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Daily Newsletter, Thursday, 11/21/2002

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The Option Investor Newsletter                Thursday 11-21-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Bulls Send Bears Into Hibernation
Futures Markets: Beheaded
Index Trader Wrap: (See Note)
Market Sentiment: Semi-Bullish
Weekly Manager Microscope: Management Team: Causeway International
Value (CIVVX)


Updated on the site tonight:
Swing Trader Game Plan: Ticket To Ride


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      11-21-2002           High     Low     Volume Advance/Decline
DJIA     8845.36 +222.40  8856.57  8625.48 2.44 bln   2166/1033
NASDAQ   1467.41 + 48.10  1468.72  1430.08 2.35 bln   2272/1130
S&P 100   477.88 + 10.89   478.44   466.99   Totals   4438/2163
S&P 500   933.79 + 19.64   935.13   914.15
RUS 2000  397.70 +  9.11   397.89   388.59
DJ TRANS 2328.78 + 47.40  2342.76  2281.91
VIX        27.37 -  1.29    28.87    27.21
VXN        44.70 -  0.12    45.85    42.16
Total Vol   5,047M
Total UpVol 4,302M
Total DnVol   708M
52wk Highs   170
52wk Lows    119
TRIN        0.53
PUT/CALL    0.74
************************************************************

Bulls Send Bears Into Hibernation

On a day that the stock with the third largest market cap warned
of lower growth and earnings for this year and next the market
broke out of its recent trading range and through strong resistance.
GE warns, BA cuts 5,000 jobs, MWD cuts -2,200 and the drooling
bears are run over by excited bulls.

Dow Chart – Daily




Nasdaq Chart – Daily




The bad news was obviously already priced into the market that
GE had fallen out of the ranks of the double-digit earnings
growers. GE said it would take a $1.4 billion charge, less than
analysts had expected, to bolster reserves at its reinsurance
unit. GE said it suffered huge losses from the 9/11 attack and
was taking the action to cover future risk. GE also said it was
going to add $4.5 billion in capital to GE Capital to reduce its
debt ratios and maintain the AAA credit rating. GE closed up
+2.05 on the news because analysts expected a much worse forecast.

Morgan Stanley also announced they would cut -2,200 jobs in a
move to cut costs and battle slumping financial markets. This
follows -67,000 job cuts already made in the sector since 2000.
Boeing said it would cut -5,000 in its commercial division due
to the continued slump in the airline sector.

The good news came in the form of an earnings win by HPQ last
night and an affirmation of their current quarter as well. This
powered tech stocks over the critical Nasdaq 1425 level and once
over that resistance the short covering began. Chip stocks roared
and consumer cyclicals fell as money rotated out of defensive
stocks and into techs.

Helping fuel the fire was a lower than expected Jobless Claims
number at 376,000 instead of 390,000. Traders ignored the fact
that last weeks numbers were revised up to 401,000. They also
ignored the fact that this was for a four day work week due to
the Veteran's Day holiday. Look for this number to rise next week.

The Philadelphia Fed Survey soared to 6.1 when estimates were
for a -3.0 number. This indicates a slowly expanding manufacturing
sector but far from a strong indication. Inventories are still
dropping as well as prices but new orders rose slightly. There
was a strong bounce in the capital expenditure component from
14.5 to 25.5 which indicates business investment is starting to
rise. Also bullish was the flat Index of Leading Indicators which
has been negative for four consecutive months. Six of the ten
components improved in October. This does not paint a picture of
a growing economy but it does indicate the drop into a second
recessionary dip is less likely.

Offsetting the positive reports was a negative Chicago Fed National
Activity Index. The number came in at -.81 and the biggest drop
in the last seven months. This reflects the overall softness in
October and weak employment. Production fell by -0.8% and well
below consensus expectations. This was the third monthly decline.
Of the 85 indicators 61 were below average and only 37 showed
improvement from September. This index indicates that the economy
has an increased risk of sliding back into recession when compared
to prior recessions and double dips. Evidently traders elected to
ignore this report.

Positive comments from several automakers helped boost sentiment
with hopes that sales would not slow as expected. Ford's chief
analyst said he was sticking with his forecast from the beginning
of the month that November sales would be better than October.
GM CFO said sales would slow next year but they would not fall
off the table as expected. Analysts had speculated that incentives
would run their course and buyers would lose interest after a
year of special deals. Evidently the consumer has not given up
on new wheels completely and the competition between brands has
provided some amazing deals. In Denver several unique promotions
have surfaced like a six month job, $1500 monthly income and $195
in cash gets you a new Kia with no credit check. A ford dealer
is running a buy one get one free special. Buy an explorer and
get a ford focus free. These unique marketing offers are making
buyers rethink their need to trade in the current oil burner and
go on the hook for big payments. It helped the stocks of auto
companies as well with GM adding +3.20.

The biggest news was provided by investors themselves. Once the
good HPQ news and better than expected GE warning pushed stocks
over initial resistance at the open the buyers piled on. The key
ranges were Dow 8650, Nasdaq 1425 and SPX 925. These were key
levels of resistance dating back to June in come cases and once
broken the short covering began. TV commentators were stumbling
over themselves with bullish comments. Guest analysts could not
draw broken resistance lines fast enough in the allotted air time
because there were so many breakouts. The key here is the difference
between breakout and fakeout. On the surface it appears to be a
valid breakout based on "hope" that the bottom is behind us.

That hope may be called into question on Friday based on the
semi book-to-bill report on Thursday night. New orders fell by
-7.9% in October making it four consecutive monthly declines. It
would have been even steeper but they revised downward the number
from September to 0.80 from 0.84. Using the original number
from last month of .84 and the headline number for October of
73 that would have been a -13% drop instead of the revised -7.9%
drop. It is amazing how the magic numbers keep getting revised
with each succeeding period. BTB, Jobless Claims, Nonfarm Payrolls.
It almost looks like a conspiracy to let us down slowly by
managing the numbers. That would be illegal so I am sure it is
just a coincidence. At .73 this is the lowest ratio in nearly a
year. Every month the order inflow drops it pushes the tech
recovery a month farther into the future. With a six-month lead
time from order to delivery this means any possible recovery is
well into 2003 "IF" orders picked up next month. Typically the
holiday season is a low spot for manufacturers with forced
holidays and mandatory plant closings to save money until orders
arrive in the 1Q. This puts any recovery off until 3Q of 2003
at the earliest if historical trends continue.

The key SPX 925 level has been seen as the magic number to confirm
a new rally. This was above the 9/11/02 high of 924.02 and the
925.66 high from Nov-6th. Today's close of 933.76 is the first
new major relative closing high since August. The next confirmation
would be a close over the August closing high of 962. However, we
have to get past Friday first. Futures are down slightly on the
BTB news and the very over bought conditions. Much talk was made
of the desire to see the market higher by year end to avoid the
historic occurrence of three down years, something not seen since
the depression. The Dow would have to clear 10021 in the next five
weeks to prevent that label from sticking. Today's close for the
Dow put us at a +21.4% bounce off the October closing low of 7286.

Bullish talk is not going to help the economic conditions but it
may convince retail investors to come back to the market. Volume
today was very heavy with over five billion shares traded and over
two billion each on the NYSE and Nasdaq. The internals were lopsided
with a 6:1 ratio of up volume to down volume. Most of that volume
was institutions with large block orders being the norm rather
than the exception. The extreme bullishness pushed the VIX back
down to more historic levels at 27.37. That is still high but
well off the recent extreme numbers. If today's action can attract
some follow through tomorrow then bullish comments in the weekend
newspapers should entice retail investors home for the holidays
next week to be become buyers. With a record $80 billion going
into money market funds last week there is plenty of cash
available to fuel a further rally if the situation warranted it.

Does the situation warrant it? That depends on your time frame.
While I think everyone expects the markets to go up from here,
they may not have much further to run based on real economics.
The Dow has even stronger resistance ahead at 9050 and again at
9200. Many and I stress MANY technical analysts are predicting
that any rally will run out of steam at those levels without an
increase in real earnings to drive prices. Since 4Q earnings
warning season will start in earnest the week after Thanksgiving
we will get to see if those earnings are going to appear of if
the 4Q is going to dip back into an earnings recession and sink
stocks prices as well.

