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Daily Newsletter, Thursday, 10/31/2002

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The Option Investor Newsletter                Thursday 10-31-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Longest October on Record
Futures Markets: Best one month for the Dow in 15 years as the Dow 
gains 11% in October.
Index Trader Wrap: Flat line
Market Sentiment: A Scary Story
Weekly Manager Microscope: John P. Hussman: Hussman Econometrics 
Advisors


Updated on the site tonight:
Swing Trader Game Plan: The Real Test Begins


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      10-31-2002           High     Low     Volume Advance/Decline
DJIA     8397.03 - 30.40  8493.92  8336.34 1.85 bln   1776/1417
NASDAQ   1329.71 +  3.00  1347.58  1323.09 1.68 bln   1746/1589
S&P 100   451.23 -  1.37   457.21   447.52   Totals   3522/3006 
S&P 500   885.80 -  4.91   898.83   879.75 
RUS 2000  373.49 -  0.68   376.71   373.05 
DJ TRANS 2260.07 - 17.20  2301.41  2249.54   
VIX        35.91 -  0.17    36.70    35.14   
VXN        52.00 +  1.70    53.67    51.52
Total Vol   3,767M
Total UpVol 1,922M
Total DnVol 1,751M
52wk Highs   118
52wk Lows    146
TRIN        1.75
PUT/CALL    0.87
************************************************************

Longest October on Record

I know that is not a real fact but it sure seemed that way. I
felt like I have been waiting for today to come for months. The
year end for many large funds has passed and all the dressing
up for statements is over. Unfortunately the waiting is not 
over. Normal, whatever that means to you, probably will not 
return to the markets until Thursday of next week. 

Dow Chart


 

Nasdaq Chart


 

What a day to be a fund manager. The economic reports are the 
worst in months and you have to buy stocks to appear fully
invested and ready for the new bull market. It is like getting
caught doing something wrong in front of your friends in high 
school and being told to report to the principal's office before 
going to class tomorrow. You have to keep up pretenses for the rest 
of the day to avoid losing face with your crowd but knowing that
you are going to get serious licks by the principal the next 
morning. I am obviously dating myself and speaking from personal 
experience. They probably don't give "licks" any more in high
school but I racked up 17 consecutive days once in the mid 60's. 

Back to the point. Funds that were forced to go long today to 
save face are likely to get whacked at the open tomorrow. The 
terrible economic news is eventually going to strike home and
Friday could be the start of that process. 

The day began with a GDP for Q3 that at 3.1% was far below 
consensus of 3.7%. Inventories rose only $1.9 billion which
indicates that businesses are not expecting any recovery anytime 
soon. This was down from $4.9 billion in Q2. This paints a 
lower profit picture for Q4 since lack of inventory prevents
sales growth. What GDP growth there was came from auto sales
which were 22.7% of the growth. Economists have been saying
that the quarter began with a bang and ended with a sigh. The
majority of the gains came in July when growth spurted to +4%
for several weeks on the back of summer auto sales but slowed 
to the current estimates of only 1.7% by quarter end. 

This paints a very negative picture of the current economy. 
Auto sales have dried up. Mortgage applications fell -20% last 
week and it was the third weekly drop in a row. The housing 
bubble is bursting and the refinancing wave is over. Estimates 
of GDP for the 4Q are less than 2.0%. Several analysts
pointed to a 6% jump in business equipment and software as 
evidence of a recovery but they forgot about the one time sale
that Microsoft held when it changed its licensing method. 
Remember the record bounce in MSFT earnings reported this month 
from that one time event. Ditto for the internal GDP numbers. 
Take that away and the overall number would even be worse.  

The Chicago PMI also fell significantly below estimates of 49.5
to 45.9 and indicating a signification contraction in the Midwest
economy. This is the lowest level since January and as the second 
month in negative territory signals the end of a seven month 
recovery. The PMI also showed continued weakness in payrolls. 

The combined GDP, PMI and higher than expected Jobless Claims 
numbers today paint a dreary picture for Friday's critical reports. 
The PMI is a leading indicator for the more important ISM numbers
and the ISM was already showing negative growth last month at
49.5. The nonfarm payrolls, estimated at -15,000 for tomorrow, 
could also be at risk despite a slight rise in help wanted ads. 
We will also see the Personal Income and Spending and Construction
Spending on Friday. October vehicle sales could be the last nail 
in the coffin. It will be a very full morning. 

The Dow finished the month about 30 points from posting the best
October on record, ever. Coming in second best was no small feat
with a +10.6% gain. This was the best monthly gain for the Dow
since Jan-1987. Unfortunately, every time the Dow has posted a
double digit gain since 1926 the following month showed a high
single digit drop. Every time! That does not mean November is
a guaranteed drop but I would not bet against it based on the 
fundamentals. The outlook for the 4Q is so bad that even food
stores are issuing warnings. Albertsons said it expected profits
to drop based on a steeper than expected drop in sales. It also
cut expectations for the entire year. Wal-Mart was blamed in 
part for stealing business from food chains but even Wal-Mart 
has warned that sales are falling. 

The wild card here is the Fed meeting on Wednesday. If there was
no impending Fed meeting the market numbers would already be more
scary than anything that will come knocking on your door tonight. 
There are so many conflicting guesses about the Fed's move that
the outcome is far from clear. The market has priced in more than
a 25 point cut but almost zero chance of a 50 point cut. There 
are many analysts that think the Fed will not cut at all and
will stick with the "current stimulus is adequate" mantra and
not risk scaring investors with an "oh my gosh, it is really bad"
type of reaction. Since there has been no Fedspeak leaning toward
a rate cut there is a feeling they will hold pat and put pressure
on the ECB to cut rates first. The Fed does not want to weaken 
the dollar any more unless the ECB follows suit. Not cutting
next week would put the pressure on them. 

Many feel they will cut 25 points to show they feel our pain
even though it would have zero impact on the economy for at least
six months. At 1.75% we already have the lowest funds rate in 
decades and according to all published Fed comments they feel
it is sufficient to fuel the recovery. 

This is the way it is shaping up for me. A .25% cut is priced into
the market already. A .25% cut would leave the markets depressed
and we could see a negative reaction. A .50% cut would bring out
concerns of deeper problems than we can see and while there might
be an immediate bounce in the markets it should not last more than
a couple days before current fundamentals take hold again. With
no rate cut we could get the instant drop as the current expectations
are taken out of the market but then a rebound as the Fed will go
on the campaign trail to promote the "current stimulus is adequate"
story. 

Whatever will happen is of course still four trading days away. 
This means the verbal battle will continue in the press with 
everyone getting their 15 min of face time on TV. They will 
rationalize the drop in consumer spending and try to spin the
kinder gentler slow growth economy as "recovering" instead of 
dipping. The confusion is going to keep investors on the sidelines
and without positive Fedspeak there will be plenty who will close
positions and move to the sidelines to avoid the possible unknowns.
Add into this the gains in the last two weeks as mutual finds 
stacked their portfolio decks and you have a very good chance of
that house of cards collapsing. 

Friday could be explosive or implosive. If the economic reports
come in better than expected then the initial reaction will be to
celebrate but they will then start discounting the chances of a
rate cut. Mass confusion. If the reports are worse than expected 
the hopes for a rate cut will rise but the economic fundamentals 
will have worsened. We have not seen any strong impact from the 
last 12 cuts and one more is not likely to do any better. What 
we are going to have is four more days of trading confusion with 
a probable downward trend. Remember, a 25 point cut is already 
priced in and everything else is just smoke. You have to ask
yourself why anyone would risk the precious capital they have
left by going long in front of the Fed meeting. Also, remember
the Fed needs to save its ammo for a response to a future 
terrorist attack and in case the war in Iraq goes badly. They 
do not want to be in the same shape as Japan with a zero interest
rate, no more bullets and the economy still falling. 

Now that I have totally confused you I think that you should also
remember that the election is on Tuesday. Incumbents typically
do badly when the markets are crashing on election day. That 
sets up another possibility of artificial manipulation that only
conspiracy theorists will admit to. Can we please just fast 
forward to next Thursday and end the pain of uncertainty? No
such luck I am afraid. 

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Best one month for the Dow in 15 years as the Dow gains 11% in 
October.
by Alan Hewko
futures@OptionInvestor.com

Three new pieces of market bearish news this morning each caused 
the market to SELL, but as we have seen so many times since Oct. 
10th, the "Bad News dip is Bought".
________________________________________________________________

Quotes:
4:00 PM Cash Market Close     ES 883, YM 8368, NQ 991
4:15 PM Future's Market Close ES 881, YM 8347, NQ 991
5:00 PM YM Dow Futures close: YM 8339
7:00 PM Futures: ES 881s, NQ 987s

Dow   8397  - 30
SP500  886  -  5
COMPX 1330  +  3

Advance/Decline by Volume was sideways to slightly bearish most 
of the day, and dipped lower going into the close to its day 
lows.

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



A side note first: It's amazing how quickly we become so used to 
certain technology. Not very many years ago, 56K dialup was what 
I used. For the last two days, I've been without my cable modem. 
I live too far away for DSL, so cable modem is my only one 
choice. Naturally, we've all experienced 1-2 hours of our ISPs 
being down, etc; but when you are without your broadband 
connection for two full days, it does make you realize how we 
take them for granted. [grins]

It appears I didn't miss much the last two days, simply more up 
and down sideways action as the market is still buying bad news.

Today is the last day of the month, but much more importantly, 
today is fiscal end of day for most mutual funds. Their tax-loss 
selling is over, and their "dressing up their funds" is over.

I don't think anyone can dispute that fund's activities the last 
two weeks has had a large impact on the markets. At times this 
may have caused some very "illogical" behavior. October earnings 
are now done, with some companies still to report in November. 
The Elections and FOMC are next week. The Economic reports we 
have seen the last two weeks are mostly rather bearish. HOWEVER - 
the trading rule of "Trade what you see on the tape, and not what 
the markets SHOULD be doing" rings true. Today being another 
great example of that rule.

At 8:30 AM today, there were two very bearish reports, the Jobs 
report and GDP. Both of them were worse than expected. Below is 
an ES chart to show the initial fast downward reaction to them.

Chart: ES02Z (E-mini SP500 futures) Thur. 8:30 AM


 

As you can see, ES tanked from 890 to 885 in moments after its 
release, and on no additional news, buyers bought the dip again.

Market went rather sideways as it then headed into the other 
large report of the day, the 10:00 AM Chicago PMI numbers. PMI 
was expected to come in at 49, and came in at 45 (bearish). 

