualized return of 6.7% lagged the
Salomon Smith Barney benchmark by 1.8% but was nearly four full
percentage points above the category average, ranking it in the
category's first quartile.

Adding to the fund's appeal is its no-load structure and below
average 0.99% expense ratio.  Carlson doesn't make big country,
interest rate or security bets says Morningstar.  He makes the
most of the fund's moderation they say, resulting in one of the
group's best risk/reward profiles.  We would have to agree with
that synopsis.

T. Rowe Price Emerging Markets Bond (PREMX)

 Total Assets: $177 million
 Expense Ratio: 1.16%
 Yield: 9.80%
 Manager: Conelius/Rothery (since December 1994)





T. Rowe Price Emerging Markets Bond (PRMEX) is run similarly to
Fidelity's emerging market bond fund - meaning it takes a more
moderate approach to emerging markets investing and emphasizes
country diversification.  The fund maintains no restrictions on
maturity, although the fund's average maturity normally remains
in the 5 to 10 year range.  It may also invest substantially in
dollar-denominated emerging market debt instruments.

Three managers share portfolio management duties today.  Michael
Conelius and Chris Rothery are veteran portfolio managers with T.
Rowe Price International (formerly Rowe Price-Fleming).  Rothery
worked with Fleming International Fixed-Income Management before
joining T. Rowe Price International in 1994, and has eight years
of experience managing "multi-currency" fixed-income portfolios.

Ian Kelson was added in May 2001.  Kelson joined Morgan Grenfell
Investment Services as portfolio manager in 1985 and became head
of fixed-income investments in 1989.   Previously, he spent four
years managing portfolios for Bank of America.

Since December 31, the fund has returned 3.3% for its investors,
compared with 2.6% for the category average, using Morningstar's
numbers.  The fund's 3-year annualized total return of 12.2% was
0.6% greater than the Salomon Smith Barney emerging markets debt
index return, ranking it in the category's 36th percentile (near
top one-third of category).  Trailing 5-year returns rank in the
45th percentile.

According to Morningstar's report, this fund tries to play it
safe by emphasizing country diversification, producing returns
that have been competitive with peers.  Since Kelson was added
last year, relative return performance has gotten better.  For
the trailing 12-month period as of October 28, the fund gained
6.8%, 5.2% above the index benchmark return and 0.8% more than
rival Fidelity's emerging market bond fund.

PIMCO Emerging Markets Bond (PAEMX, PBEMX, PEBCX)

 Total Assets: $264 million
 Expense Ratio: 1.25% to 2.00%
 Yield: 7.80%
 Manager: Mohamed El-Erian (since August 1999)







PIMCO Emerging Markets Bond Fund seeks total return by normally
investing at least 80% of net assets in fixed income securities
issued by emerging securities markets.  Up to 20% of assets may
be invested in various debt instruments issued by the developed
foreign markets.  It also invests in futures contracts, options,
equities, and convertibles, and may invest virtually all assets
in securities rated below investment grade but rated B or higher.

Manager El-Erian is an executive VP and portfolio manager with
Pacific Investment Management Company, his employer since May
1999.  Previously, he was with Salomon Smith Barney/Citibank in
London where he headed their emerging markets economic research
team.  Before that, he served a deputy director and advisor for
the International Monetary Fund.

Over the past three years (approximately El-Erian's tenure) the
fund has had average volatility compared to his category peers,
while KO'ing the competition in terms of returns.  According to
Morningstar, the fund sports a trailing 3-year annualized total
return of 17%, ranking it in the category's 13th percentile for
performance.  That is 3.8% better than the Salomon Smith Barney
Emerging Markets Mutual Fund Debt index return and 5.8% greater
than the category average (using the fund's Class A shares for
comparison purposes).

While you can't give El-Erian full credit for the fund's 5-year
average total return of 11.5% and 3rd percentile ranking in the
category, he deserves most of the credit for this fund's superb
relative performance.  Considering PIMCO's breadth and depth in
the fixed income marketplace, this fund has all the right stuff
to continue producing top-notch investment results.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

Crisis of Confidence

The Consumer Confidence numbers this morning have left many
thinking the Fed can't help but cut rates at the Nov-6th meeting.
However, I have no confidence it will happen or make a material
difference if it does. Traders are very confused about the current
market and have lost the confidence to trade. Is this a confidence
crisis?


