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Daily Newsletter, Thursday, 11/14/2002

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The Option Investor Newsletter                Thursday 11-14-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Dell Rocks
Futures Markets: The Third Friday
Index Trader Wrap: Not as bad, gets better than expected response
Market Sentiment: In a Pinch
Weekly Manager Microscope: William Fouse & Thomas Loeb: Vanguard 
Asset Allocation Fund (VAAPX)


Updated on the site tonight:
Swing Trader Game Plan: Did The Trend Just Change?


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      11-14-2002           High     Low     Volume Advance/Decline
DJIA     8542.13 +143.60  8545.11  8403.69 1.81 bln   2334/ 881
NASDAQ   1411.52 + 50.20  1411.63  1378.94 1.72 bln   2337/1078
S&P 100   461.14 + 10.43   461.32   450.61   Totals   4671/1959 
S&P 500   904.27 + 21.74   904.27   882.53 
RUS 2000  386.24 + 10.13   386.24   376.11 
DJ TRANS 2339.12 + 48.20  2339.24  2291.42   
VIX        32.60 -  3.68    34.64    32.06   
VXN        52.40 -  2.06    50.61    49.86
Total Vol   3,706M
Total UpVol   526M
Total DnVol 3,144M
52wk Highs   112
52wk Lows    147
TRIN        0.44
PUT/CALL    0.58
************************************************************

Dell Rocks

The AMAT earnings after the bell yesterday were grim with 
guidance for another -20% drop in orders in the fourth quarter
and a forecast for another 6-9 months of declining chip demand. 
Dell hit estimates which were raised twice in the quarter and
said the fourth quarter was shaping up for another rise in 
revenue. Both companies are heavily dependent on the current
economy but they appear to be living on different planets. 

Dow Chart – Daily


 

Nasdaq Chart – Daily


 

The AMAT news was grim but the chip sector soared to a huge gain
on the bad news. The SOX was up +23.48 with many chip makers
breaking out to a new recent high. Obviously if you want logic
don't look in the stock market. The consensus appeared to be 
that the bad news was already priced in after the recent AMAT 
restructuring news and everybody expected worse. That leads us
to the following assumption.

Dell posted what could only be called a remarkable quarter. 
When everyone else was growing +2% Dell grew +22%. They said
they were continuing to steal market share from HWP and GTW
and their server and notebook business was soaring. The server
side of the business gained +27% for the quarter. Michael Dell
said the fourth quarter was shaping for another +10% gain over
the third quarter. Dell said business spending had stabilized
and was no longer dropping. 

This brought back memories of the Dell of yesteryear. Constant
growth at the expense of others and continued branching out 
into other tech areas where its business model would give it 
the edge over competition. Dell said it was turning over 
inventory 99 times per quarter and that gave them a price and
feature edge over the other box makers. The bottom line to 
this story is that Dell is firing on all cylinders and kicking
box maker butt. This is a strong win for Dell but only Dell. 
The only positive thing Dell said about the market was that
IT spending had quit falling. Dell is gaining share from rivals
not from business expansion and increased capital spending. 
However, the news "should" be positive for Dell stock but it
was trading down in after hours. Surprised? You shouldn't be. 
The strong gains Dell stock posted in the last month were based
on Dell raising/affirming guidance twice during the quarter. 
The good news was already priced into the stock, which was 
trading at six month highs. In later news the COO said on the
conference call that "we are not sure the industry is going to
see a particularly strong Q4 and that is the big question mark
in our outlook. "IF" we see better industry numbers then we 
could do better." He must have been listening to the IBM call
yesterday.

Now for the assumption. If AMAT trades up after posting a 
grim quarter AS EXPECTED then should DELL trade down after
posting a strong quarter AS EXPECTED? Dell dropped -$1 in
after hours and Nasdaq futures were down -4.50 in early 
trading. This is of course temporary and tomorrow is another
story. With the extreme bullishness exhibited today I would
be surprised if the "business spending has stabilized" comment
did not fuel some more gains. 

Bad news equaled good news again. The bad news was that retail
sales were flat for October. This was also good news because 
the bottom did not fall out as many analysts had expected. 
Autos were the major cause of the flat line as the biggest
decrease in sales. Without the auto anchor consumer sales
actually grew +0.7% with winter clothing leading the charge. 
Adding to this "bullish" news was a minor drop in initial
jobless claims of -8,000. The markets roared off at the open
and you would have thought the total jobless claims were 8,000.
The key number was the +89,000 increase in continuing claims, 
which indicates the number of people out of work is still 
growing. Also, the weekly number, which got so much positive
press, was not even a complete number. The Veteran's Day 
holiday caused some data to be left out and this number will
be revised next week. There was also no allowance for the 
increase in temporary holiday jobs causing seasonal dips in
the jobless claims. The bottom line again was that traders
wanted an excuse to buy stocks and this was the best one
available. 

Remember it was just yesterday that Greenspan said there 
were "no signs of appreciable vigor" in the economy and 
warned we were in a "soft spot". That soft spot hit Sprint, 
which announced another -1,600 job cuts and Lehman Brothers, 
which announced -500 cuts after the close. They said their 
chief investment strategist Jeffery Applegate was also fired. 

Economics for tomorrow include Business Inventories, PPI, 
Industrial Production, Capacity Utilization and Michigan 
Sentiment. The Industrial Production and Sentiment are going 
to be the most important. The markets ran up to stop just
under resistance once again and the internal market indicators
are showing very overbought conditions. The Dow has strong 
resistance at 8550 and closed at 8541. Nasdaq at 1425 and 
closed at 1410. The SPX/OEX are both within a couple points 
of critical resistance levels. With option expiration tomorrow 
there is a good chance we will see some pinning at critical 
levels like OEX 460, SPX 900, Nasdaq 1400, DOW 8500. The 
exception to this forecast would be a breakout based on the 
Dell earnings, which would make no sense other than some 
positive sentiment since it is a Dell only story. A breakout 
over those levels mentioned above could generate significant 
short covering.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

The Third Friday 
By John Seckinger
jseckinger@OptionInvestor.com

Equity options technically expire Saturday immediately following 
the third Friday of the expiration month; therefore, all eyes 
should be focused on the S&P tomorrow and how closely it 
gravitates around the 900 level.  Note:  Options on cash indices 
expired on Thursday. 

Thursday, November 14th at 4:15 P.M. 

Contract          Net Change     High        Low        Volume    

ES02Z     902.75    +17.00      905.75      881.25      621,610
YM02Z    8518.00    +93.00     8546.00     8390.00       21,538
NQ02Z    1051.50    +35.00     1066.50     1002.00      265,473

ES02Z  =  E-mini SP500 futures    
YM02Z  =  E-mini Dow $5 futures    
NQ02Z  =  E-mini NDX 100 futures     

Note:  The 02Z suffix stands for 2002, December, and will change 
as the exchanges shift the contract month.  The contract months 
are March, June, September, and December.  The volume stats are 
from Q-charts.  

Making Headlines:  Initial claims fell 8k to 388 (analysts 
expecting 396k), while October Retail Sales (ex-autos) increased 
0.7% versus expectations for a 0.3% increase.  Also, HSBC 
announced plans to acquire Household Intl. for $14 billion 
dollars, or $30 a share.  Shares of HI closed at 27.50.  In other 
news, Argentina announced that it is going to default on payments 
to the World Bank.  Additionally, shares of Honeywell (HON) came 
under pressure following a downgrade amid asbestos concerns.  

Wednesday’s Potential Catalyst(s): Reaction to DELL’s earnings 
(came in-line at 0.21), as well as October PPI (8:30 a.m.), 
Industrial Production (9:15 a.m.), and November Michigan 
Sentiment figures (expectations at 82 versus 80.6 in October).

Notes:  The bond market collapsed on Thursday, falling over 2 
full points (64/32) and giving equities an underpinning bid for 
the entire session.  It did seem as though some good profit 
taking would enter stocks; however, it never truly materialized.  
A stronger dollar also played a role in the enthusiasm within the 
general equity market.  Most futures markets began the session 
gapping above solid resistance levels, with some (ES) testing 
levels just underneath these ‘now support’ levels before trending 
higher throughout the session.  In other news, there certainly 
was a lot of talk about the potential H&S formation within all 
major indices.  

=================================================================

Longer Term View, S&P 500

Let us begin with a weekly chart of the S&P 500 and establish a long-
range projection.  If the index decides to ‘pin’ the 900 area on Friday 
as options expire, sentiment will have changed from bearish (earlier in 
the week, when the index was below 886.86 – blue line) to more neutral 
levels.  With that said, a weekly close below 886.86 should be viewed 
as an opportunity for intermediate traders to short the ES02Z contract 
with the expectation that the SPX will trade down to 842.  That is the 
bearish scenario.

