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Daily Newsletter, Thursday, 11/07/2002

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The Option Investor Newsletter                Thursday 11-07-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Rally Bulls Trip Over Cisco
Futures Markets: Futures Lead Us Down
Index Trader Wrap: Just a little profit taking
Market Sentiment: Casey Strikes Out
Weekly Manager Microscope: Dr. Gene Henssler: Henssler Equity
(HEQFX)


Updated on the site tonight:
Swing Trader Game Plan: Poised on the Brink


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      11-07-2002           High     Low     Volume Advance/Decline
DJIA     8586.24 -184.80  8766.22  8549.82 1.74 bln   1095/2106
NASDAQ   1376.72 - 42.30  1400.08  1371.47 1.70 bln   1125/2239
S&P 100   460.59 - 10.47   471.06   458.13   Totals   2220/4346
S&P 500   902.70 - 21.06   923.76   898.68
RUS 2000  383.15 -  9.58   392.73   382.82
DJ TRANS 2350.62 - 63.10  2410.55  2347.27
VIX        35.28 +  0.80    35.91    34.36
VXN        53.90 +  3.84    54.71    52.29
Total Vol   3,649M
Total UpVol   597M
Total DnVol 3,021M
52wk Highs    93
52wk Lows    106
TRIN        2.35
PUT/CALL    0.88
************************************************************

Rally Bulls Trip Over Cisco

Just when bulls thought everything was coming together to launch
a year end rally the cautions from Cisco caused a face plant on
Thursday. The Cisco skid knocked the Dow back to 8550 intraday
and 1371 on the Nasdaq. The markets were tripping over century
marks left and right but in reality it was just a normal post
Fed event.

Dow chart – Daily




Nasdaq chart – daily




It was a small comment from John Chambers. "I am more worried
about the current quarter than I was the last quarter." With
that comment and guidance that 4Q revenue would be flat to down
as much as -4% instead of a +$100 million increase, he helped
take the markets back down to Friday's closing levels. They
did spin it well with much higher margins and promises of major
profits when the economy recovers. Still the markets were ripe
for a sell off and sell they did.

IBM did not help the Dow with news that they were going to issue
more stock, $1.5 billion worth, to prop up their ailing pension
plan. This follows UTX taking the same step recently. Pretty
good trick if you can get away with it. Let the investors take
the hit on stock dilution and the company gets to play it's
"get out of debt card" with no penalty. IBM dropped -2.59 on
the news.

Economically it was not a bad day. Chain Store sales rose +3.1%
in October which surprised analysts. This was double the expected
gain. Retailers blamed it on cooler weather finally appearing
and causing stronger sales in sweaters, jackets and coats. If
this trend continues when the holiday season starts in two weeks
investors will be thrilled. Consumers must have put in on a
charge card because Consumer Credit jumped +$9.9 billion from
an expected $5.5 billion. This is another sign that consumers
are not dead but they are running out of cash. Once the credit
lines are maxed out for the holidays the 1Q-2003 is going to be
tough. But paying that piper will not happen until the 2Q.

Jobless claims fell by -20,000 and -13,000 more than expected.
Continuing claims drifted up slightly but analysts were positive
that maybe the job loss cycle was easing. Nonfarm Productivity
came in at +4.0% and only slightly less than expected at 4.3%.
This was more than double the Q2 numbers at only +1.7%. Even
more surprising was the +5.9% growth in the manufacturing sector.
Productivity in the durable goods sector grew +8.8%. This does
not do any good for new jobs yet but it will grow profits as the
economy picks up steam. Workers are working more which increases
productivity. When they can't work any more hours employers
are forced to hire more workers and the cycle begins again.
Rapid increases in productivity tends to be a leading indicator
for coming economic gains. Wholesale sales increased again but
only by +0.1% while inventories increased slightly by +0.5%.
This was the fourth month of gains and it has not happened since
2000. The wholesale industry is poised for growth and with a
very low 1.22 inventory-to-sales ratio it is in great shape.

After the close today QCOM flaunted its success despite the
news that China would be developing its own CDMA technology.
QCOM beat street estimates by +4 cents on a +34% rise in
revenue. QCOM said it expected revenue to increase another
+15% to +22% for the current quarter with earnings in the 35
to 38 cent range. Their earnings this quarter were 31 cents.
QCOM jumped nearly $2 to 36.38 in after hours. This could
help the chip sector tomorrow.

The Fed surprised everyone yesterday with a unanimous 50 point
rate cut. I have to admit I was totally in denial that they
would take that giant step. They said geopolitical risk,
spending, employment and production trends were sufficient to
justify the cut. The risks were weighted to further economic
weakness but with the 50 point cut that risk had been eliminated
and the risks going forward were balanced. In short, take this
50 points and choke on it because there is not going to be any
more. The wording was blunt and while the U.S. markets were
appreciative the size and wording was actually for the rest
of the world. The Fed was saying we are committed to strong
growth and we are going to do it without you but we would love
for you to help. The timing was critical but the message fell
on deaf ears. The United Kingdom, Korea and ECB all met today
and none of them cut rates. Greenspan is probably spinning in
frustration tonight that everyone else ignored the clear
challenge. Don't spit on Superman's cape and don't thumb your
nose at Greenspan. When the U.S. is roaring back with +5%
growth and other countries look to Greenspan for help that
phone call may not be answered.

Despite the Cisco news, the IBM share issuance, earnings warnings
from COST and MIKE and a dumping of Yahoo stock, today was just
a bout of typical post Fed profit taking. The rate cut was
priced into the market and with no future cuts on the horizon
the markets had to relieve pressure. Helping the markets today
were raised guidance from FD, ANN, GPS and JCP when retailers
were supposed to be in the tank. There was a rumor about Taiwan
Semiconductor getting a 40,000 wafer order. This rumor was
dismissed as not likely but Goldman Sachs said there have been
several reports of rush orders for PC chipsets for better than
expected holiday order fills. Goldman believes TSM will raise
guidance for the 4Q from improving conditions. Surprise! Cisco
also said it was seeing stronger growth in switches and that
goes directly into the coffers of BRCM, MRVL, ALTR and XLNX.
Even John Deere raised guidance to 26 cents from the Multex
consensus of 2 cents. JPM actually came out and strongly denied
the gold derivative rumors that have been plaguing the bank for
months. They lost -1.46 on the news but the entire sector was
down and they should begin to see gains as shorts exit for
greener pastures.

Just another post Fed profit taking day. That view could change
in an instant if the days lows (Dow 8550, Compx 1371, OEX 458,
SPX 899) fail tomorrow. As long as the market can hold at the
open there is a good chance it will close higher. If those
levels fail then we could finish much lower and possibly in
the Dow 8350 level. The QCOM news should help the tech sector
and a positive report by Disney after the bell should help the
Dow. The bulls did not get slaughtered today. They just ran
out of news events to bet on.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Good news! John Seckinger will be taking over the futures
section beginning Sunday and we can get back to some real
meat here. Look for John's commentary on futures starting
Sunday and trades in the monitor several days later.


Futures Lead Us Down

Several serious sell programs pounded the futures through
out the day with only one decent buy program. That buy program
came during the presidents press conference.

The S&P futures closed right at support of 904-905 and have
not been making any gains in overnight trading. We need to
get back over 905 to have a chance of a rally but 908 is the
pivot number. That was the high on the buy program at 2:30
and selling came in hard when that level was reached. I see
that as the critical make or break for the open. With QCOM
beating earnings the tech sector may see some buyers.

The stronger support level of 900 was penetrated in late
afternoon but short covering at the close brought it back
from the edge of the cliff.

For the S&P I would look to be long over 908 with a target
of 915. If we break down again below 900 I would go short
with a target of 880. The Dow has critical resistance at
8600 and traders should keep an eye open for a failure in
that area to ruin the rest of the day.


S&P Futures Chart – Daily




S&P Futures Chart – Intraday




The NDX is still hanging on to that downtrend support now at
1029. The Nasdaq was the weakest index by far on Friday and
the QCOM earnings on Thursday night may be offset by NVDA. The
open will be telling and holding that 1029 level will be key.

I would look to short a break below 1029 and go long any rebound
over 1035 which was the afternoon high. Keep a tight stop in
case the trend changes quickly.

NDX Futures Chart – Daily




NDX Futures Chart – Intraday




The Dow futures are ugly. On the intraday chart it appears we
are in real danger of breaking below 8550 and that breakdown
could be nasty. There is minor support in the 8400+ range but
real support does not appear until around 8300.

The upside is not as well defined and there is no specific
long strategy to suggest. If we break to the downside the drop
could be sharp. I suggest shorting a breakdown under 8550 and
watch for a rally failure in the 8600 range.

Dow Futures Chart – Daily




Dow Futures Chart – Intraday





The bullish sentiment completely disappeared on Thursday as the
bulls crammed their pockets full of profits and ran for the
sidelines. Be very careful about long plays until the Dow clears
8600 again or rebounds from much lower levels.

Jim Brown


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

Just a little profit taking

Equity markets saw a decent round of profit taking today after
yesterday's aggressive FOMC rate cut and cautious comments from
Cisco Systems (NASDAQ:CSCO) $12.35 -4.7% that had some bulls
looking at a recent market recovery that has seen the S&P 500
Index (SPX.X) 902.65 -2.28% gain roughly 17% from its mid-October
lows.

Hardest hit sectors were those that have surmounted some of the
largest percentage gains from their recent lows, yet still held
the risk that an economic turnaround, potentially fueled by an
accommodative Fed, may not be a certainty.

A recent euphoric rise in the Semiconductor Index (SOX.X) 302.61
-8.25%, Networking Index (NWX.X) 125.62 -7.88% and Fiber Optic
Index (FOP.X) 42.25 -6.69% saw healthy pullbacks, but not one of
the aforementioned groups came close to their short-term 21-day
SMA's.

While some market mavens predict the Fed is though cutting rates,
the bond markets didn't seem to agree as investors eagerly
gobbled up Treasuries, sending the longer-term 30-year Treasure
futures (us02z) 113'30 +1.84% rocking above both its trending
lower 21-day SMA (110'122) and 50-day SMA (111'40) as if they
didn't exist.  The 30-year YIELD ($TNX.X) fell to 4.895% and
finished the trading session just above its rounding flat 50-day
SMA.