Once again, you can look at the below ES chart right after 10:00 
AM to see the market's reaction.

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


 


Once again, the market sold off.
Once again, dip buyers were lurking; and 'they' actually took 
them higher (and day Highs) AFTER those three very bearish 
reports had come out as the day highs occurred slightly after 
10:00 AM.

Logic took hold, and the market drifted sideways and lower into 
its day lows near 3:30 PM (a common short-covering reversal time 
period) and Shorts covered for about 15 minutes.

There have been times when right at 4 PM, at the closing of the 
cash market; 'smart money' knows a reversal is about to occur and 
starts shorting Futures to hedge all the Long Stock they own. 
Sometimes there's a fast violent reversal shortly after 4 PM in 
the futures, but that really didn't occur today.

Here's the other two charts for today:

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


 


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


 

Let's see what this week has done so far:

Chart: ES02Z (E-mini S&P 500) Four-day Chart


 

ES / SPX is still trapped in the 875 to 900 range.

Nothing has changed there. 

Market has failed on the upside several times this week, which 
needed ES to hold over 900, Dow to hold over 8500-8550, NQ to 
hold over 1000. By the same token, large support at ES 875 and 
Dow 8200 was tested and held.

_______________________________________________________________


THOUGHTS FOR FRIDAY

Charts continue to outweigh sentiment. Those three bearish 
reports today "should have" truly seen the Dow doing a -200 type 
of day. It did not. Was the fiscal year-end today for mutual 
funds a role in today's trading? Most likely.

MSFT and the Dept. of Justice have some news release Friday at 
4:30PM it appears. No idea what that means, ES and NQ will be 
closed, but YM will be open.

SOX Semi index is still very strong despite continued bearish 
news from the chip sector.

MSFT is now hitting some strong chart resistance at 54. If it 
breaks higher, 57-58 is next overhead resistance; if it breaks 


down, back to the 52 level.

The market is either forming bullish consolidation at the highs, 
or is getting ready to form a bearish distribution top.

Nasdaq closed up 13.5% for the month of October, its 2nd best 
ever October gains.

One almost gets the feeling that traders now expect the market to 
retrace now that October fund "games" are over with.

For the last two weeks, instead of doing what everyone expects 
the markets have found a way of doing the exact opposite. 

Traders have a word called the "Greenspan put" meaning whenever 
the market really got in trouble, the FOMC would bail them out by 
cutting rates. By the same token, we now seem to be trading on an 
"Election Put" meaning 'they' are holding the market up until the 
elections are over.

Bearish is the word that comes to mind for both Friday and post-
FOMC action; HOWEVER, the market could care less what I think, so 
I'll continue to let the tape dictate.

Remember, it is STILL "buy the dips" and "buy the expected bad 
news" and that sentiment has not changed.

Happy Halloween to one and all. 

Instead of looking at charts for three hours tonight, may I 
suggest going out tonight and having some fun - you have earned 
it [grins].

Alan Hewko

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


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

Flat line

The major indexes traded relatively unchanged today despite a 
plethora of economic data that showed the US economy growing at a 
3.1% annual rate in the third-quarter, but may be cooling down 
rapidly if the geographic region around Chicago, as depicted by 
the Chicago PMI and 45.9% reading there, is any indication of a 
slowdown in manufacturing activity on a broader scale in the 
United States.

After spending seven months above the 50% level, September's 
readings of 48.1% and now October's reading of 45.9% has the 
Chicago PMI showing contraction in the manufacturing sector for 
two consecutive month.  While this regional index tends to be 
volatile, it does make the case for a Fed easing next month.

It's perhaps that thought that had Treasuries finding buyers yet 
again today and driving yields lower.  The longer-dated 10-year 
December futures (ty02z) 114'230 +0.39% and 30-year December 
futures (us02z) 110'210 +0.39% outpaced the gains of the shorter 
dated 2-year (ty02z) 107'187 +0.02% and 5-year (fv02z) 113'235, 
which I interpret as investors willing to take on some risk in 
the longer-dated as they seek out higher yields.  The benchmark 
10-year YIELD ($TNX.X) fell to 3.91% as this bond's YIELD has now 
retraced 50% of its YIELD move from the October lows (3.56%) and 
recent highs of 4.273%).

How stocks, as depicted by the major indexes, have been able to 
hold near their highs as cash has been rotating back toward bonds 
is anyone's guess.  The only explanation that I can come up with 
is that investors oversold stocks anticipating a much weaker Q3 
GDP growth rate, and while economists were expecting 3.6% 
annualized growth, the preliminary 3.1% reported today wasn't all 
that bad.

So far this week, the major market indexes are actually little 
changed.  The S&P 500 Index (SPX.X) is down -1.3% on the week, 
while the Dow ($INDU) is off -0.6%, S&P 100 ($OEX.X) is lower by 
-0.9%, NASDAQ Comp.($COMPX) is down -0.2% and the NASDAQ-100 
(NDX.X) is off -0.6%.  Only the smaller cap Russell-2000 Index 
($RUT.X) has managed to show a gain so far, and that's a very 
modest 0.3%.

Dow Industrials Chart - $50 box


 

There was no "meaningful" movement in the Dow Industrials from an 
institutional perspective today.  While the dip lower to 8,336 
was close to a 3-box reversal lower, there were enough buyers 
(demand) to keep things in check.  Conversely, today's high of 
8,493 fell 7-points short of marking an X at 8,500.  It can be 
very informative when you as a trader actually "hand chart" the 
supply/demand charts as you begin making some observations, even 
on a short-term daily basis.  Today's action hints that there may 
be juuuuust enough supply and not enough demand to have the Dow 
trading a recent relative high of 8,500 and perhaps somehow, 
someway, the MARKET really feels that the bearish vertical count 
of 7,850 is achievable.  

Just a thought, but what IF the FOMC did NOT make a change in 
interest rates next week?  I'm not saying that would happen, but 
I could imagine the Dow trading 7,800 if stock buyers are buying 
on the conviction of a 25-basis or even 50-basis point rate cut.  
Time will tell, but current analysis would be ... "near-term 
weakness and vulnerable to 7,850," while Longer-term bullish 
above 7,850.

I've also noted in the past that I like to monitor various index 
components.  In today's market monitor and in recent sessions 
I've mentioned Procter & Gamble (NYSE:PG) $88.45 -0.5% as a 
bearish candidate stock after it gave a triple-bottom sell signal 
at $87.  The stock fell quickly to the $85 level, which was PG's 
bullish support trend.  With that observation in mind, a BEAR in 
a Dow Industrials trade might then be alert to support at the 
Dow's bullish support trend if it should be tested in the future.

Today's action saw no net change take place in the Dow 
Industrials Bullish % ($BPINDU).  Bullish % remains "bull 
confirmed" at 56.67%, with 17 of the 30 components showing a 
point and figure buy signal still associated with their charts.

S&P 500 Index Chart - $5 box


 

There was some meaningful supply/demand movement in the SPX today 
which saw the SPX reversing back lower by 3-boxes with a trade at 
880.  Isn't it interesting how the SPX came sooooo close to 
trading 900, which similar to the Dow Industrials near 8,500, 
just couldn't build enough demand to have the SPX muster up 2 
more points (actually, the high trade was 879.75, so 1.25 
points)?  Makes a trader wonder if that wasn't really a bull trap 
at 905 and now bears are maybe getting a little more serious.  

I've also started a little downward trend on the above chart.  We 
can't put in place a bearish resistance trend until the bullish 
support (blue +) is broken.  However, look back up at the upper-
left corner of the chart.  See how the eventual bearish 
resistance trend there (red +) could have also been visualized 
after a triple-bottom sell signal?  Once the bullish support 
trend was broken at 850, THEN the bearish resistance trend was 
put on the chart.  I've said before that BEARS are VERY EARLY in 
an index short, now you can really begin to see why.  Stops 
should be placed at 910, or if more risk averse, 900, which would 
be the first sign of trouble for a bear.  As it stands, must 
assess downside to the bearish vertical count of 830 or bullish 
support trend of 835 right now.

Today's action saw no net change in the S&P 500 Bullish % 
($BPSPX).  Still "bull alert" at 49.00%, with 245 of the 500 
components showing a point and figure buy signal still associated 
with their charts.

S&P 100 Index Chart - $5 box


 

There's been no "meaningful" movement in the OEX for two 
sessions, after Monday's 3-box reversal lower.  For now, it would 
take a trade at 465 to really have the OEX breaking out longer-
term, but if it can break three points of resistance, then it 
would definitely deserve a bulls money.  I tell you what, If I 
had bought some OEX 400 calls on the 3-box reversal up at 405, 
I'd sure be taking some profits with so much technical resistance 
nearby, wouldn't you?

Today's action had the S&P 100 seeing a net loss of 1 stock to a 
point and figure sell signal.  This has the bullish % slipping 
back to 55%, just off Monday's and yesterday's relative high 
readings of 56%.

There's been little change in the NASDAQ-100 Index 50-point or 
25-point box.  So lets have a little fun tonight, introduce more 
noise into the p/f chart and look at a $10 box of the NASDAQ-100.

NASDAQ-100 Index Chart - $10 box


 

I can't for the life of me explain the bullishness in the NDX, 
except for the fact that MSFT traded strong today and it's trade 
at 54 has the NASDAQ-100 heavyweight briefly breaking above its 
downward trending 200-day SMA of $53.63 and also triggering a 
spread-triple-top buy signal at $54.  

The $10 box chart of the NDX tells me I would want a stop at 
1,010 as past double-top buy signals at 890 and 960 have seen 
some strong moves higher.  I still like the NDX as short, but 
need a break at 940 on the above chart for further weakness.  

Today's action saw the NASDAQ-100 see a net gain of 1 stock to a 
point and figure buy signal.  This has the Bullish % back at 55%, 
which has been the recent relative high reading for this 
indicator.  It would currently take a reading of 62% to get this 
index into a "bull confirmed" reading.  Current status remains 
"bull alert."  Based on the above $10 box chart, I could envision 
a "bull confirmed" status with a trade at 1,010 and a "bear 
confirmed" reversal lower in the bullish % with an NDX trade at 
940.

Bulls can play long on a break higher at 1,010, but I personally 
lack conviction for a trade like that as the deeper cyclicals as 
depicted by the Morgan Stanley Cyclical Index (CYC.X) 430 -0.55% 
just don't seem to be confirming the tech bullishness.