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


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The Option Investor Newsletter                  Tuesday 10-29-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: QCOM, MEL, JNJ
Dropped Puts: None
Daily Results
Call Play Updates: CI, PNRA, TRMS, AZO
New Calls Plays: WPI, FRX
Put Play Updates: IP, NTRS
New Put Plays: HIG, SPW


****************
PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

JNJ $56.25 -1.02 (-1.51) Shares of JNJ got caught up in the
selling frenzy that ensued this morning following the abysmal
Consumer Confidence numbers and then spent the majority of the
day trading near the $56 support level.  It looked like a
rebound in progress in the final hour, as shorts were busy
covering, but then the stock rolled over again.  Giving up
significant ground in the final half hour is not encouraging,
especially when the broad market held onto the bulk of its
late-session gains.  The stock is now back under both its
200-dma and the month-long ascending trendline.  We're dropping
the play tonight and would recommend using any early strength
in the morning to exit open positions.

---

MEL $27.71 -0.94 (-1.17) While Financial stocks got hit hard
again this morning on the heels of the disastrous Consumer
Confidence report, the bulk of the intraday losses were wiped out
by the close, thanks to a surge in afternoon short-covering.  Our
MEL play wasn't quite so lucky, as its rebound was far more
sedate, keeping the stock from reclaiming the $28 support (now
resistance) level.  With the stock closing under $28, and daily
Stochastics rolling over, it appears MEL has put in a near-term
top.  Rather than try to wish it higher, we're going to exit
before our $26 stop is triggered.  Traders still in the play can
look to exit on any positive price action in the morning.

---

QCOM $33.69 -1.70 (-2.83) The normal consolidation in QCOM after
its recent runup got dealt a lethal body blow this morning on news
that China would introduce competing CDMA technology.  This threat
to the royalty stream QCOM was planning on pulling in from the
fast-growing Chinese wireless market was not received well, as the
stock was smashed down as low as $32 in early trade before staging
a mild rebound in the afternoon.  While the stock did finish
fractionally above our $33.50 stop, it appears the damage has been
done.  Given the stock's inability to reclaim the $34 level as
support on such a strong afternoon rebound in the broad market,
the prudent course of action is to drop the play tonight.  Use any
sort of upside follow through tomorrow to exit the play at a more
favorable level.


PUTS:
*****


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

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

CALLS              Mon    Tue    Wed   Thu  Week

AZO      84.30   -3.14   1.19 Strong rebound
CI       36.69   -0.92  -1.89  holding support
FRX      98.75   -0.45   1.08  New, recharged
JNJ      56.25   -0.71  -1.02  Drop, lagging
MEL      27.71   -0.50  -0.94  Drop, reg banks tough
PNRA     32.72   -0.28   0.03  Rising slowly
QCOM     33.69   -0.79  -1.70  Drop, bad news
TRMS     51.87    0.35   0.37  new PnF box
WPI      27.58    0.40   0.98  New, breakout


PUTS

HIG      44.40   -1.70  -3.00  New, weak into close
IP       35.89   -0.55  -0.23  big debts
NTRS     35.43   -0.08  -1.12  look for 50-dma break
SPW      41.00   -2.26  -1.44  New, splitsville


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

CI $36.69 -1.89 (-0.31 for the week) Cigna has sat out most of
the last two day's action, slowly creeping down toward its close
on the big drop Friday.  It did bounce hard enough to establish a
4-box PnF reversal, which is the first step in trying to fill an
awfully big gap.  While it is doubtful that CI will fill a gap
$26 wide, it may still climb a few points in that direction. The
company has some restructuring to take care of after failing to
manage its premiums properly, allowing rising health care costs
to outstrip price increases.   However, it announced on Monday
that it would take a charge of under $100 million to accomplish
that goal. CI is the nation's third largest health insurer, which
has been a profitable area for other companies recently.  After
positive earnings reports from Unitedhealth and Wellpoint in the
past couple of weeks, Humana also reported an earnings increase
of 20% on Monday.  The business model works when insurers
estimate increasing costs properly and CI will no doubt make
improvements in that area.  We are still playing CI for an
oversold bounce, and are encouraged by the fact that it has held
support above $35 since the drop. New entries can look for a
rebound in the S&P Insurance Index (IUX.X), which successfully
tested support today at 260.  The index is currently trading
264.43 Look for a move in CI back above $38.00 for entry, or the
IUX to hold above 275.  Leave stops at $34.00.

