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Daily Newsletter, Tuesday, 11/05/2002

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The Option Investor Newsletter                 Tuesday 11-05-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Bullish Sentiment Elected
Futures Markets: Struggling Against Resistance
Index Trader Wrap: Beloved biotech bullish before FOMC
Market Sentiment: Voting Stock
Weekly Fund Screen: Short-Term Treasury/Agency Funds


Updated on the site tonight:
Swing Trader Game Plan: On Your Mark


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      11-05-2002           High     Low     Volume Advance/Decline
DJIA     8678.27 +106.70  8691.38  8544.42 1.59 bln   1664/1486
NASDAQ   1401.17 +  4.60  1401.37  1379.33 2.06 bln   1634/1692
S&P 100   467.93 +  5.67   468.39   460.84   Totals   3298/3178 
S&P 500   915.39 +  7.04   915.83   904.91 
RUS 2000  386.07 -  0.90   386.97   382.93 
DJ TRANS 2344.46 + 10.60  2346.88  2316.32   
VIX        34.28 -  0.19    34.98    33.50   
VXN        51.20 +  1.98    52.37    50.39
Total Vol   3,835M
Total UpVol 1,949M
Total DnVol 1,789M
52wk Highs   108 
52wk Lows     96
TRIN        0.83
PUT/CALL    0.77
************************************************************

Bullish Sentiment Elected

It is far too soon to know how the political elections turned 
out but traders elected to be bullish again today. It is unknown
what is powering the sentiment other than the overwhelming 
assumption that the Fed will cut rates on Wednesday. Early 
comments from the election reporters seemed to indicate that
gridlock would remain and that means no immediate danger to 
the status quo. It appears bulls are celebrating in advance on
both counts. 

Dow Daily Chart


 

Nasdaq Daily Chart


 

There was good economic news this morning if you call a smaller
than expected drop in the ISM service numbers good news. Analysts
were expecting a drop to 51.8 for October and the real number
came in at 53.1. This was still a drop in the rate or growth 
but just not as bad as expected. This is just another indicator
that the mid-year recovery is continuing to slow but not at the
same rapid pace. 

The recent rally in the market has brought out a flood of analyst
downgrades based on valuation. The common theme appears to be
that the unexpected bounce in most stocks has propelled them 
well over what the lowered earnings expectations would support. 
They were eager to recommend them four weeks ago but are now
aggressively cutting them while they are profitable. Some of
the stocks downgraded on valuation today were ADP, IBM, AXP, 
LXK, ADNE, YHOO, NXTL and TLAB. Many stocks have come too far
too fast and we are starting to see an undercurrent to the 
bullishness that wonders how much farther the market can go
without some positive economic news. 

Circuit City added to the negative sentiment on the retail 
sector for the holidays with a strong warning. The Chain Store
Sales Snapshot released today also showed a continued slide in
sales and projected a weak number when Retail Sales are announced
on Thursday. 

AMAT was instrumental in knocking the chip sector for a rare
loss today with their news of a -1750 job cut and dismal
outlook last night. KLIC added to the gloom today by saying
they were looking into selling non-core assets to reduce costs
and conserve energy until a recovery appears. However, traders
bought the dip at 1:45 PM at the low of 307 on the SOX. It
appears no amount of bad news can weaken the chip sector before
the Fed meeting. 

After the close today CSC announced earnings after the bell
but warned that it was lowering their earnings outlook due to 
a continuing slowdown in technology spending. It blamed slack
demand in the U.S. and Europe for consulting and systems
integration for the shortfall. They lowered full year estimates
to $2.60 from $2.73 to $2.88 a share. Since IBM and EDS are
their primary competitors it would be safe to assume that those
companies are having trouble as well.

Despite the election today the markets rallied to near Monday's 
highs with the Dow closing at 8675. Regardless of the election
outcome the major hurdle in front of us is the Fed meeting on
Wednesday and Cisco earnings after the close. The closer we get
to the Fed meeting the more cautious the commentators calling
for a 50 point cut are becoming. I have heard a greater number
of analysts saying a cut will not matter which is a politically
correct way of hedging their previous comments projecting a
cut. I have beaten this topic to death but the bottom line is that
the Fed has not said a word about the chances of a cut. This is
very uncharacteristic of them but it could be due to not wanting
to become an election target. 

The bottom line is what can the Fed do "FOR" the market tomorrow?
A 25 point cut is already priced in and would cause a sell the
news event as traders captured profits. Since there is already
a 65% chance that we will see a 50 point cut by December a 50
point cut tomorrow would mean there was nothing else coming until
next year. After an initial pop on the news the markets would 
likely sell off as traders took profits and moved to the sidelines
to see what will happen next. Of course no cut would be the worst
option. The bottom line is that the maximum expectation has already
been priced in and there is nothing the Fed can do to really juice
the market. Of course with investors buying bad news recently it
is entirely possible they buy the sell off on any news with an
eye that things will get better by the end of 2003. 

As a postscript to the Fed meeting the Cisco earnings after the
close could actually be a bigger factor than the Fed. They have
widely been expected to miss the revenue numbers with one analyst
suggesting by -$200 million just this morning. Others think that
because they did not warn they will hit estimates and raise
guidance. Now that would be a surprise. However, a rumor from a
company that buys a lot of Cisco products is that they could not
get expedited shipments on products for the last month. This 
implies that they were out of inventory due to better than 
expected sales. There are other possible scenarios. They could
have let their inventory shrink to avoid massive write downs like
they have had to take in the past. Make only what you sell and
limit exposure to obsolescence. Since most boxes take only a
very small amount of time to manufacture it keeps you flexible. 
Another possibility could have been parts held up by the dock
strike. Maybe the company was ordering the newer top of the line
products where there is demand while the rest of the line was
slipping. You can see it is very dangerous to speculate on market
rumors. 

The only speculation I can see making tonight would be that the 
market is very overbought and the chances for a rate cut have 
actually diminished over the last two days. In normal markets 
this would be the prime setup for a drop regardless of what the 
Fed did. That would be my outlook for tonight. Expect a possible 
bounce at the open if the CSC news does not tank IBM and then bleed
points until the 2:15 Fed decision. Any bounce will run into strong
resistance at 8725. I expect any good news from the Fed to be muted 
due to the Cisco news after the close. Nobody is going to want 
to go long with big bets with a Cisco time bomb only two hours 
later. Thursday all bets are off as it will be tech driven and 
depend on the Cisco guidance. Even if the stars align and the Fed
and Cisco don't disappoint the resistance at 9050 is likely to 
hold until the economy shows signs of a recovery. 
  
Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Struggling Against Resistance

The S&P futures struggled higher again on Tuesday as the Dow 
cash led the charge back to near Monday's highs. Intraday the 
S&P failed twice at 914 but broke out at the close to a 915
high. They appear ready to make another attempt on the 925
high from Monday. I doubt they will be successful and expect
920 to be the turning point. 

If you want to catch the falling knife you could short 920 with
a stop at 925.50 and a target of Tuesday's low at 905, which is
also strong support. Below 905 we have support at 900 then lower
at 880.

The Fed meeting is the wild card and I would look to close any
profitable position at 2:10 PM and reenter after the post Fed 
spike, if any.


S&P Futures Chart – Daily


 

S&P Futures Chart – Intraday


 

The NDX held right at resistance of 1055 but news from CSC 
after the close could make it tough to move up from there. 
Resistance is 1058 with initial support at 1033. 

A short opportunity exists with any failure above 1055 or
below 1050 with an initial target of 1033. A Fed/Cisco
disappointment could see 1000 tested again.

NDX Futures Chart – Daily


 

NDX Futures Chart – Intraday


 

The Dow futures closed about 85 points below strong resistance
at 8736. With the Dow cash likely to fail at 8725 again on
Wednesday I would look to short the futures on any failure of 
the cash and a drop back below 8700. 