Retail sales are predicted to rise at most +0.4% and many feel
this is only wishful thinking. One survey reported on Thursday
showed that 65% of consumers were planning on spending less this
year due to the negative wealth effect from jobs and the market.
Nearly 50% surveyed were going to spend more than 45% less than
last year. Obviously retailers have their work cut out for them
and any terrorist event will make that goal even harder. If your
timeframe for investing is years then buying now and riding out
any further volatility probably will not hurt. If your time frame
is months then going long over Dow 9000 could be risky.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Beheaded
By John Seckinger
jseckinger@OptionInvestor.com

The Dow rejected the potential for a Head & Shoulders formation,
trading above 8800 and closing higher at 8845.  Does this mean
that the equity markets will continue to rise?

Thursday, November 21st at 4:15 P.M.

Contract          Net Change     High        Low        Volume

ES02Z     936.00    +17.25      936.75      916.50      628,101
YM02Z    8860.00   +188.00     8864.00     8645.00       20,785
NQ02Z    1117.50    +41.50     1121.00     1077.00      300,266

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.

Fundamental News:  Shares of Hewlett-Packard (HPQ) rose 12.7% to
18.99, following in-line earnings and higher revenue expectations
for the current quarter.  General Electric (GE) also made
headlines, rising 8.26% to 26.85 after lowering annual earnings
forecast but announcing a dividend increase.  The company also
noted that profits for next year would grow between 3 and 13
percent despite weakness in airline and power systems.  In other
news, the Philadelphia Fed index came in at 6.1 versus –13.1 for
the prior month.  Estimates were for a –0.5 reading.  Also
supportive of equities and damaging for bonds was a Jobless
Claims report of –25k to 376k.  Economists were calling for a
394k number.

Technical News:  As the bond market came under pressure once
again, falling 1’04 to 109’24 and underneath a bullish trend line
currently at 110’16, talk of massive asset allocation out of
bonds and into stocks continued to make headlines.  There is now
a Reverse Head & Shoulders formation in the 10-year sector
(neckline of 4.13%, which is fractionally above Thursday’s
close), and this signals an objective of just over 5.3% (read:
lower bond prices, and should mean higher equity prices).
Moreover, the Semiconductor Sector (Sox) closed up 8% at 365 and
is nearing an important retracement level of 376.  The dollar was
surprisingly weaker, while the Utility Index (UTY) once again
failed to close above 243.

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

The December Mini-sized Dow Contract (YM02Z)

Starting with a weekly chart of the Dow, price action this week
could have the index closing above its 22 Weekly Moving Average
(8617) for the first time in months, and a close at current
levels would be its highest close since the week of August 18th
(8872).  An objective for bullish traders seems to be for a test
of 9000 and the significant relative high at 9077.  This level is
currently just underneath the Dow’s 50 Weekly Moving Average
(WMA) of 9092.  The only other major resistance between current
prices and above 9000 appears to be at a 38.2% retracement level
(8935) and the 200 DMA at 8952 (see chart below).

As far as downside risk is concerned, a move back underneath 8800
on Friday should get some liquidation concerns heading into the
weekend.  Support under 8800 is not seen until below 8700 at
8684.  Another risk is tied to the Relative Strength Indicator
(RSI), which just moved above the pivotal 50 level and should
stay above going forward.  A close back below 50 could signify a
short-term bull trap.  Something to keep in mind.

Chart of Dow Jones, Weekly




Speaking of bull traps, a daily chart of the Dow shows the
possibility of a bearish divergence between prices and the RSI
oscillator.  This is accomplished by prices making a new high,
while the oscillator fails to do so.  Because volume was strong
on Friday (no word on open interest), it makes sense to wait for
confirmation before playing off such a divergence.

Chart of Dow, Daily




Getting to the YM02Z contract, the bearish divergence is also
seen on a 10-minute chart.  However, bulls appear to have a few
things in their favor:  higher relative highs, and the ability to
stay above 8800.  Notice how the 8684 objective (profiled on
Wednesday) quickly became support and a building block for the
contract.  Going forward, if bearish, try to avoid selling into
dips.  The only time it might work is on a move under 8800;
however, stops have to be tight.  The market never really gave a
sell signal on Wednesday, and it makes sense to go with longer
term areas to enhance one’s risk/reward.

Chart of YM02Z, 10-minute




YM02Z

Support               Resistance                  Pivot
	
8825				8900				8800
8800				8935				8684
8952				8540
9000
9077

Bold signifies levels within the Dow

The December E-mini S&P 500 Contract (ES02Z)

The S&P 500 contract had an intra-day high of 935.13, and just
missed testing the long term trend line that intersects at 936
(note:  since downward sloping line, this 936 level will be lower
on Friday).  The breakout above the 22 DMA and 38.2% retracement
area should have bulls looking for a test of the significant
relative high of 965.  Just above 965 is a 38.2% retracement
level that should be psychologically important as well. With that
said, look for an extending move higher once above 936, but
remember to use a tight stop just in case a trap commences.

Chart of S&P 500 Index, Weekly




Looking at the ES02Z contract (120-minute), the previous relative
high of 926.50 was taken out and then used as support as prices
rose throughout most of the session.  If prices do fall back
underneath 926.50, it should be analogous to the Dow falling
under 8800.  The contract does show a bearish divergence on a
daily chart (not shown), and the 120-minute chart came extremely
close to setting a lower Relative Strength number compared to the
high set at 926.50.  Note what happened the last time a bearish
divergence took place.

Chart of E-mini S&P 500, 120-minute




ES02Z

Support              Resistance                  Pivot
	
926-27			936				926.50
910				956				927
902				965
					971

Bold signifies levels within the S&P 500

The December E-mini Nasdaq 100 Contract (NQ02Z)

The NDX made a clear break on Thursday above 1079 and the highly
watched 1100 level.  Currently at 1118, there doesn’t seem to be
much resistance until 1154, a 38.2% retracement level based on
highs made back in December 2001.  Above 1154, there is a
relative high at 1163 that could offer resistance for bullish
traders.  Going forward, the contract would have to close
underneath 1088 before bears can look for a test of the
descending bearish trend line (blue).

Chart of Nasdaq-100 Index, Weekly




Looking at a 90-minute chart of the NQ contract, the 1172
objective still remains untested; however, as long as prices stay
above 1072 there is the possibility that this test will take
place.  A close back under 1072 could spell trap, and might take
the index back towards 1020.  Under 1020, support is felt at
1000.

Chart of Nasdaq-100, 90 minute




NQ02Z

Support              Resistance                  Pivot
	
1110				1133				1101
1000				1154				1088
1072				1163				1072
	1020				1172
	1000

Bold signifies levels within the Nasdaq 100.

Disclaimer:  Because defined levels of resistance in the ES and
NQ contract are significantly above current levels (expect for
936 in ES), look towards the Dow for guidance if looking for a
short term trade.

Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com


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

Check the Site Later Tonight For Jeff’s Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/112102_1.asp


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


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

Semi-Bullish
by Steven Price

Looks like we finally got the bullish confirmation we were
looking for.   Today's rally saw several significant resistance
levels fall in the broader market indices.  Before we bring out
the cheerleaders, however, let's take a look at where we are and
what's ahead.

We've been looking at a possible bearish head and shoulders
formation in the Dow and S&P 500 (SPX) over the last month.
Until yesterday, it looked as though the breakdown would come to
fruition.  However, the right shoulder rollover came to a halt
with Wednesday's rally. Today's 222-point jump over 8800
surpassed the head of the formation. So now we definitely have a
failure of that pattern.  This should serve as notice for the
bears to step aside for the time being.  The move over 8800 in
the Dow and 925 in the SPX took some major buying power and I
wouldn't be surprised to see some short covering now that those
significant resistance levels have been broken.   That could
quickly take us up to the next resistance levels of Dow 9000 and
SPX 965.  The Dow actually topped out just under 9100 in August,
but once back above 9000, we could see some real momentum
building.