Jeff Bailey


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

A Scary Story
by Steven Price

The bears and the bulls both got a little taste of what they were 
looking for today. Economic numbers were horrible, and hopes of a 
rate cut were fueled. The jobs data, which was expected to show 
400,000 first time jobless claims last week, instead came in at 
410,000.  GDP, predicted to show the economy growing at a 3.6% 
clip, came in at only 3.1%.  Auto sales, which increased 42.2% as 
a result of zero-percent financing, accounted for more than half 
of the increase in GDP over last quarter. However, on the 
positive side, there were some increases in business spending on 
equipment and software for the bulls to hang their horns on. 
Chicago PMI, a measure of Midwest manufacturing activity, showed 
contraction, registering a reading of 45.9% - short of 
expectations of 49.1%.  Bad economy?  Guess we really, really 
need a reduction in the fed funds rate. Are you listening Alan?  
The bulls are betting that he is.  

While the initial reaction to the numbers was a boost in the 
market, the Dow had given up -30.38 by the end of the day.  What 
we are seeing is short-term bulls betting on a rate cut next 
Wednesday of possibly 50 basis points, while the bears are seeing 
economic numbers that should have a long-term negative effect on 
the market. Talk of a rate cut is focusing on how much, not if, 
we will get one. Tomorrow will bring more economic news, with the 
ISM index, nonfarm payrolls, October unemployment, auto and truck 
sales, and personal income and spending.  The reaction could be 
more of the same.  Bad news = rising market.  However, anything 
short of a 50 basis point cut already seems priced in, so a rally 
should be short lived. 

The retail sector appears to finally be rolling over, after the 
combination of low Consumer Sentiment and a Wal-Mart downgrade.  
The Retail Index (RLX.X) has finally broken the 50-dma to the 
downside, and confirmed a similar move in the Retail Holders 
(RTH), which made tonight's put play list.  Wal-Mart (WMT) 
commented that Halloween sales were lower than expected and given 
today's economic data, it doesn't appear holiday sales will be 
setting any records this year. Consumer spending makes up 2/3 of 
GDP, so a miss of 14% of the expected GDP number translates into 
a significant miss for retailers' targets as well. 

SEC Chairman Harvey Pitt is under the gun once again for his 
accounting board chairman pick. Pitt selected William Webster to 
head the oversight committee.  Webster headed the audit committee 
of U.S. Technologies, which is facing shareholder lawsuits for 
alleged fraud over accounting problems.  Pitt apparently knew 
this before he made the selection, but did not share the 
information with SEC commissioners, or the White House.  Pitt has 
asked the SEC's inspector general to look into the Webster 
selection.

According to the National Association for Business Economics, 
members have scaled back capital spending for the sixth straight 
quarter.  This would seem in contrast with the business spending 
numbers on the GDP release. The NABE called this, "an ominous 
sign for the outlook for economy-wide investment."  The news is 
nothing new, after we have been hearing the mantra of capex 
reductions over the last quarter.  However, we now have concrete 
evidence of the industry-wide trend. 

October registered the biggest monthly gain in the Dow since 
1987; however, all of that gain was simply a rebound from 
September's losses, falling 266 points shy of a full bounce. I 
don't want to sound like a party pooper, but signs continue to 
point negative.  The Fed speculation should keep a floor under 
the market for the next few days, but unless we get a surprise of 
more than 25 basis points from the FOMC, I wouldn't be putting on 
full long positions in more than a few select issues. 


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7286
Current     :  8397

Moving Averages:
(Simple)

 10-dma: 8412
 50-dma: 8200
200-dma: 9300



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  885

Moving Averages:
(Simple)

 10-dma:  889
 50-dma:  871
200-dma: 1003



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     :  989

Moving Averages:
(Simple)

 10-dma:  976
 50-dma:  915
200-dma: 1166




The Retail Index (RLX.X): The Retail Index rebounded impressively 
from Tuesday's poor Consumer Sentiment numbers.  However, a 
Wednesday downgrade to Wal-Mart (WMT), and slower than expected 
GDP were too much for the group.  The RLX finally broke below its 
50-dma on Wednesday and continued lower today. Heading into the 
holiday shopping season, things do not look bleak, as consumer 
spending is likely to continue is slowdown.  Many stores have 
already lowered monthly sales projections (WMT has cut its usual 
same store sales projections in half), so that they can claim the 
numbers are on track, but the trend remains obvious. We are 
looking at shorts in the sector and after not even a rate cut 
will be able to make its way into consumers' pockets by 
Christmas. 

52-week High: n/a
52-week Low : 252
Current     : 282

Moving Averages:
(Simple)

 10-dma: 290
 50-dma: 286
200-dma: 321

Market Volatility

The VIX has clung to the mid 30s, as the market has hovered close 
to unchanged.  With a slew of economic data today and tomorrow, 
followed by the FOMC rate announcement next week, we are likely 
to see it stay in this range, or possibly creep higher if the 
data continues to miss estimates. Tomorrow should be a telltale 
sign, seeing what premium positions traders are willing to take 
home after we finish two days of economic stats.  If the news is 
positive, they may not want to get caught with time decay over 
the weekend.  If the news is negative, don't plan on much of a 
weekend decline. 


CBOE Market Volatility Index (VIX) = 35.91 –0.17
Nasdaq-100 Volatility Index  (VXN) = 52.99 +1.70

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.87        448,430       389,096
Equity Only    0.79        359,127       282,879
OEX            0.84         18,065        15,105
QQQ            1.96         29,448        57,860


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

Bullish Percent Data

           Current   Change   Status
NYSE          37      + 1     Bull Confirmed
NASDAQ-100    55      + 1     Bull Alert
Dow Indust.   57      + 0     Bull Confirmed
S&P 500       49      + 1     Bull Alert
S&P 100       55      + 0     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   1.20
10-Day Arms Index  1.02
21-Day Arms Index  1.02
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       1484          1267
NASDAQ     1646          1512

        New Highs      New Lows
NYSE         23              53
NASDAQ       45              70

        Volume (in millions)
NYSE     1,828
NASDAQ   1,748


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

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 MANAGER MICROSCOPE
*************************

John P. Hussman: Hussman Econometrics Advisors

John P. Hussman, Ph.D is the chairman, president and controlling 
shareholder of Hussman Econometrics Advisors, investment advisor 
for the Hussman Strategic Growth Fund; a relatively new, unrated 
stock fund that has beaten the competition in its brief history.  

This unique stock fund seeks long-term capital growth primarily 
from U.S. stocks like other funds, while placing added emphasis 
on capital protection during unfavorable market conditions. 

The Hussman Strategic Growth Fund varies its exposure to market 
fluctuations (from neutral to aggressive) based upon the unique 
return/risk characteristics of each "market climate" identified.

In addition to emphasizing capital protection during unfavorable 
market conditions, the fund may increase its exposure to equity 
market fluctuations through limited purchases of call options in 
favorable markets, though it hasn't truly had the opportunity to 
employ such tactics yet. 

Hussman introduced Hussman Strategic Growth (HSGFX) in July 2000 
and since inception has produced a 21.1% annualized total return 
for investors as of September 30, 2002.  As of October 30, 2002, 
the fund has produced a YTD total return of 11.3% for one of the 
best performances this year among diversified stock mutual funds.

For complete information or a fund prospectus, call 800-487-7626 
or log on to the Hussman Funds at www.hussman.net.  This fund is 
not your typical diversified stock fund, so it would behoove you 
to read the prospectus carefully before investing.  

Manager Background

Hussman received his Ph.D in Economics from Stanford University 
in 1992.  From 1992 through 1999, he was an adjunct assistant 
professor of economics and international finance at the 
University of Michigan.  His academic research has focused on 
"financial market efficiency" and "information economics."  

In the 1990's, Hussman also operated an investment newsletter 
offering in-depth commentary detailing his approach and current 
market assessment.  Like many investment academicians, Hussman 
would eventually make the leap from academia to real investment 
world, launching his own mutual fund in July 2000. 

Investment Overview

The Hussman website indicates that the Hussman Strategic Growth 
Fund is a diversified, no-load mutual fund that seeks long-term 
capital appreciation primarily from U.S. stocks, while placing 
added emphasis on capital protection during unfavorable market 
conditions.  Hussman may hedge the fund's stock holdings in an 
effort to remove the impact of market fluctuations, but he does 
not establish net short positions. 

The fund’s exposure to large-cap, mid-cap and small-cap stocks 
varies over time, depending on the valuations and market action 
of these groups.  During "very favorable" market conditions, he 
may increase (leverage) the portfolio's exposure to stock market 
fluctuations through limited purchases of call options.  

If you go the website at www.hussman.net, you'll see a diagram 
depicting various market conditions.  Hussman looks at both the 
"valuation" of stocks and "trend uniformity."  Depending on the 
current market climate, Hussman will position the portfolio in 
one of four ways, as follows:

 Hedge: Valuation Unfavorable / Trend Uniformity Unfavorable
 Positive: Valuation Unfavorable / Trend Uniformity Favorable
 Moderate: Valuation Favorable / Trend Uniformity Unfavorable
 Aggressive: Valuation Favorable / Trend Uniformity Favorable   

The website states that Hussman Strategic Growth Fund and its 
strategic income fund sibling, Hussman Strategic Total Return 
(HSTRX) are designed to be well-diversified "core" holdings for 
investors in pursuit of a disciplined long-term investment plan.  
Using the funds, investors can attain a balanced portfolio that 
includes both U.S. stocks and U.S. Treasury securities. 

Because Hussman will vary fund exposure to market fluctuations 
depending on expected return/risk at any point in time, he does 
not believe that investments in/out the funds should be "timed."  
To discourage short-term trading and minimize its impact on the 
fund's long-term shareholders, Hussman will impose a redemption 
fee of 1.50%, applied to fund redemptions within six months of 
purchase (even for the purpose of switching between the Hussman 
Strategic Growth Fund and Hussman Strategic Total Return Fund).

Investment Performance

According to Morningstar's analyst report, the $439 million 
Strategic Growth Fund (HSGFX) has been fully hedged for its 
entire existence (from inception through September 30, 2002).  
That posturing has produced excellent returns so far and low 
volatility relative to other U.S. equity funds.  Morningstar 
classifies the fund as a "mid-cap blend" fund for comparison 
purposes.




 
 
Hussman's year-to-date return of 11.3% through October 30, 2002 
is 32.8% better than the S&P 500 large-cap index, and 25% above 
the S&P Midcap 400 index, ranking the fund in the top 1% of the 
Morningstar mid-cap blend category.  The fund's trailing 1-year 
total return of 17.2% also ranks in the category's top 1 percent.