In recent commentary, it is this "riskier" bond's YIELD that
equity bulls did NOT want to see break much below the 5.0% level
and today's 4.895% closing YIELD is a sign of caution for equity
bulls.  While price action in a bond is followed, its the YIELD
that investors are concerned about when selecting any type of
income instrument.  Today's sharp move, or quick rate of change
in this YIELD hints the MARKET isn't so certain that yesterday's
50-basis point cut will be the last.

The benchmark 10-year YIELD ($TNX.X) also fell sharply, closing
at a YIELD of 3.882%.

Traders cited today's Treasury buying as being fueled by mortgage
accounts to hedge against today's spike in mortgage dollar
prices, and belief by at least one large Wall Street firm that
the Fed will move another 25-basis points in Q1 of 2003.

While both the 10-year and 30-year bond's YIELD will impact
mortgage rates, the Dow Jones US Home Construction Index (DJUSBH)
298.82 -6.78% broke critical near-term support at 300, which now
has its October lows of 260 in play with downward trend at 320
serving as resistance.

Dow Industrials Chart - 50 point box




Three Dow components mustered gains today, while four components
posted losses greater than 4%.  With Treasuries seeing strong
buying, I do have to call 8,500 as tentative support right now,
but do think there will be some bears in the 8,300-8,400 range
that didn't like the move to 8,800 and should provide support
through the next week.  While today's 6.6% decline in JP Morgan
(NYSE:JPM) $20.60 -6.61% looks large, it wasn't enough to have
that stock reversing 3-boxes to $20.00 on its point and figure
charts.  Today low in JPM is suspicious at $20.01 and came just
above a trending higher 21-day SMA.  General Motors (NYSE:GM)
$34.58 did close below its 21-day SMA of $34.78, but has been a
Dow laggard since August.

The recent rise in GM hinted that bulls were getting more
aggressive and perhaps had some conviction behind the thoughts of
an economic recovery.  Should GM begin slumping further, then the
traders axiom of "weakness leads" should have traders monitoring
the stock over the next couple of weeks.  As noted yesterday, GM
is one of the Dow components still showing a "sell signal" on its
point and figure chart and would currently need to see a trade at
$38 to generate a buy signal.  The negative here is that all of
yesterday's gains, and then some, were completely erased.

On the flip side of things, I'm still monitoring shares of 3M
(NYSE:MMM) $128.60 -1.44% for some type of "Dow confirming"
bullish move above $130.  While the stock has traded $130.89, its
not showing a great deal of leadership or demand from the markets
as it trades at 52-week highs.

My thinking between the action between a weaker GM and much
stronger MMM is that bulls don't seem to have much conviction
toward either of these stocks.  I would think that the MARKET,
under the scenario of "firm conviction" of a robust economy would
have been able to drive both stocks higher, if not MMM in recent
sessions.

Today's action saw no net change in the very narrow Dow
Industrials Bullish % ($BPINDU), which remains in "bull
confirmed" status at 63.33%.

S&P 500 Index Chart - Daily Interval




Today's trade at 900 in the SPX did generate a "sell signal" on
the traditional $5-box scale for the SPX.  While banks were weak
again today (BIX.X -3.6%, BKX.X -3.7%) the Broker/Dealer (XBD.X)
411 -3.6% and Insurance (IUX.X) 265 -2.5% were also weak.
However, it was the perceived "risk" of technology sectors that
lead the declines.  The impressive technology sector today was
the Wireless Telecom Index (YLS.X) 51.59 -0.03% which actually
managed to trade in positive territory at one point.

Tonight, Qualcomm (NASDAQ:QCOM) $34.94 reported better than
expected earnings and traded $36.35 in extended trading.

One subscriber e-mailed me a great question regarding point and
figure charts and the S&P 100 Index (OEX.X).  The subscriber's
question was why I used a $5 box scale on the OEX, similar to the
SPX chart when it was 1/2 the value and why not use a $2.5 box
size?  Hmmmm.... great question.  Not that Dorsey/Wright is
"always right," but most institutions utilize the Dorsey system.
However, that doesn't mean we can't look at a $2.5 box size,
introduce a little more "noise" or volatility into the chart.
Hey!  I see good use perhaps in the $2.5 box size as it may have
kept me and other traders from being to bearish the SPX when it
traded a prior sell signal at 875, only to reverse much higher.

On the $2.5 box of the OEX, we now see an "bear trap."  A "bear
trap" in the p/f world is identified by a triple-bottom sell
signal, where the violation of the triple-bottom is by ONLY
1-box, then quickly reverses higher.

S&P 100 Index Chart - $2.5 box scale




The $2.5 box scale of the OEX does show more detail and perhaps
could have kept a bearish trader out of trouble when the OEX
traded 442.50 on October 29th, while also testing its 50-day SMA
that same day.  An OEX trader, especially one with a bearish tent
toward things can "back test" against this $2.5 box size and
begin to think that he/she should maybe wait for at least two
consecutive sell signals before getting too bearish.  We can see
the OEX taking a rest after trading up against its bullish
resistance trend recently with some resistance showing below
472.50.  The current bullish % reading is 62% and has the
internals STRONGER than they were in mid-August, so a bearish
trader short near 450 or lower is most likely looking to cover on
weakness.  Support should be firm above 440 and provide good
support as long as the bullish % continues to hold up.

Today's action saw the S&P 100 lose a net of 1 stock to a point
and figure sell signal today, which has the Bullish % ($BPOEX)
slipping back from Wednesday's reading of 63% to 62%.  Last week
we saw similar 1% and 2% daily bullish % oscillations in the
bullish % before an OEX rise.  As such, it would take a decline
to 56% (3-box reversal from 62%) to have the OEX reversing from
its current "bull confirmed" status to "bull correction."

NASDAQ-100 Tracking Stock - Daily Interval




In Tuesday's market monitor (3rd bar to the left), I profiled a
short-term bearish trade in the QQQ in the November $26 puts for
$0.90.  I didn't get the negative reaction I feel I needed from
the FOMC response, but felt Cisco (CSCO) would say something
cautious after Intel was cautious after their earnings.  Since I
didn't get the bearish response (like today's 3.5% decline) I've
had to move my bearish target up to $25.00 for traders not
wanting to potentially exercise a $26 put into stock come next
Friday.

One thing I've done tonight that is different from the past is
place "true" regression on the QQQ chart.  In early October we
were using "cloned" regression from the August rally, but now
we've got more data.  As you can see, we've got some criss-
crossing support near the $25 level, so a bear holding November
expiration may not want to try and get "cute" with a bearish
trade.

In today's 03:15 EST Update, I showed a chart of the TYX.X.
Traders will note that the QQQ jumped above its 50-day SMA on
October 15, which is the same day the 30-year YIELD ($TYX.X)
jumped above its 50-day SMA.

With the 30-year now sitting right on its 50-day, I do become
more cautious of the major indexes and equities in general.  It
should bother an equity bull a little bit that the MARKET is
willing to buy the riskier 30-year YIELD.  For the most part,
market history has taught us that the MARKET sells risk, not buy
it.

I'm going to say today's action saw no net change in the NASDAQ-
100 Bullish % ($BPNDX).  Stockcharts.com shows a net decline of
0.31%, but that doesn't make sense if each of the 100 stocks
would account for a 1% change in the bullish %.  Therefore, still
"bull confirmed" at 69%.

Speaking of history.... the Stock Trader's Almanac point out that
for November, the MONDAY before expiration has been up 5 out of
the last 7 years.  However, if Monday's have traded down, then
next day the markets have been up big.

Traders might envision a market decline into the weekend with
some type of sharp rally early next week.

Jim Brown came through with some data cash inflow/outflow data
for us from Trim Tabs, which tracks daily inflows/outflows of
ninety fund families that have about 15% of all equity fund
assets.

Estimates are that all equity funds had inflows of $3 billion
over the week ending November 6, compared to outflows of $1.2
billion during the week prior.

Equity funds that invest primarily in US stocks had inflows of
$2.3 billion, compared with outflows of $800 million the week
prior.

Bond funds had inflows of $2.8 billion, compared with inflows of
$2.1 billion the prior week.

Hybrid funds that will invest in a combination of stocks and
bonds had inflows of $700 million for the third consecutive week.

While 15% isn't necessarily representative of the entire market,
we can perhaps see how bond inflows for three consecutive weeks
has YIELDS lower and perhaps a pulse on how "retail investors"
are still looking for some safety of bonds.

The recent $3 billion inflow to equities may have helped the
indexes achieve some new relative highs.

However, equity bulls would sure like to see some type of
reversal from Treasuries and selling there.  Remember, its not
necessarily the "retail investor" that drives the markets, it is
the institutions.

If the MARKET likes a 30-year YIELD of 4.895% or even lower, then
I have to question equities that have risen sharply in recent
weeks.  Or at least think they might be vulnerable under some
profit taking.

Jeff Bailey


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

Casey Strikes Out
by Steven Price

So much for the Fed hitting a home run with yesterday's rate cut.
Who cares about 50 basis points when the world's largest
networking company talks about a possible revenue decline of 3-4%
next quarter?   That was the theme to today's trading, as the
Nasdaq fell back from its attempt to break through the August
high of 1426, losing 42.28 to close at 1376.71.  Was it really
just a day ago that we were surging to what appeared to be a new
relative high.  If we had broken through the August levels, then
maybe an extended bull run was in the cards.  Cisco not only
rained on the parade, it popped the giant balloons and stole the
band's instruments.

Sounds pretty nasty; however, there was some joy in Mudville, as
the Dow's drop of 184.77 actually found support above previous
resistance of 8550. We appear to be back into the 8550-8750 range
of the last few days.  After a gain of 1600 intraday points from
the low on October 9 of 7197, to yesterday's high of 8800, the
pullback is certainly not catastrophic.  However, if we do
breakdown from here, the next support level will most likely be
8200.  Those traders holding long positions may want to punt on a
Dow trade under 8500 and switch teams for the ride down for the
next 300 points. A trade of 8500 will constitute a point and
figure sell signal to go along with the one registered by the SPX
today, when it traded 900.