The initial target would be secondary support at 8520 with
caution at interim support of 8600. A drop below the 8520 
level could set up a drop to 8300 on any Fed/Cisco disappointment. 

Dow Futures Chart – Daily


 

Dow Futures Chart – Intraday


 


An aggressive futures trader could have a banner day on Wednesday.
With a positive open to set the stage it is hard for me to 
imagine a scenario where traders don't take profits before the
Fed meeting is over. With any rate cut already priced in an
after meeting spike could sell off just as quickly in front 
of the Cisco news. I would be cautious and close any positions
before the Fed announcement and the Cisco announcement and look
to reenter once the news is out. 

Jim Brown


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

Beloved biotech bullish before FOMC

Perhaps the bullishness in biotechs as depicted by the 
Biotechnology Index (BTK.X) 366.50 +2.3%, which grabbed today's 
sector winner trophy hints that there's still some bullish 
capital to be put to work, but that hints of a cautious market 
ahead of tomorrow's decision on interest rates when the FOMC 
breaks from it's monthly meeting at 02:15 PM EST.

The biotech group, arguably the least "economically sensitive" 
sector in the market posted a 2.3% gain as sector bellwether 
Amgen (NASDAQ:AMGN) $50.08 +3.55% clawed its way back above the 
$50.00 after recently testing its trending higher 50-day SMA at 
$46.  

Biotech gains helped offset some of the losses found in the 
Semiconductor Index (SOX.X) 317 -2.59% after another round of 
cautious comments from brokers.  While the SOX oozed an odor of 
smelly feet into the lunch hour, the sector held above 
psychological support of 300 and erased half of its early losses.  
Sector bellwethers had shares of Intel (NASDAQ:INTC) $18.30 -2.4% 
the second most actively traded NASDAQ stock at 72 million 
shares, while Applied Materials (NASDAQ:AMAT) $15.81 -3.8% was 
the fourth most actively traded stock at 43 million shares.

Both the Dow Industrials (INDU) 8,678 (+106 points) and S&P 100 
Index (OEX.X) 468 (+5.6 points) posted matching percentage gains, 
bolstered by strong gains in Boeing (NYSE:BA) $31.52 +6.23% and 
Exxon Mobil (NYSE:XOM) $35.58 +3.85%.  

Weakness in healtchare sectors, HMO Index (HMO.X) 531 -2.9% and 
Morg. Stanley Health Provider (RXH.X) 296 -2% had the broader S&P 
500 Index (SPX.X) 915 +0.7% posting a more marginal gain, while a 
mixed session from computer-related technology stocks had the 
NASDAQ Composite (COMPX) 1,401 +0.3% and NASDAQ-100 Index (NDX.X) 
1,050 +0.3% processing fractional gains.  

Smaller caps as depicted by the Russell-2000 Index (RUT.X) 386 
-0.23% never did quite get into positive territory during the 
session, rallying from the 383 level into close to post a 
fractional loss.

Ahead of tomorrow's decision on interest rates, Treasuries 
finished the session with fractional price declines, as the 
longer-dated maturities experience modestly heavier selling.  The 
30-year December Treasury futures (us02z) 109'140 fell 0.22%, 
while the benchmark 10-year December futures (ty02z) 113'20 
slipped 0.16%, which had its YIELD rising to 4.081%.

The December Fed Funds futures (ff02z) settled out at 98.60, 
which calculates a Fed rate of 1.4% ahead of tomorrows FOMC 
meeting.  The has the MARKET looking for at least a 25-basis 
point cut from current 1.75% and anything less than that would 
most likely be seen as a near-term disappointment for equities.

From my perspective, a 50-basis point cut would be a surprise and 
could have stocks popping higher on the news, only to settle back 
on a reality check that the Fed deems the economy so weak that it 
would need to try and pump that much liquidity of money into the 
economy.

Dow Industrials Chart - Daily Interval


 

It has been my view that many of the Dow components would be the 
greatest benefactors of further Fed easing if the economy is to 
show robust growth from a friendly Fed.  Many of the components 
are more deeply rooted in the economy.  Technology components 
faired relative well consider the number of downgrades from 
brokers in the semiconductors today.

Today's action saw no change take place in the very narrow Dow 
Industrials Bullish % ($BPINDU) from www.stockcharts.com, with 
the bullish % still "bull confirmed" at 63.33%.

S&P 100 Index Chart - Daily Interval


 

The OEX has looked technically stronger and performed slightly 
better during periods of strength and weakness.  Today's close 
above 465 looks bullish.  Yesterday's trade at 465 had the OEX's 
point and figure chart ($5 box scale) breaking above longer-term 
bearish resistance and triggering a spread-triple-top buy signal.  
Today's ability to close above that 465 level hints demand is 
strong for the bulk of these 100 stocks.  Downward trend on the 
above chart is from the March 18th relative highs of 595.

Today's action saw no net change in the S&P 100 Bullish % 
($BPOEX) as 60% of the stocks still show a point and figure "buy 
signal" associated with their charts.  I can still envision the 
OEX trading 480 before this indicator reaches a more overbought 
reading of 70% or higher, but tomorrow's FOMC meeting and MARKET 
response remains key.  

S&P 500 Index Chart - Daily Interval


 

In the past, we actually "fit" retracement on the SPX and OEX 
from identical levels.  It's fascinating perhaps that the OEX 
never did trade below its July 24th lows, while the SPX did.  Now 
we are seeing the OEX trade marginally more bullish from a 
technical perspective on the upside move.  Bearish traders will 
take note of this and most likely select the OEX for their 
bullish trading, while looking at the broader SPX for their 
bearish SPX trades.

This observation may also hint of a more "narrow" bullish rally 
taking place where the 100 larges S&P stocks perhaps find more 
sponsorship compared to a broader market of 500.

Traders may also note how the SPX is still just under downward 
trend from similar anchor points as used in the OEX.  While OEX 
traders can be bullish, they should be looking over their 
shoulder perhaps to see if the broader 500 are coming along for 
the ride.  Bulls like to see broader bullishness whenever 
possible.

If after tomorrow's FOMC meeting the SPX looks to close above 
925, I'd view that as a bullish market response.

Today's action saw the S&P 500 Bullish % ($BPSPX) realize a net 
gain 0.8%, or 4 stocks to point and figure buy signals.  This has 
the bullish % edging higher at 55.6% and still "bull alert" 
status.  It would still take a reading of 60% to get this index 
into "bull confirmed" status like the narrower OEX Bullish % 
achieved after Monday's trading.

NASDAQ-100 Index Chart - Daily Interval


 

It's my view that the NDX has perhaps benefited most from talk of 
a 25-basis point and even 50-basis point rate cut by the Fed.  If 
the MARKET is going to show disappointment and I'm going to risk 
capital in a bearish trade, then the index I feel has the most 
downside for disappointment is the NASDAQ-100 Index.  My bearish 
target for a QQQ $26 puts is $24.25, which would be just above 
the 61.8% retracement on the NDX and rising 21-day SMA.  My risk 
is the 90-cents in the option.  If I were to have shorted the 
underlying Q's outright, I would have followed with a stop just 
above $26.80.  However, that didn't make sense if I could buy 
some time in a QQQ put that also got me some exposure to Cisco 
Systems (NASDAQ:CSCO) $12.69 +3.08% earnings, scheduled for 
release Wednesday after the bell.  In essence, if I was going to 
risk 90-cents to a stop on 1,000 shares of QQQ short, might as 
well limit my risk in a QQQ put and get until November 15th 
expiration to see how things pan out.

Today's action saw the NASDAQ-100 Bullish % ($BPNDX) seeing a net 
gain of 2 stocks to point and figure buy signals as the bullish % 
now grows to 68%.  Wow!  What a turn of events after early 
October's 14% reading when bears carried the bulk of the risk.  
The tables have turned and this bullish % now nears the more 
"overbought" reading of 70%.  Still, the NASDAQ-100 is "bull 
confirmed" and very bullish, but bulls holding some gains should 
be snugging up stops to protect gains.