Below is a summary of this fund's quarterly performance results, 
using data from Morningstar.

 Q4 2000: +12.5%
 Q1 2001: +6.8%
 Q2 2001: -1.9%
 Q3 2001: +3.6%
 Q4 2001: +5.6%
 Q1 2002: +8.5%
 Q2 2002: +3.0%
 Q3 2002: +2.0%

You can see that the Hussman Strategic Growth Fund has had only 
one negative quarter since inception.  As Morningstar's analyst 
Brian Lund points out, total returns so far have been excellent, 
but it may still be too early to adopt this product.  Certainly 
those investors who have made this a $439 million fund are glad 
with their investment decision.  How well it does when the U.S. 
market climate is favorable is yet to be seen, though you would 
have to believe it has strong potential considering that Hussman 
did his academic research through the bull market of the 1990's.

John Hussman has also done an excellent job Morningstar says of 
keeping shareholders updated and informed in "real" time.  That 
should allow shareholders to make "informed" decisions as stock 
market conditions change.  Kudos to Mr. Hussman in that regard. 

With a current expense ratio of 1.99%, Hussman Strategic Growth 
Fund isn't cheap.  Then again, no one is upset with this fund's 
excellent performance so far.  As time goes on, and assets grow, 
the fund's operating expenses "should" come down. 

Conclusion

While the Hussman website states that the Strategic Growth Fund 
is designed to be a well-diversified "core" holding, Morningstar 
suggests this fund should play a supporting role in a portfolio.

I would tend to agree with Morningstar's assessment, since this 
fund carries special risks that most mutual fund investors don't 
understand (or fully appreciate).  Hussman Strategic Growth Fund 
has the ability to hedge market risk by selling short U.S. stock 
indices in an amount equal to but not exceeding the value of its 
holdings.

When market conditions are believed to be favorable, Hussman has 
the ability to "leverage" the amount of stock he controls to as 
much as 1 1/2 times (150%) the value of net assets, typically by 
purchasing call options on individual stocks.  And, as indicated 
earlier, that leg of the strategy has yet been tested or proven.

Still, it's hard to dispute what Hussman has accomplished so far.  
Hussman Strategic Growth Fund is no trick; it is a treat!  Happy 
Halloween.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

The Real Test Begins

October is over and the need for funds to hold their nose and buy 
stocks has passed. The real market should begin to appear once the 
economic reports for Friday are released. The last remaining 
obstacle to the return of normal markets will be the Fed meeting 
on Wednesday. 


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The Option Investor Newsletter                 Thursday 10-31-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Stock Picks: Force of Habit
Dropped Calls: CI, PNRA
Dropped Puts: None
Daily Results
Call Play Updates: AZO, FRX, TRMS, WPI
New Calls Plays: FCS
Put Play Updates: HIG, NTRS, SPW
New Put Plays: LEH


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

PMCS - PMC-Sierra - $4.87 
Strategy: Long stock with put insurance 

Technology stocks are maintaining their habit of leading the
 broad markets.  Just as they led on the downside over the past
year, 'kinky' groups like Semiconductors and the Networkers are
finding favor with investors all over again.  Just in the past 3
weeks, the Semiconductor index (SOX.X) is up 40% and the
Networking index (NWX.X) has tacked on a whopping 47.5%.  That's
pretty impressive in light of the fact that we haven't yet gotten
a firm indication of improving fundamentals in either sector.

Clearly, short-covering is playing a major role in the rally
we've seen in the past 3 weeks, and it remains to be seen if it
is sustainable.  More than likely we'll see a healthy pullback
in the near-term, which should be met with renewed buying
interest (buying interest, not further short-covering) at a
higher level than the lows posted 3 weeks ago.

As a supplier of high-performance integrated circuits to the
manufacturers in the telecommunications industry, PMCS is wedged
in the sweet spot between the Semiconductors and Networkers.  So
if the demand picture begins to improve, the stock could really
take off.  We haven't seen evidence of that improving demand just
yet, and likely the only near term clue that we may get is CSCO's
earnings next week.

As you can see from the chart below, PMCS is going to have quite
the battle with that 18-month descending trendline (currently at
$6), and that will likely provide the catalyst for the next
pullback towards solid support at $4.  But so long as the news
doesn't get any worse, investors seem to be indicating that the
recent lows near $2.75 represent a practical floor for the stock.
Perhaps that has to do with the fact that the company still has
$2.47 per share in cash.  To be sure, the fundamentals of the
company are not rosy, as both of the industries it is associated
with, have been decimated by the IT spending slowdown, especially
in the Telecom sector.  But with the company actually beating
earnings estimates by a penny earlier this month, now may be the
time to do a little bit of bottom fishing.

Looking at the daily chart, PMCS seems to have some decent
technical support in the $4.00 area, although we could see a
possible dip to as low as $3.50 on a severe pullback (possibly
in the wake of a less-than-favorable earnings report from CSCO).
Ideally, we want to enter the play on a rebound from the $4.00
level, and if it is violated, we want to wait for a rebound back
through that level before entering the play.

Once the bulls get going again, the first obstacle will be to
push through that formidable descending trendline at $6 and then
we can start eyeing the $10 resistance level.  While a rally to
that level would represent more than a double on the play, if
demand were to really start improving in the sector, the bulls
could actually make a run on the $15 level.

The play is to go long PMCS stock near $4.00 level and go long
one contract of the Jan-2003 $2.50 puts SQL-MZ at $0.20 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 PMCS or the rest of the
Networking industry. 

Option 1: If PMCS is not above $6.00 by Jan 2nd, close both
positions and exit the play.

Option 2: If PMCS is below $4.00 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 PMCS is above $7.00 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 $4.00 plus any short fall on
the put premium.

PMC-Sierra (PMCS) Weekly Chart


 


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

CI $36.14 +0.04 (-0.86 for the week)  We were looking for a 
bounce on CI, which has held support since its big drop.  CI 
appears to simply be moving sideways ahead of its official 
earnings release date tomorrow.  We said in the original write-up 
that the news was already out, so earning's should not be much of 
an event, at least to the negative side.  However, we didn't get 
the bounce and the stock has seen a series of lower highs since 
the drop.  In keeping with our policy of closing the play before 
earnings, we will exit tonight. 

---

PNRA $32.50 +0.75 (-0.35 for the week)  PNRA has been moving 
sideways since its run after breaking the 200-dma of $30.46 on 
October 18.  While it has tacked on a couple of dollars, it 
appears to be forming a bullish flag.  For that reason, readers 
who want to keep the play open will not get an argument from us.  
However, with the stock seemingly unable to hold gains above $33, 
we don't want to see our option premium decay further, and will 
walk away with the stock $1.55 higher than where we entered.


PUTS:
*****

None


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

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

CALLS              Mon    Tue    Wed   Thu  Week

AZO      85.77   -3.14   1.19  -0.18  1.75  trendline bounce
CI       36.14   -0.92  -1.89  -0.69  0.04  Drop, earnings 
FCS      11.90   -0.74   0.22   0.75  0.90  New, low risk semi
FRX      97.99   -0.45   1.08   1.00 –1.01  entry pullback
PNRA     32.50   -0.28   0.03  -0.84  0.75  Drop, stalled
TRMS     52.92    0.35   0.37   1.35 –0.43  saved by the bell
WPI      27.49    0.40   0.98   0.29 –0.31  consolidating

PUTS               

HIG      39.50   -1.70  -3.00  -1.83 –0.67  rolling again
IP       34.93   -0.55  -0.23  -0.40 –0.56  below $35
LEH      53.27   -1.13  -0.58  -0.01 –1.89  New, weak into close
LOW      41.73   -1.37   1.20  -0.77 –1.22  New, retail weakness
NTRS     34.90   -0.08  -1.12   0.11 –0.80  slow but steady
RTH      74.60   -2.11   0.15  -0.64 –1.36  New, weak economy
SPW      42.01   -2.26  -1.44   0.24  0.66  bounce for entry


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

AZO $85.77 +1.75 (-0.18) As the mutual funds wrapped up their
books for the month, they seemed to favor our AZO call play, in
large part due to both the stock and company's strong performance
over the past year.  While the broad market failed to hold onto
positive territory in the final hour of trading, AZO held onto
the bulk of its intraday gains to post a better than 2% advance
for the day.  That rebound off the ascending trendline down near
$81 looks like it is paying off again.  Now significantly above
that level, it is time to tighten up our stop and prevent giving
back our gains in case the funds decide to sell their recent
acquisitions tomorrow on the heels of what is expected to be more
dismal economic news.  Raise the stop to $83 tonight, which is
just below yesterday afternoon's intraday low and the 20-dma
(currently $83.48).  If still looking to enter the play, an
intraday dip and bounce from above the $83 level still looks
favorable.  Otherwise, look to enter on a breakout over $86.50,
the site of Thursday's high.

---

FRX $97.99 -1.01 (+0.84) In contrast to the rest of the market,
FRX has actually seen fairly quiet trade this week.  The $97
level has been providing a consistent floor, while bullish
advances have been turned back below $100.  Not only has the
price action been rather subdued compared to the recent past, but
so has volume, which has been drifting along near 75% of the ADV.
This paints a mixed picture over the near term.  It is
encouraging to see the stock holding support, which helps to make
the case that new entries on the intraday dips to support in the
$96-97 area look attractive.  On the other hand, we would sure
like to see some upside follow through to give us the conviction
that FRX has more upside in store for the bulls.  Momentum type
traders will want to wait for a push above $100 before stepping
into new positions, but need to be cognizant of the fact that the
stock won't be free and clear until clearing last week's intraday
high at $101.75.  Keep stops set at $95.

---

TRMS $52.92 -0.43 (+1.68 for the week) In keeping with the 
Halloween spirit, Trimeris gave us quite a scare today.  After 
rallying all the way to $54.60 this morning, the stock sold off 
with other biotechs the latter part of the day.   However, after 
bouncing at $51, the stock found a surge of buyers once again at 
the end of the day.  With no fundamental change in the company's 
planned release of Fuzeon, pending FDA approval in the middle of 
March, the future for TRMS still looks bright.  The fact that the 
drug can be used with patients who have developed resistance to 
other HIV therapies, along with its lack of side effects, makes 
it likely to fulfill the promise of its high demand. Investors 
who are weary of today's mid-day sell-off can exit the play with 
a profit.  However, with the renewed buying interest on the 
volume surge at the end of the day, we will leave the play open.  
The stock added another box to the PnF chart at $54, and traded 
at a level not seen since January 2001.  The end of day rally 
took it back above resistance at $52 from the beginning of the 
week and earned it another day on the list, in spite of our 
concerns about the sell-off.  New entries should wait for signs 
of support at $52, or a higher high, above $55.  Our stop loss 
remains $50, just below today's bounce.  Note that the company 
releases earnings on November 7, so we will be exiting ahead of 
that date.