The bullish scenario still requires a few things to fall into place.  
One is for the index to remain above 900 and settle above it 22 Weekly 
Moving Average, not shown, currently at 914.46.  A close above the 22 
WMA should be the catalyst for a test of the 38.2% retracement area at 
923.  If the index closes above 923, intermediate traders should then 
expect a move above the upper bearish red trend line (currently at 
950).  This ‘laddered’ bullish scenario will require a trailing stop 
just below the aforementioned areas.  A bit tighter than necessary for 
long-range traders; however, the current geopolitical risk makes the 
trading environment a bit riskier.  Therefore, it makes sense to err on 
the side of caution.  

Chart of SPX, Weekly 


 

Getting to a swing trader’s mentality, a 60-minute chart of the SPX 
shows a “zone of resistance” from 907-910, and traders keying off the 
SPX to close near 900 on Friday could use this level to place a 
potential short position.  Stops should be placed at 915, since there 
is not much resistance from roughly 914 to 925.66.  If the SPX index 
falls under the 899.37 pivot, look for a move to 894 before buyers step 
in.  This support area will most likely line up with the bearish trend 
line from June.  It appears the most optimistic bearish opportunity on 
Friday is a move to 886.68, and that could be played once 892 is 
penetrated on good volume.  

Chart of SPX, 60-minute


 

A 5-minute chart of the ES02Z contract shows a short-term regression 
channel containing prices relatively well during trading on Thursday.  
Furthermore, the mid-regression line (from a daily chart) bisected 
prices near the highs of the session.  Because of option expiration, I 
would key off the cash market pretty heavily on Friday when initiating 
positions.  Then turn to the ES02Z market for the exit.  With that 
said, the SPX contract at 907 should line up nicely with the mid-
regression channel.  Therefore, a potential trade would be to Go SHORT 
ES02Z contract at 905 (or 899 if market opens lower) with at stop at 
910 (or 904).  The target would be 895 and 890, respectively.  

Chart of ES02Z, 5-minute


 

Turning to the NQ02Z contract, a 120-minute chart seems to capture 
sentiment pretty well for the Nasdaq-100 Index.  With the market under 
resistance at 1058, look for a potential move to 1023.50 and then the 
upward trending blue line (currently at 995).  The blue line would be 
the best-case scenario.  I would be more inclined to play this market 
responsively (sell resistance, buy support) than the ES contract; 
therefore, a potential trade would be to Go LONG at 1023 with an 
objective of 1050 and stop at 1014.  If the market rallies, look to Go 
SHORT at 1080 with a target of 1060 and stop at 1090.  

Chart of NQ02Z, 120-minute


 

Most likely, technicians are going to be focusing on a possible H&S 
formation in the Dow and the likely drawing of the left shoulder near 
8560.  If prices continue to rise above 8550-60 area, the major 
regression channel comes in at 8670 and should temporarily halt the 
enthusiasm.  On the downside, a move below the lower channel of the 
shorter regression channel (upward trending) at 8485 will most likely 
get new shorts involved and buyers stepping to the sidelines until 
either 8400 or 8331 (horizontal blue line).  .  

Chart of Dow Jones, Daily 


 

Taking things to a more micro level, the YM02Z contract shows support 
at 8505 and below at 8492.  If prices move below 8492, a potential 
trade would be to Go SHORT YM02Z contract at 8485 with a target of 8437 
and stop of 8525.  An optimistic objective for bears on Friday would be 
for a test of 8405, which would become our eventual target if the 
market doesn’t bounce from 8437.  If the YM contract finds a bid, a 
possible play would be to Go LONG at 8565 with a target of 8670 and 
stop at 8520.  Note:  Resistance will definitely be felt at 8600, so 
re-evaluate market conditions once reached.  

Chart of YM02Z, 3-minute


 

Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com 


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

Not as bad, gets better than expected response

A bear has got to be raking the bark from trees as October retail 
sales came in at unchanged, but was better than the economists 
had expected.  That news, combined with weekly jobless claims of 
388K, which was also better than the forecasted 396K and a four-
week average falling below 400K to 397K got a better than 
expected response from the market as investors pushed stocks back 
near their recent recovery highs.

The move higher in equities was helped along not only from angry 
bears covering on the "not as bad as expected" news, but also by 
a fresh round of cash coming out of Treasuries as the 2, 5, 10 
and 30-year Treasury bonds all found selling, with the longer-
dated 30-year December futures (us02z) 111'07 -1.63% falling 
sharply as YIELD ($TYX.X) 4.926% jumped sharply back above its 
50-day SMA, which bearish technicians had probably looked to 
begin serving as resistance.

The benchmark 10-year also found a strong round of selling as its 
YIELD ($TNX.X) 4.021% jumped in similar manner and above its 50-
day SMA, to close just under a starting to round flat 21-day SMA.  
Near-term, this may be the bond YIELD that gets some technical 
attention from stock and bond traders should further selling take 
place in Treasuries and have this benchmark bond breaking higher 
above the 21-day SMA at 40.35, or 4.035%.

As crazy as it may sound or seem to you and I, the floor traders 
in equities will make buy/sell decisions as the bond market 
dictates, while the same is true for the bond traders themselves.

One thing I did tonight at the close is quickly "click through" 
the major indexes and multiple sector charts, looking for an 
index or sector that had been able to break above its recent 
October highs.  Looking for some type of breakout to hint that 
the MARKET was willing to push at least on group to upside 
ground.

While I was unable to discover these technical, its worth noting 
that the Wireless Telecom Sector (YLS.X) 52.34 +4.8% did close at 
a new relative high, just above its longer-term 200-day SMA, but 
just shy of its November 4th relative high of 52.86.

Wireless Telecom Sector Chart - Daily Interval


 

Wireless Telecom stocks made a new relative closing high today, 
which came just above the trending lower 200-day SMA.  Past moves 
above the 200-day have been short-lived and sharply turned lower, 
but with some renewed selling in Treasuries, this rather volatile 
group of stocks, where 7-10% swings in a day are not uncommon 
looks to be a group that wants to push higher.  A sustained move 
above the 200-day SMA would be DIVERGENCE from the past and hints 
that bulls are very aggressive and willing to take on risk.  A 
move higher may also hint that bears are washed out and ready to 
call it quits.  The rising 21-day SMA would be the bullish 
trader's trend, with a stop just under this trend of $45.76.  It 
a group of momentum, and right now the momentum looks to be 
building on the upside.  Sector components (AETH, AWE, CCI, CHL, 
DT, ERICY, LU, MOT, NOK, NT, NXTL, PALMD, PCS, QCOM, RFMD, TLAB, 
USM, VOD, VZ, WWCA).

In today's 01:00 EST Update, I showed a "cleaned up" chart of the 
Dow Industrials and pointed out a POTENTIAL head/shoulder top 
with left shoulder at 8,560.  In past commentary here, I've shown 
the Dow chart with horizontal resistance at 8,550, which a trade 
at that 8,550 level would have the Dow's 50-point box point and 
figure chart giving a "buy signal" and negating the current 
bearish count of 7,850.  

Contrary to some subscriber e-mail, I'm NOT an eternal bear.  
It's my job to point out POTENTIAL technicals regardless of 
bullish/bearish nature, to help all traders understand and better 
assess trade risk.  It's hasn't been all that long ago, we noted 
similar technicals in the Dow.  

Dow Industrials Chart - Daily Interval


 

It was back in August-September that many of the indexes showed 
head and shoulders tops and breaks of neckline.  All we're doing 
currently is noting similarity and exercising some caution and 
not getting to skewed on the bullish side.  However, it is 
notable that on September 3rd, the NDX bullish % reversed lower, 
the next day, the OEX bullish % reversed lower, the next day the 
SPX and Dow bullish % charts reversed lower.  Currently, the 
market internals are showing strength, not weakness and should 
help the Dow break above 8,560 and make a rally attempt at 8,765 
and perhaps 9,000.

Today's action saw the Dow Industrials Bullish % ($BPINDU) see a 
net gain of 1 stock to a point and figure buy signal and the 
bullish % grows to 66.67%.  In May of 2001, the Dow bullish % 
reached 80% before falling to 18% by September of that year 
(terrorist attacks helped the decline).  Then in March of this 
year, the Dow bullish % reached a high of 76% before reversing 
lower to 3.33% this past July.  The bullish % can always go as 
high as 100%, but I'd think anything close to 9,000 is formidable 
resistance, not just from a technical standpoint, but RISK 
standpoint.