The Nasdaq Composite was an even bigger winner.  The tech index
blew through its August highs (1426), which had turned it back on
the last three tries.  It gained 48.20, and is now up 93 points
in two days.  While we may be due for a pullback, the bias is now
clearly bullish after such an impressive breakthrough.  I'll be
looking to enter long on a pullback anywhere above 1426.

The Nasdaq was led in part by the chip stocks, which continued
their recent explosion, following Hewlett-Packard's earnings
surprise after the bell last night. The Semiconductor Index (SOX)
not only broke higher after barely getting above its recent high
from the beginning of the month, it made up 27 points in a
heartbeat and broke above the August closing high of 363, to
finish at 365.30.  The only fly in the ointment is the intraday
high from August at 366, but that just seems downright nitpicky.
After the bell, we got the industry book-to-bill ratio for
October, which showed a 7.9% drop in new orders.  This was the
fourth straight monthly decline and was worse than expected.  The
combination of the SOX hitting the August high and a poor book-
to-bill would seem to indicate at least a mild pullback. However,
it seems that most of the bad news from the sector has been
followed by rallies, as long as the news was not as bad as
expected.  After all of the lowered revenue guidance and poor
future visibility revealed over the past earnings season, it is
frightening to imagine what the institutions were actually
expecting.

It is hard to find a sector that was in the red today, but one
place to start would be the bond market.  The bearish head and
shoulders pattern that was forming in the ten-year note (ty02z)
looks to have broken its neckline and can be used for
confirmation of the shift from bonds into equities.

The other sector to take a major hit was the HMOs.  UnitedHealth
Group (UNH) made comments at an investors meeting that pricing
may have peaked, causing concerns about margins in the industry.
The HMO index dropped 3.5%, led by UNH (-4.86), Wellpoint (-
3.50).  With rising healthcare costs, the HMOs that have managed
costs properly have simply raised premiums and posted impressive
profits.  With the possibility that they can no longer raise
prices, rising costs could take a serious bite out of future
earnings. UNH still predicted significant profits in 2003 and
2004, but apparently investors were more than a little spooked.

Predicting tomorrow's movement is a little tricky.  With the
breakthroughs in the Dow, SPX and Nasdaq, there is definitely
room to run on the upside.  However, with the SOX at the August
high and a poor book-to-bill report, I can see some profit taking
in the sector. If the chips pull back, expect the rest of the
techs to follow.  If the BTB doesn't cause a pullback, then look
out above for Nasdaq 1500.


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  8845

Moving Averages:
(Simple)

 10-dma: 8523
 50-dma: 8183
200-dma: 9209



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  933

Moving Averages:
(Simple)

 10-dma:  899
 50-dma:  868
200-dma:  987



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1118

Moving Averages:
(Simple)

 10-dma: 1037
 50-dma:  941
200-dma: 1130



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

The Semiconductor Index (SOX.X):  After just barely breaking over
the relative highs from earlier in the month, the SOX shot all
the way up through the August high of 363, finishing the day at
365.  The intraday high back on August 19 was actually 366, and
after the book to bill ratio showed its fourth straight monthly
decline this evening, we may be left deciding whether a pullback
tomorrow is actually a rejection at resistance, or simply a
pullback after a 53 point gain in two days. If we get a continued
run, then the PnF target of 412 coincides exactly with the 200-
dma of 412.66 (descending) and could be the next target.  If we
do get a run to that level, I'd be thinking about picking up some
puts on the sector in the 400 area, with a stop over the 200-dma.

52-week High: 657
52-week Low : 214
Current     : 365

Moving Averages:
(Simple)

 10-dma: 314
 50-dma: 274
200-dma: 412


Market Volatility

As the broad market rally continues, the VIX remains squarely
under 30, finishing the day at 27.37.  As stocks are purchased
the most common option trade in the market is the covered call
write. This occurs when purchasers sell out of the money calls to
reduce the cost of the stock.  If the stock goes up and is called
away, there is still a profit and if it doesn't reach the short
strike by expiration, the writer gets to keep the premium.  This
creates selling pressure on the options, thus lowering implied
volatility.  For a graph of the trend in the Dow compared to the
VIX, see Wednesday's Market Wrap.


CBOE Market Volatility Index (VIX) = 27.37 –1.29
Nasdaq-100 Volatility Index  (VXN) = 44.73 –0.09

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.75        921,070       690,855
Equity Only    0.62        780,719       486,353
OEX            0.88         29,249        25,660
QQQ            2.17         44,781        97,476


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

Bullish Percent Data

           Current   Change   Status
NYSE          45      + 3     Bull Confirmed
NASDAQ-100    75      + 6     Bull Confirmed
Dow Indust.   70      + 3     Bull Confirmed
S&P 500       63      + 7     Bull Confirmed
S&P 100       67      + 5     Bull Confirmed

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

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

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

5-Day Arms Index   0.84
10-Day Arms Index  1.09
21-Day Arms Index  1.11
55-Day Arms Index  1.18


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       1972           779
NASDAQ     2214          1013

        New Highs      New Lows
NYSE         39              24
NASDAQ       70              37

        Volume (in millions)
NYSE     1,619
NASDAQ   1,615


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

Commitments Of Traders Report: 11/12/02

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 increased short positions by 4,000 contracts, while
slightly reducing the long side.  Small traders increased long
positions by 3,000 contracts, while reducing the short side by
6,000.

Commercials   Long      Short      Net     % Of OI
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%)
11/12/02      437,683   476,540   (38,857)   (4.3%)

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
10/22/02      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%
11/12/02      141,389    70,624    70,765     33.4%

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 reduced the long side by 3,500 contracts while
leaving the short side virtually unchanged.  Small traders, on
the other hand, reduced short positions by 4,000 contracts and
longs by just 700.


Commercials   Long      Short      Net     % of OI
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%)
11/12/02       45,647     55,892   (10,245) (10.1%)

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
10/22/02       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%
11/12/02       12,698     8,801     3,897    18.1%

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 left positions relatively unchanged, with a slight
reduction in both longs and shorts.  Small traders increased the
long side slightly and left shorts around the same level.

Commercials   Long      Short      Net     % of OI
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%
11/12/02       22,283    14,953    7,330      19.6%

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
10/22/02        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%)
11/12/02        5,736     8,513    (2,777)   (19.5)

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

Management Team: Causeway International Value (CIVVX)

This week's manager microscope report looks at the three former
Hotchkis & Wiley international value team members that left the
H&W division of Merrill Lynch Investment Managers last year and
established their own investment firm and flagship fund, called
Causeway International Value Fund (CIVVX).  Three fund managers
have more than 43 years of combined investment experience among
them.

My interest in these international value managers dates back to
the mid 1990s when the trio worked for Hotchkis & Wiley and the
corporation I worked with was interviewing for an international
value manager for the pension trust fund.  Although the pension
committee ultimately went in a different direction, I came away
with a good sense about the H&W international value team, their
philosophy, process, etc.

In 1996, Merrill Lynch Investment Managers acquired Hotchkis &
Wiley, which then had in excess of $10 billion in assets under
management, having built a strong reputation in value equities,
among other things.  Sarah H. Ketterer, CEO of Causeway Capital
Management and a co-portfolio manager for the flagship Causeway
International Value Fund, co-founded H&W's international equity
product in 1990, and contributed significantly to the product's
success.

From 1990 until June 2001, Ms. Ketterer was a portfolio manager
at H&W and the MLIM H&W division.  At MLIM, she was a managing
director and co-head of H&W's international/global value equity
team, which managed approximately $3.4 billion in international
and global assets for Merrill Lynch, including the $1.1 billion
HW International Value Fund (now known as Mercury International
Value Fund).

Harry W. Hartford and James A. Doyle left the MLIM H&W division
along with Ms. Ketterer in June 2001 and started their own firm,
Causeway Capital Management LLC, in Los Angeles, California.  Mr.
Hartford, president of Causeway Capital Management LLC and a co-
manager for Causeway International Value Fund, joined Hotchkis &
Wiley in 1994 after 10 years with the Investment Bank of Ireland
(now, Bank of Ireland Asset Management).