The Semiconductor Index (SOX.X) is showing signs that the bull
run of the last month may be over. The index had been contained
in a rising channel, bouncing from the bottom trend line on each
pullback since October 9.  The SOX had increased 53% in less than
a month, but has now dropped out of its channel and is re-testing
the 300 level as support, with a close today of 302.61.  A break
under 300 could be decisive and those traders waiting for a short
opportunity should keep an eye on that level. With Qualcomm
beating expectations after the close, that confirmation may not
come, but the trend break should make longs in the sector
nervous.

President Bush took to the airwaves again with his Iraq plans,
letting anyone who was listening know that he wanted "peace," as
long as Saddam disarmed himself completely.  He said this request
was different than the last 16 or so, since if he did not comply
this time there would be action to make sure he did.

Retail sales reports flooded the market this morning, with mixed
results.  Several retailers, including Kohl's (KSS), Gap Stores
(GPS) and J.C. Penney (JCP), posted impressive same store sales
gains over last year.   However, there were also plenty of
disappointments; Wal-Mart posted gains in the upper end of a
reduced range and Sears saw a 10% decrease and most analysts are
still cautious about the spending environment.  With Consumer
Confidence and personal spending on the decline, a shortened
holiday shopping season takes on greater significance.
Thanksgiving falls six days later this year than it did in 2001,
leaving fewer days in the official holiday shopping season
between Thanksgiving and Christmas.  The Retail Index reflected
these fears, dropping 1.5%, along with a similar drop in the
Retail holders (RTH).

The homebuilders received a CSFB downgrade this morning, lowering
its recommendation on the group from "overweight" to "market
weight."  It said that industry and economic trends support a
more cautious view and that  "we no longer feel comfortable
telling clients to put new capital in the group."  The Dow Jones
U.S. Home Construction Index (DJUSHB) fell almost 7% and cracked
support at 300, finishing the day at 298.82. It has now rolled
over from its fourth lower high since August.  The index has
bounced from this level several times, and traders looking for
shorts need to exercise caution.  Look for resistance at 300
before piling on stocks in the sector to the short side.

Tomorrow should bring a downside test in the Dow.  If we bounce
once again from 8550, then traders can feel somewhat safe with
long positions, as the pullback will constitute a higher low and
could signal further strength and a run to 9000.  The Nasdaq
still has a gap to fill from Monday, and a bounce off 1360 would
do the job.  Therefore another 16 points can be shaved off the
COMP before the bears can truly state their case for continued
weakness. Watch these levels closely and don't be afraid to
switch teams quickly.  There is no such thing as a traitor when
it comes to playing the market.


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7286
Current     :  8586

Moving Averages:
(Simple)

 10-dma: 8513
 50-dma: 8175
200-dma: 9271



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  902

Moving Averages:
(Simple)

 10-dma:  899
 50-dma:  867
200-dma:  998



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1025

Moving Averages:
(Simple)

 10-dma: 1011
 50-dma:  919
200-dma: 1153



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

The Semiconductor Index (SOX.X): The SOX gave evidence today that
the boom of the last month may be coming to an end.  With its
breakdown out of the ascending channel on the 27-point pullback
and break in the trend of higher lows, the expected 4th quarter
slowdown may finally be catching up to these stocks.  Up until
Cisco's warning last night, the sector had been able to shake off
the bad news that seemed to keep dripping from each earnings
report in the group.  There were some notable exceptions, but the
overall tone has been extremely negative. Nevertheless, the chip
stocks continued to soar until today.  The drop registered a new
PnF sell signal for the first time since pulling back to 272 on
the way up.  That pullback was a trap for the shorts, but after a
gain of more than 50%, the new signal is something to watch.  A
break below 300 would be the next short signal to keep an eye on.
Qualcomm beat earnings expectations after the bell and traded up
over a dollar, so we may not get the confirmation with a trade
below 300. However, if we do, then watch out below.

52-week High: 657
52-week Low : 214
Current     : 302

Moving Averages:
(Simple)

 10-dma: 305
 50-dma: 270
200-dma: 424

Market Volatility

The VIX jumped back over 35 today, indicating the fear has crept
back into the market and the premium sellers are out of the way.
Even yesterday, when the Dow surged almost a hundred points
following the FOMC rate cut, the VIX crept higher, as traders
were apparently weary of the recent bull run. That reluctance to
sell premium was rewarded today, when the Dow dropped almost 200
points and the S&P 500 gave up 21. The S&P gave a point and
figure sell signal and the Dow came within 50 points of doing the
same.


CBOE Market Volatility Index (VIX) = 35.28 +0.80
Nasdaq-100 Volatility Index  (VXN) = 53.90 +3.84

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.88        588,172       517,093
Equity Only    0.78        452,575       354,590
OEX            0.72         32,307        23,334
QQQ            0.93         68,861        63,921


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

Bullish Percent Data

           Current   Change   Status
NYSE          41      + 1     Bull Confirmed
NASDAQ-100    69      + 1     Bull Confirmed
Dow Indust.   63      + 0     Bull Confirmed
S&P 500       57      + 1     Bull Alert
S&P 100       62      + 2     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   1.06
10-Day Arms Index  1.13
21-Day Arms Index  0.96
55-Day Arms Index  1.28


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        855          1880
NASDAQ     1029          2139

        New Highs      New Lows
NYSE         18              29
NASDAQ       41              34

        Volume (in millions)
NYSE     1,740
NASDAQ   1,747


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

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

Dr. Gene Henssler: Henssler Equity (HEQFX)

The Henssler Equity Fund, managed by Dr. Gene W. Henssler, along
with co-managers Theodore Parrish and James Brookover, is fairly
new and not well known, but since its mid-June 1998 inception it
has performed relatively well, producing high returns with below
average risk relative to its large-cap blend peers.  Morningstar
awards Henssler's fund 5 stars, its top rating for risk-adjusted
performance within the large-cap blend category.

The $53 million Henssler Equity Fund (HEQFX) pursues long-term
capital appreciation through investments in common stocks with
consideration to safety of principal.  In selecting securities,
Henssler and co-managers like companies with undervalued assets,
strong balance sheet characteristics, high earnings expectations,
quality management, and potential for future growth.  Henssler's
team may invest in companies of any size, and may put up to 20%
of fund assets in foreign securities traded in the United States.

Henssler et al keeps the large-cap core portfolio fully invested
under normal conditions, with common stocks typically comprising
at least 90% of assets.  The balance of assets may be invested in
cash and money market instruments, U.S. government securities, or
various other fixed-income securities.  Because it invests in the
giant- and large-cap sectors of the market, and blends growth and
value styles, Henssler Equity Fund's role is one of "core" equity
investment.

Manager Background

Dr. Gene Henssler is founder, President and Chief
Investment Officer of G.W. Henssler and Associates
Ltd., the firm he started in 1986.  Henssler Asset
Management, the firm's investment arm, manages the
Henssler Equity Fund assets.

Previously, he was a finance professor at Kennesaw
State University in Georgia for 10 years.  He also
was a columnist for the Atlanta Business Journal.

Dr. Henssler's bio reads that he has worked in financial analysis
for over 25 years.  He received a B.S. Degree in Business Admin.
from Wayne State University, in Detroit, and subsequently earned
both his M.B.A. Degree and Ph.D in Finance from the University of
Michigan.

Theodore Parrish joined Henssler's investment management firm in
1995 as a portfolio manager and has co-managed the Henssler fund
with Dr. Henssler since its June 10, 1998 inception.  Parrish is
Director of Investments at G.W. Henssler and Associates Ltd. and
Henssler Asset Management.  He's responsible for managing all of
the firm's research and trading activities.

Mr. Parrish received his B.S. in Business Administration, major
Finance, from Kennesaw State University, and is currently a CFA
Level 3 candidate.  In addition, Parrish holds several licenses,
including his Series 7, Series 63, and Series 65 licenses.

James Brookover, CFA is a recent addition to the Henssler Equity
Fund team, but has worked as an investment manager for more than
20 years, his bio reads.  Before joining The Henssler Funds, Inc.
Board of Directors, Mr. Brookover was a portfolio manager, Vice
President and Chief Information Officer of Reams Asset Management
from 1981 until his retirement in 2000.

Mr. Brookover graduated cum laude from the University of Toledo
with a Bachelor of Business Administration in 1972, and earned a
Master of Business Administration With Distinction from the
University of Toledo in 1973.

Fund Overview

The Henssler Equity fund is described as a no-load, diversified
portfolio of high quality common stocks.  The fund seeks growth
of capital over time and can invest in small, medium, and large
sized companies.  So far the fund portfolio has had a large-cap
blend style according to Morningstar's analysis.  The old 80/20
rule applies here with about 80% of assets invested in the mega
and large capitalization sectors, and the other 20% invested in
predominantly in the mid-cap sector.

Henssler's philosophy is to remain fully invested and maintain
broad diversification.  The co-managers and analysts invest in
40-50 stocks they believe to represent "solid businesses with
growth opportunities that can weather market fluctuations and add
value over the long term."  Investment decisions are made with a
long-term view, resulting in a low annual turnover rate of 44%.
That makes Henssler Equity Fund a suitable option for both tax-
deferred accounts, such as IRAs, and regular (taxable) accounts.

Dr. Henssler, along with his co-managers and a team of research
analysts, continually review the equity markets for trends and
economic events.  The firm's research staff meets regularly to
review performance, individual equities, and market news.  The
website states the firm's equity selection is a "comprehensive"
process.  No stock, they say, is added to the portfolio without
agreement among the managers and analysts.  All efforts of the
staff are geared towards managing the fund in a manner that'll
maximize performance of the portfolio.

According to Morningstar, the Henssler Equity Fund portfolio had
an average market cap of $39.3 billion at October 31, 2002, with
an average price to projected earnings ratio of 19.4, about 120%
of the benchmark S&P 500 index.  So, currently the portfolio has
a slight growth bias relative to the market, but still in "blend"
turf.  100% of assets were invested in stocks per Morningstar's
report, with just 3.1% of assets invested in foreign securities.