---

WPI $27.49 -0.31 (+1.67 for the week) Watson experienced mostly 
sideways movement today, as the overall market tried to make up 
its mind as to which direction it wanted to go. The stock has 
settled in since its recent run, following the announcement that 
it has once again expanded its product line to include three 
popular oral contraceptives when their patents expire. The stock 
has maintained the current level, and entry on a pullback is 
looking less likely.  The stock recently broke out of a long-
term, reverse head and shoulders pattern, with a measuring 
objective of $35. Now that the stock has left its 200-dma and 50-
dma behind, the next resistance level is most likely $33, which 
is close to the objective of $35.   It is still possible that the 
stock could re-test the 200-dma of $25.33, but with each day it 
consolidates at the current level, the stock looks stronger.  New 
entries can enter here, now that we have seen support over $27 
for the last three days.  If the stock breaks below that level, 
then wait for the 200-dma re-test. The current bullish vertical 
count remains $42, with the bearish resistance line also far 
above at $48, leaving plenty of blue sky above.


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

FCS – Fairchild Semiconductor Int'l $11.90 +0.90 (+1.58 this week)

Company Summary:
Fairchild Semiconductor is a global company that designs,
manufactures and market high-performance building block
semiconductors critical for multiple end markets, with a focus
on developing power and interface solutions.  The company's
products are used in consumer, communications, computer,
industrial and automotive applications.  FCS' products are
organized into three principal product groups: Analog and Mixed
Signal Products, Discrete Products and Interface and Logic
Products.  Additionally, the company produces non-volatile memory
and optoelectronics.

Why We Like It:
After being one of the most-abused sectors for the past several
months, it is refreshing to see signs of life returning to the
Semiconductor stocks.  To be sure, it is a bit disconcerting to
see the SOX continue to rally in the face of the continuous
negative stream of sector-related news, but perhaps there are a
few diamonds in the rough that can provide attractive bullish
plays.  FCS seems to be one such stock, as it is outperforming
the overall sector, and really put in a strong performance on
Thursday.  While the rest of the market was whipped about by the
window dressing shenanigans, FCS blasted through the $11.50
resistance level that had been holding it back, and it did so on
very strong volume of 3.5 million shares.  That's not bad, when
you consider that the SOX actually lost ground, once again falling
under the $300 resistance level.  What's driving FCS' strong
performance is the old standby, solid earnings performance.  The
company beat street estimates by a penny when they announced
earnings on October 17th, and they did so on revenues that rose
more than 10% year-over-year.  As has been the pattern lately,
investors seemed to shrug off comments from the company that Q4
revenues will be down as much as 4-6%, as they were apparently
expecting much worse news from the company.  So long as this run
continues, we might as well take a piece of the action.  Ideal
entries will come from a pullback to test the $11 level as
support, although we'd be willing to accept a rebound from as low
as $10, so long as the stock remains above its 50-dma (currently
$10.06) on a closing basis.  More aggressive traders can chase the
stock higher on a breakout over $12.30 (Thursday's intraday high),
but only if the SOX is showing strength over the $300 level.
Place stops initially at $9.75.

BUY CALL NOV-10 FCS-KB OI=323 at $2.30 SL=1.25
BUY CALL NOV-12 FCS-KV OI=550 at $0.70 SL=0.25
BUY CALL DEC-10*FCS-LB OI=135 at $2.70 SL=1.25
BUY CALL DEC-12 FCS-LV OI=119 at $1.20 SL=0.50

Average Daily Volume = 2.20 mln



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

HIG $39.50 -0.67 (-8.38) Oh, if only we had been a day earlier.
We initiated coverage of HIG on Tuesday, as shares of the insurer
looked like they were about to break down.  Apparently we weren't
the only ones that thought the stock was looking weak, as it was
selling off on strong volume following stronger than expected
earnings reported on Monday.  UBS Warburg really got the ball
rolling yesterday morning with their downgrade to Hold before the
open.  Traders rushing for the exits pushed the stock to gap down
to $42 and it then fell just below $39 before catching a very
weak bounce.  Traders that entered on the opening weakness got
the best entry, while the rest of us have had to settle for
looking for a rollover between $40-42.  Even the volatility in
the broad market hasn't been sufficient to lift HIG off the mat,
with the intraday highs since the gap down, failing even to test
the $41 level.  Continue to look for failed rallies below the
bottom of yesterday's gap to initiate new positions or else wait
for a drop under $38.75 (just under yesterday's intraday low) to
open momentum-based positions.  We're lowering our stop to
$42.50, just above yesterday's intraday high.

---

NTRS $34.90 -0.80 (-1.66) The funds made several attempts on
Thursday to dress up their windows, but in the end, selling
pressure won out, in part due to apprehension about what
tomorrow's economic releases will reveal about the sick economy.
Banking stocks weakened again, with the BKX index sliding
fractionally lower.  Shares of NTRS have been dueling with the
$35 support level, but lost that battle near the close with the
stock finally slipping slightly lower.  The pattern of lower highs
and lower lows remains intact, as the stock continues to be
pressured by the 2-week descending trendline, which has now fallen
to $36.  An early bounce tomorrow morning would generate a gift of
an entry point, as the stock would likely roll over below that
trendline yet again.  But with the economic reports likely to be
dismal, NTRS is likely to trade lower at the open, completing the
breakdown under the $34.75-35.00 support level.  Momentum traders
will want to see a break below $35.50, with the BKX continuing to
show weakness before adding new positions.  Lower stops to $37.

---

SPW $42.01 +0.66 (-1.91) After a 6-day, $14 slide, shares of SPW
were due for a bit of a dead cat bounce.  That's about all they
got, as the stock weakly recovered from Tuesday's $41 level,
crawling up to the $42 level by the close of trading today.  So
now that the funds have finished dressing up their windows, the
question is whether SPW is ready to head south again.  While that
may be the case, we need to let the price action prove our case
for us before plunging headlong into new positions.  While a
rollover from current levels can be used for new entries, a
failed rally up near $43 or even $44 would be even better.  If
looking for continued weakness before playing, momentum traders
will be best served by waiting for SPW to fall under $40.50 on
strong volume before playing.  For now, we're leaving our stop
set at $45.


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

LEH – Lehman Brothers Holdings $53.27 -1.89 (-3.21 this week)

Company Summary:
Through its subsidiaries, LEH constitutes one of the leading
global investment banks, serving institutional, corporate,
government and high-net-worth individuals clients.  The company
is engaged primarily in providing financial services, including
securities writing and direct placements, corporate finance and
strategic advisory services, private equity investments and
securities sales and trading.  Completing its array of banking,
research and trading capabilities, LEH also engages in the
trading of foreign exchange, derivative products and certain
commodities.

Why We Like It:
Amongst all the earnings and economic reports and the speculation
over whether or not we'll be treated with another interest rate
cut next week, you would think that the woes of the Brokerage
sector had gone away.  Nothing could be further from the truth,
even in the wake of news that Citigroup will break off its
Brokerage and Research arms in an attempt to appease government
regulators.  To recap, trading volumes are still anemic, there
isn't any appreciable Investment Banking business to be had,
layoffs are still percolating through the industry, and the major
firms still have quite a gauntlet to run with respect to inquiries
about their past business ethics.  End of quarter window dressing
may have propped up the Brokerage sector (XBD.X) through
Thursday's session, but the charts are pointing to the $400
support level giving way in the near future.  Not content to wait
for its sector, LEH is already making strong strides towards its
own breakdown, bidding farewell today to the $54.50 support level
that has held the sellers in check for the past 2 weeks.  There
is some mild support just below, first at the 50-dma ($52.74),
then the bottom of the mid-October gap at $52.50 and finally the
20-dma ($51.79).  But if the XBD index gives way to the bears'
advances, these levels will likely be just speedbumps along the
way to filling that big gap down to the $50 level.  More important
perhaps is the PnF chart, which is on the verge of generating a
new Sell signal.  When LEH prints $53, we'll have a fresh bearish
price target of $48 to work with, which just happens to coincide
with the bullish support line.  Aggressive traders can enter on
any failed rally near the $54.50 level, which should now act as
resistance.  More conservative traders are going to want to wait
for that print at $53, and possibly a drop under the 50-dma before
playing.  One final note in favor of the bears is that LEH just
recently reversed from its 6-month descending trendline, currently
$57.75.  In order to give LEH some room to move, we're starting
out with a fairly wide stop at $58, just above that descending
trendline.  Needless to say, if the stock breaks down tomorrow,
we'll be tightening that stop significantly this weekend.

BUY PUT NOV-55*LEH-WK OI=2399 at $3.10 SL=1.50
BUY PUT NOV-50 LEH-WJ OI=1814 at $1.10 SL=0.50
BUY PUT DEC-50 LEH-XJ OI=1365 at $2.55 SL=1.25

Average Daily Volume = 2.80 mln


---

RTH - Retail Holding Company Depository Receipts - $74.60 -1.36 
(-3.90 for the week)

Company Summary:
Retail HOLDRS are Depositary Receipts issued by the Retail HOLDRS 
Trust which represent your undivided beneficial ownership in the 
common stock of a group of specified companies that are involved 
in the retailing industry. The Bank of New York is the trustee. 
Retail HOLDRS may be acquired, held or transferred in a round-lot 
amount of 100 Retail HOLDRS or round-lot multiples. Retail HOLDRS 
are separate from the underlying deposited common stocks that are 
represented by the Retail HOLDRS. The Retail HOLDRS Trust is not 
a registered investment company under the Investment Company Act 
of 1940. (source: AMEX)

Why We Like It:
The retailing group rallied with the broader markets the last 
three weeks, but the cracks in the sector are starting to show. 
The first sign was this week's Consumer Confidence report that 
missed estimates by 10 points, which was a huge deficit.  When 
consumers are worried about jobs and the stock market, they 
generally do not spend.  GDP came in this morning below 
expectations, as well.  While the market held up on the 
possibility that it solidified the possibility of a rate cut, it 
showed that the recovery is coming along more slowly than 
analysts thought it was.  The trend of same store sales 
disappointments has continued for the last several months, and 
Wal-mart's comments that Halloween sales were below plans are an 
indication that holidays will not be enough to overcome concerns 
about the economy, when it comes to spending.  That does not bode 
well heading into the holiday season.  Same store sales growth 
expectations have been dialed down, as evidenced by Wal-Mart 
cutting their usual predictions of 4-6% to 2-4%. The industry was 
able to bounce from the Consumer Confidence report, but not from 
the WMT downgrade the next morning. Analyst comments accompanying 
the downgrade cited a continued slowdown in consumer spending 
into 2003. 