Please note:  Today's bearish profiled trade in the market 
monitor (10:30:32) is what I considered to be "risk capital" only 
and I kept bearish position very small and risked minimum capital 
as it relates to my account and offsetting bullish positions 
currently held.

Jeff Bailey


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

Voting Stock
by Steven Price

Whether today's rally was election related, or simply an attempt 
to jump on the bandwagon ahead of Wednesday's FOMC meeting, it 
still kept us range bound.  Of course, we are now in a higher 
range than we were for the last two weeks, so it can be viewed as 
bullish by those looking for a little reassurance that the 1400-
point Dow rally has been for real.  The Dow struggled to break 
through 8550 from October 21 until Monday.  That level now 
appears as support, with the next upside test at 8750.  Likewise, 
the SPX has now broken above 900 for the first time since 
September 11 and has found support there, as well. Don't pinch 
yourself just yet, however, as the next 24 hours will be long 
ones.  

Tomorrow morning will bring the market's reaction to a new 
political landscape.  Of course the market will have only a few 
hours to digest the election results before Team Greenspan let's 
us know just how low they'll go.  Some financial institutions are 
calling for a fed funds rate cut of 50 basis points tomorrow 
afternoon, however that seems very unlikely.  With the fed funds 
futures predicting a cut of 25 basis points, and an already low 
rate of 1.75%, the FOMC is likely to give us what we are 
expecting.  They may even throw us bone by keeping an easing bias 
for the near future.  There is another FOMC meeting a little more 
than a month from now, so there will be a chance for another 25 
points before the end of the year if needed. With the threat of 
terrorism still very much existent and the economy growing, 
albeit at a very slow pace, the Fed is likely be stingy with the 
few rate cuts it has left.  

SEC Chairman Harvey Pitt resigned tonight, after pressure mounted 
surrounding his choice of William Webster to head the SEC's 
accounting oversight board. Pitt failed to inform the commission 
or the White House that Webster had been involved in an 
accounting investigation a few years ago, although Webster had 
told Pitt of the potential problem.  

The Semiconductor Index finally gave something back today, after 
gaining 52% since October 9.  At one point it looked like it may 
test support at 300, but rallied at the end of the day to finish 
down only 8.47, at 317.55.  Last night AMAT said it was cutting 
11% of its workforce in an attempt to combat a 2-year slump in 
chip demand, which got the group rolling downhill this morning.  
In keeping with the recent trend however, the SOX shook off the 
bad news to keep its up trend in tact. The index has been 
following its ascending channel for the last month, and has 
bounced from the lower trend line on each test, including today. 

One market that is predicting a big win for the democrats is oil. 
Crude Oil futures have been dropping like a stone, from a high of 
almost $31 per barrel, to a close today of $26.01.  The threat of 
an Iraqi invasion is being discounted in the oil market, which 
would indicate a predicted shift of sentiment in Congress. While 
most pundits will virtually guarantee an Iraqi regime change, the 
oil futures are telling us that it may be a while.  Donald 
Rumsfeld indicated yesterday that he "would expect that there 
would be guard and reserve call-ups in the immediate period 
ahead," however that does not necessarily mean we will invade 
before the December oil futures expire. 

The market internals gave mixed signals today, in spite of the 
big gain in the Dow.  Advancing volume on the NYSE was only 
favored 1.4:1 over declining volume. In the Nasdaq, which posted 
a gain of 4.63, declining volume actually outpaced advancing 
volume by about the same margin. We basically saw a market on 
hold ahead of election results and the Fed announcement. 

One important development was that the Nasdaq 100 and S&P 100 
bullish percentages both shifted into bull confirmed status 
today.  We now have the NDX, OEX, Dow and NYSE all giving strong 
bullish point and figure signals.

While today may have been a snoozer, tomorrow should be just the 
opposite. If the republicans gain control of the Senate, we could 
see a rally in the morning.  However, if we get no more than a 25 
basis point rate cut, the rally may be short lived.   If we get 
no cut at all, watch out below.  If the democrats retain the 
Senate, we may see a sell-off, or a very quiet open ahead of the 
FOMC announcement.  

The Put/Call ratio at the CBOE increased today to .77, however, 
that level is somewhat neutral, relative to recent ratios. This 
would indicate that the big players are not betting in either 
direction. Keep an eye on 8750 Dow to the upside and 8550 to the 
downside, in order to gauge direction after tomorrow's FOMC 
announcement. In either case, give it a few minutes to settle in 
before piling on, as there is usually tremendous volatility 
immediately following the release. Once we get a directional 
feel, we'll go for the quick hits, as history has told us that 
volatility usually lasts a few days.


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7286
Current     :  8678

Moving Averages:
(Simple)

 10-dma: 8636
 50-dma: 8448
200-dma: 9282



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  915

Moving Averages:
(Simple)

 10-dma:  912
 50-dma:  894
200-dma: 1000



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1050

Moving Averages:
(Simple)

 10-dma: 1047
 50-dma:  999
200-dma: 1158



-----------------------------------------------------------------
The Semiconductor Index (SOX.X): The SOX finally began giving 
back its gain of more than 50% in the last month, after AMAT said 
last night that it would lay off 11% of its workforce in order to 
cope with declining demand in the chip industry.  While this was 
a mantra heard often throughout earnings season, it has had 
little effect on the soaring SOX.  Until the index breaks below 
300, that level should be viewed as support.  Today's low of 306 
reinforced that notion. While we are hesitant to play a sector 
long that is seeing continued weakness, we won't jump in short 
until there is a decisive support break.  Data from the 
Semiconductor Industry Association indicated that the last 
quarter saw a 20% increase from the year ago period, but 

52-week High: 657
52-week Low : 214
Current     : 317

Moving Averages:
(Simple)

 10-dma: 298
 50-dma: 269
200-dma: 426


Market Volatility

The VIX is not acting as though the Dow was up over 100 points 
and has reached a higher support level after breaking through 
8550.  Most likely that is because there is so much uncertainty 
swirling around today's elections and tomorrow's FOMC meeting.  
Normally we would see a big drop in premium levels as the market 
heads higher, and buy writing commences.  However, we will not 
likely get that drop until the market chooses a direction later 
in the week, following the FOMC announcement Wednesday afternoon. 
If that direction is down, we may re-test 40.  If it is up, we 
may crack 30 for the first time since early July

CBOE Market Volatility Index (VIX) = 34.28 –0.19
Nasdaq-100 Volatility Index  (VXN) = 51.20 +1.98

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.77        581,986       448,606
Equity Only    0.62        485,543       302,506
OEX            0.84         19,423        16,251
QQQ            0.71        113,414        79,985


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

Bullish Percent Data

           Current   Change   Status
NYSE          40      + 2     Bull Confirmed
NASDAQ-100    68      + 9     Bull Confirmed
Dow Indust.   63      + 6     Bull Confirmed
S&P 500       56      + 6     Bull Alert
S&P 100       60      + 6     Bull Confirmed

Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

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

5-Day Arms Index   0.97
10-Day Arms Index  1.04
21-Day Arms Index  0.90
55-Day Arms Index  1.27


Extreme readings above 1.5 are bullish, and readings below .85 
are bearish.  These signals don't occur often and tend be early, 
but when they do, they can signal significant market turning 
points.

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

Market Internals

        Advancers     Decliners
NYSE       1429          1284
NASDAQ     1536          1616

        New Highs      New Lows
NYSE         22              28
NASDAQ       56              39

        Volume (in millions)
NYSE     1,579
NASDAQ   1,691


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

Commitments Of Traders Report: 10/29/02

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 loaded up slightly on both sides of their position, adding 
5,000 long and short contracts.  Small traders treated their positions 
similarly, adding 3,000 contracts to both sides.