Fund Performance

The risk-adjusted performance of Henssler Equity Fund in its 4+
years of existence has been quite good relative to its category
peers.  As we said earlier, Morningstar rates the fund's return
performance as "high" and its risk as "average" relative to the
large-cap blend category over the past three years, good enough
to earn Morningstar's highest overall rating of 5 stars for the
trailing 3-year period.

In 1999, the fund's first full year of operation, it produced a
total return of 14.9%, lagging both the market and its category
peers.  Since 2000, Henssler Equity Fund has generated results
that rank in the top decile of the Morningstar large-cap blend
fund category.  A performance summary is provided below, using
Morningstar's numbers through November 6, 2002.

 1-Month Return:
 Henssler Equity Fund: +17.8% (-1.3% to S&P 500)
 Category Average: +17.2%
 Rank in Category: 57th Percentile

 Year-To-Date Return:
 Henssler Equity Fund: -13.0% (+5.5% to S&P 500)
 Category Average: -18.4%
 Rank in Category: 8th Percentile

 Average 3-Year Return:
 Henssler Equity Fund: -3.2% (+7.9% to S&P 500)
 Category Average: -10.2%
 Rank in Category: 6th Percentile

You can see that Henssler and his co-managers have done a good
job of preserving capital over the past three years versus the
average large-cap blend fund.  Henssler Equity Fund produced a
negative return of 3.2% on an annualized basis compared to the
11.1% average annual loss by the market (S&P 500) and category
average, which lost 10.2% annually.

Henssler Equity Fund, a large-cap core fund in Lipper's system,
is recognized as a Lipper Leader in three categories: 1) total
return, 2) preservation and 3) tax-efficiency.  So, while this
fund is still not well recognized, it has made a solid case for
itself in its four plus years of operation.

How well has the fund performed since inception?  The company's
website, located at (www.henssler.com), shows that the Henssler
Equity Fund sustained an annualized loss of 0.5% for the period
from inception through September 30, 2002.  That compares to an
annual-equivalent loss of 5.7% for the stock market as measured
by the S&P 500 large-cap index.  So this "all-weather" fund has
added significant value for shareholders by limiting its losses
relative to the market.

The fund's 1.27% expense ratio is only 0.03% above the category
average.  Perhaps that number can come down as assets grow from
the present $53 million under management.  Henssler Equity Fund
has a minimum initial investment of $2,000 for regular accounts
and $1,000 for IRA accounts, and is available on a no-load, NTF
basis through Schwab and other fund marketplaces, adding to its
appeal.

Conclusion

Dr. Henssler, along with his co-managers and team of analysts at
Henssler Asset Management, has excelled at preserving capital in
the market downtown and weathering the market storm.  The firm's
only equity fund should appeal to conservative equity investors.
According to Morningstar, the fund's risk (volatility) has been
below average compared to its category peers, offering investors
a strong return-risk tradeoff.

The fund's top six holdings as of October 31, 2002 were PepsiCo,
Johnson & Johnson, Mylan Labs, Applied Materials, IBM, and last
but not least Microsoft.  Most of them you know because they're
household names.  Accordingly, this fund offers large-cap core
exposure to some of the most established companies in America,
serving a "core" role in someone's long-term equity portfolio.

To obtain more information or download a prospectus, go to the
Henssler Funds website located at www.henssler.com.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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Poised on the Brink

Bad news, good news and no news was what the market had to deal
with today. Bad news from Cisco, good news from the retailers and
no major news event in the near future for bulls to focus on.


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The Option Investor Newsletter                 Thursday 11-07-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: ERTS, SYMC, AZO, INTU
Dropped Puts: BAX
Daily Results
Call Play Updates: FCX, FRX
New Calls Plays: EXPE, SYK
Put Play Updates: RTH, LOW, LEH, OHP
New Put Plays: None


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

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


CALLS:
*****

ERTS $64.53 -2.21 (-1.55 for the week)  Electronic Arts was 
following its trend nicely and looked as though it was on its way 
to another higher high. It has bounced above the PnF reversal 
point and remains in a column of "X".  However, the stock ran out 
of gas earlier than it has on prior rebounds and we don't like 
the early reversal on the daily chart and failure at the 50-dma 
of $65.10.  Traders who want to give it a chance can wait for a 
PnF reversal at $64 to close out, but we are exiting here.

---

SYMC $40.50 -1.37 (-0.45 for the week) We used a trigger of 
$43.10 for the SYMC call play, which we never got. The stock 
pulled back and bounced at $40.  If this bounce was accompanied 
by a strong enough bounce in the Nasdaq (over 1400), we could see 
entering the long play at this level.  However, the COMP 
continued to sink and we are no longer sure SYMC can get enough 
legs to break out above $43 without some sector help.  After not 
getting our trigger, we will close the play and wait for it to 
re-test the previous resistance level around $43.

---

AZO $83.80 -1.52 (-4.10) Try as they might, the bulls just
couldn't keep the momentum going.  After the latest dip to its
ascending trendline, AZO rallied right up to the $88.50 resistance
level.  But contrary to its recent pattern, the stock couldn't
break out to a new high this time and has been setting lower highs
and lows all week long.  The stock came back to its ascending
support line again today, but failed to get a bounce this time,
ending on its low of the day.  Not only is the price performance
of the stock discouraging, but AZO closed below our $84 stop,
mandating that we drop it tonight.  If not stopped out today, use
any rebound tomorrow to exit open positions ahead of the weekend.

---

INTU $53.33 -1.44 (-0.68) In its brief tenure on the Call list,
INTU has continued its volatile action, as it whips between the
$51 and $55 levels.  Nimble day-traders may have been able to
carve out a profitable trade, but largely the play has been a
disappointment as the bulls have been unable to break out over
the $55 resistance level.  Thursday's session produced another
data point in that trend as the stock pushed up to that level
and then drifted lower throughout the day, ending near its lows.
While the stock hasn't violated its stop, it appears the bullish
interest is fading and we want to get out before the rest of the
crowd.  Use any strength on Friday to exit the play ahead of the
weekend.


PUTS:
*****

BAX $25.75 +0.06 (+1.53 for the week) Baxter did not breakdown 
below $24, which was our preferred entry point.  We also looked 
for a failed bounce under $28, which never materialized.  BAX has 
essentially crept higher after its recent drop, but it is moving 
too slowly for our taste.   It is actually staying true to form 
with a slight gain after each big drop, and a long-term short 
play might be feasible.  However, we feel there are better places 
to use our "put money," so we will make a shift and close the 
play.


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

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

CALLS              Mon    Tue    Wed   Thu  Week
 
AZO      83.80   -3.08   1.16  -1.15 -1.52  Drop, lower high
ERTS     64.53   -0.43  -0.56   1.03 –2.21  Drop, trend break
EXPE     75.01    0.77   0.40   1.50  0.78  New, keeps going
FCS      13.50   -0.16  -0.99   0.41 –0.71  relative strength
FRX     101.27    0.11   0.08  -0.54  0.11  higher highs
INTU     53.36   -2.62   1.80   0.60 –1.41  Drop, $55 tough
SYK      67.23    0.44  -1.39   0.84  1.00  New, new highs
SYMC     40.46    0.22  -0.01  -0.01 –1.41  Drop, no entry


PUTS               

BAX      25.75    0.60   0.00   0.45  0.06  Drop, sideways
LEH      56.24    2.29   0.49   0.71 –1.56  entry point
LOW      39.97   -1.00   0.70  -0.46 –1.67  retail breakdown
OHP      35.70    0.07  -0.88   0.90 –0.45  testing $35
RTH      73.84   -2.20   1.20  -0.15 –0.81  short season

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

FCS $13.50 -0.71 (+0.20) To say the Semiconductor index (SOX.X)
was weak on Thursday would be a gross understatement, as the SOX
got slammed for more than an 8% loss.  Part of the problem was
fallout from the CSCO earnings report, which pointed to a
still-challenging spending environment.  Wachovia made bearish
comments about the communications chip providers, highlighting
XLNX and ALTR as two chip stocks likely to feel the brunt of
this weakness due to their strong ties to CSCO.  Nevertheless,
our FCS play once again held up remarkably well.  Sure it got hit
for a 5% loss, ending at $13.50, but once again held above the
$13 level.  This is shaping up as an important support level, as
is the $300 level on the SOX.  If the SOX can rebound from this
level, it should correspond to FCS rebounding from above $13
again and would make for a solid entry for the next leg up the
chart.  But we need to be cautious, as a breakdown of FCS under
$13 or the SOX under $300 would be an ominous sign.  Keep stops
set at $13 and wait for evidence of renewed buying in the sector
before initiating new positions.

---

FRX $101.27 +0.11 (+1.09) The broad markets sold off on Thursday,
once again going in the opposite direction of what was seen as
the dominant trend following yesterday's surprising 50 basis
point cut from the Fed.  Despite that weakness, FRX remains very
resilient as it holds above the $101 level.  While the stock
hasn't been able to sustain a breakout over the $102 level on a
closing basis, it is encouraging to see the stock continuing to
build on its pattern of lower lows.  The $100-101 area is shaping
up as decent intraday support and successive rebounds from this
area should provide for solid entries ahead of the expected
breakout to new highs.  .  Before breaking above $100, FRX had
been finding resistance near $99, and this level should provide
additional support on a more significant pullback.  A rebound
from this area would make for an even better entry, so long as
we don't see a drop under $98.  Due to the stock's inability to
sustain a breakout over $103, we would shy away from attempting
new momentum entries on a breakout  We're raising our stop to
$97.50 tonight.


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

EXPE – Expedia, Inc. $75.10 +0.78 (+5.95 this week)

Company Summary:
Expedia is a provider of online travel services for leisure and
small business travelers, offering one-stop shopping and
reservation services with real-time access to schedules, pricing
and availability.  The company's global travel marketplace
includes direct-to-consumer Websites offering travel-planning
services at Expedia.com, Expedia.co.uk, Expedia.de, Expedia.nl
and Expedia.it.  In addition, the company provides
travel-planning services through its telephone call centers and
through private label travel Websites through its WWTE business.
WWTE is a division of Travelscape, Inc., one of EXPE's wholly
owned subsidiaries.