---

PNRA $32.72 +0.03 (-0.13 for the week) Panera pulled back to
previous support at $31.50, as the Dow tested its low around
8200.  However, the stock once again found buyers and finished up
on the day, although just barely.  While the stock has yet to
hold a close over $33.00, the bounce today was convincing and
rallied strongly into the close.   If the stock continues to
struggle with $33, we will most likely close the play, but that
is hard to do with so much interest heading into the close.  The
stock appears to be consolidating for a move higher and a close
over $33 would underscore this sentiment. The company continues
to grow its business, both in the form of same store sales and
expanding to build new locations. The same store sales percentage
increase is also showing a gain, from 4.4% in August, to 5.1% in
September. We still see the initial target at $35, so we would
recommend holding the play for those traders already long.  New
entries, however, can look for pullbacks above $31.50, or a
breakout over $35, to maximize profits on the play.

---

TRMS $51.85 +0.35 (+0.61 for the week) Trimeris has re-tested
support at $50 several times this week, but has rebounded  to put
together a series of higher lows the last three days.  It also
broke through $52 intraday, a level it hasn't seen since May.
The stock traded as high as $52.28 this morning, before pulling
back with the rest of the broader markets.  It found support,
however, at $51 and then made another run at $52 into the close.
While it was unable to hold this level, the fact is that it
continues to set higher highs. It also added another box the
point and figure chart.  The recent $51 box constituted a spread
triple top breakout, which carries with it the possibility of a
bull trap.  A bull trap is a one-box breakout on a triple top,
followed by a quick reversal down.  The trade of $52 got us past
this possibility and also broke above the previous top on the
bearish resistance line.   The current bullish vertical count for
TRMS is $77, but achieving that count will likely depend on the
success of the company's new HIV drug, which is currently under
FDA priority status review, and should receive a decision by
March 16.   New entries can look for intraday support over $52.
Place stops at $48.00.

---

AZO $84.30 +1.19 (-1.65) True to form, AZO served up a
picture-perfect entry point this morning.  Along with the rest
of the market, the stock sold off sharply on the heels of the
Consumer Confidence report, and briefly traded below our $81.50
stop.  But that ascending trendline that has been in place for
the past few months performed its magic again today.  Buyers
stepped in gingerly at first and then in greater numbers as the
afternoon short-covering rally got underway.  By the closing
bell, AZO had not only made up all of its intraday losses, but
posted a gain of more than $1.  This play is all about
recognizing a pattern and then taking advantage of that pattern
when it repeats.  This marks the fourth time that AZO has found
strong support at that trendline, as buyers take advantage of
the sharp dips to negotiate favorable entries into the stock.
AZO isn't out of the woods quite yet, as it will need to see some
upside follow through to get it back above $86 to set the stage
for a renewed run at the $90 resistance level.  But if the
pattern of higher highs and higher lows holds true, we could see
that level sooner, rather than later.  Traders that missed
today's entry can either target another dip near the $82 level or
else need to wait for the stock to push back over the $86 level
before opening new positions.


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

WPI -Watson Pharmaceuticals - $27.58 +0.98 (+1.76 for the week)

Company Summary:
Watson Pharmaceuticals, Inc., headquartered in Corona,
California, is a leading specialty pharmaceutical company that
develops, manufactures, markets and distributes branded and
generic pharmaceutical products. Watson pursues a growth strategy
combining internal product development, strategic alliances and
collaborations and synergistic acquisitions of products and
businesses.
(source: company release)

Why We Like It:
Watson was already trending upward and rated an outperform by SG
Cowen before Monday's announcement that it had signed an
agreement to produce three new generic oral contraceptives when
the patents expire.  Under the agreement Watson will market and
distribute Ortho- Novum, Ortho-Cyclen and OrthoTri-Cyclen. Cowen
upgraded the stock to a "strong buy," citing the agreement, as
well as 20-23% EPS growth through Q1, more visibility in branded
drug pipeline, belief that the generic drug line is poised to
turn in the second half, and improving generic drug industry
backdrop in 2003.  President Bush also recently said he would
back efforts to bring generics to market quicker, rather than
allow drug companies to extend patents beyond the original
protection terms.