S&P 500 Index Chart - Daily Interval


 

Today's boost from the S&P Retail Index (RLX.X) 290.29 +2.95% and 
Retail HOLDRS (AMEX:RTH) $75.25 +3.36% slightly outpaced the SPX 
gains.  SPX and even OEX bulls would like to see some follow 
through from both these groups tomorrow and over the next coupe 
of weeks to show some conviction by bulls.  The Retail HOLDRS 
closed right on their 21-day SMA, but just under their 50-day SMA 
of $75.65.  MACD on the Retail HOLDRS chart (-0.629) is ever so 
close to crossing above its Signal (-0.476), but most likely 
takes above its 50-day SMA to get that more bullish signal.

Today's action saw the S&P 500 Bullish % ($BPSPX) gaining 1.4% or 
seeing a net gain of 7 stocks to new buy signals.  This had the 
SPX bullish % recovering some recent weakness to the 54.6% level, 
but still a little shy of last Wednesday's best reading of 57.6%.

While bulls got a bullish response to the consumer-related 
economic data, there's no time to rest.  For the consumer to show 
strength, the consumer needs jobs.  To create jobs, that's where 
a bull wants to see a DECLINE in business inventories (then they 
need to be replenished) and a RISE in industrial production.  I 
don't think the capacity utilization reading will be that closely 
watched, but bulls wouldn't mind a RISE in that number, which 
would most likely come from a RISE in industrial production.

S&P 100 Index Chart - Daily Interval


 

There may still be some bears that held into the close that are 
holding out for tomorrow's economic data and the potential 
reverse head and shoulders pattern with left shoulder at 460.84.  
However, a bullish response to economic data above 465 should see 
a nice move higher and challenge of the recent highs.  It's been 
tough for indexes like the SPX and OEX to make big gains above 
their Bollinger Bands, but if we were to see another strong round 
of selling from Treasuries, then relative high of 472 by 
tomorrow's close isn't out of the question.  Negative response 
would still have a trader looking for support above 440.

Today's action saw the S&P 100 bullish % ($BPOEX) find a net gain 
of 3 stocks to point and figure buy signals as the bullish % 
grows to 64% bullish.  Still some room to the 70% and more 
"overbought" levels.  Internals confirming the OEX chart.  
March's high reading was 78%.

NASDAQ-100 Index Chart - Daily Interval


 

Fiber Optic (FOP.X) +8.7%, Semiconductor (SOX.X) +7.9%, 
Networking (NWX.X) 131 +6.9%, Internet (INX.X) +6% and Software 
(GSO.X) +4.21% all bolstered the NASDAQ-100 higher today.  Right 
now, I'm not looking short/put with Treasuries seeing selling.  I 
had a "tough enough" time putting the QQQ at NDX 1,045 last 
Wednesday and getting a move to 1,001 when Treasuries found 
buying, so I'm not about to try and launch a short here with 
Treasuries seeing selling.  Could get a four session run up along 
a rising upper Bollinger Band like that found in late August with 
1,100 a target on break above horizontal resistance of 1,075 
(thick red line).

Hmmmm... today's action saw a net loss of 1 stock to a sell 
signal in the NASDAQ-100 bullish % ($BPNDX).  That's right.  I 
remember that Intuit (NASDAQ:INTU) $49.24 -6.8% generated that 
sell signal.  However, I noted in the market monitor that the 
tock might find support at bullish support trend and rising 50-
day SMA of 48.  The stock held that level today.  It's a fairly 
meaningful stock considering price and perhaps one to monitor if 
an NDX trader.  It's been one of the longer-term strong stocks in 
the NDX and a NDX/QQQ bull would want to see some firming and 
hold of upward trending 50-day SMA.

Jeff Bailey


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

In a Pinch
by Steve Price

Let's see, Applied Materials (AMAT) predicts a 20% revenue 
decline in the first quarter, and the semiconductor stocks jump 
7%.  Retail sales were flat in October and the sector rises 3%.  
Confused?  Bulls looking to get into the market can certainly 
interpret data any way they want. And if they are going to keep 
buying, in spite of data that does not look promising, then the 
bears should step back and get out of the way.   The Dow close 
over 8500 should throw up a big red flag, although 8550 is also 
strong resistance. 

I talked about the possibility of another head and shoulders 
formation taking place in the Dow and S&P 500 several days ago, 
and in order to get that formation we needed a bounce to form the 
right shoulder.   The top of the left shoulder is 8550, so we are 
not in all-out bullish territory just yet. In fact, we could 
rally all the way to below 8800 in the Dow (925 SPX), and still 
see significant downside risk.  If we do roll over below 8550, 
then look for a neckline break around 8300 to land us back below 
8000 (downside measuring objective of 7750).  The current bearish 
vertical count on the Dow's point and figure chart is 7850. Of 
course, that's the bear's view of the current market situation. 

Bulls will point to the higher low on the recent pullback and 
rebound back above 8500. While a 50-point range seems a little 
tight to draw conclusions from, this 50-point range contains two 
significant levels.  A breakout above 8550 should give the buyers 
fuel and we could see a run back to 8800.  A drop back below 8500 
will help form the aforementioned right shoulder.

There was some good news this morning.  Initial jobless claims 
for the week ended November 9 dropped 8,000 to 388,000.  More 
importantly, the 4-week moving average fell below the 400,000 
barometer most analysts use as an indication for a weakening or 
improving economy.  The median home price in the U.S. also rose 
7.2% to $161,800, indicating that buyers are still outstripping 
supply.  

After the bell, Dell released earnings that met expectations and 
said that next quarter should see an increase in revenue of 20% 
year over year. It pegged revenue at $9.7 billion, which was 
actually slightly below some expectations of $9.9 billion.  When 
asked if the company had seen an increase in IT budgets, CEO 
Michael Dell said there had been more of a re-allocation than an 
increase. The stock traded down 0.90 after hours to $30.06.

Gap Stores also reported after the bell and beat expectations by 
a penny.  The retailer, which also owns Banana Republic and Old 
Navy, said that it would remain cautious going forward, though, 
until its business shows consistent results.  It also said capex 
for the full year 2002 would be down in the low $300 million 
range, from previous estimates of $360 million.

Tomorrow's economic plate includes PPI, business inventories and 
the preliminary University of Michigan Consumer Sentiment report.  
We should definitely get a feel for which direction the rally is 
headed.  We haven't seen less than a 100-point intraday range in 
the Dow since the middle of September, so the chances of trading 
between 8500 and 8550 are fairly remote.   

Dow 8537.13 is where we ended last week, so for all the triple 
digit movement, we are up only 5 Dow points for the week. We are 
up 10 in the SPX.  The Nasdaq is the big winner so far, up 52.24, 
after a gain of 50.18 today. With the COMP at 1411.52, a rally 
could once again test the August high of 1426.  If we break that 
level, then it doesn't make sense to lean short, regardless of 
the action in the rest of the market.  However, if we fail there, 
and at Dow 8500 (and SPX 900), then it appears that we can ride 
the range back down to 8300 for the short term and possibly much 
lower with a move under 8300. 


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7286
Current     :  8542

Moving Averages:
(Simple)

 10-dma: 8534
 50-dma: 8173
200-dma: 9237



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  775
Current     :  904

Moving Averages:
(Simple)

 10-dma:  899
 50-dma:  867
200-dma:  992



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1057

Moving Averages:
(Simple)

 10-dma: 1026
 50-dma:  928
200-dma: 1140




-----------------------------------------------------------------
The Semiconductor Index (SOX.X):  AMAT predicts a 20% revenue 
decline and says it sees no turnaround anytime soon in the chip 
sector - and the SOX jumps 8% to 319.13.  If you listened only to 
the comments coming out of the sector, and viewed only the IT 
spending trends, you would short every chip stock on the board.  
If you looked only at the charts and completely ignored forecasts 
and comments about the industry, you'd be buying.  Therefore, I 
am still struggling with jumping on board long to a sector that 
has no visible turnaround. However, shorting the sector, given 
the current buying and blast through resistance at 300 and 310, 
also seems foolish.  I'm going to close short positions here 
until I see an appreciable downtrend, however I haven't quite 
convinced myself to hang on for a ride up yet, either. 