Why We Like It:
After the strong rebound off the October lows, there is an
increase in the number of stocks that are moving to new 52-week
highs.  While moving to new highs is certainly an admirable feat,
how many of them are up by 100% in the past month?  EXPE is one
such stock, as it has been steadily churning higher on expanding
volume.  That's right, the stock is actually seeing stronger
volume as it continues to march up the chart.  Reporting earnings
that beat the street by 9 cents really lit a fire under the stock
and it gapped higher and started running on October 24th.
Breaking above its 200-dma with a breakaway gap was impressive to
start with, but the rate of ascent hasn't even begun to slow down.
EXPE has only had one down day in all that time, as it continues
to post higher highs and higher lows.  The volume is showing the
conviction behind the move and Thursday's push above the $75 level
was accompanied by volume that more than doubled the ADV.  To be
sure, it can be risky trying to game a bullish entry into a stock
that has already advanced so far in such a short period of time,
but it appears that the bulls have their sights set on challenging
the stock's all-time highs near $84 and we're more than willing
to go along for the ride.  Each push higher has been followed by
a mild pullback to a higher low, before the bulls propel EXPE
higher yet.  The last consolidation zone was near the $73 level
and a pullback and rebound from that level looks like a high odds
entry into the play.  The measured way in which the stock takes
two steps forward and one step back makes buying the dips the
preferred strategy.  If you must trade a breakout, then wait for
EXPE to push through Thursday's intraday high ($76.34) on
continued heavy volume.  Because this is an aggressive play, we
are starting coverage with a tight stop at $72, just below the
intraday lows on the last pullback.  If that level is violated,
it will break the pattern of higher lows and be a warning that
perhaps the trend is coming to an end.

*** November contracts expire next week ***

BUY CALL NOV-75 UED-KO OI=1401 at $2.80 SL=1.50
BUY CALL NOV-80 UED-KP OI= 607 at $0.80 SL=0.40
BUY CALL DEC-75*UED-LO OI= 161 at $5.80 SL=3.75
BUY CALL DEC-80 UED-LP OI=  99 at $3.40 SL=1.75

Average Daily Volume = 2.16 mln


---

SYK - Stryker - $67.23 +1.00 (+1.78 for the week) 

Company Summary:
Stryker Corporation develops, manufactures and markets specialty 
surgical and medical products, including orthopaedic 
reconstructive, trauma, spinal and craniomaxillofacial implants, 
the bone growth factor osteogenic protein-1, powered surgical 
instruments, endoscopic systems, patient care and handling 
equipment for the global market, and provides outpatient physical 
therapy services in the United States. (source: company release)

Why We Like It: 
As baby boomers have aged, so has the need for physical therapy 
and orthopedics.  Stryker is a company that is well positioned 
for an aging country and its earnings have underscored that 
sentiment. The company makes artificial hips, knees, spinal 
implants, and related surgical instrumentation, as well as 
providing physical therapy services.  Although Goldman Sachs 
recently removed the stock from its recommended list, citing 
valuation, it kept a market outperformer rating on SYK and said," 
Importantly, investors should not interpret our rating change as 
a sign that fundamentals are weakening. To the contrary, 
fundamentals remain robust with an orthopedic implant environment 
marked by solid unit gains and price increases."  Goldman also 
said it believes the company can grow earnings at a 20% yearly 
clip.   

The company released earnings on October 16 and showed a 20% 
increase in both profits and sales over the year ago period.  It 
also posted a 26% increase in earnings for the first nine months 
of 2002, as compared to 2001.   SYK raised guidance for the 
fourth quarter, saying it would beat analysts' expectations by 
$0.02 per share.  The company is clearly on the rise and the 
recent run in the stock is a good indication.  We put the stock 
on our Watch List a few days ago when it first broke $65 for the 
first time.  We were looking for a pullback and then support over 
$65 and got exactly that.  The stock pulled back on Tuesday and 
bounced at $64, before blowing back through $65 and $66.  The 
stock tacked on another dollar today and posted a stream of 
higher highs and higher lows throughout the day, in spite of the 
Dow falling over 200 points at one point intraday.  SYK closed 
within 0.02 of its high for the day, indicating bulls were still 
looking to buy into the close.   The stock gave a new buy signal 
at $66 on the point and figure chart and ideal entry would be on 
a pullback to support at $65. However, if the stock continues 
higher from this level, with no pullback, then momentum traders 
can look for a break above $67.50 to enter.  The bullish vertical 
count is $93, however we are not quite that bullish on this move. 
Our initial target will be $75, and we expect some resistance in 
the $70 range. More conservative traders can look for a pullback 
and evidence of support above $64, which would be a PnF reversal, 
for entry.

***** November contracts expire next week *******

BUY CALL NOV-65 SYK-KM OI=  566 at $2.65 SL=1.30
BUY CALL NOV-70 SYK-KN OI=   71 at $0.40 SL=0.40
BUY CALL DEC-65*SYK-LM OI=  977 at $4.50 SL=2.25
BUY CALL DEC-70 SYK-LN OI=  285 at $1.60 SL=0.80

Average Daily Volume = 749 k



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

RTH $73.61 -1.04 (-1.82 for the week)  Many of the retailers 
released same store sales results this morning.  There were mixed 
results, but the most positive results came from stores that had 
dialed down expectations from previous months goals.  Wal-Mart, 
for instance, posted a same store sales increase of 3.7%.  While 
this was at the high end of the 2-4% range the company had 
predicted, it was below the normal 4-6% growth range of previous 
years.  There were also cautious comments regarding the low 
Consumer Confidence numbers and the fact that the holiday 
shopping season will be shorter this year, as Thanksgiving falls 
six days later than last year.  This sounds like a warning that 
stores may suffer when compared to previous year's numbers.  
Initial jobless claims fell by 20,000 last week, but the 4-week 
moving average remained over 400,000 and actually rose. Given the 
high rate of layoffs in October, the holiday shopping season 
still looks to have too many obstacles to overcome end up 
positive. The RTH has moved sideways during the recent rally, 
showing poor relative strength and has yet to approach its 50-dma 
up at $76.29, which is our barometer for the short play.  The 
tracking stock has rolled over from its third lower high and is 
still trending down.  New entries can look for a break under 
73.00, which has been a bounce point the last few days. 

---

LOW $39.97 -1.67 (-2.13 for the week)  Lowe's has been trending 
downward ever since its rejection at $45.  This morning's sales 
data from a number of retailers was mixed, and many made cautious 
comments about the upcoming holiday shopping season.  LOW is more 
of a hard line retailer and is likely to suffer as holiday 
shoppers steer reduced shopping dollars toward gift items, as 
opposed to home remodeling. The stock filled its gap from October 
15, bounced and was rejected at the 50-dma of $42.14 on 
Wednesday.  The sell-off continued on Thursday, with LOW breaking 
through $40 to trade as low as $39.77.   The trade of $40 
achieved another box in the current column of "O" on the point 
and figure and looks headed to its bullish resistance line at 
$38, at the least. The stock barely got a boost during the recent 
Dow rally, and has been downgraded by Goldman Sachs, along with 
Home Depot.  Goldman cited 'daunting' near-term comparisons for 
some of the sector's largest-cap companies, and few organic 
growth opportunities.  We like the continuing weakness in LOW and 
the close under $40. New entries should look for resistance below 
$40.00 and more conservative traders can wait for a breakdown of 
bullish support at $38.

---

LEH $56.24 -1.56 (+1.67) The positive reaction to the Fed's
decision to lower interest rates yesterday put a bid into
Brokerage stocks, with LEH rising to end just fractionally below
our $58 stop.  But the sellers were back in control on Thursday,
with the Brokerage sector (XBD.X) sliding back by 3.6%.  Part
of the driver for today's weakness was a rumor circulated about
JPM, that the company had suffered as much as $70 billion in
derivative losses.  Despite the company denying the rumors, it
still ended the day deep in the red.  That action weighed on the
rest of the sector, and LEH couldn't get out of the way.  Given
the carnage in the rest of the sector, LEH's performance really
wasn't that bad, as it still held above the $56 level, which
has provided support all week long.  The key to the play will be
to see LEH break below $55.50.  This is just below the intraday
lows from Monday following the sharp upward gap.  If LEH falls
below that level, it can be used for initiating new positions,
as it will likely indicate that the stock is intent on filling
that gap down to the $54.60 level, and likely heading down from
there.  Once that gap is filled, the bears will be setting their
sights on the $52.70 level, which provided support for the bounce
last week.  The descending trendline is still in play, as it once
again turned back the bulls near $58 yesterday and aggressive
players can continue to use failed rallies near this level to
initiate new positions, but only if the XBD index stays below
the $430 resistance level.  Leave stops at $58.

---

OHP $35.70 -0.45 (-0.80) While the broad market has tried to
digest the significant changes delivered over the past two days
(Republican win in the Senate, and an unexpected 50 basis point
interest rate cut), the Health Care sector is likewise trying
to determine the ramifications of these events.  The Health Care
Payor index (HMO.X) managed to drag itself off the mat down at
the $520 support level and ended yesterday with a respectable
gain. Despite the broad market weakness, the HMO index actually
held up rather well and that strength has been reflected to a
lesser degree in our OHP play.  OHP rebounded from its Tuesday
lows below $35, but it is clear from the intraday chart that
there are plenty of willing sellers just overhead.  Yesterday's
rally attempt was promptly reversed this morning , and the stock
went out just above its low of the day.  The $36.50-37.00 area
is shaping up as firm resistance, and we can continue to use
failed rallies in this area to target new entries ahead of the
next break down in price. Recall that Tuesday's drop below $34
generated a fresh PnF Sell signal, and that is still very much
in play.  Things could start out on a sour note again tomorrow,
with the management changes at THC, which were announced after
the close.  That stock ended the regular session near $28 and is
trading below $20 this evening.  That weakness could generate
more sympathy selling in other names like OHP tomorrow.  If
looking to enter the OHP play on a breakdown, wait for a trade
below $33.50, along with the HMO index breaking the $520 level.