WPI has been setting higher lows since the beginning of October,
while finding resistance at its 200-dma.  The stock broke out
above that resistance yesterday, and added another +0.98 today.
A look at the point and figure shows that yesterday's trade of
$27 established a new buy signal, off of a pattern that looks
like a reverse head and shoulders. That head and shoulders can
also be seen on the daily chart, starting in March and continuing
through a neckline break that coincides with the 200-dma break.
The measuring objective of this pattern establishes a target of
just over $35 for the stock, which seems achievable, given the
$42 bullish vertical count.  Volume has also increased on the
breakout - another bullish sign. The stock closed above
resistance at $27.50 from the beginning of the year, and we view
the current level as an entry point.  However, ideal entries can
be initiated on a pullback above the 200-dma of $25.36.  This
would be the best strategy for conservative traders, as well.
Place stops at $24, just below recent support.

BUY CALL NOV-25*WPI-KE OI= 792 at $3.10 SL=1.50
BUY CALL NOV-30 WPI-KF OI= 721 at $0.50 SL=0.00
BUY CALL DEC-25 WPI-LE OI=  18 at $3.60 SL=1.80
BUY CALL DEC-30 WPI-LF OI= 121 at $0.90 SL=0.00

Average Daily Volume = 600 k


---

FRX – Forest Laboratories $98.75 +1.05 (+1.60 this week)

Company Summary:
One of many specialty pharmaceutical companies, Forest
Laboratories develops, manufactures and sells both branded
and generic forms of ethical prescription and non-prescription
drug products.  . Some of the company's more notable products
are Celexa (for depression), Tiazac (for hypertension and
angina), and respiratory products Aerobid, Aerochamber and
Tessalon.  Additionally, the company produces Infasurf, a
lung surfacant for the treatment and prevention of respiratory
distress syndrome in premature infants.  FRX markets its
products directly to physicians using the company's own
specialized sales force.

Why We Like It:
Momentum breakouts in this market that actually sustain their
breakouts have been few and far between.  But when you find one
that sticks, it often leads substantially higher than originally
thought possible.  That has certainly been the case with generic
drug maker FRX.  Not only did the stock refuse to participate in
the broad market selloff in September, but it actually broke out
to a new all-time high on October 1st, closing just below $90.
That was apparently just the opening act, as the stock worked
higher into its October 16th earnings report and then gapped up
through $95 following the better than expected results, which
were largely due to strong sales of Celexa.  The company stated
in their report that they were comfortable that the second half
FY02 earnings would be up 50% year-over-year.  Those bullish
comments have seemingly put a solid floor under the stock at $95.
Even the broad market weakness over the past couple days hasn't
been able to dent the bulls' enthusiasm for the stock, as it once
again advanced on Tuesday.  The volatile trade over the past week
appears to simply be some consolidation of the recent stellar
gains ahead of the next push up the chart.  Note that the 20-dma
has now risen to $94.98 and should provide support on any
significant pullback.  This is clearly an aggressive play, given
the strong run the stock has already had, but this winner is
continuing to be rewarded by the market for continuing to deliver
on the bottom line.  We want to target new entries on intraday
pullbacks to support near $97.50, or possibly as low as $95.50,
the site of recent intraday support.  Alternatively, momentum
traders will want to enter the play if FRX can blast through the
$102 level to new all time highs.  Note that we only want to trade
a breakout if it comes on strong volume.  Initial stops are set
at $95, as this support level should not be violated if the
uptrend is to continue.

BUY CALL NOV- 95 FRX-KS OI=4615 at $5.70 SL=3.75
BUY CALL NOV-100 FRX-KT OI=3469 at $2.45 SL=1.25
BUY CALL DEC-100*FRX-LT OI=  88 at $5.10 SL=3.00
BUY CALL DEC-105 FRX-LA OI=  49 at $3.00 SL=1.50

Average Daily Volume = 2.05 mln



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

WPI -Watson Pharmaceuticals - $27.58 +0.98 (+1.76 for the week)

Company Summary:
Watson Pharmaceuticals, Inc., headquartered in Corona,
California, is a leading specialty pharmaceutical company that
develops, manufactures, markets and distributes branded and
generic pharmaceutical products. Watson pursues a growth strategy
combining internal product development, strategic alliances and
collaborations and synergistic acquisitions of products and
businesses.
(source: company release)

Why We Like It:
Watson was already trending upward and rated an outperform by SG
Cowen before Monday's announcement that it had signed an
agreement to produce three new generic oral contraceptives when
the patents expire.  Under the agreement Watson will market and
distribute Ortho- Novum, Ortho-Cyclen and OrthoTri-Cyclen. Cowen
upgraded the stock to a "strong buy," citing the agreement, as
well as 20-23% EPS growth through Q1, more visibility in branded
drug pipeline, belief that the generic drug line is poised to
turn in the second half, and improving generic drug industry
backdrop in 2003.  President Bush also recently said he would
back efforts to bring generics to market quicker, rather than
allow drug companies to extend patents beyond the original
protection terms.