Commercials   Long      Short      Net     % Of OI 
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%)
10/29/02      437,565   468,557   (30,992)   (3.4%)

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
10/08/02      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%
10/29/02      137,740    75,587    62,153     29.1%

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 left positions virtually the same, with a slight reduction 
to the long side and a slight increase to the short side.  Small 
traders added less than 1,000 contracts to both sides.


Commercials   Long      Short      Net     % of OI 
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%)
10/29/02       47,837     55,261    (7,324) ( 7.1%)

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
10/08/02       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     6.6%
10/29/02       10,584     9,419     1,165     5.8%

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

Commercials kept the status quo here, as well, reducing the net long 
position by 300 contracts, of 0.4% of open interest.  Small traders 
increased longs by 1,200 and shorts by 2,000.


Commercials   Long      Short      Net     % of OI
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%
10/29/02       21,800    13,337    8,463      24.1%

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
10/08/02        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%)
10/29/02        5,602    11,090    (5,488)   (32.9%)

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

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


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

Short-Term Treasury/Agency Funds

Last week, we profiled three emerging-market bond funds for the 
aggressive portion of your income portfolio; this week, we talk 
about two low-expense Vanguard bond funds that are hard to beat 
for the conservative portion.  One fund is Vanguard Short-Term 
Treasury Fund (VFISX), and the other is sibling Vanguard Short-
Term Federal Fund (VSGBX).  

Both Vanguard funds are "short-term" in nature and seek current 
income by investing primarily in Treasury or agency securities.  
Government agencies such as Federal Home Loan Banks are exempt 
from SEC registration requirements and are deemed to be of the 
highest credit quality ("AAA") along with Treasury obligations.  
Both funds benefit from Vanguard's industry-low expense ratios.

Neither Vanguard fund invests much, if any, in corporate debt 
securities and asset-backed securities, nor do they emphasize 
mortgage-backed securities.  Those sectors of the bond market 
offer greater return potential, but carry additional risks not 
associated with Treasury/agency securities.  Our aim this week 
is to identify a couple conservatively managed bond funds with 
solid track records of performance.

Screen Process

The screen process was relatively simple to perform.  We used 
Morningstar's Fund Selector tool online (www.morningstar.com), 
which allows you to quickly identify funds that meet specific 
criteria, such as average credit quality and average duration.  
Our search criterion is summarized below.

 Fund Group = Taxable Bond
 Minimum Initial Purchase < or = $3,000
 Expense Ratio < or = Category Average
 Morningstar Rating = 4 or 5 Stars or Unrated
 Average Credit Quality = AAA
 Average Duration < or = 3 Years  

This simple but effective screen yielded only 13 fund results, 
two of which are not yet rated by Morningstar: Pacific Capital 
Ultra Short Government Fund (PCUAX) and the Vanguard Inflation 
Protected Securities Fund (VIPSX).  The latter fund invests in 
Treasury inflation-indexed securities ("TIPS"), and would be a 
solid choice for income investors seeking inflation protection.  

VIPSX is the cheapest and largest fund of its kind and returns 
have been great so far, but inflation-indexed securities could 
underperform conventional Treasuries during an extended stretch 
of modest inflation Morningstar says in its report.  The fund's 
higher average effective maturity gives it a little more risk in 
relation to the two other Vanguard short-term funds on the list.  
Returns have been great so far, with the fund generating a 12.2% 
total return for the YTD period through November 5, 2002.

Next, we reviewed the results list and removed funds that invest 
primarily in corporate debt securities, asset-backed securities, 
or mortgage-backed securities.  The Ginnie Mae (GNMA) funds that 
made the list included American Century Ginnie Mae Fund (BGNMX), 
Fidelity Ginnie Mae Fund (FGMNX), and the USAA GNMA Fund (USGNX).  
They'd be a good place to start your search, if you were seeking 
the higher total return potential of mortgage-backed securities.

We also ruled out three ultra short-term bond funds on the list, 
since they fall somewhere between a money market fund and short-
term bond fund in terms of risk and reward.  They are all higher 
on a year-to-date basis as of November 4, 2002, but fund returns 
are less than 3 percent.  The two Vanguard short-term funds have 
YTD total returns of over 6.5%, more than twice the total return 
of their ultra short-term fund peers.

The only other fund on the list was Northern Short-Intermediate 
U.S. Government (NSIUX), which we like but has a higher expense 
ratio of 0.90%.  The two Vanguard funds we like more have lower 
expense ratios of near 0.30% of assets per annum, giving them a 
sizeable cost advantage.  Low expenses can permit fund advisors 
to pursue more conservative strategies and still be competitive 
when compared to similar funds.

Both Vanguard funds profiled this week have been profiled before 
on this site, but we feel deserve discussing again.  They offer 
conservative income investors a superior return to risk and cost 
tradeoff.   

Vanguard Short-Term Treasury Fund (VFISX)

The $3.68 billion Vanguard Short-Term Treasury Fund seeks income 
by investing primarily in direct government obligations, such as 
U.S. Treasury notes and other securities backed by the full faith 
and credit of the U.S. government.  The fund maintains an average 
maturity of 1 to 3 years, and has been co-managed by two members 
of Vanguard's fixed income group, David Glocke and Ian MacKinnon, 
since February 2001.  VFISX has a low total expense ratio of just 
0.29%, compared with 0.97% for the short-term government category 
average, per Morningstar.




 


Vanguard Short-Term Treasury Fund's low expenses have contributed 
to solid total returns for shareholders with less volatility than 
its short-term government bond fund peers.  Below is a summary of 
the fund's total returns and category rankings per Morningstar as 
of November 4, 2002.   

 YTD Total Return:
 VFISX +6.9% (20th percentile)

 1-Year Total Return:
 VFISX +5.7% (20th percentile)

 3-Year Average Return:
 VFISX +7.8% (18th percentile)

 5-Year Average Return:
 VFISX  +6.7% (14th percentile)

The fund's trailing 10-year average return as of October 31, 2002 
of 6.2% ranked in the first quintile of the short-term government 
fund category as well, Morningstar's report shows.  So, 6 percent 
a year may be a reasonable total return expectation for the fund, 
but remember that its solid results were achieved during a period 
when interest rates generally declined and bond prices advanced.  

In terms of volatility over the last three years, Vanguard Short-
Term Treasury Fund's average standard deviation of 2.3% is right 
in line with its short-government fund peers, and less than half 
that of Morningstar's all taxable bond fund average (4.8%).  The 
fund's volatility is approximately one-tenth that of the average 
U.S. stock fund (21.8%), using Morningstar's volatility numbers.

Morningstar says Vanguard Short-Term Treasury Fund's low expense 
ratio and conservative portfolio mix make it a safe bet, and for 
those reasons, it should appeal to conservative income investors.  

Vanguard Short-Term Federal Fund (VSGBX)

The $3.38 billion Vanguard Short-Term Federal Fund seeks current 
income by investing mostly in U.S. government agency securities.  
Unlike Vanguard Short-Term Treasury Fund, which must have 65% or 
more of assets invested in Treasuries, this fund invests more so 
in the agency markets, which provide slightly better yields than 
Treasuries with nearly the same credit safety as Treasuries.

Vanguard veteran John Hollyer has managed the fund since January 
1, 1996.  Ian MacKinnon joined Hollyer as co-manager in February 
2001.  Like its sibling, this fund maintains an average maturity 
of one to three years.  




 


Again, Vanguard's cost advantage helps the performance of Short-
Term Federal Fund relative to other short-term government funds.
Its expense ratio of 0.31% is about a third that of the category 
average as well.  The result is above average to high returns in 
relation to similar funds according to Morningstar, with average 
category risk.  

Below is a summary of Vanguard Short-Term Federal Fund's returns 
and category rankings through November 4, 2002, per Morningstar.   