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

None


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The Option Investor Newsletter                 Thursday 11-07-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three: 

Play of the Day: CALL - SYK
Traders Corner: Stock Went Up.  Call Option Went Down. Whasssup 
With That?
Traders Corner: Reversal patterns: V Top & Bottoms
Traders Corner: Closing Confirmation
Options 101: The OTHER Drag on Earnings


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

SYK -Stryker - $67.23 +1.00 (+1.78 for the week) 

Company Summary:
Stryker Corporation develops, manufactures and markets specialty 
surgical and medical products, including orthopaedic 
reconstructive, trauma, spinal and craniomaxillofacial implants, 
the bone growth factor osteogenic protein-1, powered surgical 
instruments, endoscopic systems, patient care and handling 
equipment for the global market, and provides outpatient physical 
therapy services in the United States. (source: company release)

Why We Like It: 
As baby boomers have aged, so has the need for physical therapy 
and orthopedics.  Stryker is a company that is well positioned 
for an aging country and its earnings have underscored that 
sentiment. The company makes artificial hips, knees, spinal 
implants, and related surgical instrumentation, as well as 
providing physical therapy services.  Although Goldman Sachs 
recently removed the stock from its recommended list, citing 
valuation, it kept a market outperformer rating on SYK and said," 
Importantly, investors should not interpret our rating change as 
a sign that fundamentals are weakening. To the contrary, 
fundamentals remain robust with an orthopedic implant environment 
marked by solid unit gains and price increases."  Goldman also 
said it believes the company can grow earnings at a 20% yearly 
clip.   

The company released earnings on October 16 and showed a 20% 
increase in both profits and sales over the year ago period.  It 
also posted a 26% increase in earnings for the first nine months 
of 2002, as compared to 2001.   SYK raised guidance for the 
fourth quarter, saying it would beat analysts' expectations by 
$0.02 per share.  The company is clearly on the rise and the 
recent run in the stock is a good indication.  We put the stock 
on our Watch List a few days ago when it first broke $65 for the 
first time.  We were looking for a pullback and then support over 
$65 and got exactly that.  The stock pulled back on Tuesday and 
bounced at $64, before blowing back through $65 and $66.  The 
stock tacked on another dollar today and posted a stream of 
higher highs and higher lows throughout the day, in spite of the 
Dow falling over 200 points at one point intraday.  SYK closed 
within 0.02 of its high for the day, indicating bulls were still 
looking to buy into the close.   The stock gave a new buy signal 
at $66 on the point and figure chart and ideal entry would be on 
a pullback to support at $65. However, if the stock continues 
higher from this level, with no pullback, then momentum traders 
can look for a break above $67.50 to enter.  The bullish vertical 
count is $93, however we are not quite that bullish on this move. 
Our initial target will be $75, and we expect some resistance in 
the $70 range. More conservative traders can look for a pullback 
and evidence of support above $64, which would be a PnF reversal, 
for entry.

***** November contracts expire next week *******

BUY CALL NOV-65 SYK-KM OI=  566 at $2.65 SL=1.30
BUY CALL NOV-70 SYK-KN OI=   71 at $0.40 SL=0.40
BUY CALL DEC-65*SYK-LM OI=  977 at $4.50 SL=2.25
BUY CALL DEC-70 SYK-LN OI=  285 at $1.60 SL=0.80

Average Daily Volume = 749 k



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

Stock Went Up.  Call Option Went Down. Whasssup With That?
By Mike Parnos, Investing With Attitude

More strange things happen in the options market than in the 
Twilight Zone.  You bought a call for $3.50.  The price of the 
stock goes up, but the price of the option goes down.  “Quick, 
Gertrude, call our lawyer, we’re going to sue somebody?  But who? 
We can’t sue Rod Serling -- he’s dead.  Someone’s got to pay!!  
I guessed right on the direction.  What happened?”

Wake up!! Life isn’t fair.  That should be no surprise.  It 
applies to option trading too!  If I have to tell you that, your 
status as a Couch Potato Trading Institute (CPTI) student is in 
serious jeopardy because you haven’t been paying attention.

As you know, the price of the underlying is the biggest piece of 
the option-pricing puzzle, but there’s a lot of other stuff too. 

A significant change in an option’s implied volatility can cause 
an option to move in the opposite direction.  They can spike 
higher on a variety of news events – like stock split 
announcements, acquisition rumors, anticipation of a positive 
earnings announcement or an upcoming FDA approval decision. 

This higher implied volatility reflects an increase in the demand 
for the option.  An increased demand translates into a higher 
price for the option.  It’s a combination of the principle of 
supply and demand plus the market maker salivating at an 
opportunity to inflate the cost to the clamoring masses.  They 
know that, once the news is absorbed in the marketplace, they 
will remove the implied volatility (and your money) from the 
option faster than a doctor removing an appendix. The only 
difference is that I doubt the doctor puts the appendix into his 
wallet.

You’re asking, “Why me?”  Call it -- unbridled enthusiasm.  Call 
it – just plain dumb.  Call it -- another expensive lesson.  It’s 
like the people that put in a market order to buy technology IPOs 
few years ago (when there were IPOs).  It’s like grabbing your 
ankles and sending out invitations.  And the market makers will 
R.S.V.P. every time.

Another ingredient in the option-pricing recipe is time decay.  
Time decay is the loss of value in an option over time when all 
other factors are constant.  The rate of decay increases the 
closer the option gets to expiration.  Which options are most 
vulnerable?  The out-of-the-money options, in the last week or 
two, can lose value so quickly that the decrease might be larger 
than a small increase in the price of the stock.

Time decay is the option seller’s best friend and the option 
owner’s worst enemy.  At the Couch Potato Trading Institute, 
we’ve got the time if you’ve got the premium.

Normally, the price of an option will move up and down with the 
movement of the stock – but, obviously, not always.
_____________________________________________________________

The Ups and Downs of VIX 
What is the VIX?  
No, it’s not a Roman numeral.  It’s not something you rub on your 
chest to alleviate cold symptoms.  It has other uses – it’s a 
tool to measure just how flaky the market is in general – and 
that’s good to know.

We talk a lot about volatility in our trading strategy scenarios.  
It’s a major ingredient in the option-pricing model.  The higher 
the volatility, the higher the option premium 

The market, as a whole, has come up with a measure of volatility 
called the VIX – the CBOE Market Volatility Index.   It’s a 
measure of expected volatility for the S&P 100 Index.  It’s not a 
measure of any individual stock’s volatility, but a lot of 
traders use it as a general indicator of implied option 
volatility.

How is the VIX calculated?  Does it really matter?  Probably not, 
but it’s a question that may someday show up on Jeopardy or in 
the next edition of Trivial Pursuit, so, what the hell, I looked 
it up.

“The VIX is a market consensus forecast of future stock market 
volatility over the next month and is constructed using the 
implied volatilities of eight near-the-money, front- and back-
month OEX calls and puts. This design creates a hypothetical 
option that is always at the money and has exactly one month 
until expiration. The VIX is then updated throughout the day by 
the CBOE in real time using OEX bid/ask quotes. Over the years, 
research has shown that the implied volatilities of this 
artificially constructed option (the VIX) have been able to 
accurately predict subsequent stock market volatility.”

Why is the VIX good to know?
Well, I don’t know how airplanes work either, but I use them.  
The VIX can come in pretty handy.  It serves as an indicator of 
how market participants are currently reacting to the market and 
what they may expect to happen next.  It plays a key role in our 
ability to predict future market movement.

If the market is weak and the demand for puts increases, the VIX 
will spike up.  This means that there is fear in the market.  Due 
to the fact that retail investors are usually wrong, this higher 
VIX figure is a bullish sign for contrarians.  Speculators, when 
they finally sell out of their long stock position, will try to 
jump on the downward bandwagon and buy puts. Therefore, it can 
signal an end to short-term selling.

By the same token, if the market is heading down and the VIX 
doesn’t spike up, it means the speculators are complacent about 
the move.  What does this mean?  Well, again, considering that 
they’re wrong more often than not, it’s a good bet that there is 
more selling on the horizon.

____________________________________________________________

CPTI Portfolio Update (as of Thursday morning)

BBH Iron Condor – Trading at $89.61.  Just dandy!  We want it to 
finish between $80 and $95 at November expiration.

MMM Iron Condor – Trading at $128.68.  Also dandy!  We want it to 
finish between $120 and $130 at November expiration.  We made a 
few adjustments, buying shares and then reselling them twice when 
MMM violated $130.

TTWO Short Strangle – Trading at $27.85.  Couldn’t be better! We 
want it to finish between $25 and $30 at November expiration.

QQQ ITM Strangle – Trading at $25.80.  This week has been 
interesting.  For those who bought the Dec. $23 calls, the QQQs 
made it up to about $26.75 and a few alert traders I know took 
some very respectable profits.  It’s still early in the trade and 
the market is trying to move up.  The resistance at $26 seems to 
be substantial, but who knows?  Stay tuned . . .
_____________________________________________________________

Happy trading!  
Remember the CPTI credo:  May our remote batteries and self-
discipline last forever, but mierde happens.  Be prepared!  In 
trading, as in life, it’s not the cards we’re dealt.  It’s how we 
play them.
 
Your questions and comments are always welcome.  
mparnos@OptionInvestor.com  


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

Reversal patterns: V Top & Bottoms 
By Leigh Stevens
lstevens@OptionInvestor.com

You have probably seen a number of examples of double (or 
triple) tops and bottoms but there are other common types of 
bottom and top patterns also, the names and characteristics of 
which may not be so familiar to you – to find a recent example of 
a double bottom we need only look at the S&P 500 daily chart: 



 

While a “double” bottom on the S&P 500 (SPX) chart is the key 
technical pattern in the chart above, each upside reversal (each 
bottom) can each individually be looked at as a “V” type bottom – 
just as the top at 960 in SPX can be seen as a “V” top.  More 
explanation on this shortly on the “V” top/bottom formation. 