From 1994 until June 2001, Mr. Hartford was a portfolio manager
with H&W and the MLIM H&W division.  He was a managing director
there as well, and co-headed the H&W international/global value
equity team along with Ms. Ketterer.

Mr. Doyle joined the H&W division of MLIM in 1997 after serving
as an equity research consultant for Morgan Stanley's investment
management unit while still a student at Wharton.  From 1997 to
June 2001, he worked for the MLIM H&W division, where he was VP
and head of investment research for the H&W international value
team.

Causeway Capital Management LLC, investment adviser to Causeway
International Value Fund, began operations in June 2001.  Today,
the Causeway firm has already amassed more than $1.9 billion in
assets, including about $642 million in the mutual fund product.

The firm employs 24 people, 11 of whom they state are "seasoned
investment professionals."  The website says that all employees,
with the exception of one sales/marketing professional, came to
Causeway as a team from the H&W division of Merrill Lynch (MLIM).
Continuity is important.

Causeway International Value Fund started operations on October
26, 2001, and now has over a year under its belt.  According to
Morningstar, this relatively new fund with a veteran management
team behind it "could go far" and we like its chances over time
as well.  In the next section, we provide an overview of the co-
managers' investment philosophy and process.

Fund Overview

Causeway International Value Fund, Investor Class (CIVIX) seeks
long-term appreciation by normally investing 80% or more of its
assets in stocks of companies paying dividends, or repurchasing
their own shares.  The fund will normally invest in at least 10
foreign markets, and may invest up to 30% of assets in equities
in any one country (35% in the U.K.).

Investor Class shares charge a shareholder service fee and have
an expense ratio of 1.30%.  The minimum initial purchase is $5k
for Investor shares, and the fund imposes a 2.0% redemption fee
on the value of shares redeemed less than 90 days from purchase.

Causeway's flagship fund is reflective of the firm's investment
philosophy, which is based on the belief that active management
can add value, with lower risk.  The management team's approach
is value-driven with a fundamental based, bottom-up methodology
to stock selection, the website states.  The fund's country and
sector weightings are more a residual of their equity selection
process.

Causeway International Value Fund is also based on the principle
that companies derive their value from the contribution of yield
and profitable re-investment back into the company.  Thus, their
emphasis on dividend-paying companies and companies repurchasing
their shares.  Management doesn't believe in "timing" the market,
and instead tries to remain fully invested.

Causeway's management team also seeks to structure an investment
portfolio that controls the volatility of fund returns, so as to
focus on providing consistent long-term, "risk-adjusted" returns
for shareholders.

The team's investment process starts with a screen of large- and
mid-sized companies in developed international markets.  Smaller
international companies are not considered since they tend to be
less stable than their larger counterparts, they contend.  Their
screens sift through some 3,200 companies using a combination of
quantitative and value-driven methods to isolate the prospective
stocks for further analysis.

Once there's a manageable number of stock candidates, Causeway's
portfolio managers and analysts get to work, performing in-depth
analysis of each company, their industry, competitors, financial
condition, valuation, etc.  Their fundamental research will vary
depending on the company and industry involved, the website says,
and may include company visits, meetings with senior management,
and discussions with clients, suppliers and competitors.

When it analyzes a security, Causeway develops an expected 2-year
return target and weighs that against the stock's "risk score," a
measure based on the additional risk (volatility) that the equity
holding adds to the portfolio.

The final portfolio of 60-80 holdings represents the stocks with
the highest expected risk-adjusted return.  The website says the
portfolio will tend to have characteristics typically associated
with value managers.  Causeway International Value Fund normally
will have a lower P/E ratio and higher dividend yield than other
international funds, as well as a lower turnover rate (that adds
to its attractiveness as a taxable investment).

In the 10 years that Ketterer and Hartford ran H&W International
Value Fund (now, Mercury International Value Fund), the fund had
"below average" volatility compared to the typical international
stock fund.  In its 1-year history, Causeway International Value
Fund has followed suit, limiting losses relative to the category
average.  In the next section, we take a look at how well the co-
managers have performed for shareholders since starting the fund
in October 2001.

Fund Performance

Ketterer, Hartford and Doyle have not had the opportunity yet to
demonstrate what they can do when market conditions are positive,
but since December 31, 2001 and over the past year, the Causeway
International Value Fund (CIVVX) has produced results ranking in
the first quintile (20%) of the foreign stock fund category, per
Morningstar.




For the year-to-date period through November 20, 2002, the fund
had a negative total return of 11.1%, shaving 6.7% off the loss
produced by the fund's index benchmark, MSCI EAFE ND index, and
beating the Morningstar foreign stock fund average by five full
percentage points.  Though negative, the fund's performance was
good enough to rank it in the category's 17th percentile, using
data from Morningstar.

Causeway International Value Fund had a trailing 1-year loss of
8.9% through November 20, 2002, ranking it in the top 14% of the
foreign stock fund category, per Morningstar.  That outperformed
the MSCI EAFE benchmark by 6.7% and the category average by 6.1%.
So, Ketterer, Hartford and Doyle's moderate approach has limited
losses to date relative to both index benchmarks and fund peers.

A look at Mercury International Value Fund's long-term record is
helpful to understanding what the Causeway international product
may produce over time in terms of return and risk for investors.
According to Morningstar, the Mercury international fund holds a
4-star rating for the most recent 10-year period, based on above
average return and below average risk (volatility) when compared
to other foreign stock funds.

For the trailing 10-year period as of October 31, 2002, Mercury
International Value Fund, Institutional Shares (MIVIX) generated
an average annual total return of 7.8%, beating the MSCI EAFE ND
index by an average of 3.7% and ranking it in the top 11% of the
Morningstar foreign stock fund category.  Ketterer, Hartford and
Doyle deserve most of the credit for that fund's solid long-term
performance and ranking.  So, while the new fund hasn't operated
in a positive market environment, there's reason to be confident
about its long-term prospects.

Conclusion

The fact that the H&W international and global value division of
MLIM managed over $3.4 billion in assets when Ketterer, Hartford
and Doyle were there, and the new Causeway firm already has $1.9
billion in managed assets, shows how successful their lower risk
approach to international equity investing has been.

While this fund is diversified across countries, industries, and
securities, it does maintain a true value style bias.  Hence, it
may lag other international stock funds when "growth" is in favor
with the market.  Long-term investors seeking exposure to quality
foreign companies who want to take the high dividend, low average
P/E path have a compelling option here.

Since the fund invests in larger, established companies and won't
pay up in price for stocks, it offers "core" exposure to non-U.S.
stocks.  For further fund information or to download a prospectus
go to the Causeway Funds website at www.causewayfunds.com.  These
co-managers have what it takes to continue producing strong risk-
adjusted returns for shareholders.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

Ticket To Ride

Ticket please? Bulls boarded the rally train in mass on Thursday
as better than expected bad news from GE and better than expected
good news from HPQ provided the market motion. Those left standing
on the sidelines with a pocket full of cash were left wondering if
there would be another express in their future.


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The Option Investor Newsletter                 Thursday 11-21-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

To view this email newsletter in HTML format with embedded
charts and graphs, click here:
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In Section Two:

Dropped Calls: AIG, FRX
Dropped Puts: TRMS, IDPH
Daily Results
Call Play Updates: GNSS, HOV, CEPH. IMCL
New Calls Plays: ADBE, ETN
Put Play Updates: PG
New Put Plays: JBLU


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

AIG $66.91 -0.50 (-0.98) All coiled up and nowhere to go, seems
to have been the theme for AIG on Thursday.  After last week's
breakout move through the $66 resistance level, the stock has run
into a veritable brick wall of resistance at $68.  While the stock
could very well break this resistance tomorrow, we don't like the
fact that AIG didn't really participate in the rally over the past
2 days.  It doesn't necessarily mean a bearish reversal is in
store, just that the bulls seem to have lost their incentive in
the near term and we don't want to wait around.  If holding open
positions, ratchet stops up nice and tight to $66, which has been
intraday support all week.  Alternatively, look to take a more
favorable exit on another push up near resistance.