The Retail Index (RLX.X) managed to hold above its 50-dma until 
the Wal-Mart news hit, which kept us on the sidelines in regard 
to playing the RTH short. Albertson's, another RTH component, 
followed the Wal-Mart downgrade with a warning of its own, 
lowering 3rd quarter and full year estimates today.  The RLX has 
now broken down through that 50-dma, confirming the same move in 
the RTH, and both have now seen resistance at those levels since 
the breakdowns. We are seeing rollovers in a number of retail 
stocks included in the RTH and feel a short play on the HOLDRS is 
the best way to take advantage of the group. The 50-dma in the 
RTH is $77.03 and cautious traders can wait for another test of 
that level before entering.  We see the current level as an entry 
point.  Place stops above recent resistance, at $80.00.  More 
conservative traders can place stops just above the 50-dma, at 
$78.50.  Our initial target is $70, however, the ultimate target 
on the play is $65, which is both daily support, and the PnF 
bullish support line.

BUY PUT NOV-75 RTH-WO OI= 269 at $2.40 SL=1.20
BUY PUT DEC-75*RTH-XO OI= 133 at $4.00 SL=2.00

Average Daily Volume = N/A


---

LOW - Lowe's Companies - $41.73 -1.22 (-2.12 for the week)

Company Summary:
With 2001 sales of $22.1 billion, Lowe's Companies Inc. is a 
Fortune 100 company that serves more than seven million customers 
a week at more than 800 home improvement stores in 43 states. The 
14th largest retailer in the nation, Wilkesboro, N.C.-based 
Lowe's is the second-largest home improvement retailer in the 
world. (source: company release)

Why We Like It:
Lowe's experienced a bull run with the rest of the broader market 
over the last few weeks.  However, that run stalled at $45, and 
the stock has slowly rolled over since that time. Poor Consumer 
Confidence numbers this week, which are an indication of 
consumers' willingness to spend, were followed by a downgrade of 
retail giant Wal-Mart, affecting the entire sector. Lowe's is 
concentrated in the home improvement field, which got bit of bad 
news yesterday, as well. Mortgage and refinancing applications 
fell 19% last week, which is not good for a company whose 
customers have been financing home improvements through 
refinancing. This also cuts into the business derived from 
customers purchasing fix-up homes.   As we head into the holiday 
shopping season, more of consumers disposable income will 
undoubtedly be steered toward gift purchases, rather than new 
kitchens and baths.  While those projects are often completed in 
time for the holidays, they are usually ordered more than two 
months ahead of time, and thus the season is past. 

The stock was unable to break the $45 level, however did manage 
to break through the $43 bearish support line on the PnF chart.  
However, $44 and $45 are strong resistance on the PnF, as well. A 
trade of $41 will amount to a three-box reversal and conservative 
traders can wait for that break to enter the play. a look at the 
daily chart shows that each breakdown of the 200-dma this year 
has been good for at least $3.00 and as much as $10.29, and an 
average gain of $6.03 on the four breakdowns.  The stock broke 
its 200-dma of $42.95 on Wednesday is currently trading $41.73.  
Our target on the play is $37, which coincides closely with the 
average aforementioned gain, and was the recent low in early 
October.  We see the current price level as an entry point, 
however alternative entries are a failed rebound at the 200-dma 
and the three-box reversal level of $41.00. Place stops at $45.

BUY PUT NOV-42.50*LOW-WV OI= 1036 at $2.20 SL=1.10
BUY PUT DEC-42.50 LOW-XV OI=   39 at $3.40 SL=1.70

Average Daily Volume = 5.59 MIL



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The Option Investor Newsletter                 Thursday 10-31-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three: 

Play of the Day: Put - RTH
Traders Corner: Dow Theory and Technical Analysis: Part 1
Traders Corner: ADX: Truth or Hoax?
Futures Corner: New information on the November 8th launch date of 
Single Stock Futures (SSFs).
Options 101: Bear Call Spread Revisited


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

RTH - Retail Holding Company Depository Receipts - $74.60 -1.36 
(-3.90 for the week)

Company Summary:
Retail HOLDRS are Depositary Receipts issued by the Retail HOLDRS 
Trust which represent your undivided beneficial ownership in the 
common stock of a group of specified companies that are involved 
in the retailing industry. The Bank of New York is the trustee. 
Retail HOLDRS may be acquired, held or transferred in a round-lot 
amount of 100 Retail HOLDRS or round-lot multiples. Retail HOLDRS 
are separate from the underlying deposited common stocks that are 
represented by the Retail HOLDRS. The Retail HOLDRS Trust is not 
a registered investment company under the Investment Company Act 
of 1940. (source: AMEX)

Why We Like It:
The retailing group rallied with the broader markets the last 
three weeks, but the cracks in the sector are starting to show. 
The first sign was this week's Consumer Confidence report that 
missed estimates by 10 points, which was a huge deficit.  When 
consumers are worried about jobs and the stock market, they 
generally do not spend.  GDP came in this morning below 
expectations, as well.  While the market held up on the 
possibility that it solidified the possibility of a rate cut, it 
showed that the recovery is coming along more slowly than 
analysts thought it was.  The trend of same store sales 
disappointments has continued for the last several months, and 
Wal-mart's comments that Halloween sales were below plans are an 
indication that holidays will not be enough to overcome concerns 
about the economy, when it comes to spending.  That does not bode 
well heading into the holiday season.  Same store sales growth 
expectations have been dialed down, as evidenced by Wal-Mart 
cutting their usual predictions of 4-6% to 2-4%. The industry was 
able to bounce from the Consumer Confidence report, but not from 
the WMT downgrade the next morning. Analyst comments accompanying 
the downgrade cited a continued slowdown in consumer spending 
into 2003. 

The Retail Index (RLX.X) managed to hold above its 50-dma until 
the Wal-Mart news hit, which kept us on the sidelines in regard 
to playing the RTH short. Albertson's, another RTH component, 
followed the Wal-Mart downgrade with a warning of its own, 
lowering 3rd quarter and full year estimates today.  The RLX has 
now broken down through that 50-dma, confirming the same move in 
the RTH, and both have now seen resistance at those levels since 
the breakdowns. We are seeing rollovers in a number of retail 
stocks included in the RTH and feel a short play on the HOLDRS is 
the best way to take advantage of the group. The 50-dma in the 
RTH is $77.03 and cautious traders can wait for another test of 
that level before entering.  We see the current level as an entry 
point.  Place stops above recent resistance, at $80.00.  More 
conservative traders can place stops just above the 50-dma, at 
$78.50.  Our initial target is $70, however, the ultimate target 
on the play is $65, which is both daily support, and the PnF 
bullish support line.

BUY PUT NOV-75 RTH-WO OI= 269 at $2.40 SL=1.20
BUY PUT DEC-75*RTH-XO OI= 133 at $4.00 SL=2.00

Average Daily Volume = N/A



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

Dow Theory and Technical Analysis: Part 1 
By Leigh Stevens
lstevens@OptionInvestor.com

A funny thing happened on the way to writing this, my next 
Trader’s Corner article – I noticed that, in terms of Dow Theory, 
there has been NO “confirmed” sell “signal” given since the 2000 
top at least on a monthly closing basis. This was a revelation 
and I decided to take up the topic of what Dow’s work might tell 
us about the market today and its great importance as a 
foundation for the technical (analysis) approach to understanding 
market trends.   

It’s important to understand that Charles Dow considered his 
ideas on the market (he didn’t call it “Dow Theory”) to be the 
broad strokes and provide the big picture for INVESTMENT purposes 
only. He used closing prices only. Moreover, he would use a 
monthly close quite often, rather than on a daily or weekly 
basis. 

I’ll get to Charles Dow and how he expected the averages to 
behave relative to each other (and to his overall theory of how 
the markets work in a subsequent article).  As we are closing out 
the month, I first present a monthly chart of the Dow Industrials 
or Dow 30 stock average compared to the Dow 20 Transportation 
average – 



   

So, what’s this all about you may say?  And, after losing 34% 
from the highest to lowest close in the Dow 30, what “good” is a 
market theory that suggested that there is still a green light on 
staying invested?  By the way, I am making an assumption that not 
all Dow Theorists would make, which is that the prior SIGNIFICANT 
low was the major closing low at 7539 in ’98 as noted on the 
chart above and not the more minor downswing low 3 months before 
the final 2000 peak.  

Dow Theory is not a system of market timing exactly, only a 
forecaster of the major or “primary” trend (over years, not 
months or weeks) and a good forecaster of the deeper recessions – 
more then we’ve experienced in the last two years which was 
actually fairly mild. The real “recession” (depression?) was in 
tech stocks, not in the mainstream economy which the Dow 30 
represents.  

Now that I’ve suggested where we stand currently in terms of a 
Dow Theory signal – still on a “buy” or “stay invested” track – 
let me back up and talk about Charles Dow, who is the father or 
“grandfather” of technical analysis.  

Back in the 1880’s and 1890’s, Charles Dow (who, along with 
Edward Jones formed Dow Jones & Co.) came up with the first stock 
market averages, which became, over time, the Dow Jones 30 
Industrial, 20 Transportation and 15 Utility stock averages as 
known today.  I tend to call the Dow Industrials the “Dow 30” as 
these stocks have become more technological, manufacturing and 
service oriented and less industrial, unlike the case of the 
heavy industry stocks like U.S. Steel that were part of the early 
Dow.  

Today common parlance is “the Dow”, or the “Dow Jones” for this 
average.  This average of 30 stocks is not capitalization 
weighted, as is the case of the Standard and Poor 500 or Nasdaq 
Composite index.  Dow stocks of companies that have become price 
laggards, even if they’re much smaller companies than say General 
Electric, can have more of a dragging effect in the PRICE 
weighted Dow 30 average than indexes that give more weight to 
these larger companies with far more shares outstanding; e.g., 
the S&P 500(SPX).  