52-week High: 657
52-week Low : 214
Current     : 319

Moving Averages:
(Simple)

 10-dma: 308
 50-dma: 270
200-dma: 417
------------------------------------------------------------------

Market Volatility

All of a sudden, everything is alright.  A Dow rally over 8500 
and the VIX drops into the low 30s.  I wonder what will happen if 
we end up testing 8400 again.  Actually, the big firms don't seem 
too worried about that possibility, since you don't get a 3.68 
drop in the VIX without some institutional selling. If we 
continue upward tomorrow, we could see the VIX testing 30 on 
expiration Friday, as firms who sold November premium buy it back 
in for pennies and roll out to short December positions.  
November is no longer included in the VIX calculation, so a big 
drop in the December at the money premium levels could possibly 
even lead the VIX below 30. 


CBOE Market Volatility Index (VIX) = 32.60 –3.68
Nasdaq-100 Volatility Index  (VXN) = 52.46 –2.00

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.58        884,857       514,447
Equity Only    0.50        567,203       284,752
OEX            1.07         54,009        57,729
QQQ            0.68         73,417        50,174


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

Bullish Percent Data

           Current   Change   Status
NYSE          40      - 1     Bull Confirmed
NASDAQ-100    66      - 1     Bull Confirmed
Dow Indust.   67      + 4     Bull Confirmed
S&P 500       55      + 0     Bull Alert
S&P 100       64      + 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   1.34
10-Day Arms Index  1.20
21-Day Arms Index  1.10
55-Day Arms Index  1.25


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       2120           634
NASDAQ     2219          1019

        New Highs      New Lows
NYSE         22              43
NASDAQ       55              52

        Volume (in millions)
NYSE     1,796
NASDAQ   1,746


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

Commitments Of Traders Report: 11/05/02

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

Commercials added 4,000 contracts to the short side, while 
increasing longs by 1,000.  Small trader added 1,000 to the long 
side, while increasing short positions by only 500 contracts.


Commercials   Long      Short      Net     % Of OI 
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%)
11/05/02      438,546   472,384   (33,838)   (3.7%)

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
10/15/02      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%
11/05/02      138,604    76,032    65,572     30.5%

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 added 2,000 long contracts while adding 1,000 to the 
short side.  Small traders added 30%, or 3,000 contracts to the 
long side, while increasing shorts by a similar amount.  


Commercials   Long      Short      Net     % of OI 
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%)
11/05/02       49,128     56,121    (6,993) ( 6.6%)

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
10/15/02       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%
11/05/02       13,355    12,903       452     1.7%

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 added to both sides, increasing longs by 700 and 
shorts by 2,300.  Small traders reduced long positions slightly, 
but dropped 2,300 from their short side, for a significant 
reduction in the overall short position. 


Commercials   Long      Short      Net     % of OI
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%
11/05/02       22,533    15,687    6,846      17.9%

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
10/15/02        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%)
11/05/02        5,089     8,735    (3,646)   (26.4%)

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

William Fouse & Thomas Loeb: Vanguard Asset Allocation Fund (VAAPX)

William Fouse and Thomas Loeb are co-chairmen of Mellon Capital 
Management, the firm they co-founded in 1983 that has served as 
investment adviser for Vanguard Asset Allocation Fund since its 
inception in November 1988.  The two principals responsible for 
managing the fund's investments bring over 80 years of combined 
investment experience.  

Fouse, a CFA, started in investment management in 1953, and has 
managed the fund since 1988.  He is the former chief investment 
officer of Wells Fargo Investment Advisers.  Fouse designed the 
asset-allocation model used by Mellon Capital Management today.   

Loeb has been in investment management since 1970, and has been 
fund adviser since 1988.     He has more than 30 years of industry 
experience, working with both Mellon Capital and Wells Fargo.

The $6.6 billion Vanguard Asset Allocation Fund is offered on a 
no-load basis through the leading brokerage fund networks; some 
of which offer the fund on a no-load NTF basis.  The fund has a 
minimum initial investment of $3000 for regular accounts ($1000 
for IRAs).  For more information or a fund prospectus, call the 
Vanguard Funds at 800-662-7447 or logon to the www.vanguard.com 
website.

Fund Overview

Fouse and Loeb seek to provide long-term total return that is 
commensurate with an investment in an all-stock fund but with 
less risk.  The two managers use a computer model to evaluate 
expected return and risk of stocks, bonds and cash securities, 
and to make changes to the fund's allocation, as expectations 
shift.

Fouse's asset-allocation model is designed to vary the fund's 
allocation based on the relative attractiveness of each asset 
class, with no limitation as to the amount of assets in each 
class.  Common stocks are evaluated using a dividend-discount 
model that evaluates the projected worth of their "dividends."  
The bond portion normally consists of long-term Treasuries and 
government agency securities.

Portfolio data for Vanguard Asset Allocation Fund is a little 
old, but still provides a snapshot of what the fund typically 
does in terms of asset allocation.  According to Morningstar, 
Fouse and Loeb had 52.9% of net assets invested in stocks at 
March 31, 2002, with only 1.1% of stocks invested in foreign 
issues.  The bond portion represented 28.6% of assets, while 
money market securities accounted for another 18.4% of assets.    

Fouse and Loeb had the fund's stock portion invested mainly in 
the giant- and large-cap sectors, for an average market cap of 
$46.4 billion at March 31, 2002, significantly higher than the 
category average of $29.3 billion per Morningstar.  The fund's 
investment valuations were similar to category averages, for a 
large-cap blend style overall.

At 0.44%, the fund's total expense ratio is roughly one third 
that of the average domestic hybrid fund, giving it a sizeable 
expense advantage over other hybrid products now on the market.  
That helps the fund's performance relative to its competition.

Fund Performance

Morningstar's return ratings vary depending on which trailing 
time period you're looking at.  The Vanguard Asset Allocation 
Fund's YTD loss of 16.1% was 6.1% better than the U.S. equity 
market, as measured by the S&P 500 index, ranking in the 86th 
percentile of the domestic hybrid fund group.




 

For the trailing 3-year period through November 13, 2002, the 
fund declined at an annual-equivalent rate of 5.9%, some 7.1% 
better than the S&P 500 index, ranking in the 71st percentile 
within the Morningstar domestic hybrid category.  Because the 
fund's co-managers produce above average risk relative to the 
category, according to Morningstar, Vanguard Asset Allocation 
Fund is rated only 2 stars (below average) for the trailing 3-
year period.  

However, Fouse and Loeb have earned better returns on a risk-
adjusted basis for longer time periods.  For the last 5 years, 
Vanguard Asset Allocation Fund had an average total return of 
2.9%, beating the market (S&P 500 index) by an average of 2.3%, 
ranking in the 38th percentile of the domestic hybrid category 
per Morningstar.  Morningstar's 3-star overall rating for the 
trailing 5-year period through November 13, 2002 reflects the 
fund's above-average volatility compared to other U.S. hybrids.

While shorter-term relative performance has been below average, 
the fund's 10-year track record still reflects what Fouse/Loeb 
are capable of over time compared to other U.S. hybrid managers.  
For the trailing 10-year period through October 31, 2002, Fouse 
and Loeb produced an annualized total return of 9.7%, just 0.1% 
off the market as measured by the S&P 500 index and good enough 
for a top quintile (14th percentile) ranking in the U.S. hybrid 
category.  The fund's 10-year rating per Morningstar is 4 stars, 
reflecting above-average return and risk within the U.S. hybrid 
fund group. 

Below is a summary of the fund's 9.7% average total return over 
the past decade compared to different Morningstar fund averages.

 10-Year Annualized Return (as of October 31, 2002):
 Vanguard Asset Allocation (VAAPX) +9.7%
 S&P 500 Index: +9.9%%
 Domestic Hybrid Average: +7.3%
 U.S. Stock Fund Average: +8.4%

The fact that the average U.S. equity fund lagged the S&P 500 
index by an average of 1.5% per year for the past 10 years is 
another issue in and of itself.  However, Fouse and Loeb have 
gotten the job done for shareholders, generating returns that 
have been commensurate with the broad stock market ("S&P 500") 
and significantly better than both the average full-stock and 
partial-equity (hybrid) portfolio.

So while Fouse and Loeb have incurred above-average volatility 
for shareholders, the returns that they have produced over the 
long run are superior relative to their category peers, not to 
mention the average U.S. stock fund.  The product has achieved 
its goal of producing returns commensurate with the U.S. stock 
fund average, but with less risk.  Volatility is above average 
versus category peers, but still below that of the average U.S. 
stock fund tracked by Morningstar.

Conclusion

While Fouse and Loeb whiff from time to time, they have banged 
enough doubles and triples through the years to produce "above 
average" returns over time for shareholders.  Hybrid investors 
looking for an asset allocation fund that's capable of earning 
full-equity fund returns with less risk than a 100% stock fund, 
and can accept the associated above-average volatility, have a 
compelling hybrid option here.  