---

FRX $104.65 +1.15 (-1.10) Our FRX play gave us a nice move when
it broke out to new highs last week, and we were looking for a
repeat performance this week.  The strong buying across the
market should have gotten the job done over the past couple days,
but the money appears to be flowing elsewhere.  While it was
encouraging to see the stock rebound from the $102 level
yesterday, the stock's inability to close back over $105 today
is not encouraging.  While we don't see a bearish near-term
future for the stock, we just don't want to wait for another
period of consolidation before the next upward move.  There are
better plays available.  Look to harvest gains on open positions
on another intraday surge up near the $105 level.


PUTS:
*****

TRMS $51.19 +2.33 (+1.35 for the week) We added Trimeris to the
short list, in spite of the predicted successful release of their
new drug, Fuzeon, in March.  Investors were scared off by
comments from analysts that the company may have trouble
producing enough of the drug to meet earnings estimates for the
next couple of years. The stock sold off dramatically, but we
were targeting a PnF sell signal at $47 for entry, which we never
got, as the stock bounced from $47.24.  Our secondary entry was a
rollover under $50.  Unfortunately, the stock hit $50 and just
kept going, finishing at $51.19.  Without either entry point
being triggered, we'll drop the play and look for other
opportunities.

---

IDPH $40.33 +1.79 (-0.03) With the Biotechnology index (BTK.X)
pinned under the $365 resistance level and little bullish life
in the stock, IDPH was looking good as a put yesterday.  But then
we got a strong positive open in the broad markets today (led by
Technology shares) and the BTK exploded upwards, closing at the
high of the day and above recent resistance.  IDPH was lifted
along with the rest of the sector, clearing the $40 level, which
had been solid resistance.  Intraday weakness was unable to get
IDPH back under that level and the stock proceeded to go out near
the high of the day.  There is still significant resistance
between here and $41, but the strong buying volume today has us
shying away from the play.  IDPH could pull back from resistance,
but with the strong move in the BTK today, it looks like the bears
have lost their grip on the sector and stock.  Instead of looking
to enter on weakness, use a pullback from current levels to exit
open positions.


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

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

CALLS              Mon    Tue    Wed   Thu  Week

ADBE    30.24    -0.77  -0.79  -0.71  1.84  New, above $30
AIG     66.91    -1.40   0.07   0.91 -0.50  Drop
CEPH    59.05     0.71  -1.39  -1.80  2.08  Higher high
ETN     76.55    -1.24  -0.03   1.48  2.77  New, Breakout
FRX    104.65    -1.56  -0.38  -0.08  1.15  Drop, Profits
GNSS    18.90     0.01  -1.26   1.67  0.90  $20 next
HOV     33.70    -1.35  -0.95   0.55  1.35  dma bounce
IMCL    14.19    -0.77   1.15   0.82  1.43  New highs


PUTS

IDPH    40.33    -1.31  -1.09   0.17  1.79  Drop, strong bounce
JBLU    34.99    -0.77  -0.79  -0.71 –1.01  New, Rel. weakness
PG      86.73    -1.15   0.95   1.44 –1.26  Dow stock down
TRMS    51.19    -1.97  -0.62   1.06  2.33  TRMS, no entry


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

GNSS $18.90 +0.90 (+1.73 for the week) Genesis continues its
strong rebound, along with many of the other chip stocks.  It was
downgraded due to uncertainty in the ASP market, and the fact
that it had reached RBC's price target of $16.  WE say, so what?
In fact the stock not only rebounded strongly off that price of
$16 on its pullback, but continues to set new relative highs.
The pullback above $16 gave a brief PnF reversal, before taking
off again into another column of "X" and giving a fresh double
top buy signal at $19.00.  The fact that the sector has been on a
tear, breaking above its August highs, and breaking through its
own bearish resistance line, can be used as confirmation for the
bullish move. Today's close saw the Semiconductor Index break
above its August closing high, finishing on its high of the day,
as well.  Unlike many of the other chip stocks, which are looking
at declining revenues, GNSS is in a market that is growing by
leaps and bounds, with flat panel monitors and projectors.  New
entries can look for support over $19 on a move back above that
level, or a breakout above today's resistance at $20 for more
conservative traders.  After the recent run in the chips, we may
get a pullback, as well, and in that case look for support at
$17, just above the 200-dma, for entry.

---

HOV $33.70 +1.35 (-0.30 for the week) Hovanian has rebounded once
again from its 200-dma, for the fifth straight time, giving
traders a good entry point on the pullback over $31 highlighted
in the original play write-up for conservative traders. We also
highlighted entry at the PnF buy signal at $34, which the stock
gave on the last rally.  After the pullback, the company came out
and raised earnings guidance once again for the 2002 full year,
and said November orders remain strong.  This is good news, after
a 94% increase in September orders and a 60% increase in October
orders.  The recent MBA mortgage application data also showed a
21% increase for the second week of November, in spite of the 11%
drop in housing starts in October (which obviously didn't fall
too hard on HOV, considering the company's aforementioned 60%
increase that month). Some seasonal drop off can be expected as
we head into the winter months, and even the 11% drop in October
housing starts  still leaves the market strong.  We still like
the technical strength here, and the next resistance on the PnF
chart comes up at $40, which remains our target on the play.
After the bounce over $31, which would have been a PnF reversal
down, new entries can look for support over the $34 level, which
was the original move into a column of "X."

---

CEPH $59.05 +2.08 (+3.34 for the week) Cephalon bounced strongly
on the recent pullback to support at $55.  The stock has been
consolidating in $5 jumps, first at $45, then $50 and now $55.
After topping out at $58.67, the stock received a questionable
downgrade, citing possible future attempts by generic drug makers
to grab a piece of Provigil.  Nevertheless, investors have looked
to the company's sales growth and strong demand across all
product sectors and scooped the stock on the pullback.  The stock
took off again, achieving a new higher high and establishing
another buy signal on the point and figure chart at $59.  CEPH
was recently upgraded by Adams Harkness, which raised earnings
estimates all the way through 2006 and set a price target of $64.
The current PnF bullish count is an astronomical $97, which seems
pretty unlikely on the current move, without several pullbacks,
but nonetheless raises the PnF resistance ceiling.  There is some
resistance on the daily chart between $63 and $64, which
coincides with the analyst price target, however that resistance
was in place when the 200-dma was at that level back in April.
The current 200-dma is far below at $51.60.  We will raise our
target on the play to $64, from the original target of $60.  New
entries can use the $59 PnF buy signal to initiate longs, but
conservative traders may want to wait for a break above probable
round number resistance at $60.

---

IMCL $14.97 +1.49 (+3.20) Perhaps the surge in price in IMCL
last week had less to do with the rumors of a buyout offer from
Bristol Myers and more to do with improving internals in the
overall Biotechnology index (BTK.X).  Recall that IMCL surged to
as high as $14.36 last Thursday on those rumors, before falling
back and consolidating near $11.50.  The past 2 days have seen
some concerted buying in the BTK, with Thursday's rally
propelling the index through important resistance near $370.
That seems to have added enough fuel for the bulls, as they
bought IMCL in volume, driving the stock through last week's
highs and closing just below the $15 level.  IMCL is now solidly
above its 200-dma and all of the shorter term moving averages
are curling higher as well.  With the intraday move through the
$15 level, the PnF chart generated a fresh Buy signal and bulls
now set their sights on $20 as the next upside target.  But
before they can focus on that level, they'll need to get through
the next level of resistance near $16.25.  Traders that took
advantage of the dip to support earlier this week are smiling
tonight, as the stock looks like it is building up a head of
steam to go higher.  Pullbacks near intraday support, first at
$13.50 and then $12, can be used for new entries, so long as the
BTK index doesn't fall below $365.  Momentum traders now need to
wait for a push through the $16.50 level before entering on
strength.  Raise stops to $11.50, as that level of support needs
to hold on any significant pullback to keep the bullish trend
intact.