The Dow Industrials in its recent low and in its upside reversal 
can be viewed more purely as a single “V” bottom and not a double 
bottom per the chart below –



 

In the Dow the second low was well under its first upside 
reversal or bottom pattern.  Each can be seen as a “V” type 
bottom.  A “V” bottom is contrasted with bottoms with price lows 
that form in the same area multiple times – a bottom that is the 
low end of a trading range or a “rectangle” or line formation.  
The same is true, only in reverse, for the tops of trading 
ranges. Then there are rounding bottoms and rounding tops and 
these are typically MORE significant for a major reversal move, 
but I will discuss in another article.  

“V” type reversals are not as frequently as “definitive” for a 
bottom or top as the others mentioned – they (“V’s”) tend to form 
in more volatile markets where there are sudden and sharp moves 
but that don’t necessarily reverse the trend. For example, in the 
charts above in both SPX and the Dow neither index has taken out 
its prior intermediate rally high – and stayed above the prior 
swing high – which would be the technical definition for a trend 
reversal of at least intermediate proportions. 

The “V” type pattern is usually good for a substantial move after 
the top/bottom of the “V” forms in the “reversal” direction – all 
traders need is a few moves of this magnitude every so often!
To be technically correct we should probably call “V” tops UPSIDE 
down “V” tops, but no one does - unlike a “reverse” Head & 
Shoulders.  

“V” TOP OR BOTTOM PATTERNS 
You best see this pattern on bar charts, then candlestick chart 
followed by “line” (close-only) charts.  Point & Figure (P&F) 
charts are another, but “V” type tops and bottoms are not as 
apparent as often.  

As implied by the shape of the letter “V” in technical analysis 
terms the pattern is where an intraday or intraweek low or high 
forms at the end of a price move when prices go into a final 
steep descent or ascent, followed by an equally sharp 
countertrend move; e.g., a “V” bottom in technical analysis 
terms.  The same letter name is given to a top that is formed by 
a sharp advance, followed by an equally steep decline – a “V” top 
might be more accurately called an inverted “V” top, but it’s 
generally not qualified in this manner.  

As part of the discussion of “V” tops and bottoms, it’s useful 
and appropriate to describe a “spike” and also what is sometimes 
called a “thrust” day.  A spike is simply a sharp run up or 
decline whose hourly, daily or weekly high or low substantially 
exceeds the respective high or low of the “bar” or bars (e.g., 
day or days) that immediately preceded the spike - as well as for 
some time AFTER the spike has occurred.  What we often see on 
daily charts at tops is a spike high well above the prior day or 
days, but a close that is well under that day’s intraday peak.  
At bottoms we often see a spike low that is well under the prior 
day or days, but a close that is well up from the intraday 
bottom.  

When a daily close is below the low of the prior day, it is 
sometimes also qualified as a downthrust day.  When a close is 
above the high of the prior day, this is also sometimes called an 
upthrust day.  Analogous to mechanical power, whenever “thrust” 
is used in technical analysis it implies a strong force pushing 
the market in one direction or another.  However, in the markets, 
a force pushing strongly in one direction may reverse by the 
close.  As emphasized in the candlestick charting method, the 
close tends to be more important than an intraday high or low 
well beyond the prior day’s high or low, if the close is less 
extreme than the spike high or low.  

An even stronger case for a trend reversal, after an uptrend has 
been underway for some time, is suggested by a day with a jump to 
a high well above the prior day or days (a spike), but a close 
that is under the low of the prior day - a down thrust day.  
Conversely, a stronger case for a trend reversal is made well 
into a downtrend, when there is low well under what has gone 
before (a spike low), followed by an up thrust day whose close is 
above the prior day’s high.  

The concept of the thrust day, taking into account the close, 
relative to whether it is below or above the prior day’s low or 
high, is something that is not necessarily significant as a 
single event.  Thrust days are quite common – a series of them is 
what is significant.  A strongly up trending market typically 
will have a number of up thrust days and a market in a pronounced 
decline, a number of down thrust days.  

Stocks, futures or FX instruments that are thinly traded, or are 
volatile in general or just in a particular period such as during 
a top or bottom, are more prone to exhibit spikes and thrust 
days.  The chart below some sharp down spikes and thrust days – 



 

“V” tops and bottoms often have a spike high or low at the end of 
the climb or at the very bottom, but not always. The discussion 
on spikes, including spikes that have closes above or below the 
prior day’s price range (up or down thrust days) is often 
relevant to “V” reversal tops or bottoms as they are often part 
of the “V” top or bottom pattern.  



 

It’s very common to see even steeper “V” top patterns such as in 
the major top shown on a weekly basis – Yahoo had a pronounced 
spike high at the very top and in the center of an inverted “V” 
top – 



  

You can cover up the price scale and the dates at bottom and 
imagine that this is a 15, 30 or 60-minute chart also – the 
pattern is the same. 

The chart below, of bellwether GE is an example of a classic “V” 
bottom formation – “V” bottoms do not have as many instances of 
very steep angles making up the sides of the “V” as is the case 
with tops – 



  

An obvious difficulty in predicting a reversal based on a “V” 
bottom or top pattern is that they are always easy to identify 
until the reversal move is under way for a time.  While they are 
developing they are not much different in appearance than from a 
pronounced further price spurt, followed by a correction.  

However, when there is also a definite spike high or low and/or a 
thrust day or days, accompanied by a confirming surge in volume, 
these provide further technical clues pointing toward the 
appearance of a reversal pattern.  

We can take the chart above and add volume to the price picture 
alone. The jump in daily volume that mirrored the spike low 
(bottom of the “V”), offers an excellent confirmation of the 
likelihood of an upside reversal as suggested by a close in the 
middle of the daily range, which was followed by a strong rebound 
in prices in the following day and days – 



 


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

Closing Confirmation 
By John Seckinger
jseckinger@OptionInvestor.com

Daily chart patterns love to make us believe something big is 
about to happen.  It might, but there is one more step the market 
needs to perform.  Confirmation.  

Case-in-point:  Monday, November 4th.  The Dow rallied from 8521 
to 8730, and then proceeded to fall back to 8571 by the close.  
As a candlestick follower, this pattern is called a “Bearish 
Shooting Star” and defined as: (1) Price gap open to the upside, 
(2) Small real body formed near the bottom of the price range, 
(3) The upper shadow at least three times as long as the body, 
and (4) The lower shadow is small or nonexistent.  

Ok, so I am now bearish on the Dow, correct?  Yes, and no.  I 
have a ‘bearish viewpoint,’ but as a trader I need confirmation 
before putting on a bearish trade.  I hope this makes sense.  How 
is confirmation reached?  In this particular case, I would use a 
level underneath the day’s low in order to go short (read: buy 
puts).  I would need the market to close underneath this low as 
well.  Only then we would have our confirmation.

Chart of the Dow Jones Industrial Average  


 

Once a daily pattern is recognized, wait until there is 
confirmation before blindly entering and just hoping that the 
pattern will take form.

It is absolutely critical to do a few things when trading: (1) 
Try to account for stops.  This means when forecasting an 
objective, remember that the market will almost always overshoot 
it.  Therefore, letting the market perform one extra step will 
really take a lot of the guesswork out of trading.  The problem?  
I only use closing confirmation patterns with breakouts, moves 
above moving averages, gaps, and maybe a few other scenarios.  
Not a very common tool when the market is in a gradual trend.  

It should be noted that I am referring to only daily chart 
patterns, or longer.  A daily chart is nice because it attracts a 
lot of eyes from mutual fund managers, hedge funds, etc.; whereas 
shorter-term charts are sometimes ignored by a lot of traders 
because of all the “noise” it creates during the session.  This 
could be why most funds enter and exit near the open and as the 
close approaches.  Daily chart patterns also can be used nicely 
for swing traders and people looking for more intermediate 
patterns.  The longer the time frame, the better the odds of 
success.  

Let us turn to the Sox for another example.  On November 1st, the 
Sox broke a bearish trend line that was formed by the high on 
July 17th and the relative high during August 22nd.  By the end of 
the session, the Sox closed at 313 (intra-day low of 291) and ran 
into a trend line that started on April 17th and bisected the high 
on May 15th.  Ok, this should be relatively simple, right?  Maybe 
not.  There are two steps.  I would first use a level above the 
intra-day high (313) in order to go long, but that only confirms 
the break of the first trend line.  Not the second.  

Chart of the Semiconductor Sector Index


 

For the breakout of the pattern dating back to May, we have to 
use the trading range on November 4th, since that was the first 
day above the second trend line.  Levels above November 4th will 
then give us our ‘confirmation’ reading.  As we have done before, 
I will use a level outside the day’s range.  Since we are talking 
about a breakout higher, I will use a level slightly above 337 
(intra-day high) to confirm the upward trend.  As the chart 
shows, we did not get that confirmation. 

Yes, I am very cynical of a lot of market “breakout” moves; 
therefore, I think it makes sense to watch movement the next day 
for confirmation.  If the chart says “sell,” fine, I will; 
however, only after the market proves it makes sense to be short.  
Do I miss part of the move?  Of course, but almost all trading 
tools miss the exact high/low as well.  

With that said, let us turn to a chart of the XAU and put one 
more spin in this article.  On October 28th, the XAU broke out of 
a consolidation pattern and rose above the 22 DMA (exp).  
“Breakout; therefore, I should go long just above the high 
(64.97) and put a stop underneath the day’s low of 63.15.”  Why a 
stop there?  With a breakout, I assume that the entire day’s 
range is part of the breakout; therefore, I will have to include 
all prices within that range.  There is a chance that the day’s 
range may be too great (not the case here); therefore, use your 
own judgment if risk is too great.

Chart of the Gold And Silver Index


 

Just because the XAU index rose above the 22 DMA, I need a few 
more things to fall into place.  First, I need the XAU to close 
above this average.  Secondly, as stated before, I need prices to 
rise above the day’s high and confirm the increased buying.  I 
don’t want to buy after all stops are hit and get stuck with a 
horrible execution level.   