Morningstar may have soured a little bit on Fouse, Loeb and the 
Vanguard Asset Allocation Fund in recent times, but I'm still a 
believer in these investment industry vets and their allocation 
model, especially if you have a long-term horizon (of 5+ years).

Note that the Vanguard LifeStrategy portfolios, which invest in 
various Vanguard index funds to achieve the desired risk/reward 
tradeoff, allocate a portion of their assets to Vanguard Asset 
Allocation Fund, using Fouse's mathematical model to provide a 
"swing" factor.  Mutual investors can use the fund for the same 
purpose, as a swing factor in your stock/bond portfolio.  A 10% 
allocation to Vanguard Asset Allocation Fund would achieve that 
purpose.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

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The markets roared off at the open and then failed to sell off at 
the close. This was a definite change in the trend and could 
signal new trading ranges ahead. Before you start backing up the 
truck take a look at the overhead resistance levels and calculate 
your risk reward.


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The Option Investor Newsletter                 Thursday 11-14-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: None
Dropped Puts: Low, RTH, IBM, LEH
Daily Results
Call Play Updates: CEPH, FRX
New Calls Plays: HOV
Put Play Updates: MBI, ABK, GE, PG
New Put Plays: ABC


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

None


PUTS:
*****

LOW $41.89 +1.59 (+2.42 for the week) Lowe's slid from our entry 
point of $41.73, down to a low of  $38.40 on Monday.  The stock 
followed other retailers downward, as concerns seeped out of the 
sector that the shortened holiday season and low consumer 
confidence numbers could endanger sales numbers heading into the 
busiest time of the year for the industry.  A shift from home 
improvement spending to gift spending also looked to cut into 
Lowe's profits as we headed deeper into winter. Better than 
expected retail sales numbers lifted all boats today, along with 
Target's earnings surprise. With three straight days of upward 
movement, the downtrend in LOW appears to be on hold, and we will 
close the play approximately where we entered.  Traders wishing 
to hold on can look to action at the 50-dma of $41.95 as an 
additional gauge of a break in resistance. 

---

RTH $75.25 +2.45 (+2.75 for the week) The retail holders reversed 
their slide the last two days, after dropping as low as $70.95 on 
Monday.  Although better than expected earnings from Wal-Mart 
were accompanied by guidance at the low end of estimates for next 
quarter, investors apparently had faith restored with the current 
quarter's surprise.  Today's retail sales data, which showed flat 
sales, also came in better than expected and gave the sector 
another boost. We had lowered our stop on the play, entered at 
$74.60, to $75 and were stopped out on the close of $75.25.  
Traders wishing to give the play more time can use the 50-dma of 
$75.65 as the next level of resistance by which to measure the 
current bounce. If tomorrow's consumer sentiment number 
disappoints, we could still see a failure here.

---

IBM $80.72 +1.37 (+3.13) With the broad markets once again
ignoring bad news, Thursday's session had IBM trading up all
day.  Yesterday's analyst meeting didn't reveal any hidden
skeletons and the buyers were back in force today, lifting the
stock back above the $80 level.  While we like the fact that the
stock couldn't get back over the 200-dma, there's no ignoring the
fact that our stop was violated.  We're dropping the play tonight,
as there is no sense arguing with the market.  Look for IBM to
fall back near the $80 level tomorrow as market makers strive to
pin the stock to an even strike on expiration Friday.

---

LEH $56.74 +2.30 (+2.24) Wrong!  While it looked like LEH was
finally going to break down earlier this week, the action of the
past 2 days was enough to challenge the conviction of even the
staunchest bear.  The Brokerage sector reversed from major support
on Wednesday and staged an impressive 5% rebound on Thursday.
That was enough to propel LEH right back to its descending
trendline (now at $57), and based on the increased volume, a
breakout looks like the likely outcome.  Rather than get run over
by stampeding bulls, we're pulling the plug on LEH tonight.  If
holding open positions, look for an pullback from resistance on
Friday to provide for a more attractive exit point.


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

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

CALLS              Mon    Tue    Wed   Thu

CEPH     58.41    1.65   -0.70 -1.71  1.31  Climbing quickly 
FRX     105.30    0.05    0.92 –0.50  4.05  All-time high
HOV      33.86   -0.66   -0.85  0.48  2.06  New, 200-dma rebound


PUTS               

ABC     63.80     -1.38   0.03 –0.16 –2.63  New, gaining speed 
ABK     55.98      0.09  -0.11 –1.03 –0.64  No strength
IBM     80.72     -0.28   1.86 –0.15  1.37  Drop, stopped
LEH     56.74     -0.20   0.16 –0.03  2.30  Drop, big bounce
LOW     41.89     -0.75   0.83  0.75  1.59  Drop, sector rebound
RTH     75.25     -1.35   0.85  0.85  2.45  Drop, stopped
MBI     39.71     -0.33  -0.88 –2.75  1.21  failure at $40


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

CEPH $58.41 +1.31 (+3.86 for the week) Cephalon has continued its 
run, with very little pullback.  It has continued to set a series 
of higher highs and higher lows, even during broader market 
intraday pullbacks. The recent comments from the CEO that, " The 
results and the strong underlying demand we are experiencing for 
all of our products have allowed us to increase guidance for 
2002," have kept investors bullish, following a 65% product sales 
increase in year-over-year third quarter sales.  Adams, Harkness, 
which upgraded the stock to "Strong Buy," said the third quarter 
was," an excellent quarter. The second in row they were very, 
very strong on total product sales."  The stock continues to add 
boxes on the point and figure chart, following a triple -top 
breakout at $44.   CEPH is approaching resistance between $59 and 
$60 from back in May of this year and could see a pullback from 
that level.  So far, however, momentum traders have been able to 
enter on breakouts, and new entries can take one of two different 
strategies.  The first would be a pullback from resistance and 
support above a three-box PNF reversal, which would come at $55.  
The second would be a breakout above resistance at either $59, or 
$60 for more conservative traders.   We will raise our stop loss 
on the play to $54, which would signal a break from the rising 
trend and possibly a more pronounced pullback.

---

FRX $105.30 +4.05 (+5.15) After storing up energy for the past
2 weeks, FRX exploded higher on Thursday following news that the
company's Lexapro replacement for its popular Celexa
anti-depressant drug is seeing better acceptance from physicians
than initially expected.  While Lexapro is just a refinement of
the Celexa drug, it is anticipated that it will extend the
company's protection from generic competition, which improves the
stock's long-term prospects.  After trading in the $100-103 area
from the past 2 weeks, FRX blasted through resistance to close
above $105 for the first time.  Accompanying the price breakout
was strong volume throughout the day.  This combined with bullish
Stochastics divergence suggests that FRX has more room to run.
But given the strong move on Thursday, we don't want to chase it
higher at this point.  If looking for a new entry point, look for
a pullback near the $103 area and a rebound, which would confirm
that old resistance is new support.  Raise stops to $102, just
below today's intraday low.


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

HOV - Hovanian Enterprises - $33.86 +2.06 (+1.16 for the week)

Company Summary:
Hovnanian Enterprises, Inc. founded in 1959, is headquartered in 
Red Bank, New Jersey. The Company is one of the nation's largest 
homebuilders with operations in California, Maryland, New Jersey, 
New York, North Carolina, Pennsylvania, Texas and Virginia. The 
Company's homes are marketed and sold under the trade names K. 
Hovnanian, Washington Homes, Goodman Homes, Matzel & Mumford, 
Diamond Homes, Westminster Homes, Fortis Homes and Forecast 
Homes. As the developer of K. Hovnanian's Four Seasons 
communities, the Company is also one of the nation's largest 
builders of active adult homes. (source: company release)

Why We Like It:
The homebuilding sector has been extremely volatile lately.  
While mortgage applications have shown big declines, followed by 
big bounces, it appears the recent sell-off in the sector, after 
a downgrade by CSFB, has reached another bounce point.  Hovanian 
is one of the stronger homebuilders, with astounding increases in 
orders the last couple of months.  A 94% increase in September 
new home orders was followed by a 60% increase in October.  The 
company released earnings in September, at which time it stated 
that, "Hovnanian achieved all-time record highs for any third 
quarter in the Company's history in home deliveries, net 
contracts, sales backlog, revenues and net earnings."  HOV saw 
earnings rise 78% in the third quarter from Q3 2001 and topped 
analyst expectations.  The company raised guidance for both 2002 
and 2003, due to strong sales predictions. Given the recent drop 
in interest rates, a new round of mortgage financing could be on 
the horizon, further increasing the current large backlog of 
homes waiting to be built in 2003. A 7.2% increase in median home 
prices in the third quarter should help the bottom line, as well.
 