WPI has been setting higher lows since the beginning of October,
while finding resistance at its 200-dma.  The stock broke out
above that resistance yesterday, and added another +0.98 today.
A look at the point and figure shows that yesterday's trade of
$27 established a new buy signal, off of a pattern that looks
like a reverse head and shoulders. That head and shoulders can
also be seen on the daily chart, starting in March and continuing
through a neckline break that coincides with the 200-dma break.
The measuring objective of this pattern establishes a target of
just over $35 for the stock, which seems achievable, given the
$42 bullish vertical count.  Volume has also increased on the
breakout - another bullish sign. The stock closed above
resistance at $27.50 from the beginning of the year, and we view
the current level as an entry point.  However, ideal entries can
be initiated on a pullback above the 200-dma of $25.36.  This
would be the best strategy for conservative traders, as well.
Place stops at $24, just below recent support.

BUY CALL NOV-25*WPI-KE OI= 792 at $3.10 SL=1.50
BUY CALL NOV-30 WPI-KF OI= 721 at $0.50 SL=0.00
BUY CALL DEC-25 WPI-LE OI=  18 at $3.60 SL=1.80
BUY CALL DEC-30 WPI-LF OI= 121 at $0.90 SL=0.00

Average Daily Volume = 600 k


---

FRX – Forest Laboratories $98.75 +1.05 (+1.60 this week)

Company Summary:
One of many specialty pharmaceutical companies, Forest
Laboratories develops, manufactures and sells both branded
and generic forms of ethical prescription and non-prescription
drug products.  . Some of the company's more notable products
are Celexa (for depression), Tiazac (for hypertension and
angina), and respiratory products Aerobid, Aerochamber and
Tessalon.  Additionally, the company produces Infasurf, a
lung surfacant for the treatment and prevention of respiratory
distress syndrome in premature infants.  FRX markets its
products directly to physicians using the company's own
specialized sales force.

Why We Like It:
Momentum breakouts in this market that actually sustain their
breakouts have been few and far between.  But when you find one
that sticks, it often leads substantially higher than originally
thought possible.  That has certainly been the case with generic
drug maker FRX.  Not only did the stock refuse to participate in
the broad market selloff in September, but it actually broke out
to a new all-time high on October 1st, closing just below $90.
That was apparently just the opening act, as the stock worked
higher into its October 16th earnings report and then gapped up
through $95 following the better than expected results, which
were largely due to strong sales of Celexa.  The company stated
in their report that they were comfortable that the second half
FY02 earnings would be up 50% year-over-year.  Those bullish
comments have seemingly put a solid floor under the stock at $95.
Even the broad market weakness over the past couple days hasn't
been able to dent the bulls' enthusiasm for the stock, as it once
again advanced on Tuesday.  The volatile trade over the past week
appears to simply be some consolidation of the recent stellar
gains ahead of the next push up the chart.  Note that the 20-dma
has now risen to $94.98 and should provide support on any
significant pullback.  This is clearly an aggressive play, given
the strong run the stock has already had, but this winner is
continuing to be rewarded by the market for continuing to deliver
on the bottom line.  We want to target new entries on intraday
pullbacks to support near $97.50, or possibly as low as $95.50,
the site of recent intraday support.  Alternatively, momentum
traders will want to enter the play if FRX can blast through the
$102 level to new all time highs.  Note that we only want to trade
a breakout if it comes on strong volume.  Initial stops are set
at $95, as this support level should not be violated if the
uptrend is to continue.

BUY CALL NOV- 95 FRX-KS OI=4615 at $5.70 SL=3.75
BUY CALL NOV-100 FRX-KT OI=3469 at $2.45 SL=1.25
BUY CALL DEC-100*FRX-LT OI=  88 at $5.10 SL=3.00
BUY CALL DEC-105 FRX-LA OI=  49 at $3.00 SL=1.50

Average Daily Volume = 2.05 mln



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

HIG - Hartford Financial Services $44.40 -3.00 (-3.48 this week)

Company Summary:
Hartford Financial Services Group is a diversified insurance and
financial services company.  The company provides investment
products, individual life, group life and group disability
insurance products, as well as property and casualty insurance
products in the United States.  HIG writes insurance and
reinsurance in the United States and internationally, and is
organized into two major operations: Life and Property & Casualty.