Look at the next session on October 29th.  The XAU traded above 
the 50 DMA, probably hit stops, and then fell by the close.  
Traders that didn’t wait for the confirmation either got stopped 
out or took a lot of heat until a few days later when that 
breakout was confirmed.  

I use this same closing confirmation theory when looking at gaps.  

Chart of the Nasdaq 


  

After a gap, I expect the market to take out the day’s high (if 
gap higher) and close higher.  Waiting the one extra day can make 
all the difference, which was the case from October 15th to the 
16th, when prices gapped lower and didn’t confirm the day prior’s 
gap.  Currently, the last runaway gap has not been confirmed; 
therefore, traders can start to think about prices falling 
further.  Is there an “expiration date” on confirming gaps?  If 
the gap created a new relative high/low, I don’t believe that 
there is.  

Ok, what is the main drawback of this ‘closing confirmation’ 
theory?  It requires traders to put positions on at the close 
when volatility may have spiked higher and there could be a 
sleepless night wondering if the market will fail to respond in a 
profitable manner.  I agree, it is hard; however, it really 
depends on what kind of trader you are.  It might be more 
comfortable to trade this way.  If so, fantastic.  

Who doesn’t love this adage, “Trade what you see, not what you 
think”.  I “believe” the XAU Index is in a Head & Shoulders 
formation and will go to 60 and 40; however, what I “see” is a 
confirmation of the bullish trend.  Take the emotion out, and 
leave the opinions at the door.  If the market confirms a buy or 
sell signal, it is telling you to go with the trend.  Good luck.  


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

The OTHER Drag on Earnings
Buzz Lynn
buzz@OptionInvestor.com

Some days, subject matter for articles just doesn't come easily.  
Others, it pops up on the radar screen like an intruder at Fort 
Knox.  While contemplating the issue of employee stock options and 
its real effect on corporate earnings for us owners - an issue 
that many Wall Street pundits and hucksters hope just dies and 
goes away - I stumbled into news released earlier today from 
Europe.  

Guess what?  The International Accounting Standards Board (IASB), 
a two-year-old board based in London designed to unify corporate 
accounting standards across 10 nations, issued a draft proposal 
saying specifically, "all share-based payments should be 
recognized in the financial statements."  Whoa!  No ambiguity 
there.  If it costs the company money, it needs to show up on the 
earnings report and balance sheet.  No more trickery, to which I 
say, "Amen".

But it doesn’t end there.  Besides, calling for corporate 
expensing of incentive stock options is yesterday's rally cry and 
seemingly futile exercise in hand wringing.  I was thinking of 
something much bigger that has barely surfaced in public financial 
circles, yet has remained in the corporate boardroom under lock 
and key in the "dirty little secret" file.  I'll probably get hate 
mail from CFO's, CEO's, and COO's telling me that their firms are 
above board, as all information pertaining to said corporate shell 
game (oops, err. . .EBITDA [earnings before I trick dumb 
auditors]) is available in public disclosures filed with the SEC.  

Right.  And all taxes are fully disclosed in the purchase of a 
gallon of gasoline, a pack of cigarettes, a bottle of hard 
alcohol.  While we may be able to figure it out, we have to know 
what we're looking for and where to look.  That might explain why 
very few are aware the next big accounting issue, UNDERFUNDED 
PENIONS, soon to be the other drag on earnings.

Well, I was going to talk at great length about the general 
concept of underfunded pensions as the next great drag on earnings 
and how they will affect stock prices in the future.  
Unfortunately that ranks right up there on the entertain-o-meter 
with rearranging my sock drawer.  I had already ruled out 
revisiting the bear call spread on IBM, as we've hit that twice in 
the last two weeks.  Again, about as entertaining as watching 
paint dry.  Still a pretty decent bearish play in my opinion.

Then, in one of the rare moments when I was actually tuned in to 
CNBC, what to my wondering eyes did appear, but a little segment 
on. . .ta da. . .IBM and its underfunded pension!  Sometimes, it's 
better to be lucky than smart.  This was just such an instance.  
How much better could it get than dovetailing a bearish trade on 
IBM with the concept of underfunded pensions?  And thus, here we 
are with the topic of the day.

Let me state it for the record.  Despite the bullish cyclical 
pattern of equities during the last three weeks, this is still a 
secular bear market.  Stocks are going to crest again and likely 
get hammered to lower lows.  How can I be so sure?  Many factors, 
but the one sticking most in my mind is squarely focused on 
earnings.  If you thought earnings and forward statements were 
weak now, just wait until corporate America starts confessing its 
underfunded pension sins.  We aint seen nothing yet.

Here's the issue in a nutshell.  In addition to the 401K or IRA, 
many Fortune 500 companies fund a pension plan for their employees 
to be used by the employee (or beneficiary) at some point as a 
source of income following corporate retirement.  Consider it a 
private enterprise version of social security.  We work hard 
putting in 20 years with the same company and the company mails us 
a check every month once we've retired.  That's simplified, but 
you get the idea.

Every year, the company is allowed to set aside some of its 
revenue (and call it an expense) for the benefit of its employee 
pension fund.  Say a company grosses $1 bln in sales, and among 
other expenses totaling $800 mln (including interest taxes, 
amortization, and depreciation), it also includes a $100 mln 
expense that to be set aside for the pension.  So far, so good - 
pensions funded from profits of the business - makes sense.

One of the integral parts of pension funding as it relates to net 
income is that the CEO, COO, CFO, or the board (pick one or a few) 
gets to assign a rate of return on the pension fund assets that is 
allowed to be counted as net income to the corporation.  Did you 
get that?

Assume that over the years, a company's pension fund has grown to 
$1 bln in assets.  The CEO says (under his breath buried deep in a 
10K or 10Q where he hopes you won't find it), "I expect to earn 9% 
on that invested money this year, 2002".  Doing the math, he 
expects to earn $90 mln on the pension fund assets, which he is 
allowed to count toward net income of the business!

In the same vain, if we impute that we earn 9% on our $500K 
portfolio of stocks this year (even if we don't), it still counts 
as income on the loan application when try qualifying for that $1 
mln home loan on our $100K income.  Wouldn't that be nice?

Yes, despite its appearance as a game of 3-card Monte, imputed 
pension asset returns are actually legal.  So for the company with 
$200 mln in earnings from operations, it can report $290 mln in 
its earnings report thanks to the $90 mln imputed in the return on 
pension assets.  So, if the company is a few dollars short in 
operating earnings, no problem!  Just assign a higher imputed rate 
of return to the pension fund and everything will be OK!  You 
don't actually have to earn it.  You just have to SAY you are 
going to earn it.  Neat trick!

Well, not really.  See, the pension assets didn't really earn 9% 
last year.  In fact, it actually lost about 15% last year and 25% 
the year before that thanks to the bear market in stocks.  The 
company not only never earned the 9%, they lost 15% and 25% in 
value respectively over the last two years.  And they are heading 
for another loser year in 2002, as well.

So for the pension fund with $1 bln in assets above, those assets 
were worth $750 mln (25% loss) the year before, $638 mln last 
year, and $510 mln at the end of this year, assuming another 20% 
loss.  Let's see. . .$1 bln in assets to just over $500 mln in 
assets over three years.  That's a $500 mln loss in value.  Or as 
a sharp financial mind would say, "underfunded by $500 mln 
dollars".

Uh oh!  The company is actually going to have to fund that missing 
$500 mln some day.  

But the worst thing is that companies are still, to this day, 
assuming imputed rates of return of 8.5%-10% on pension fund 
assets that they hope to count toward net income!  Unbelievable!  
How long can accompany report income it never actually earned?  
And how long can it hide losses in asset value that need to be 
replaced without actually replacing them?  And when that company 
does fund the underfunded $500 mln, how will it affect their $200 
mln of EBITDA earnings?  

Once this shell game is discovered and given the coverage it 
deserves, don't look for an earnings recovery anywhere even near 
today's levels.  Underfunded pensions are going to cost 
shareholders a bundle in earnings and stock price.

But where does IBM fit into all this?  They happen to be today's 
stellar example of pension abuse.  IBM has pension fund assets of 
roughly $60 bln.  That's a huge number.  Trouble is that it is 
10%-15% underfunded.  That's a minimum of $6 bln to a maximum of 
$9 bln that IBM will have to fund from somewhere.  How will it do 
that?  The only way it can.  From earnings, of course!

I can hear it now from the shareholders meeting:  "IBM had a 
stellar year because we imputed $5.4 bln of pension income to our 
income statement that we didn't really earn and we neglected to 
fund $7.5 bln to our underfunded pension, which we were able to 
defer to another year of our choosing.  Were it not for those 
perpetual sources of "one-time" income and hiding of actual 
pension fund losses, we'd have lost $12.5 bln more this year!  Oh, 
and we're guiding earnings from operations down for the 
foreseeable future."

Of course, the longer IBM prolongs the pension underfunding, and 
the application of a bogus imputed 9% return on those assets, the 
greater the hit to earnings in the future.  

Corporate CEO's, CFO's, or COO's, are caught between the devil and 
the deep blue sea.  How much longer do they fraudulently keep 
imputed pension returns higher than what they know is possible?  

The bigger question is how much longer does FASB keep its mouth 
shut on the subject?  [I believe the operative word in their title 
is, "Standards".]  Or do companies take the monster hit now and 
smaller hits from pension losses year after year as stock prices 
deflate around smaller earnings and deflating P/E ratios of 
stocks, which more accurately resemble interests in a going 
concern rather than speculative pieces of paper?  No wonder CEO's 
pray for the return of irrational exuberance!  It's the only thing 
that will cover up mistakes and accounting quackery.

Alright, enough of that.  I don't hate IBM.  I just point them out 
and lump them in along with a majority of other corporate 
chieftains as a flagrant example of trying to "span the chasm" in 
hopes of avoiding bad news and ultimate cratering of the stock 
price.  And there are plenty.  

But IBM still makes a nice put play or bear call spread in my 
opinion.  Eventually, they are going to have to make real money or 
confess their sins.  It's only a matter of time.

All that said, focus on the bigger picture.  Financial imagination 
is going to be tested and fail against the harsh reality of 
underfunded pensions and imputed rates of return.

See you next week!

Buzz


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