The stock has experienced pullbacks to its 200-dma, which has 
served as a rising trend line since the middle of July, giving it 
a bounce on each test. The smallest bounce was $5 and the largest 
was $15.  The stock has just bounced from this level again, so 
far tacking on $1.60 from the bounce point of the $31.26 at 
Tuesday's close.  The stock closed on its high of the day, just 
0.14 short of a point and figure reversal into a bullish column 
of "X."  While the 50-dma of $35.72 looms just above the entry 
point of $34, it has failed to provide much resistance or support 
in the past in HOV, indicating it should not be much of a hurdle.  
Our initial target on the play will be $40, where the stock has 
failed on the last three rallies, but a $6 gain will be fine with 
us. New entries should look to enter on a trade of $34, or a 
pullback and bounce above the 200-dma of $30.45.  Place stops at 
$30, which would be the first breakdown below the 200-dma this 
year.

BUY CALL DEC-30 HOV-LF OI=   90 at $5.30 SL=2.70
BUY CALL DEC-35 HOV-LG OI=  328 at $2.15 SL=1.10
BUY CALL FEB-30 HOV-BF OI=  148 at $6.80 SL=3.40
BUY CALL FEB-35 HOV-BG OI=  919 at $3.80 SL=1.90

Average Daily Volume = 754 K



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

MBI $39.71 +1.21 (-2.99 for the week) MBIA dove after its truck 
school loan default exposure hit the airwaves en masse on 
Wednesday.  Salomon Smith Barney defended the drop, saying that 
the loan defaults were old news. While the news actually broke 
last week, and just got added exposure, justifying the "old news" 
statement, it still could cost this bond insurer significant 
dollars.  The stock dropped $2.99 on Wednesday, finishing the day 
at $38.50. Today's bounce took the stock up to $41 temporarily, 
but the stock pulled back below $40 by the end of the day, 
closing at $39.71.  The intraday chart shows the initial surge 
was met with heavy selling, which pushed the stock down for the 
rest of the afternoon, in spite of a broad market rally involving 
both the Dow and Nasdaq. There was a mild rebound attempt at the 
end of the day, but it saw little volume and the trend here 
remains down.  The rebound fell well short of a PnF reversal back 
up, which comes at $42, leaving the stock in its current column 
of "O." That PnF reversal level will serve as our stop loss after 
the big drop.  New entries can look for continued resistance 
under $40 to initiate shorts. Momentum traders can jump on if the 
stock continues back down under yesterday's low of $38.10, using 
a trigger below $38.

---

ABK $55.98 -0.64 (-1.55) Traders looking for weakness have been
well-served by our ABK play over the past couple days.  After
failing to hold above its 50-dma on Tuesday, the stock slid below
the $57 level on Wednesday and then posted another fractional
loss on Thursday.  Today's slide is particularly noteworthy
because of the contrast to the broad market, which saw strong
gains across the board.  ABK is now sitting right on the $56
support level, which is also the top of the October 11th gap.
That could translate into an oversold rebound on Friday, and if
it does, we can look to enter new positions on a rollover below
the $58 level, which now appears to be solid resistance.  The
selling over the past two days has been interesting due to the
fact that it has come on very heavy volume (more than double the
ADV), with the only notable news event being a CSFB downgrade on
Wednesday.  While the vertical count extended on Thursday to $46,
bears need to be cautious here.  The bullish support line is
currently resting at $53, so signs of a rebound in the $53-54
area would be a good signal to harvest gains and wait to re-enter
at a higher level.  Lower stops to $59.

---

GE $24.50 +0.41 (-0.60) Following its sharp drop of the past
week, GE was poised for an oversold rebound and the strength in
the broad market provided the perfect catalyst for that bounce to
take place.  Showing just how weak the stock is, price failed to
capitalize on the initial bounce, spending the remainder of the
day drifting lower.  GE failed to even reach the $25 resistance
level before rolling over, and it is interesting that the stock
actually closed below its opening price, despite the strong broad
market gains.  Although it fell into its opening gap this
afternoon, we're not wild about new entries on further weakness
on Friday due to the proximity of support in the $23.50-24.00
area.  With the artificial price action of expiration Friday, an
attempt to pin price near the $25 level would not be unexpected.
Look to fade any failed rally into the $25-26 area with new
entries in anticipation of a retest of the recent lows next week.
Keep stops set at $27.

---

PG $86.48 +0.68 (-1.21) Left out in the cold again, Consumer
Staples stocks like PG failed to participate in the broad market
rally on Thursday.  While the stock did manage to end the day in
the green, the +0.80% gain was a pale reflection of the 2-3% gain
seen in the broad market.  Even MO, which got slammed earlier in
the week for cautioning that sales were slowing, managed a better
percentage gain than PG on both of the past 2 days.  Traders
looking for an entry point yesterday got a decent one as PG
rallied to and then failed right at the $87 resistance level.
The stock's failure to challenge yesterday's intraday highs today
speaks to the lack of bullish interest for shares of PG.
Additional failed rallies in the $87-88 area look good for new
entries.  If you want to trade a breakdown you'll need to wait
for a volume-backed decline below the $85 before initiating the
trade.  Until we get that breakdown, we're leaving our stop at
$89.


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

ABC – AmerisourceBergen Corporation $63.80 –2.63 (-3.20 this week)

Company Summary:
AmerisourceBergen is a pharmaceutical services company dedicated
solely to the pharmaceutical supply chain.  The company markets
its products and services to hospital systems (hospitals and
acute care facilities), alternate care customers (mail order
facilities, physicians' offices, long-term care institutions and
clinics), independent community pharmacies, and regional
drugstore and food merchandising chains.  ABC also provides
outsourced pharmacies to long-term care and workers' compensation
programs.  ABC perates in two segments: Pharmaceutical
Distribution and PharMerica.  The Pharmaceutical Distribution
division is primarily the company's wholesale and specialty drug
distribution business, and PharMerica is the company's
institutional pharmacy business.

Why We Like It:
Weak stocks really stand out when the broad market rallies, as
the rising tide should lift all the boats.  Stocks that can't
post gains on such a broad-based rally as we saw on Thursday are
clear pockets of weakness that can be exploited when the bears
flex their muscles again.  Shares of ABC haven't had a very good
week.  After plunging below the 200-dma (currently $70.58) last
Thursday, the stock has lost another 10% and judging by the
heavy selling volume today (2.5 times the ADV), the bearish
party is just getting started.  The story is actually somewhat
humorous in light of recent analyst comments.  Following the
heavy selling last Tuesday, Bear Stearns defended the stock
after it slid sharply lower in the wake of some of the statements
released with the company's earnings report.  Those comments
were good for a one-day pop before the stock started back down
the slippery slope.  Good old Bear Stearns was out defending the
stock again today, citing their belief that it was down because
of its removal from BofA's Fresh Money list.  If history repeats,
we ought to get an oversold rebound tomorrow, which we can use
to initiate new positions into this beleaguered Pharmaceutical
stock.  Certainly, the PnF chart doesn't hold any hope for the
bulls, as it has generated a series of Sell signals over the past
few weeks, but we do need to be careful, as it achieved its
bearish price target of $63 on Thursday.  Look for a rally
failure at $66, or possibly as high as $67-68 to provide the next
solid entry point.  Initial stops are in place at $68, as a close
above that level would likely indicate a change of trend.

BUY PUT DEC-65*ABC-XM OI=320 at $4.50 SL=2.75
BUY PUT DEC-60 ABC-XL OI=132 at $2.50 SL=1.00

Average Daily Volume = 1.20 mln



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The Option Investor Newsletter                 Thursday 11-14-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three: 

Play of the Day: CALL - HOV
Traders Corner: Reversal patterns: Rounding Tops & Bottoms
Futures Corner: Regression Analysis for Futures
Options 101: Divergence

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

HOV - Hovanian Enterprises - $33.86 +2.06 (+1.16 for the week)

Company Summary:
Hovnanian Enterprises, Inc. founded in 1959, is headquartered in 
Red Bank, New Jersey. The Company is one of the nation's largest 
homebuilders with operations in California, Maryland, New Jersey, 
New York, North Carolina, Pennsylvania, Texas and Virginia. The 
Company's homes are marketed and sold under the trade names K. 
Hovnanian, Washington Homes, Goodman Homes, Matzel & Mumford, 
Diamond Homes, Westminster Homes, Fortis Homes and Forecast 
Homes. As the developer of K. Hovnanian's Four Seasons 
communities, the Company is also one of the nation's largest 
builders of active adult homes. (source: company release)

Why We Like It:
The homebuilding sector has been extremely volatile lately.  
While mortgage applications have shown big declines, followed by 
big bounces, it appears the recent sell-off in the sector, after 
a downgrade by CSFB, has reached another bounce point.  Hovanian 
is one of the stronger homebuilders, with astounding increases in 
orders the last couple of months.  A 94% increase in September 
new home orders was followed by a 60% increase in October.  The 
company released earnings in September, at which time it stated 
that, "Hovnanian achieved all-time record highs for any third 
quarter in the Company's history in home deliveries, net 
contracts, sales backlog, revenues and net earnings."  HOV saw 
earnings rise 78% in the third quarter from Q3 2001 and topped 
analyst expectations.  The company raised guidance for both 2002 
and 2003, due to strong sales predictions. Given the recent drop 
in interest rates, a new round of mortgage financing could be on 
the horizon, further increasing the current large backlog of 
homes waiting to be built in 2003. A 7.2% increase in median home 
prices in the third quarter should help the bottom line, as well.
 