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

ADBE – Adobe Systems $30.20 +1.80 (+1.25 this week)

Company Summary:
A long-time leader in desktop publishing software, ADBE
provides graphic design, publishing, and imaging software
for Web and print production.  Offering a line of application
software products for creating, distributing, and managing
information of all types, the company generates nearly 75% of
sales through publishing software products such as Photoshop,
Illustrator, and PageMaker.  Its Acrobat Reader, which uses
portable document format (PDF) is popping up all over the
Internet, as businesses shift from print to digital
communications.  In addition, ADBE licenses its industry
standard technologies to major hardware manufacturers,
software developers, and service providers, as well as
offering integrated software solutions to businesses of all
sizes.

Why We Like It:
While the gains in the Software index (GSO.X) of late can't rival
those of the once again red hot Semiconductor index (SOX.X),
there is a solid bullish trend of higher lows and higher highs
building in the group.  MSFT is the big daddy in this group, and
while that stock has been struggling to advance over the past
couple weeks, Thursday's breakout over $57.50 should help to keep
the momentum going.  Using that as our backdrop, the stock that
we really like in the group is ADBE, which has really been
performing like a champ over the past 6 weeks.  After bottoming
near $18 in early October, the stock has been steadily churning
higher, leaving a consistent string of higher lows and higher
highs in its wake.  That pattern continued this week, with the
10-dma (now at $27.47) providing the springboard for the rally
of the past 2 days, which propelled the stock to its highest
level since June.  Not only did ADBE clear major resistance at
$29, but it also scaled the 200-dma for the first time since the
big breakdown in June.  The PnF chart shows the strength of this
breakout, as it took the stock through its bearish resistance
line at $29, and with the stock currently on a Buy signal with
an upside target of $50.  We don't expect to see that level
anytime soon, but a near-term move to the next major level of
resistance at $35 certainly seems reasonable.  An intraday
pullback near $28-29 can be used for initiating new positions,
but make sure to wait for the bounce before entering.  Momentum
traders can enter new positions on a push through $30.50 (just
above today's intraday high), especially if the GSO index is
able to rally through its 200-dma (currently $117.92).  The low
earlier this week was just above $27, so that gives us a solid
level of support to base our stop on.  A close below that level
will have us dropping the play due to a break in the string of
higher lows.

BUY CALL DEC-30*AEQ-LF OI=1776 at $2.45 SL=1.25
BUY CALL DEC-35 AEQ-LG OI= 803 at $0.65 SL=0.25
BUY CALL JAN-30 AEQ-AF OI=2379 at $3.30 SL=1.75
BUY CALL JAN-35 AEQ-AG OI=1629 at $1.40 SL=0.75

Average Daily Volume = 3.63 mln


---

ETN – Eaton Corporation $76.55 +2.77 (+3.37 this week)

Company Summary:
Eaton Corporation is a global diversified industrial manufacturer
with businesses in fluid power systems, electrical power quality,
distribution and control, automotive engine air management and
fuel economy and intelligent truck systems for fuel economy and
safety.    The principal markets for the company's Fluid Power,
Automotive and Truck segments are original equipment
manufacturers and after market customers of heavy-, medium- and
light-duty trucks, passenger cars, off-highway vehicles,
industrial equipment, and aerospace products and systems.  The
principal markets for the company's Industrial and Commercial
Controls segment are industrial, construction, commercial,
automotive and government customers.

Why We Like It:
While the rally off the October lows has been driven by gains in
the Technology sector, we're starting to see the gains broaden
out to other areas of the market.  One of the key sectors that
needs to see some bullishness build is the Cyclical index (CYC.X)
and Thursday's 4.25% gain is certainly what we're looking for.
The index found support right at its 20-dma earlier this week,
and today's breakout over the early November highs keeps the
string of higher lows and higher highs intact.  Shares of ETN
have really been on a tear lately, and today's rally was very
important to the near-term picture.  This week we've gotten a
fresh PnF Buy signal as the stock cleared $72 resistance and
the vertical count currently projects up to $97, which would
be very close to the all-time highs, if achieved.  Near-term,
ETN looks to have resistance near $80, and then again in the
$83-85 area.  The stock cleared major resistance at $74, and
then powered through the 200-dma ($74.58) on strong buying
volume.  On the theory that prior resistance becomes support,
the stock ought to find firm support now in the $73-74 area
and an intraday pullback and bounce in that range can be used
for new bullish entries.  Momentum traders need to be careful
here after the strong gains of the past 2 days, but a
continuation of the heavy buying that propels the stock through
$77 can be used for new entries as well.  Look for continued
strength in the CYC index if trading on further strength, as a
pullback in the sector will likely cause some near-term weakness
in ETN.  We're initially setting our stop at $72, just below
the 10-dma, which provided support for this week's rebound.

BUY CALL DEC-75*ETN-LO OI=214 at $4.40 SL=2.75
BUY CALL JAN-75 ETN-AO OI=355 at $5.80 SL=3.75
BUY CALL JAN-80 ETN-AP OI=116 at $3.20 SL=1.50

Average Daily Volume = 460 K



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

PG $86.73 -1.26 (-0.55) It seemed there was nothing but a sea
of green in the market on Thursday, with virtually every sector
(except Health Care) moving up with enthusiasm.  But PG never
got into the action, reversing from the $88 resistance level and
giving up 1.4% on the day.  That's not much of a drop, but when
compared to the 2.5% gain in the DOW it is an important
confirmation of the stock's relative weakness.  Another way of
looking at it is that there were only 6 losers in the DOW, and
PG was the biggest loser (both on a point and percentage basis)
of the entire group.  That relative weakness should continue to
assert itself, as investors seem to be shunning the Consumer
stocks in favor of the sexy Technology shares.  Should the market
see a bout of profit taking in the broad market (entirely possible
after the stellar run of the past 2 days), then PG ought to lead
the slide.  Traders that took advantage of the failed rally at
$88 nailed a solid entry to the play and new entries still look
good on failed rallies below that level.  If looking for confirmed
weakness though, traders need to see the stock break the $85
support level, and preferably drop below the October 28th
intraday low of $84.75 before playing.  Our stop remains at $89.


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

JBLU - Jet Blue - $34.99 -1.01 (-2.86 for the week)

Company Summary:
The Company's principal activity is to provide low-fare,
innovative, quality passenger air transportation service to and
from a growing number of United States locations. As of December
31, 2001, the Company operated 102 flights a day providing daily
service to 18 cities. The Company focuses on serving underserved
markets and large metropolitan areas that have high average
fares.

Why We Like It:
It was a good day for some of the airlines, following the
announcement from United that it had reached an agreement with
its machinists for $1.5 billion in wage cuts.  While the Airline
Index (XAL.X) was rebounding, Jet Blue continued its recent drop.
The stock began its recent descent when J.P. Morgan dumped almost
its entire stake in the airline as soon as its IPO restriction
came off. JPM was one of JBLU's biggest initial investors and the
dumping of stock scared investors off for more than just the day
it sold the stock.  Ever since, JBLU has been setting lower daily
highs and lower lows and looks to have now completed a bearish
head and shoulders pattern.  Today's drop came in spite of the
222-point gain in the Dow and followed more bad news on the
competition front. Delta Airlines announced on Wednesday that
they are creating a new lost cost airline within an airline to
compete with airlines such as JBLU. The number 3 U.S. carrier has
the power to cut into the low-cost market and steal market share
from airlines such as Jet Blue, Southwest and AirTran.

The recent sell-off was just the continuation of a pattern that
has been developing on the point and figure chart since the stock
began its descent from $55 in May.  It has been setting lower
highs and lower lows with each new column on the chart ever
since, with scare exceptions.  The last time it tested its
bullish support line was at $42 and the breakthrough was good for
a $5 gain on the breakdown to $37.  The stock is now sitting
right on that line, and conservative traders can wait for a
breakthrough on a trade of $34 to initiate the short play.
However, we like the breakdown under $35 and failed rebound at
that level at the end of the day for an entry at the current
level. If we see a bounce in the morning, we'll let it run its
course to the descending trendline on the PnF and enter on a
failed bounce under $38. Past rebounds in the stock have broken
the 50-dma, but the most recent bounce here was rejected at that
level ($38.35).  Our initial target on the play will be $30, the
bounce level before the rally of the last month. Place stops
initially at $39.