Only the Dow Industrials and Dow Transportation (then a group of 
railroad stocks) averages are used in what became known as “Dow 
theory”.  Charles Dow never called the market principles he wrote 
about a theory, only observations on how the economy and the 
market functioned.  Dow’s principles were later discussed in a 
book by the Wall Street Journal Editor that succeeded Charles 
Dow, William Hamilton, and was called The Wall Street Barometer.  
Robert Rhea is credited with distilling the ideas of Dow further 
and wrote a book in the early-30’s called Dow Theory. 

In Part 2 (on Sunday, 11/3) – there may have to be a Part 3 to 
prevent any one article from being too long - I’ll get into the 
main tenets of Dow’s observations on market behavior, which is a 
lot more than just how these two averages behave.  

Nevertheless, one of Charles Dow most important contributions was 
the idea that “confirmation” of the primary trend must exist by 
the actions of BOTH the Industrial and Transportation averages.  
A related aspect to this, really the flip side of it so to speak, 
is the concept of “divergence”. Dow spoke mostly about 
confirmation – divergences between averages and between prices 
and volume or between price action and indicators is mostly what 
came in this century by various technical analysts. 

What Dow said was that if the Industrials moved to a new closing 
high or low, without the Transportation average following suit – 
“confirming” it – or vice versa, with the Transports going to a 
new peak or bottom, without the same action in the Industrials, 
no change in the primary trend was “signaled”.  We are talking 
about the situation where there is a potential reversal in the 
primary trend.  To suggest such a change, the averages must be 
synch. 

Now, the reasons for this are simple, but accounted for a very 
astute observation on Dow’s part.  For example, industrial or 
manufacturing activity could continue to be very strong for a 
period of time while orders for those goods were slowing.  This 
would result in the build up of inventories.  Where such a 
slowdown would show up however, is in transportation orders and 
activity.  Slowing orders in the transportation sector, as fewer 
goods were shipped, would result in a fall off of company 
revenues.  Astute followers of these stocks would notice this and 
selling would start to show up in these stocks, either keeping a 
“lid” on stock prices or actually driving them lower. 

Conversely, manufacturing could start picking up but might not be 
at first reflected in a pick up in those stocks – however, an 
increase in shipping might be noticed more readily and cause 
those stocks to begin rising.  The Dow Industrials might fall to 
a new low, but not be followed by the Dow Transports.   

Therefore, a new high or low in the Industrial average, not 
confirmed by the Transportation average is suspect. In the case 
of a new high not confirmed by the Transportation stocks it may 
indicate that the same slowing of earnings and hence stock 
prices, will show up later on in the Dow Industrials. This was 
NOT the case for the 2000 highs, as both the Dow 30 AND the 
Transports went to new closing monthly highs as you can see on my 
first chart above. 

Perhaps manufacturing activity in the past two years, as 
reflected in the Dow Industrials, has not declined so much that 
it put the Dow 30 to a new closing monthly low – its interesting 
that this most recent rebound was from an area of the major low 
in the Dow (month ending 8/31/98) prior to its 2000 price peak.    

Back in 1994 there was another important case of a new low in the 
Dow Transports not being followed by a new low in the 
Industrials– as has been true (so far) in 2002. Here I use a 
weekly chart, but the result would have been the same on a 
monthly chart basis - 



 

We can assume that manufacturing was holding relatively steady – 
perhaps there was not a big build up of inventories - but 
transportation stocks were suffering more relative to the heavy 
volume and good earnings that they were experiencing in the prior 
year(s). 

A different sort of “non-confirmation” is when a new low in 
the Industrial average is not confirmed by a similar new low in 
the Transportation stocks. It may be that shipments of goods has 
started to rebound and has shown up in a slowing of the decline 
of the transportation stocks or in an actual upturn in their 
prices, whereas industrial companies are just shipping already 
produced and built up inventories – a rebound in their earnings 
lies ahead still, after they start up their manufacturing lines 
again in earnest.

In the chart below (also a weekly chart), depicting the 1998 to 
2000 period, it is striking how failure to confirm new relative 
highs in the Dow Industrials in both 1998 and again in 1999, by a 
similar move in the Dow Transportation average, preceded major 
downside reversals in the Industrials within a few weeks to 
months.  The 1999 example is the most striking - 



 

In the period shown in the above chart – you can observe that as 
the Industrial average was going to greater and greater highs, 
the transportation average was moving to ever-greater lows.  
Eventually, there was a sharp decline in the Industrials into 
late-1999 into early-2000, followed by a lengthily sideway trend 
with no further new highs.  The flip side of a lack of 
confirmation is the warning signs posted by such pronounced 
divergences. 

It will be interesting to see, in terms of Dow Theory, if the 
primary uptrend continues now over the coming months or years.  
AND, whether there will be an eventual new high in the Dow 30 in 
coming years; i.e., above 11,500 on a monthly closing basis. 
Failure to make an eventual new high would mean that we were in a 
bear market in terms of Dow Theory, but at some point an old high 
should be exceeded to suggest that the primary up trend was alive 
and well. A major or primary bear market would be signaled 
however, if the Dow closed below 7539 on a monthly basis (per my 
first chart at the top).  


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

ADX: Truth or Hoax?
By John Seckinger
jseckinger@OptionInvestor.com 

The Average Directional Index, or ADX, has recently got my 
attention because the Dow has been in a relatively trend less 
pattern since October 22nd.  The question is, Has the ADX 
oscillator been reliable in the past, or is this just another 
trading tool that needs to be put out to pasture?  

The ADX is technically measured from 0 and 100; however, readings 
above 60 are relatively rare.  Low readings, below 20, should 
indicate a weak trend and high readings, above 40, indicate a 
strong trend.  The indicator does not grade the trend as bullish 
or bearish, but merely assesses the strength of the current 
trend.  Note: A reading above 40 can indicate a strong downtrend 
as well as a strong uptrend.  

In theory, when the ADX rises from below 20 and/or moves above 
20, it is a sign that the trading range is ending and a trend 
could be developing.  When ADX begins to weaken from above 40 (example 60 to 50) and/or moves below 40, it is a sign that the 
current trend is losing strength and a trading range could 
develop.  For example:  If the ADX falls from 30 to 10 and then 
rises to 15, I will consider that a sign that a near bullish 
trend could be developing.  

The ADX gets a little more complex because there are two other 
Indicators to consider; Positive Directional Indicator (+DI) and 
the Negative Directional Indicator (-DI).  The default setting is 
a length of 14 for DI readings, and a smoothing number of 14 for 
the ADX.  I like to use the default because there is a good 
chance traders will keep this setting and look at the same 
numbers as myself.  Feel free to chance the length and smoothing 
numbers, but be careful not to create an oscillator that 
dramatically legs the security it is following. 

Buy and sell signals are generated when these +DI/-DI indicators 
cross.  A buy signal occurs when +DI moves above -DI and a sell 
signal when -DI moves above the +DI.  

Also with the ADX, there is something called the 'turning point 
concept.  First, the ADX must be above both DI lines.  When the 
ADX turns lower, the market often reverses the current trend.  
The ADX serves as a warning for a market about to change 
direction. The main exception to this rule is a strong bull 
market during a blow-off stage. The ADX turns lower only to turn 
higher a few days later.  

Ok, time to test the oscillator.  Beginning with a weekly chart 
of the Dow, I interpreted a sell signal given as the +DI crossed 
under the –DI during April of 2001.  It was also at the same time 
that the ADX (pink line) turned higher and did indicate the 
beginning of a trend.  

Another sell signal was given above Dow 10,000 as the +DI 
indicator fell underneath the –DI once again.  The ADX continued 
its downward trend and was indicative of a market not ready to 
trend in one direction.  However, the ADX wasn’t exactly going 
lower, either.  Roughly one month later, the ADX was correct and 
the Dow really didn’t do more than trade in a range.  Would that 
have stopped out traders that went long from the initial signal?  
Well, actually it should not have.  The +DI never rose back above 
the –DI, so shorts should still have been maintained.  Here is a 
possible problem:  What if the Dow moves a thousand points and 
the +DI doesn’t rise above the –DI?   Well, to increase 
probabilities, maybe it makes sense to put on a trade when the 
ADX has confirmed a trend change.  It might reduce profits, but 
should certainly increase probability of a winning trade.  

Food for thought: Is there a ‘turning point’ formation taking 
place at the moment?  The ADX is above both the +DI and –DI 
indicators, and we do not seem to be in a strong bull market 
(possible exception previously noted).  

Dow Jones, Weekly 


 

Looking at a daily chart of the Dow, the ADX fell underneath 40 
and signaled a weakening of trend.  The difference between the 
+DI and –DI also decreased; thus preparing traders for the 
beginning of a trend to take place in the near future.  Then, 
during late August, the ADX line did begin to trend higher from 
below 20 and the +DI crossed above the –DI.  

This appears to be a great trade; however, it depends on the 
execution getting out of the trade.  When the ADX began to turn 
down and the +DI met the –DI once again, the Dow rallied hundreds 
on points and closed above the 50 DMA.  So, is there a solution?  
I would use moving averages as a complement towards entry and 
exiting equity positions.  

Dow Jones, Daily 


 

As can be seen in the above chart, the Dow is currently showing a 
21.34 rating and represents a trend less market.  With that said, 
I pulled up a 30 minute chart from mid- to late September when 
there was a better trend taking place.  Looking at the 30-minute 
chart and oscillator readings, there was a solid sell signal 
given above 8200 as the +DI fell underneath the –DI indicator and 
the ADX line turned higher and indicated the possibility of a 
trend.  It was 400 points lower when the ADX line broke its 
upward trend and gave an indicating that shorts would cover.  

Looking at the right hand side of the chart, the ADX is currently 
trending higher, and the –DI index spiked higher to 50 and then 
fell under 40 (sounds like short covering to me).  Moreover, the 
spread between –DI and +DI looks to be narrowing.  The ADX has 
not reached 40 (sign of strong trend), but I feel that forces 
traders to miss a good part of the move.  

Dow, 30 minute 


 

In conclusion, I felt that the ADX oscillator actually works 
fine.  Should it be the only indicator used?  Definitely not; 
however, long-term traders should have good results if they wait 
for the +DI to cross the –DI and the ADX line is solidly trending 
higher.  With that said:  I give this oscillator a “Truth” rating.  
Good luck.  


**************
FUTURES CORNER
**************

New information on the November 8th launch date of Single Stock 
Futures (SSFs).
by Alan Hewko
futures@OptionInvestor.com


SINGLE STOCK FUTURES

News was released today about next Friday's (November 8th) start 
information regarding Single Stock Futures (SSFs).