The stock has experienced pullbacks to its 200-dma, which has 
served as a rising trend line since the middle of July, giving it 
a bounce on each test. The smallest bounce was $5 and the largest 
was $15.  The stock has just bounced from this level again, so 
far tacking on $1.60 from the bounce point of the $31.26 at 
Tuesday's close.  The stock closed on its high of the day, just 
0.14 short of a point and figure reversal into a bullish column 
of "X."  While the 50-dma of $35.72 looms just above the entry 
point of $34, it has failed to provide much resistance or support 
in the past in HOV, indicating it should not be much of a hurdle.  
Our initial target on the play will be $40, where the stock has 
failed on the last three rallies, but a $6 gain will be fine with 
us. New entries should look to enter on a trade of $34, or a 
pullback and bounce above the 200-dma of $30.45.  Place stops at 
$30, which would be the first breakdown below the 200-dma this 
year.

BUY CALL DEC-30 HOV-LF OI=   90 at $5.30 SL=2.70
BUY CALL DEC-35 HOV-LG OI=  328 at $2.15 SL=1.10
BUY CALL FEB-30 HOV-BF OI=  148 at $6.80 SL=3.40
BUY CALL FEB-35 HOV-BG OI=  919 at $3.80 SL=1.90

Average Daily Volume = 754 K



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

Reversal patterns: Rounding Tops & Bottoms
By Leigh Stevens
lstevens@OptionInvestor.com

ROUNDING TOPS AND BOTTOMS - 
I’ve been writing some recent Trader’s Corner’s articles on the 
various technical patterns that prices will trace out in forming 
a top or bottom. Examples include double (and triple) bottoms and 
tops, sharp reversals in the form of a “V” including and “upside” 
down “V’s” when prices spike up to new high and then reverse down 
sharply.  Also included are rectangle tops and bottoms. You can 
peruse some of these recent columns at –
http://www.OptionInvestor.com/indexes/traderscorner.asp 

Rounded or “rounding” tops and rounding bottoms are a pattern 
that I have found to offer one of the better buying or selling 
opportunities when it is seen – it is not the most common pattern 
but a gem when it does occur, in terms of its tendency to precede 
a substantial trend.  A recent example of a rounding formations, 
in this case a rounding bottom is the chart of Corning (GLW) 
below – 



   

The first rule of thumb with a rounding pattern is that the price 
trend often accelerates once there are 2,3 or 4 “touches” that 
form a circular arc and the stock or index begins to move AWAY 
from the arc – this is “thrust” and the rounding pattern seems to 
have plenty of it, once the trend reversal gets going.

Another trading rule of thumb is to buy dips that carry prices 
down toward a circle that represents the line of a rounding 
bottom – conversely, sell rallies that carry prices up toward a 
circle that represents a rounding top: 
 


 


Here is another example and demonstrates yet another tendency 
with this pattern – if prices fall to below the line of this 
circular arc in the case of a rounding bottom, especially on a 
closing basis and by a factor more that has already occurred, 
this is an EXIT point and usually where you can REVERSE to a put 
trade - 



 

This curved line or arc is like a (straight) trendline in this 
respect, only the subsequent move is more likely to be BIG.  

Circular arc type patterns often form over a long-time, although 
you will see this on hourly charts as well. But in terms of the 
big picture, the dynamics of how and why these big rounding tops 
or bottoms form has to do with gradual “accumulation” (buying) or 
gradual “distribution” (selling).  I’ll start with another 
example, then more explanation  –



 

When accumulation or distribution (selling to others) occurs 
gradually in a market by deep pocket investors, particularly 
institutional ones, it can create these types of rounding 
formations. This situation is especially driven by the 
professional types of market participants that Charles Dow found 
to be the early buyers and sellers of equities (and the market) 
as these folks correctly perceive stocks to under or overvalued, 
respectively – 



 

Hey, I bet YOU wish you could have bought IBM at $10-15 at the 
time – note that when the curve of the circle got nearly vertical 
and prices went into a “waterfall” type decline, this was getting 
near to being the “blow off” bottom.

The “smart money” institutional money managers, to use that term, 
will be very moderate in their buying or selling activity so as 
to not drive the price up or down overly much. Nevertheless given 
this added volume – volume precedes price – the stock gradually 
moves either up from the bottom or down from the high: 



 

Because this movement is so gradual and takes place over a 
lengthily period whether that is over many many hours, days, 
weeks of months - the outline traced out on a chart is that of an 
arc or part of circle.  A hand held compass, which is one of the 
most simple hand-held drawing instruments – remember from 
geometry perhaps? - and that can so easily can construct a 
circle, allows the drawing an arc that has multiple touches of 
the lows of a bottom or highs of a top pattern on a printed out 
chart.  

Otherwise, you need a sophisticated graphics or technical 
analysis program that allows drawing of arcs. However, you can 
also visual this type pattern quite well and a little drawing on 
a cocktail napkin will do quite well also – an art practiced by 
Art Cashin and his NYSE floor buddies.   

If the subsequent price action continues so that about a quarter 
of the circle is completed, the stock or other item then gets 
further along in terms of an accelerating trend and there is 
increasing price momentum.  Such momentum is created by the 
buying and selling activity of the widening circle of investors 
and traders who get involved in the stock because it is moving – 
also usually at this stage, the increasingly positive, or 
negative, fundamentals become more widely known written about or 
discussed in such forums as within professional research 
departments, the business media, investments clubs and internet 
chat rooms. 

This underlying dynamic relates very much to what I described in 
past articles in our Trader’s Corner on Dow Theory and how Dow 
would perceive a gradual shift from a bull to bear market and 
vice versa - from the bear to a bull. The business media talking 
heads are abuzz as to whether the U.S. is getting a shift like 
this currently – a resounding MAYBE! 

The current state of profits (not great) and the slow potential 
growth of earnings is certainly the type of conditions that could 
lead to a big, but slow-forming rounding bottom over the coming 
year - perhaps to be followed by a stronger upswing in 2004. 
Well, options traders mostly need some good-sized price swings 
from day to day, week to week.  However, when I put on my 
“investor” hat, this will be a long-term pattern  to be alert 
for.    


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

Regression Analysis for Futures
By John Seckinger
jseckinger@OptionInvestor.com

While trading futures, one of my favorite tools for macro and 
microanalysis is Regression Analysis.  Using regression analysis 
properly can help identify either potential trend reversal areas, 
or simply allow traders to trade with a range.  

A definition of Linear regression is as follows; a statistical tool 
used for forecasting future price via finding the best estimate of the 
trend given a noisy sample of data points.  It is calculated by using 
the "Least Squares" method over a given period, which is drawn as a 
trend line extending through the defined period that attempts to filter 
out market noise.  Ok, that is the end of the ‘science’ part.

Penetration outside of a regression channel is an indication that a 
reversal of the price trend is in a higher risk of occurring.  
Unfortunately, I have found that there is some art needed when using 
these channels in a practical manner.

Getting to an example, I try to focus on three important steps while 
setting up a trade using regression analysis.  The three steps are as 
follows:  Establish a trend line, recognize a relative high and low, 
look for an execution.  

From November 11th to the 12th, the ES contract gapped higher and started 
to trade in an aggressive bullish fashion.  With that said, I drew a 
bullish trend line (blue) from the low on the 11th and waited until this 
trend line was penetrated.  Once penetrated, I use the relative high 
before the penetration as “the relative high.”  Then, using regression 
analysis, I start the channel at the relative low and end just above 
892.  A nice channel is mapped out, and the key now becomes looking 
for the proper execution.   . 