BUY PUT DEC-40 JGQ-XH OI= 554 at $6.20 SL=3.10
BUY PUT DEC-35 JGQ-XG OI= 502 at $2.90 SL=1.50

Average Daily Volume = 756 k



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The Option Investor Newsletter                 Thursday 11-21-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Play of the Day: CALL - ADBE
Traders Corner: Are You An Eagle or A Turtle?
Traders Corner: Indicators: Seeing Accumulation using OBV
Traders Corner: Single Stock Futures: What's the Difference
Futures Corner: It’s all Relative
Options 101: Divergence (Again)


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

ADBE – Adobe Systems $30.20 +1.80 (+1.25 this week)

Company Summary:
A long-time leader in desktop publishing software, ADBE
provides graphic design, publishing, and imaging software
for Web and print production.  Offering a line of application
software products for creating, distributing, and managing
information of all types, the company generates nearly 75% of
sales through publishing software products such as Photoshop,
Illustrator, and PageMaker.  Its Acrobat Reader, which uses
portable document format (PDF) is popping up all over the
Internet, as businesses shift from print to digital
communications.  In addition, ADBE licenses its industry
standard technologies to major hardware manufacturers,
software developers, and service providers, as well as
offering integrated software solutions to businesses of all
sizes.

Why We Like It:
While the gains in the Software index (GSO.X) of late can't rival
those of the once again red hot Semiconductor index (SOX.X),
there is a solid bullish trend of higher lows and higher highs
building in the group.  MSFT is the big daddy in this group, and
while that stock has been struggling to advance over the past
couple weeks, Thursday's breakout over $57.50 should help to keep
the momentum going.  Using that as our backdrop, the stock that
we really like in the group is ADBE, which has really been
performing like a champ over the past 6 weeks.  After bottoming
near $18 in early October, the stock has been steadily churning
higher, leaving a consistent string of higher lows and higher
highs in its wake.  That pattern continued this week, with the
10-dma (now at $27.47) providing the springboard for the rally
of the past 2 days, which propelled the stock to its highest
level since June.  Not only did ADBE clear major resistance at
$29, but it also scaled the 200-dma for the first time since the
big breakdown in June.  The PnF chart shows the strength of this
breakout, as it took the stock through its bearish resistance
line at $29, and with the stock currently on a Buy signal with
an upside target of $50.  We don't expect to see that level
anytime soon, but a near-term move to the next major level of
resistance at $35 certainly seems reasonable.  An intraday
pullback near $28-29 can be used for initiating new positions,
but make sure to wait for the bounce before entering.  Momentum
traders can enter new positions on a push through $30.50 (just
above today's intraday high), especially if the GSO index is
able to rally through its 200-dma (currently $117.92).  The low
earlier this week was just above $27, so that gives us a solid
level of support to base our stop on.  A close below that level
will have us dropping the play due to a break in the string of
higher lows.

BUY CALL DEC-30*AEQ-LF OI=1776 at $2.45 SL=1.25
BUY CALL DEC-35 AEQ-LG OI= 803 at $0.65 SL=0.25
BUY CALL JAN-30 AEQ-AF OI=2379 at $3.30 SL=1.75
BUY CALL JAN-35 AEQ-AG OI=1629 at $1.40 SL=0.75

Average Daily Volume = 3.63 mln



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

Are You An Eagle or A Turtle?
By Mike Parnos, Trading With Attitude

"Eagles may soar, free and proud, but turtles never get sucked
into jet engines.”  At the Couch Potato Trading Institute, we are
devout turtles – slow and deliberate with a hard protective
shell.  While we may occasionally use LEAPS, our trading pace is
small certain steps.  We want to reach our profit objectives
without becoming turtle soup.
____________________________________________________________

What’s Wrong With This Picture?
Last week on the OI Market Monitor I noticed some conversation
about straddles.  What I found interesting was that the straddles
that were being discussed consisted of buying strikes only one
month out at a cost of about $4.50.  Even if one of the strikes
was $.50 in the money when the proposed position was initiated,
that means there is $4.00 of time value circling the bowl
preparing to disappear if the market doesn’t come to the rescue.

OK, CPTI students –What’s the cardinal rule for trading
straddles?  -- If you believe there will be a substantial
movement in the next month, buy the straddle at least 3-4 months
out.

Why?  Because, in the first month of a four-month option, time
premium erodes very slowly.   Only about 10%-15% of the time
value will disappear during that first month.   So, you may have
to pay for some additional time premium when you buy puts and
calls three months out, but this additional money is not at risk.

Let’s look at Microsoft (MSFT) – trading at $55.87.
Scenario A:
Buy the MSFT Dec. $55 calls @ $2.60
Buy the MSFT Dec. $55 puts @ $1.70
You are exposed for $4.30

Scenario B:
Buy the MSFT Apr. 03 $55 calls @ $6.40
Buy the MSFT Apr. 03 $55 puts @ $5.20
You are exposed for $11.60 – NOT!

You are only exposed for the full $11.60 if you plan to hold the
position to expiration in April.  However, we’re going to exit
this position in ONE MONTH or less.  During this time, the
options may lose 10% of their value because this is the first
month of a five-month option.  Ten percent of $11.60 is only
$1.16.  That’s a hell-of-a-lot LESS than the $4.30 in Scenario A.

You may be tying up the $11.60 for that first month, but the bulk
of that money is NOT at risk.  Why risk $4.60 when you can risk
$1.16?

One month straddles may work occasionally, but even a blind
squirrel finds an acorn once in awhile.   This same blind
squirrel is more likely to end up as roadkill.  So, before you
have to face scraping up what’s left of your investment off the
pavement, think twice about sending a blind squirrel out to do
your nut shopping – especially if you have any feelings for the
squirrel.
____________________________________________________________

Hi Mike,
I think I am confusing risk/reward ratios with return on
investment or profit.

I am trying to reconcile what Jeff said about establishing a
risk/reward guideline with what I read in the CPTI articles.
Jeff is proposing a 1:2 risk/reward ration.  In Mike's recap of
the CPTI portfolio plays, the risk/reward ratios appear to be
more around 2:1 or worse.  So...

Is risk/reward the same as ROI or profit margin? If I pick a
risk/reward rule of 1:2, am I suppose to make a 100% return on
the trade? Thanks for your help.

Response:
I can see where this might be confusing.  I haven't read Jeff's
risk/reward discussion.  The thought of a 1:2 risk/reward ratio
is certainly appealing.  However, I think that, in order to get a
1:2 risk/reward ratio, you have to be in a position requiring
substantial stock movement.  I'm assuming we're talking about
spreads here. This is an aggressive trade.

For example:  IBM is trading at about $78.50 and you:
1.  Buy the December $80 call @ $2.45
2.  Sell the December $85 call @ $.80
You have created a bull call spread and your total debit is
$1.65.  Your maximum total profit will occur only if IBM moves up
and finishes above $85 at December expiration. Both options would
then be exercised and you would receive the difference between
the strike prices ($5.00).  Since your debit was $1.65, your
profit is $3.35 ($5.00 - $3.35).  That's where the 1:2 ratio
comes from.

The only problem is that, for you to profit at all, IBM has to
move up -- significantly.  If it doesn't move up, both you and
your 1:2 risk/reward ratio will be having dinner at your local
soup kitchen.

Now, if I had a similarly bullish outlook on IBM, I might take a
less aggressive position in the form of a bull put spread.  Try
this on for size.

1.  Sell the December $75 put @ $1.85
2.  Buy the December $70 put @ $.85

I have taken in $1.00 in premium.  That $1.00 is resting
comfortably in my pocket (next to my loose change, Tic-Tacs and
pocket lint).  My maximum risk (exposure) scenario in this
position would only occur if IBM breaks down and finishes under
$70.  Then, the two put options would be exercised and it would
cost me $5.00.  I've already taken in $1.00, so my exposure is
really only $4.00  ($5.00 - $1.00).

My return of $1.00 on the bull put spread is less than the
potential $3.35 return from the bear call spread. And, my
exposure is greater ($4.00) than the exposure in the bull call
spread ($1.65).  BUT – I have three ways to make money with the
bull put spread compared to only one with the bull call spread
(if IBM goes up).