Why We Like It:
This quarter's earnings reports have been a reminder that it
isn't necessarily the earnings report that matters.  What really
counts is the expectation for earnings and how that matches up
with the actual report.  We've seen numerous Chip stocks totally
miss their earnings estimate and then get bid up sharply the next
day.  The reason why is that expectations were actually lower
than reality.  In contrast is our new Put play, HIG.  The company
reported earnings last night and beat estimates by 4 cents.  But
the company had to lower its full year view to the low end of the
consensus range due to less than favorable results from the
individual annuity side of the business.  Adding insult to injury,
DB Securities cut their earnings outlook for HIG, as well as
trimming their price target from $68 to $61.  While that certainly
isn't good, what really caught our attention was the recent price
action.  After topping out near $49.50, the past two days have not
been kind, as the stock fell through both the 50-dma ($46.25) and
support near $45.  With a fresh double bottom Sell signal on the
PnF chart, things are looking pretty grim for the bulls.  The
vertical count is pointing to a tentative price target of $40, but
that target will fall as long as the current column of O's
continues to grow.  The $46.50 level is shaping up as pretty solid
intraday resistance with strong resistance up at $48.  Any sort
of failed rebound below $48 looks good for new entries, although
momentum players may prefer to enter on continued weakness below
$44, with the $40 level in mind as an initial target.  Given the
volatile nature of the market lately, we're initiating the play
with a wide stop up at $49.50, near the stock's recent intraday
highs.  But for momentum players that enter on a breakdown, we
would recommend using $47 (just above today's intraday high) as
a stop.

BUY PUT NOV-45*HIG-WI OI=325 at $3.10 SL=1.50
BUY PUT NOV-40 HIG-WH OI= 30 at $1.30 SL=0.75

Average Daily Volume = 1.64 mln


---

SPW - SPX Corporation $41.00 -1.44 (-2.92 this week)

Company Summary:
SPX Corporation is a global provider of technical products and
systems, industrial products and services, flow technology and
service solutions.  The company offers networking and switching
products, fire detection and building life-safety products,
television and radio broadcast antennas and towers, life science
products and services, transformers, dock products and systems,
cooling towers, air filtration products, valves, back-flow
protection and fluid handling devices and metering and mixing
solutions.  The company also provides specialty service tools,
diagnostic systems, service equipment and technical information
services.  SPW services a broad array of customers in a variety
of industries, including chemical processing, pharmaceuticals,
infrastructure, mineral processing, petrochemical,
telecommunications, financial services, transportation and
power generation.

Why We Like It:
Remember the good old days, when momentum stocks would run up
into earnings releases or splits?  It seems like just a distant
memory, especially given recent market action.  Rather than run
up into its 2-for-1 split last Friday, shares of SPW sold off
hard, reaching down to post another 52-week low.  Concerns about
the quality of the earnings the company reported on October 22nd
seem to have been the cause, although it didn't help to have
Merrill Lynch follow up with a ratings cut from Buy to Neutral.
Yesterday morning it looked like the stock might actually buck
the recent trend and attempt a rebound, but the attempt didn't
last long.  The open turned out to be the high print of the day,
and the stock has been falling on heavy volume since then, giving
up more than 8% between yesterday's open and today's close.  The
PnF chart is painting an absolutely dismal picture with its recent
Sell signal that is giving us a vertical count of $26, well below
the current price of $41.  There is support near $37.50, (the
site of the September 2001 lows) and then $36 (the stock's
all-time lows).  But once below there, we won't have any
historical support to work from.  Following the big move lower,
$45 appears to be strong resistance, making it a logical spot to
place our stop.  Look to enter the play either on a failed rally
below $45 or on a continued breakdown below $40.75, just below
Tuesday's low.