So, how do we go about finding an execution level?  That is the 
“catch,” since it involves even more art.  If the market tests the 
relative high (above 892) one more time, that should be the ideal area 
where traders can go short.  I would then recommend using a 5-point 
stop loss (just above 896) to minimize risk and possible unforeseen 
shock to the market.  If this area is not retested, I look for the last 
relative low to be taken out.  This is done because it will put in a 
lower low and really break the bullish trend.  In this particular 
example, that low is at 886.50 (set near noon on Tuesday).  

Chart of ES02Z, 5-minute


 

As the market continued to trade, ideally a trader should be short just 
above 892 as the relative high was in-fact retested; however, it is ok 
if that was missed and a short was taken just below 886.50.  Just 
remember to use a 5-point stop either way.  As the chart below shows, 
it is now time to start an entirely new regression channel and trend 
line.  

The first obvious relative low AFTER THE TREND LINE IS BROKEN is found 
at 879, and that is when we draw a new downward regression channel.  
Note:  Forgot to mention, I use 2 standard deviations with all 
regression channels (default setting on Q-charts).  

Ok, now what?  We are still short, and now we have a regression line 
drawn.  We can do one of two things.  One is to buy the ES (read: cover 
short) as the bottom of the regression channel is tested, or simply 
wait for the market to either rise or close above the drawn channel.  
Note: After the regression channel is drawn, it is ok to disregard the 
trend line.  

Chart of ES02Z, 5-minute


 

As most of us probably remember pretty clearly, the market rose 
extremely fast on Wednesday due to the Iraqi news regarding the UN 
weapons inspectors.  Or was it really because the upper regression 
channel was broken?  Kidding aside, there definitely would have been 
some slippage while exiting the short position.  Nevertheless, this
 trading tool makes it clear to exit and look for a new trend line and 
new regression channel.  

The trick of course would have been to both exit the short AND gone 
long as the last relative high (set on 10 a.m. on Wednesday) was taken 
out and gave an execution trigger (opposite of last example when last 
relative low was taken out).  

Chart of ES02Z, 5-minute


 

As noted at the beginning of this article, regression analysis can be 
used both on a micro and macro level.  I like to go from a weekly to a 
five-minute chart, constantly reinforcing my viewpoint on the market.  
Remember, no matter how well these channels work, proper execution is 
key.  Prices can rise above the top channel and last relative high 
during the first minute of trading.  Be prepared.  Without proper 
execution, trading becomes extremely difficult.  

Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com 


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

Divergence
Buzz Lynn
buzz@OptionInvestor.com

Webster's Dictionary says, "To go or move in different directions; 
to differ, as in opinion".  Sounds like CNBC Analyst de Jour's 
market opinion vs. my own - definitely different.  

However, divergence isn't always about being bullish when everyone 
is bearish or vice-versa.  It's not necessarily fundamentals-laden 
opinion either.  For despite it's fundamental bent toward, well, 
fundamental opinions, it's a concept we use frequently in 
technical analysis too to help us decipher potential market 
direction.  We use the term when looking at charts.

So just how does divergence work and how can we apply it to our 
charts for better interpretations of the market?  Glad you asked!  
Today, we are going to stick to the meaning and definition of the 
word so that fellow readers can add this to their trading arsenal.  
Application is like anything else with a thousand different 
nuances, but today, it's important to understand what it is.  Only 
then is it useful.  And it's so simple, we almost don't even need 
an instruction manual!

OK, so back to, "What is it?".  Divergence is based on a chart 
relationship of oscillators - stochastics - to candle or price 
action.  It's based on the assumption that when oscillators are 
moving up, so are stochastics.  And when prices are moving down, 
stochastics do too.  But it's the magnitude of the price move and 
its relationship to the stochastic move that determines 
"divergence" 

It's important to understand too that there are two different 
types of divergence - bullish and bearish.  Bearish divergence 
occurs only from a stochastically overbought chart situation.  The 
meaning here is that the divergence carries a bearish implication 
for future price action.  Conversely, bullish divergence occurs 
only from a stochastically oversold chart situation.  Keep in mind 
that "overbought" or "oversold" isn't necessarily indicative of 
divergence.

So come on, Buzz.  Spill the beans!  What's it look like?  To tell 
the truth, I don’t' have a good example of bullish divergence 
tonight.  But maybe I'll think of one before the article is over 
.  Isn't it just like Fundamentals guy to hint that he's 
still building and finds value in a financial ark?

That said, let's take a look at today's Dow Jones Industrial 
Average (INDEX:INDU) chart.  Like I noted above, if there's no 
bullish divergence example coming immediately to mind, then it 
follows that this chart is an example of bearish divergence.

Dow Industrial chart - INDU (weekly/daily):


 


Oh, so that's what it looks like!  Wait, one side is different 
from the other.  How can they both be bearish divergence?  Ahh, 
good eye!

Starting on the left side of the chart (weekly), first note that 
there are two high points in "overbought" in the stochastic part 
of the chart.  Without that, there could be no divergence.  
Actually, even if only the most recent point were stochastically 
overbought, it would still count as "overbought" and thus be a 
divergence candidate.  That we have two, one higher than the 
other, is an added bonus.  Anyway, the most recent "overbought" 
crossover (fast stochastic over slow stochastic) is higher than 
the last one. 

Second, note that for the same period of time, the tops of the 
candles (not the wicks) show lower price action than the last 
time.  Connecting the stochastic tops and the price candle tops 
gives us two black lines, which "diverge", hence divergence!  Big 
deal.  It's just lines on a chart.  Why is that important?

Now for the interpretation part:  Think of stochastics as the 
power behind a price move.  The first data point on the candle and 
the first data point on the stochastic have a relationship.  The 
second data points on each determine the presence or absence of 
divergence.  If both lines were sloped up or both sloped down, 
there would be no divergence.  NEXT!  But in this case, we have 
price sloped down and stochastic sloped up.  

It's those second data points that bring this all together in 
opposing sloped lines.  Here's the "big whoop":  while the power 
(stochastic) behind the move up the charts was greater than last 
time, price did not match it.  Price stayed lower despite the 
power behind it.  While the conviction was great, as indicated by 
the stochastic, the market was not willing to support a higher 
value.  That's bearish.  Were the price to have moved higher above 
it's last top, that would be consistent with a continued upward 
move.  It looks like that upward trend is going to change, give or 
take a few daily gyrations.  (Don't look for Dow 10,000 any time 
soon.)

Hence, we use the divergence to signal the POSSIBILITY OF A CHANGE 
IN MARKET DIRECTION.  That's one half the explanation.  But what 
about the exact opposite lines on the daily chart?  Why is that 
bearish too?

Refresh your eyesight for just a moment and take another look at 
the daily side of the chart.  In this case, we see a HIGHER price 
point from the last time and a LOWER stochastic high from the last 
time.  Connecting those points with previous data points, we again 
see a divergence.  While the lines are opposite, it's still a 
divergence, and still bearish at that.

Here's why.  On the daily chart, price has taken off like a shot 
from a gun.  But the power behind it, as shown by a lower 
stochastic hasn't kept pace with the price before rolling over 
from overbought.  The psychology behind this is that while prices 
were rising at a frenzied pace, there was little conviction to 
make it happen.  It's like Jim Belushi in the movie, Animal House, 
running out the door by himself with nobody following after half-
heartedly asking the first time, "Who's with me?"  His advance was 
OK, but his stochastic was a little low!  He needed to return to 
rally the troops for a second attempt, with the power of a crazed 
lunatic yelling, "Who's with me!?"  

Related to the market, that second attempt may happen, but it will 
have to overcome the greater weekly trend.

But the point is that a higher price move with lack of conviction 
on the stochastic is equally bearish.  This also signals a 
possible change in market direction.  Were the lines in either 
side of the chart moving up or down together, there would be no 
divergence.  Thus the status quo would be intact, and no possible 
change of market directions could be foretold.

How about an example of that?  Your wish is my command (at least 
for now).  Take a look at Dow stalwart, GE.

General Electric chart - GE (weekly/daily):


 

Note that the slope of the weekly stochastic line and price line 
are the same - also true for the daily side.  There is no 
divergence here; just an indication of the downward status quo.  
Thus, we would not expect a reversal in the trend of GE.  The 
weekly trend chart appears to indicate that this uber-company's 
stock price is headed lower over the next few weeks/months, and 
not about to change.

Wish we could show a chart undergoing some bullish divergence, but 
I can't find one!  That's OK.  We're a patient lot.  We'll bring 
up the subject again when we see it in the charts.

Until then, make a great weekend for yourselves!

Buzz


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