 YTD Total Return:
 VSGBX +6.7% (26th percentile)

 1-Year Total Return:
 VSGBX +5.7% (21st percentile)

 3-Year Average Return:
 VSGBX +8.1% (10th percentile)

 5-Year Average Return:
 VSGBX  +6.9% (5th percentile)

The fund's trailing 10-year average return as of October 31, 2002 
of 6.3% ranked in the first quintile of the short-term government 
fund category as well (15th percentile).  So, again, a 6% average 
annual return over the past decade for shareholders, albeit under 
conditions favorable to bond prices.

Vanguard Short-Term Federal Fund's average standard deviation of 
2.2% is a tiny bit better than its short-government fund sibling.  
Both Vanguard funds are right in line with the category average, 
and less than half that of the average taxable bond fund (4.8%).

While the fund's trailing 5-year performance earns it an overall 
rating of 5 stars from Morningstar in the short-term government 
category, its 10-year average return is just 0.1% a year better 
than its Vanguard Short-Term Treasury Fund sibling.  That tells 
you that the two funds are very close in terms of their risk and 
return characteristics.  Both funds sport high alphas and Sharpe 
ratios relative to their peers.

Conclusion

Both Vanguard Short-Term Treasury Fund and Vanguard Short-Term 
Federal Fund are hard to beat if you're looking for a well-run, 
low-expense short-term government fund.  The Short-Term Federal 
Fund is a Morningstar analyst pick, but if you're at all uneasy 
about investing in government agency bonds and securities, then 
you may want to consider the Short-Term Treasury Fund.  The two 
products are nearly equal in terms of potential return and risk.

Morningstar's other favorites in the short-term government fund 
group are Montgomery Short Duration Government Bond (MNSGX) and 
SIT U.S. Government Securities (SNGVX).  Both funds have put up 
solid numbers, but not as strong as Vanguard Short-Term Federal 
Fund over the past three to five years at least.  In the credit 
markets, where every basis point counts, being the low expense 
leader has significant value.  Income investors seeking a low-
risk, low-expense bond fund with a solid track record need not 
look further than the two Vanguard short-term government funds.

For more information or to download a prospectus, you can logon 
to The Vanguard Group at www.vanguard.com.  Follow the links to 
Personal Investors.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

On Your Mark
 
After two days of patiently waiting for the markets to wear 
themselves out it appears we are about to enter the race. The 
strong gain against the odds on Tuesday has set us up for a pre-
Fed signal on Wednesday. 


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The Option Investor Newsletter                  Tuesday 11-05-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: TRMS, WPI
Dropped Puts: IP, SPW
Daily Results
Call Play Updates: ERTS, AZO, FCS, FRX, INTU
New Calls Plays: SYMC
Put Play Updates: RTH, LOW, BAX, LEH
New Put Plays: OHP


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

TRMS $56.00 -0.16 (+2.08 for the week) Trimeris has treated us 
well, as we stuck with it in spite of recent pullbacks on the way 
up.  Although the company will not post a profit until they start 
marketing their drug, Fuzeon, next year, we are dropping it ahead 
of earnings on Thursday, as is our policy. We entered the play at 
$51.50 and will close it for a profit.  Readers who wish to 
remain long TRMS can keep an eye on support at $55 from the last 
2 days.  We will still respond to questions on the Market 
Monitor, when possible, but will no longer update the stock in 
this space. 

---

WPI $29.04 +1.19 (+0.70 for the week)  As we said in our write-
up, we will close the play ahead of earnings Wednesday, with a 
small profit after entering the play at $27.58.  We still like 
the recent run to higher ground, where WPI has found support and 
begun moving up once again. The recent deal to expand the 
company's generic drug stable has kept it going and the next 
resistance level is around $33. Future questions can be directed 
to the Market Monitor.


PUTS:
*****

IP $35.77 +0.22 (+0.58 for the week) IP has rebounded with the 
broader markets.  As a Dow stock, it is subject to overall market 
moves, sometimes in spite of its news and financial results. This 
has been the case the last couple of days, with IP breaking back 
above its 50-dma, after filling the gap from October 15. We will 
drop the play, as a slow moving stock going in the wrong 
direction is eating up too much premium for our taste.  We'll 
take our "put money" and invest it in other opportunities.

---

SPW $44.00 +0.60 (+1.18) While the broad market has continued
to march slowly upwards this week, shares of SPW are shrugging
off their shackles and reluctantly going along for the ride.
While the $45 level still held as resistance yesterday, bears
had to be disappointed that there wasn't much follow through to
the downside this morning.  Rather than weakness, we saw the
stock find intraday support near $43.50 the past 2 days, and
that hints that perhaps the stock could break out on any
positive reception of the Fed's decision on interest rates.  We
want to take advantage of the quiet trade expected ahead of the
announcement to exit the play and remove that risk.  Since SPW
hasn't shown the weakness we expected when we began coverage
last week, we're dropping it tonight before it decides to really
move against us.


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

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

CALLS              Mon    Tue    Wed   Thu  Week
 
AZO      86.43   -3.08   1.16  Still bouncing
ERTS     65.21   -0.43  -0.56  Support at 50-dma
FCS      13.35   -0.16  -0.99  Filled gap
FRX     101.05    0.11   0.08  Staying over $100
INTU     53.80   -2.62   1.80  Rebound from entry 
SYMC     41.98    0.22  -0.01  New, $43 ahead
TRMS     56.00    2.24  -0.16  Drop, Profits/earnings
WPI      29.04   -0.65   1.19  Drop, Profits/earnings

PUTS               

BAX      25.15    0.60   0.00  No bounce
IP       35.77   -0.15   0.22  Drop, Premium decay
LEH      56.95    2.29   0.49  better risk/reward
LOW      41.90   -1.00   0.70  downtrend in tact
OHP      34.97    0.07  -0.88  New, breakdown under $35
RTH      74.55   -2.20   1.20  Group downgrades
SPW      44.00    0.14   0.60  Drop, 4 days up


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

ERTS $65.21 -0.56 (-0.87 for the week) Electronic Arts broke 
through its 50-dma on October 30, and has been setting higher 
highs and higher lows on the current rebound.  It pulled back 
today, along with some of the other techs, but found support at 
that level for the third time in the last four days. The stock 
has been true to its recent pattern of climbing to new highs and 
then dipping to its bullish support line on the PnF chart.  Four 
of the last five rebounds have taken it higher than the last.  
Three of the last four have bounced from the 200-dma, as did the 
last one. Monday's high of $68 was an increase of $6.70 from the 
last 200-dma bounce on October 29 and some pullback can be 
expected after such a bullish run.  The fact that the pullback 
stopped above the 50-dma indicates we may be seeing a new level 
of consolidation.  The stock has a bullish vertical count of $95, 
and while that may be an eventual target, most likely interrupted 
by several reversals along the way, we are looking for the stock 
to repeat its pattern of adding another higher "X" to the 
previous column. That would take the current run as high as $73, 
which is our target on the long play.  New entries can target a 
trade above today's high of $66.55 in this volatile stock.  We 
will raise the stop loss to $62.50, just below recent lows in the 
last week.

---

AZO $86.43 +1.16 (-1.47) Still cruising up the charts, AZO
continues to find willing buyers on each dip.  While the selloff
yesterday afternoon generated some concern, the sellers really
couldn't press the stock appreciably lower on Tuesday, despite
weakness in the broad market.  Then when the broad market began
to recover, so did AZO, which ended up more than $1 on the day.
It is interesting to note that the stock found support today
right at the steadily rising 20-dma (currently $84.33).  While
volume was notably light on Tuesday, this was to be expected
ahead of the uncertainty of the Fed's decision on interest rates.
Looking at the hourly chart shows a slightly modified trendline
that connects the intraday lows for the past 2 months.  That
trendline currently rests right at $84, which provides a nice
confirmation of the 20-dma as support.  Look for that level to
continue to attract buyers so long as the pattern of higher lows
continues.  The current behavior of the stock is more favorable
to buying the dips right now, and momentum traders looking to buy
a breakout will need to be very careful.  Each recent assault on
the highs near $89 has been followed by a pullback, so the best
approach in the near term will be to buy the dips and then harvest
gains on any weakness near the $89 resistance level.  Keep stops
set at $84.