BUY PUT NOV-42*SPW-WV OI=294 at $3.50 SL=1.75
BUY PUT NOV-40 SPW-WH OI= 25 at $2.00 SL=1.00

Average Daily Volume = 1.16 mln



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The Option Investor Newsletter                  Tuesday 10-29-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three: 

Play of the Day: Call - WPI
Traders Corner: Imagination

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

WPI -Watson Pharmaceuticals - $27.58 +0.98 (+1.76 for the week)

Company Summary:
Watson Pharmaceuticals, Inc., headquartered in Corona, 
California, is a leading specialty pharmaceutical company that 
develops, manufactures, markets and distributes branded and 
generic pharmaceutical products. Watson pursues a growth strategy 
combining internal product development, strategic alliances and 
collaborations and synergistic acquisitions of products and 
businesses.
(source: company release)

Why We Like It:
Watson was already trending upward and rated an outperform by SG 
Cowen before Monday's announcement that it had signed an 
agreement to produce three new generic oral contraceptives when 
the patents expire.  Under the agreement Watson will market and 
distribute Ortho- Novum, Ortho-Cyclen and OrthoTri-Cyclen. Cowen 
upgraded the stock to a "strong buy," citing the agreement, as 
well as 20-23% EPS growth through Q1, more visibility in branded 
drug pipeline, belief that the generic drug line is poised to 
turn in the second half, and improving generic drug industry 
backdrop in 2003.  President Bush also recently said he would 
back efforts to bring generics to market quicker, rather than 
allow drug companies to extend patents beyond the original 
protection terms. 

WPI has been setting higher lows since the beginning of October, 
while finding resistance at its 200-dma.  The stock broke out 
above that resistance yesterday, and added another +0.98 today.  
A look at the point and figure shows that yesterday's trade of 
$27 established a new buy signal, off of a pattern that looks 
like a reverse head and shoulders. That head and shoulders can 
also be seen on the daily chart, starting in March and continuing 
through a neckline break that coincides with the 200-dma break.  
The measuring objective of this pattern establishes a target of 
just over $35 for the stock, which seems achievable, given the 
$42 bullish vertical count.  Volume has also increased on the 
breakout - another bullish sign. The stock closed above 
resistance at $27.50 from the beginning of the year, and we view 
the current level as an entry point.  However, ideal entries can 
be initiated on a pullback above the 200-dma of $25.36.  This 
would be the best strategy for conservative traders, as well. 
Place stops at $24, just below recent support. 

BUY CALL NOV-25*WPI-KE OI= 792 at $3.10 SL=1.50
BUY CALL NOV-30 WPI-KF OI= 721 at $0.50 SL=0.00
BUY CALL DEC-25 WPI-LE OI=  18 at $3.60 SL=1.80
BUY CALL DEC-30 WPI-LF OI= 121 at $0.90 SL=0.00

Average Daily Volume = 600 k



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

Imagination
By John Seckinger
jseckinger@OptionInvestor.com 

Have you ever looked at a chart and said, "Double-bottom!"; only 
for it to turn into another common pattern and trigger your stop
shortly thereafter?  In this article, we will use our imagination 
and try to account for all possible chart patterns.  

The index in question is the Oil Index, or XOI.X.  Timeframe:  
September 25th to October 29th.  Looking at a chart on September 
25th, prices are well below the bearish trend line and seem to be 
paying attention to retracement analysis.  The bearish objective 
most likely is for prices to fall to 418.40 and set a double 
bottom.  There certainly is a pattern of lower highs, so should 
we be short this index at 441?

Try not to cheat.  Use your trading instincts and make an 
"educated guess" on where you think prices are going.  

September 24th  


 

September 30th


 

Well, did you 'speculate' correctly?  Traders that had hoped for
 the double-bottom pattern were most likely stopped out as prices 
seemed to "create a relative low" near 430 and head back towards 
the bearish trend line.  Trust me, these relative lows that 
materialize without having any real historical significance is 
common.  In fact, think of it from another perspective.  
Everybody is thinking about a double-bottom, and shorts are 
watching every tick in order to protect profits.  Shorts have a 
winning trade on, and we all know how impatient traders can get 
when they have the opportunity to take money off the table.  

Ok, time to use your intuition once more.  Where is the XOI.X 
index heading now?  Here is a clue:  When a highly-watched 
retracement number (38.2, 50, or 61.8 percent) coincides with a 
trend line (in terms of TIME), there is a good chance that prices 
will trade opposite of the previous session.  I don't follow 
trading cycles often, but I have seen this work before.  The apex 
can be seen above via the “X” marker.  

October 3rd


 

Well, I probably gave it away.  Yes, prices certainly did reverse 
on October 1st and once again head back towards the bearish trend 
line.  So, what patterns could take place from here on in?  Since 
the index did not settle above the aforementioned bearish trend 
line (as well as closing under the 50% retracement), conclusions 
could be for prices to fall.  