In a prior column, I had written an article on Oct. 13th covering 
their basic information, and it can be read at 
http://www.OptionInvestor.com/futurescorner/101302_3.asp

SSFs are set to start trading next Friday on Nov. 8th.

Most futures brokers as I understand the situation are ready to 
begin trading them on their Nov. 8th start date. It is also my 
understanding that very few Stock and Option Brokers will allow 
you to trade SSFs at this time. Preferred Trade as an example is 
giving an approximate time period of "hopefully by year-end" to 
begin trading them.

SSF's Trading hours are from 9:15 AM to 4:02 PM EST.

OneChicago is the newly created Exchange for SSFs and their 
website is www.OneChicago.com

The "front month" for SSFs shall be Dec 2002.

The full press release, along with the actual stocks that shall 
start trading SSFs on Nov. 8 is below.

__________________________________________________________________


PRESS RELEASE - OneChicago

OneChicago Announces Products for Nov. 8 Launch.

CHICAGO, IL – Oct. 30, 2002 – OneChicago, LLC today announced the 
first single stock futures to be traded at its launch on Friday, 
Nov. 8, 2002, pending regulatory approval. The Exchange also 
listed the single stock futures that had not already been 
revealed to be offered during the first weeks of trading.

OneChicago Chairman and Chief Executive Officer William J. Rainer 
said, "OneChicago is offering futures on some of the most 
actively traded stocks from a variety of industries. Our 
intention is to continually add new products every two weeks 
until we have a complete menu of 100 security futures offerings."
The initial product launch, which will trade with December 2002 
contracts as the front month, include: 

Bank of America Corp. (BAC)
Best Buy Co. Inc. (BBY)
Brocade Communications Systems Inc. (BRCD), 
Citigroup (C)
Dell Computer (DELL)
Exxon Mobil Corp. (XOM)
General Electric (GE)
Goldman Sachs Group Inc. (GS)
Hewlett Packard (HPQ),
Home Depot Inc. (HD),
Johnson & Johnson (JNJ) 
JP Morgan Chase & Co. (JPM)
Merck & Co. Inc. (MRK),
Microsoft Corp. (MSFT)
Nokia Corp. ADR (NOK) 
Oracle Corp. (ORCL)
Philip Morris (MO)
Qualcomm Inc. (QCOM)
SBC Communications Inc. (SBC)
Schlumberger Ltd. (SLB)
Veritas Software Corp. (VRTS)

OneChicago also unveiled additional single stock futures not 
previously announced that will be available for trading in the 
weeks following the launch. They include: 3M (MMM), Alcoa Inc. 
(AA), Altera Corp. (ALTR), Boeing Co. (BA), Caterpillar (CAT), 
Disney Co. (DIS), Dupont (DD), Eastman Kodak (EK), Honeywell 
Int’l Inc. (HON), International Paper Co. (IP), Maxim Integrated 
Products Inc. (MXIM), McDonald’s Corp. (MCD), San Disk Corp. 
(SNDK) and United Technologies Corp. (UTX).

The Exchange is listing futures on narrow-based indices as well, 
which are already listed on the OneChicago Web site at 
www.OneChicago.com.

OneChicago is a joint venture of the Chicago Board Options 
Exchange® (CBOE®), Chicago Mercantile Exchange Inc. (CME) and the 
Chicago Board of Trade (CBOT®). All of OneChicago’s products will 
be electronically traded on the CBOEdirect® match engine and can 
be accessed through both CBOEdirect® and GLOBEX® platforms. Both 
single stock futures and futures on narrow-based indices can be 
carried in either securities accounts or futures accounts.


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***********
OPTIONS 101
***********

Bear Call Spread Revisited
Buzz Lynn
buzz@OptionInvestor.com

OOPS!  The law of probability says that some trades are bound to 
get off to a rocky start.  We talked last week about bear call 
spreads using IBM as an example, which clearly fits that bill.  We 
want the price moving down in order to profit from our spread, but 
the price is moving up!  Panic - we're stuck!  

OK, let's take a deep breath and clear our minds for minute from 
that unavoidable sinking feeling when a trade moves against us.  
It isn't as bad as we think as long as we keep a clear, cool head.

In essence, we're going to examine the trade again to determine 
that age-old traders' question (with apologies to The Clash from 
1982), "Should I stay or should I go?"

Here's a recap of where we left off.  We had opened a bear call 
credit spread:

IBM-KM NOV 65 = $8.10 bid - short
IBM-KO NOV 75 = $1.80 ask - long

Net credit = $6.30 in our pocket.  

$6.30 was our maximum potential reward for IBM closing under $65 
by November expiration.  Our maximum risk of loss would be $3.70 
if IBM closed $75 or over at November expiration.  We entered this 
with IBM trading at about $72.

IBM trades at nearly $79 today.  Thus, the trade has run against 
us.  And that panic, fretting and fear of loss starts running wild 
in our brains.  Maybe we're even losing sleep over it.

OK, put the brakes on those thoughts.  It's time to collect 
ourselves.  I remember reading probably 11 years ago a passage in 
the book, "The 7 Habits of Highly Effective People" by Steven 
Covey.  It was a helpful book, by the way, in that it really 
encourages us to focus most on the "Important, Not Urgent" aspects 
of our lives.  It all boiled down to a simple concept, "Begin with 
the end in mind".  Something like writing our epitaphs and then 
doing the things with our lives that would enable those words to 
be placed on our tombstones and to have nice things said about us 
in eulogy.  

Beginning with end in mind is exactly how we should enter every 
trade.  "Great Buzz, you big smart aleck.  The end I had in mind 
was to make a profit, and it aint here yet!"  I know, but that's 
not what I mean.  One of the basic rules of trading is that we 
always know our entry and exit BEFORE we ever enter the trade.  
And before we know that, we have to have REASONS WHY we're 
entering the trade in the first place.

Let's recap - we entered this trade having evaluated risk and 
reward and determined that the risk of $3.70 was worth the reward 
of $6.30.  We looked at the charts and decided that IBM was 
nearing resistance and that a price move to $75 might make the 
ideal entry.  Most importantly, we interested in the likelihood of 
collapsing volatility premium and time decay that would both work 
in our favor on this play even as we slept.  Our most important 
factor - volatility and time decay - are still very much intact.  
Our risk and reward are still quantifiable, as exactly as they 
were last week.  Also, we still have time to be right and let the 
oscillators do their job.  While the price has moved against us, 
the principles guiding the trade are coming true.

So just how far under water have we gone?  Well, at $79, we're 
subject to the extent of maximum risk penalty of $3.70.  This is 
where a personal decision has to be made.  Perhaps we can exit the 
trade early and avoid losing the whole $3.70.  As I write this, 
IBM trades at $79.09.  In order to close the position, we would 
have to buy back the short NOV65 call and sell back the NOV75 
call.  The NOV65 costs $14.40.  We can get $5.10 for our NOV75 
call.  That would cost us $9.30 net.  But remember, we have a 
$6.30 credit from opening the position to offset that.  $9.30 cost 
minus a $6.30 credit equals a net $3.00 loss.  We can book that $3 
loss, or "roll the dice" and maybe or maybe not lose the whole 
$3.70.  That's a personal choice we each have to make.

My personal thinking goes back to the recap of two paragraphs 
above.  I remember why I entered this trade.  I remember the risk 
I committed to taking - $3.70 worth.  I was willing to live with 
that possible outcome, and I still am because other than price, 
the trade still stands on the principles in which it was entered.  
This may sound harsh, and not very touchy-feely.  But those who 
have switched their "feelings" about the trade and have now 
decided that risking $3.70 is no longer acceptable should 
evaluated their risk tolerance BEFORE entering the trade.  That 
emotional change of heart based on fear of loss will prove deadly 
to an attempted long-term career as a trader.  

The point is to remember that we took a calculated risk to enter 
the trade, and if those principles still apply, we stick with it.  
Please don't misunderstand.  Our job in the trade is not to "take 
the pain" and hope to be right.  Our job is to enter initially or 
stay out based on our own determination of risk and reward.  We 
make the decision to stay or go before we ever enter the trade.  
Better to have stayed out on unwillingness to lose $3.70 than 
change the strategy and lock in the $3 loss.  In other words, we 
stick to the plan on principle than change it on emotion.

All that said, what could we do from here?  Any change we might 
salvage the play?  The answer depends a lot on risk profile and 
our willingness to guarantee a $3 loss, limit loss to $3.70 by 
staying the course, or assuming more risk and potentially reaping 
reward.  We must decide where we stand and "know thyself".

Each branch of that decision tree must be evaluated.  The first 
two, we've already evaluated.  Assuming more risk is really a 
separate trade and should be evaluated completely independently of 
the position we already hold,  If we are thinking, "Great, an 
opportunity to make up for our loss", we are dead meat.  That's a 
dangerous emotion belonging to a gambler.  It must be evaluate as 
a fresh trade.  

So let's evaluate starting with the chart.

IBM chart - IBM (weekly/daily/60): 


 


Well, $75 resistance was broken and $80 is looking like a 
formidable next stop of resistance.  We can see that on the weekly 
chart, as well as the weekly stochastic entering overbought.  Take 
a look at the daily too.  Notice the overbought stochastic on both 
the 10 and 5 period lookbacks.  Just to keep it interesting, I 
threw on a volume chart, as well.  Notice that volume increased 
during the selling that started in late September and volume began 
declining on the recent advance from early October.  We note the 
60 chart is also peaking just under $80 and candle action is 
beginning to weaken as the stochastics have lost their "oomph" in 
the thin air around the current price.

This still looks like a great short candidate to me, only this 
time with a better entry.  Were I going to enter another bear call 
spread, shorting the $75 call ($5.00) and going long the $85 call 
($0.50) yields would yield a $4.50 credit.  But that leaves $5.50 
of risk.  Too much risk and not enough reward for my taste this 
time around.  

But there is another factor missing here too.  Volatility isn't as 
great as it was a week ago, which reminds me that I don't have 
quite as much to gain from a volatility collapse. Personally, I 
think a volatility collapse back under 30 is unlikely for the 
current option cycle.  For this reason, I'd personally rule out 
entering a new 75/85 bear call spread.  

What to do?  Let's see, volatility is down slightly; DEC contracts 
would have even less volatility in the put option prices, which 
leaves more time to be right.  You know, I might just consider 
buying straight puts this time around.

Of course, there are no guarantees, but this looks to me like an 
even better entry if we are to bet on future declines in IBM.  Not 
only that, but we may yet be right on the first bear call spread 
for all the right reasons.

Make a great weekend for yourselves!  Happy Halloween!

Buzz


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