---

FCS $13.35 -0.99 (+0.05) With the day before the FOMC meeting
sandwiched between a couple of bearish comments on Chip stocks,
shares of FCS actually held up pretty well on Tuesday.  Before
the open, Lehman stated that investors are overlooking weak
fundamentals in the semi equipment shares, pointing out that
overall shares trade well above historical trough levels. Then
shortly after the lunchtime lull, Bear Stearns took a shot at
the group, cutting their 2003 industry revenue growth forecast
from 17% to 14% on expectations of a weak Q4 that will probably
extend through the first half of 2003. Following AMAT announcing
plans to slash 11% of their workforce last night after the close,
it's a wonder the group didn't go into free fall today.  But the
bulls stayed in the fight, trimming the SOX losses to a little
over 3% by the close.  While FCS did give up nearly 6% today, we
need to keep in mind the stellar gains already accrued in the past
week.  The stock dipped to the $13 level by early afternoon and
then promptly reversed course after filling yesterday's gap,
possibly providing a decent entry point heading into tomorrow.
Conditions will likely be noisy tomorrow ahead of the FOMC
interest rate announcement, but then we can look for the next
entry into the play on a renewed dip and bounce near today's low.
Be careful about chasing the stock higher right now, as it is
getting close to solid resistance in the $15.00-15.25 area.
Recall from yesterday that our stop is now at $12.

---

FRX $101.05 +0.08 (+0.87) Reminding us that "slow and steady"
wins the race, shares of FRX ignored the noise in the broad
market and consolidated its gains from Monday, now finding
intraday support above the century mark.  As the stock
consolidates its recent breakout, the bulls are storing energy
for their next breakout attempt.  While the past two days have
seen intraday support building above the $100 level, there is
some solid support just below there at $99, which served as
resistance for most of last week.  We can use any dip and bounce
near these levels as an entry into the play, while momentum
traders will have their eye out for an entry as FRX breaks out
above $102 to set new highs.  The first sign of weakness that we
need to be concerned about would be a trade below $97, which
would constitute a break of last week's intraday support.  Of
course, on a sharp post-FOMC drop, a rebound from above $97 could
be used for aggressive entries.  For now, keep stops set at
$96.50.

---

INTU $53.80 +1.80 (-0.21) Volatility seems to be INTU's middle
name, as can be seen in the last 3 days large-range candles.  The
stock has been swinging back and forth between $51.50-55.00, as
investors jockey for position ahead of the Fed's expected interest
rate cut.  Demonstrating its lack of dependence on broad market
action today, INTU launched higher from the open, quickly
reclaiming most of yesterday's loss.  But then as the broad
market weakened throughout the middle of the day, INTU held its
ground, slowly creeping higher through the afternoon, closing just
below its intraday high.  Trader's that took advantage of the
drop yesterday afternoon or early this morning got a solid entry
point near the $51.50-52.00 level, which is shaping up as decent
support with the help of the 10-dma (currently $51.43).  A
renewed dip and bounce from this area can be used for new entries,
but prudence would suggest waiting until after the Fed releases
its verdict on interest rates.  Momentum types will want to key
off the $55 level.  A push through the highs from yesterday
morning that sticks, will have the bulls eyeing the $60 level as
their next upside target.  Given the stock's recent volatile
behavior, a push up to that level would make for a good
opportunity to harvest some gains.  Also due to expected
volatility surrounding the FOMC meeting, we're keeping a wide
stop at $49.50.


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

SYMC - Symantec - $41.98 -0.01 (+1.03 for the week)

Company Summary:
Symantec, the world leader in Internet security technology, 
provides a broad range of content and network security software 
and appliance solutions to individuals, enterprises and service 
providers. The company is a leading provider of client, gateway 
and server security solutions for virus protection, firewall and 
virtual private network, vulnerability management, intrusion 
detection, Internet content and e-mail filtering, remote 
management technologies and security services to enterprises and 
service providers around the world. Symantec's Norton brand of 
consumer security products is a leader in worldwide retail sales 
and industry awards. Headquartered in Cupertino, Calif., Symantec 
has worldwide operations in 38 countries.

Why We Like It:  
SYMC had been in a long-term consolidation pattern from the 
middle of May until the middle of October.  It broke out after 
smashing earnings estimates on October 16.  The company posted a 
34% profit gain in the quarter on strong anti-virus sales and 
raised guidance for the year. The company now expects to earn 
$1.55 per share, up from forecasts of $1.42.  Symantec is a 
classic example of a company that was in the right place at the 
right time. The U.S. Government has turned its attention to 
internet security, with president Bush appointing cyber security 
czar Richard Clarke to head an initiative to protect the nation's 
data, as well as citizenry.  The administration recently released 
its National Strategy to Secure Cyberspace and is expected to 
increase its IT security budget by 60% this year.  Symantec has 
recently purchased two companies, Recourse Technologies and 
Riptech, to address their lack of competitive network intrusion 
detection products and a managed security service provider.  SYMC 
is attempting to become a one-stop security stop and seems well 
positioned to do so.

The stock broke out of the consolidation pattern in impressive 
fashion, heading strongly in the direction of its bullish 
vertical point and figure count of $67.  The recent run has taken 
it not only through resistance at $35 and $36, but also through 
resistance at $40 and its bearish resistance line.  It is now 
testing $43, where it topped out in March before the broad market 
swoon.  The fact that the recent run consolidated between $37 and 
$40, before taking off again, lends credibility to the stock's 
explosion upward, and gives us a logical stop loss at the bottom 
of that range.  A trade of $39 would indicate that it is testing 
the bottom part of that consolidation and we would close the 
trade with a break below that level.  We will also look for a 
trade over $43.10 as our trigger to go long SYMC.  While we don't 
normally set up a play that isn't entered at current levels, we 
want to make sure not to buy the top, if in fact $43 proves too 
tough on the current run. 

*** November contracts expire in less than 2 weeks ***

BUY CALL NOV-40 SYQ-KH OI= 4057 at $2.70 SL=1.35
BUY CALL NOV-45 SYQ-KI OI=  883 at $0.35 SL=0.00
BUY CALL DEC-40 SYQ-LH OI= 1075 at $4.10 SL=2.05
BUY CALL DEC-45*SYQ-LH OI= 1633 at $1.50 SL=0.75

Average Daily Volume = 4.31 mil



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

RTH $74.55 +1.20 (-0.88 for the week) The RTH followed the 
broader market higher today, but was not able to make up Monday's 
loss.  The sector looks weak, with yesterday's downgrades to Home 
Depot and Lowe's, which cited "daunting" near-term comparisons 
for LOW and HD and few organic growth opportunities.  In addition 
to those downgrades, we got a warning from May Department Stores 
(MAY), which is seeing a same store, and overall, sales decrease 
from last year.  This is disturbing, considering last year most 
shoppers were still dealing with the 9/11 hangover in October.   
MAY has now seen six consecutive monthly same store sales 
declines. This trend should keep a lid on the retail stocks 
heading into the busiest time of the year, when comparisons will 
likely continue to suffer.  Recent layoffs and decreases is 
personal spending and Consumer Confidence do not bode well for 
the sector.  The RTH rebound today fell far short of the 50-dma 
of $76.55 and the downtrend remains in tact. Five of the last six 
days have set lower intraday lows and we will continue to target 
$70 initially.  If we break through that level, then $65 will be 
the next target.  Conservative traders may want to sit on the 
sidelines until Thursday, after many retailers report monthly 
sales.  If we get a rebound tomorrow following the FOMC rate 
announcement, a failed rebound under the 50-dma can serve as an 
entry point, as well. 