Traders are most likely calling the last two sessions a ‘bull 
trap,’ and odds of a falling wedge developing does make sense.  
Where would the base of this wedge be found at?  Well, the apex 
would be where the red trend line connects with the blue 
horizontal support line.  If you are thinking that a falling 
wedge formation is the right call, remember, this red descending 
trend line would then be tested a few more times before an apex 
is reached.  

What is prices rise back above 475, what pattern could then 
exist?  Maybe a Reverse Head & Shoulders formation with the left 
shoulder at 457 during September 4th?  Possibly.  The point is to 
try to imagine all possible chart patterns.  If you sell yourself 
on the possibility of only one chart pattern, you could be doing 
your trading account a disservice.  

Ok, time to speculate.  With the XOI on its lows, does it make 
sense to expect falling prices?  Take a look at the chart below.  

October 9th


 


Are you surprised that the index failed to reach 418 once again?  
Don’t be.  This really does happen quite frequently.  What was 
surprising was the fact that the XOI rose above the trend line 
without pausing.  Did we draw the trend line wrong?  Always think 
that this could be a possibility.  With the index stopping right 
at the 50% retracement level, technical analysis is still working 
and we will definitely leave that line.  

So, is the 462 level a solid ceiling of some kind?  Remember, 
horizontal support/resistance levels can easily be more important 
than vertical levels.  If prices rise above the 462 level, what 
pattern could take form?  For one, the recent rise could be a 
pole for a bullish flag, right?  Sure.  

Ok, take a look at the chart and make an educated guess on future 
price action.  Are prices going to 500, or back towards 420?

October 15th


 

For the next few sessions, the Index did seem to form a bullish 
flag; however the 50% retracement level was too great and prices 
eventually came under pressure.  As the chart implies, could 
recent price action be the right shoulder of a small reverse head 
and shoulder formation?  Sure.  Why not?  What is interesting is 
that the red bearish trend line once again acted as a powerful 
psychological level.  Therefore, the trend line will remain in 
place going forward, and not discarded as previously thought  

So, if this is a Reverse H&S formation, prices should go back to 
the 50% level and finally breakout to the upside.  The objective 
would be for a move to 500.  Makes sense, and it would be nice to 
see this happen.  There is one problem:  The purpose of this 
article is to use your imagination.  With that said, do you think 
that prices fell on Tuesday and nullified the possible Reverse
H&S formation?  

October 28th 


 

I think I gave this one away as well.  As the chart shows, prices 
fell underneath the 418 level and it was most likely hopeful 
buyers looking at the possibility of a Reverse H&S formation that
allowed a penetration of 418 (read: brought more liquidity to the 
marketplace.  This selling pressure, added to shorts taking 
positions, certainly would take out a relative low).  

If prices continue to fall, maybe we should look for a wedge 
pattern (red lines) instead of hoping for an apex to form?  
Anything is possible.  As a trader, I would look to go long if 
prices rise back above 420.  I would then use a stop at 417 and 
look to exit half of position at 441.  If prices rise above 441, 
I would then look for prices to bid to the blue line and then the 
ascending red line.  

What if prices keep falling?  I would use the descending red line 
as resistance instead of support, and would also look to sell the 
index off the horizontal blue line instead of an area to take a 
long position.  There is some art to this, however.  Prices will 
probably have to drop under 410 before shorts will defend both 
the red and blue lines.  If prices only fall fractionally, longs 
probably would not get too nervous and shorts would most likely 
would not defend the 418 level too vigorously.  

October 29th


 

From futures to stocks to indices to bond contracts, all chart 
patterns allow a trader to “imagine” what could happen.  Sure, 
some patterns are more obvious than others, but it was my feeling 
that it made more sense to do a index that really didn’t have an 
obvious pattern.  Since it didn’t, imagination has to run wild. 

I do believe that certain traders made it their mission yesterday 
to make traders put on a bullish trade based on the hope of a 
Reverse H&S formation.  Who doesn’t like to buy?  Buying is so 
much easier, and higher prices usually mean that our standard of 
living will increase.  Why would we want to sell our standard of 
living short?  We might not, but it is purely a business 
decision.  

Going forward, play with trend lines and different chart 
patterns.  Constantly think:  What pattern should I see?  Would 
it make sense to do the exact opposite of what the chart tells 
me?  Example:  If all traders see a bullish wedge, where will the 
buying then come from?  Don’t get too complex with your trend 
lines; only draw what the majority of traders could also be 
jhidrawing.  Remember:  Leave your emotions at the door.  Good 
luck.  


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