---

LOW $41.90 +0.70 (-0.20 for the week) Lowe's enjoyed a bit of a 
bounce today, on a triple digit gainer for the Dow.  However, not 
before dropping before yesterday's close twice during the day.  
The stock remains in the downtrend it began after failing the $45 
level and has been setting a series of lower lows and lower 
highs.  It broke below its 50-dma on October 31 and has now found 
resistance at that level (currently $42.14) on bounce attempts. 
CIBC World markets lowered its profit estimates on the stock last 
week, citing slowing square footage growth and limited 
opportunities to expand operating profit margin.  This was 
followed by Goldman Sachs rating the hardline retailers (of which 
LOW is a member) "cautious" due to 'daunting' near-term 
comparisons for some of the sector's largest-cap companies, and 
few organic growth opportunities.  The seasonal switch from home 
projects to holiday shopping should take some of the already slim 
retail business away from Lowe's at this time of the year. Recent 
economic data showing low Consumer Confidence and decreases in 
personal spending and durable goods just make matters worse for 
the home improvement center. We like entries currently underneath 
the 50-dma of $42.14 or on a failed bounce under the 200-dma 
$42.94, in case of a broad market rally after Wednesday's FOMC 
announcement.

---

BAX $25.15 unch (+0.93 for the week) Baxter has tried to manage a 
rebound on the broad market rally the last two days, but has yet 
to make up Friday's loss. Monday tacked under just under a 
dollar, and today found the stock unchanged, in spite of a triple 
digit gain in the Dow.  We were looking for entry on either a 
trade of $24, which would register a triple bottom point and 
figure breakdown, or a failed rally under $28.  We figured with a 
market rally we might get the failed rally.  However, with the 
stock in a strong downtrend, we may not get that entry point. We 
also like entry below Friday's high of $25.38, if it is unable to 
crack that level on Wednesday, following the FOMC announcement, 
as that will be an additional sign of weakness.  BAX has not 
posted a positive month since March, and after the Dow posted its 
biggest monthly gain in over a decade in October, leaving BAX 
behind, it is hard to imagine a catalyst that would change this 
any time soon.  Right now the stock has been plagued by several 
downgrades, sales warnings and questions about its dialysis 
machine tubing causing deaths.  We will continue to target $20 on 
the play and leave our stop at $29.

---

LEH $56.95 +0.49 (+2.38) Despite all the fundamental problems
that still exist in the Brokerage industry, the XBD index has
been stubbornly chugging higher this week, going along with the
rest of the broad market ahead of the expected interest rate
cut tomorrow.  While there is some formidable overhead resistance
at the $436 level (the convergence of the 200-dma and the 50%
retracement of the XBD's range over the past year), that still
leaves some upside to be had before the bears are likely to lean
heavily on this group again.  Which brings us to our LEH play.
We got a solid reversal yesterday afternoon from the descending
trendline near $57.50, which also happens to be the 50%
retracement of this stock's total range for the past year.  But
the bulls were back at work again this afternoon, serving up
another fractional gain, and a close just below $57.  Another
rally failure below our $58 stop still looks good for new
entries, but cautious traders will be well served by waiting
until after the Fed's interest rate decision before opening new
positions.  Should weakness prevail tomorrow, then a trade under
$55.50 can be used for initiating momentum-based positions, as
this would constitute LEH moving into the gap left behind from
yesterday's euphoric gap higher.  Confirm sector weakness before
playing.


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

OHP – Oxford Health Plans, Inc. $34.97 -0.88 (-1.53 this week)

Company Summary:
Oxford Health Plans is a healthcare company providing health
benefit plans primarily in New York, New Jersey and Connecticut.
The company's product line includes its point-of-service plans,
the Freedom Plan and the Liberty Plan, health maintenance
organizations, preferred provider organizations, Medicare+Choice
and third-party administration of employer-funded benefit plans.

Why We Like It:
While the alleged shenanigans at THC's company-owned hospital
got the major air time on the news services over the past few
days, that incident is only one part of the severe weakness that
has been seen in the Health Care Payor's index (HMO.X) so far
this week.  Yesterday's rally attempt in the sector was promptly
rebuffed, and the picture turned gloomy again this morning when
HRC missed its earnings target by 11 cents.  But that's all
background for sector weakness, and our new play, OHP brings its
own foibles to the table.  While the company beats earnings
estimates last Tuesday, that positive headline was soured by the
fact that the company announced a $151 million charge to cover
lawsuit expenses related to a 1997 charge and profit warning that
led to a slew of shareholder lawsuits.  Obviously investors
didn't like what they heard, as they sold the stock hard that
day, and the selling volume has been steadily rising, reaching a
peak of more than 5 million shares today (vs. the ADV of just
over 1 million) as the stock slid below $35 for the first time
since January.  OHP actually traded down below $34 this morning
and that trade generated a fresh PnF Sell signal.  Don't look
now, but the vertical count now projects a price target of $22,
which just happens to be where the stock bottomed last October
before rallying to north of $50.  While there is some mild
resistance in the $35-36 area now, that resistance becomes
downright formidable in the $37-38 area.  Look for a failed
rally to provide the best entry points, ideally near the $37
level.  Should the weakness of the past 2 weeks prevail tomorrow,
momentum traders can look to initiate new positions on a decline
under the $33.50 level (just below today's intraday low).  The HMO
index is at a critical level itself, sitting just above major
support at $520.  Look for it to lose this support level in
conjunction with a breakdown in the price of OHP before entering
on a breakdown.  Place stops initially at $38.

*** November contracts expire in less than 2 weeks ***

BUY PUT NOV-35 OHP-WG OI=1386 at $1.65 SL=0.75
BUY PUT DEC-35*OHP-XG OI= 507 at $2.85 SL=1.50

Average Daily Volume = 1.03 mln



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The Option Investor Newsletter                  Tuesday 11-05-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three: 

Play of the Day: PUT - OHP
Traders Corner: A Trader’s Checklist  

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

OHP – Oxford Health Plans, Inc. $34.97 -0.88 (-1.53 this week)

Company Summary:
Oxford Health Plans is a healthcare company providing health
benefit plans primarily in New York, New Jersey and Connecticut.
The company's product line includes its point-of-service plans,
the Freedom Plan and the Liberty Plan, health maintenance
organizations, preferred provider organizations, Medicare+Choice
and third-party administration of employer-funded benefit plans.

Why We Like It:
While the alleged shenanigans at THC's company-owned hospital
got the major air time on the news services over the past few
days, that incident is only one part of the severe weakness that
has been seen in the Health Care Payor's index (HMO.X) so far
this week.  Yesterday's rally attempt in the sector was promptly
rebuffed, and the picture turned gloomy again this morning when
HRC missed its earnings target by 11 cents.  But that's all
background for sector weakness, and our new play, OHP brings its
own foibles to the table.  While the company beats earnings
estimates last Tuesday, that positive headline was soured by the
fact that the company announced a $151 million charge to cover
lawsuit expenses related to a 1997 charge and profit warning that
led to a slew of shareholder lawsuits.  Obviously investors
didn't like what they heard, as they sold the stock hard that
day, and the selling volume has been steadily rising, reaching a
peak of more than 5 million shares today (vs. the ADV of just
over 1 million) as the stock slid below $35 for the first time
since January.  OHP actually traded down below $34 this morning
and that trade generated a fresh PnF Sell signal.  Don't look
now, but the vertical count now projects a price target of $22,
which just happens to be where the stock bottomed last October
before rallying to north of $50.  While there is some mild
resistance in the $35-36 area now, that resistance becomes
downright formidable in the $37-38 area.  Look for a failed
rally to provide the best entry points, ideally near the $37
level.  Should the weakness of the past 2 weeks prevail tomorrow,
momentum traders can look to initiate new positions on a decline
under the $33.50 level (just below today's intraday low).  The HMO
index is at a critical level itself, sitting just above major
support at $520.  Look for it to lose this support level in
conjunction with a breakdown in the price of OHP before entering
on a breakdown.  Place stops initially at $38.

*** November contracts expire in less than 2 weeks ***

BUY PUT NOV-35 OHP-WG OI=1386 at $1.65 SL=0.75
BUY PUT DEC-35*OHP-XG OI= 507 at $2.85 SL=1.50

Average Daily Volume = 1.03 mln



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

A Trader’s Checklist  
By John Seckinger
jseckinger@OptionInvestor.com

As a trader, finding correlations that work can make all the 
difference in the world.  Wouldn’t it be nice if the guesswork 
could be taken out, and the markets tell you exactly what to 
follow during any particular session?  Well, it only takes a few 
simple questions during the day.  

6:20 a.m.

The bond market opens at the Chicago Board of Trade, and 
following the 30-year (ZB02Z), 10-year (ZN02Z), and 5-year note 
(ZF02Z) can usually foreshadow equity movement when the NYSE 
opens one hour and ten minutes later.  If movement in the equity 
futures (SP02Z, NQF, YM02Z, and ND02Z) is significant, action in 
the bond pits will either confirm or refute the likelihood of 
such an opening.  

Example:  Equity futures are showing significant gains, while the 
price of the 30-year bond is significantly lower (one full point 
(32/32) is noteworthy).  If that is the case, expect stocks to 
find a bid and keep it for the first few hours of trading.  If, 
on the other hand, equity futures are pointing to a significant 
lower opening and bond prices are lower as well, I would become 
skeptical of a significant sell-off in stocks.  Why?  Since cash 
is not “rushing” out of stocks to enter bonds, it makes sense to 
wait until one can determine exactly where this cash is going.  
Remember, we are trying to think like a mutual fund manager, and 
these managers normally cannot hold more than 5% in cash

7:30 a.m.

As an option trader, it is usually a wise decision to not 
initiate a position during the first few minutes of activity; 
therefore, begin to ask questions instead and increase one’s odds 
of profitable trading.  

If equities are rising, are bond prices falling?  
If equities are rising, is the Utility Index (UTY) rising as 
well?  If yes, do the percentages equal or is one index 
outperforming the other?
What is the Oil Index (XOI.X) doing?  Is this index trading 
instep with equities?  If yes, is this index leading, lagging, or 
acting as a coincident indicator?
If equities are rising, is the Dollar (DXOOY) rising as well?  

If answering these checklists paints a picture of a market going 
higher with no conflicting signals, look to put on a better-than-
average size position.  Remember, you can change the words 
“rising” to “falling” and it should make sense as well.  Of 
course, before we continue, there is still some homework that 
needs to be done.  

What are the obvious support and resistance levels in the Dow, 
Nasdaq, S&P 500, Bonds, UTY, XOI, and dollar?  

This question has to be asked the night prior to the trading 
session.  If there is/are psychological areas that could become 
paramount to a trading day (example: Monday when the Dow tested 
near 9730 and right shoulder of Head & Shoulders formation), 
these levels should be given a lot of weight.  

The key then will be determining which support/resistance levels 
supercede activity in the other indices.  Do not get too micro 
involved with these levels.  The word “obvious” in the 
aforementioned question implies a weekly or daily level that 
could easily be seen with the naked eye.  Ok, so what about 
retracement analysis, stochastics, RSI, or other technical tools?  
Of course, use them; however, not yet.  Up until 9:30 a.m., try 
to focus on the macro picture first.        

Between 9:30 and 10:30 a.m.  

It is roughly two to three hours after the market is open when I 
begin to look for pattern recognition, re-enforced by the 
aforementioned questions.  The “amateurs” are done trading the 
first hour, and the “noise” is somewhat filtered out and real 
trading is allowed to take place.  This is when I use moving 
averages (22, 50, and 200 – all exponential) and retracement 
analysis, MACD, etc. to better increase my odds of a profitable 
trade.  I also focus on the opening level in the Dow (how far it 
is from current levels), as well as predicting whether the market 
will trade range-bound or run in one direction into the close.

Also during this time period, most of the economic reports are 
greatly factored into the market; allowing for a better 
assessment of the market psychology.  Moreover, foreigners (read: 
Europe) are finalizing positions before heading home for dinner, 
and this infusion of liquidity can definitely help matters.  

A few questions I ask myself are:

Is the market at any important retracement levels or on a highly 
watched moving average?
Is RSI or Stochastics reaching relatively oversold/overbought 
levels due to the first hour of activity?
Is a previous day’s high or low being tested, or short-term trend 
line that market makers would be watching?
What does a 60-minute chart look like?
Are the markets following or fading the morning’s economic 
reports? 

Lunch Hour (around noon)

Lunchtime is usually a period that is void of liquidity; however, 
I actually like this time “if” involved in a winning trade (read: 
don’t exit a winning trade simply because traders in NY are going 
to lunch).  Just like during the first hour of trading, the 
“smart money” is most likely passively watching and allowing the 
amateurs trade.  The difference between noon and the first hour 
is that during noon there is a much better chance of the market 
behaving rationally and keeping with the trend that was 
recognized around 10:30 a.m.  This then becomes a perfect time to 
exit trades established just a few hours ago.  

Example:  Dow opens higher by 50, and then is negative around 
10:30 a.m. by a few points.  Then lunch hits and the Dow is lower 
by 10 points.  I would be comfortable having a short position on 
at lunchtime, since the “energy” needed to raise valuations 
really isn’t there.  During lunch, the trend is your friend.    

A few questions I ask are:

Does the market have room to run before hitting an important 
technical level?
Is the market close to a new low or new high?
Does the question “Never sell a quiet market” ring a bell?
Is the volatility Index rising or falling?
Is the market in a range that it has been in for the last few 
hours, waiting for a catalyst? (If yes, look for a trap then)

1:00 p.m.

At 1:00 p.m., the bond market closes and the equity markets enter 
their last hour of trading.  A difficult time to trade (read: 
added volatility), but there are some questions we can ask for a 
better evaluation of market sentiment:  

Where did the 30-year (ZF02Z) close?  Did it end its session on a 
pivotal level?  Will fixed-income traders rush into equities in 
order to hedge their position(s)?
Would there be a reason for mutual fund managers to enter/exit as 
the close approaches (read: end of month, quarter, fiscal year, 
etc.)?
How have the correlations between Oil, Utilities, and bonds 
worked during the session?
Is there a really important event taking place the following 
morning?
Is the market under (above) a highly watched support (resistance) 
level?  If so, I normally expect the market to continue trading 
with that bias and try to make the chart look fantastic 
(horrible).
Where is the 22 PMA exp. on a five-minute chart? 

As a trader heading into the final hour, stops should be 
tightened and signs of buying/selling programs have to be taken 
seriously.  I bring up the 22 PMA because it usually acts as a 
catalyst for “nervous” traders looking for a reason to exit.  
First and foremost, if the market has been trading inversely with 
bond prices all session, I will definitely expect the sentiment 
to remain during the last hour.  Moreover, if a correlation 
between the UTY index and the Dow was strong throughout the 
session, I do expect that correlation to remain into the close.

So, Is this how I really trade?  Absolutely.  It gets a lot 
harder if a position is held overnight; however, if all signs 
point towards exiting a position, fine.  Ideally, I would like to 
avoid the first hour (based on risk tolerance) and then wait 
until 10:30 before exiting. 

Another important thing to consider is completely avoiding a 
particular index on a particular day, week, or month.  If the 
correlation between the Utility Index and stocks diminishes, I 
look elsewhere.  Do I want to?  Of course not, but it makes no 
sense to fit a relationship when one simply does not exist.  It 
will drive you crazy and take money straight out of your account.  
I get these questions all the time, “John, bonds are lower and 
stocks are lower, do you think equities will find a bid here?”  
Based on that information, it is impossible to tell.  If mutual 
fund managers, institutional traders, and hedge funds are not too 
worried about a particular relationship, then neither will I.

Good luck.  Questions are welcome.  Remember, the Market Monitor 
is there to help answer these questions on a daily basis and help 
take your trading to the next level.  Please enter the monitor 
and ask away.  

jseckinger@OptionInvestor.com 


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