With the bull put spread, I profit if:
1.  If IBM goes up, both put options expire worthless.
2.  If IBM goes nowhere, both put options expire worthless.
3.  If IBM goes down to $75, both put options expire worthless.
4.  If IBM violates the $75 short put, I can short the stock to
protect the $1.00 of premium I took in.

My reward on the bull put spread is only 4:1 (25%), but I like my
odds of success a lot better.  So, I’ve increased my probability
of success threefold.  The cost for this is some additional
exposure.  There’s a bonus, however.  In addition to the $1.00 of
premium, you’ll probably get a lot more good nights sleep.

Do you want to be the casino or the gambler?  CPTI students will
not bet their bus ticket home.  If you’re not careful you may
have to trade your house for a double-wide.
____________________________________________________________

I understand how difficult it can be to alter one’s trading
style.  How does one change?  This familiar story may help get
you on the right track.

A well-known Zen Master steps up to a hot dog cart and says:
"Make me one with everything."
The Hot Dog vendor fixes a dog and hands it to the Master, who
pays with a $20 bill.
The vendor puts the bill in the cash drawer and closes the
drawer.
"Where's my change?" inquires the Master.
"Change, my friend, must come from within," said the Hot Dog
vendor.
___________________________________________________________

CPTI Portfolio Update – As of Thursday’s Close.

BBH Iron Condor – Currently trading at $91.09
We want BBH to finish the December option cycle anywhere between
$80 and $95.  Looking good!

TTWO Short Strangle – Currently trading at $30.71.
We want TTWO to finish the December option cycle anywhere between
$22.50 and $35.00. Looking good!

IMCL Covered Call – Currently trading at $14.97.
We want IMCL to finish the December option cycle over $10 so it
will be called away.  Looking good!

QQQ ITM Strangle – Currently trading at $27.73
The QQQs finally made its predicted 3-point move.  CPTI students,
who were bullish and put on the $23/$25 strangle, can now sell
the $23 call for $4.80.  That’s a profit of $.35 and you now own
the $25 put free and clear with a month to go.  CPTI students,
who were bearish and put on the $24/$26 strangle can now sell the
$24 call for $3.90 and own the $26 put at only $.45 with a month
to go.  If the market does a typical Fibonacci retracement, back
up the truck and get ready to load up the profits.
____________________________________________________________

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

Indicators: Seeing Accumulation using OBV
By Leigh Stevens
lstevens@OptionInvestor.com

ON BALANCE VOLUME (OBV) -
In my weekly Index Trader of Sunday (11/17/02) I described how
the Nasdaq 100 tracking stock (QQQ) was in a strong up trend that
was “confirmed” with its volume pattern – however, this was not
to be seen in the “normal” way of displaying daily trading volume
as seen below –






The above way of displaying volume is what you get when you
select “volume” as an “indicator” such as in Q-charts or other
charting applications  - it displays volume as a histogram or as
vertical bars that show the volume total for that day (as read
from the right hand numerical volume scale).

On Balance Volume or OBV is also a type of volume indicator or
volume-RELATED technical study or formula.  An indicator being of
course any mathematical calculation that is applied to a
financial instrument’s price and/or volume information.

First, to look at what OBV looks like, as overlaid on the QQQ
daily chart volume bars below - more explanation will follow this
next chart but first the chart. In technical analysis a picture
IS worth a thousand words –





On Balance Volume keeps a cumulative running volume figure that
adds ALL the volume on an up date and subtracts ALL the trading
volume on down day.  If there is more trading volume on up days
then there is on down days, OBV rises, as can be seen in the
lower portion of the daily chart on the QQQ chart above.

OBV provided an early and ongoing indication that the buying
interest in the Nasdaq 100, as reflected in QQQ, was stronger
than the selling activity. So, for this reason, I said that OBV
can alert us to “accumulation” of a stock (it is being
“accumulated”) or that there is buying “on balance” in the item,
but not so much that volume spikes dramatically. This is typical
of institutional/fund buying.  Professional money managers tend
to accumulate stocks gradually and is in fact a necessity for
them, as their buying could really drive the stock up fast as
they might have a few million shares they want to buy or
accumulate in total.

OBV HISTORY & CONSTRUCTION -
OBV uses daily stock trading volume for its construction and was
devised by Joe Granville, a legendary market analyst who was
especially well known in the 1960s through the 1980’s. (Joe is
still writing a market letter I believe but he is not so well to
traders these days and he is in his senior years – fortunately, a
good trading advisor is judged not by age but by his ability to
“call” the market turns.)

Any, Joe Granville when he was mildly famous was a very colorful
person who, at times, seemed to be more of a showman than an
analyst and market advisor.  However, his market knowledge was
through and his insights often profound.  One such insight of
Granville furthered Charles Dow’s concept that volume should
INCREASE in the direction of the dominant trend.  On balance
volume or OBV as it’s popularly known, provided some further
assessment of this principle and enhanced volume analysis quite
significantly.

To construct the OBV indicator, a running total of volume is
kept.  Assume we started with a stock that traded a million
shares on day 1.  This is a neutral starting point, as we have to
start somewhere.  If the stock closes higher the next day and
trades 750,000 shares, day 2’s volume figure is added to the
first day and assigned a positive number because our running
total is a positive number; OBV is now a +1,750,000.

[NOTE: OBV would be a negative number if our example stock closed
lower on day 2, on 1,500,000 shares: OBV would be –500,000.]

Going back to the example - on day 3 the stock closed lower on
500,000 shares and we subtract that day’s volume from our
cumulative OBV total: on day 3, OBV is +1,250,000.  When the
stock is unchanged in price on day 4, we leave OBV unchanged at
+1,250,000.

This calculation process continues on into the future.  If we
graph the points, the resulting line will start moving upward or
downward following the direction of the price trend of the stock
for which OBV is being calculated.

We are primarily concerned with the DIRECTION of OBV - is the
(OBV) line moving UP or DOWN? If the direction is up, the OBV
line is bullish, as there is more volume on up days than on days
when the stock price is down.  A falling on-balance volume line
is bearish, as more stock is being traded on down days than on up
days.  If both price and OBV are moving up together, it is a
bullish sign portending higher prices.  If both price and OBV are
moving down together, this is a bearish indication for still
lower prices ahead.

However, if prices move higher during a period of time when OBV
lags or moves lower, this is a bearish divergence indicating
diminishing buying activity and warns of a possible top or trend
reversal.  Conversely, of course, if prices are moving lower but
OBV is trending higher, this is bullish divergence – this is seen
below in next chart, a prior period in a stock with its
corresponding on-balance volume indicator.  This example is also
useful in that it shows OBV when its cumulative total is both a
negative and positive number –





A divergence in technical analysis is what occurs when one
component to market activity goes in one direction and another
related component goes in an opposite direction.  The first
example of a “divergence” was Dow’s example of one of his
averages going to a new high or low, when the other did not. This
last example relating to price and volume is another type of
divergence – that of price going one direction and an indicator,
based on a calculation involving price or volume, going in an
opposite direction.

The example above of a bullish divergence occurs (in a downtrend)
if OBV starts trending higher – the dynamic is that the sellers
would now appear to be less active and this divergence suggests
being alert to an end to the downtrend.  This concept goes back
to the idea that volume activity can precede a change in price
direction.

Now, what I’ve said here is not to suggest taking action before
PRICE activity confirms what OBV and volume activity has
suggested.  But if this occurs you can be ready to take
appropriate action.  In the example above, the upturn in OBV
preceded a reversal of a downtrend in the stock but I would not
generally act on such a divergence or “signal”, only be ALERT to
a potential reversal.  You can bet that I would a heavy buyer of
the stock or calls on the stock as soon as price action
“confirmed” such as by a breakout above its down trendline.

Another thing about volume, pretty much always, is that it is
secondary indicator and that price action “trumps” what volume is
doing so to speak.  In the chart below, that of the up to date
price and volume action in ABT, there is a lack of an apparent
“breakout” move in daily volume as suggested by the down
trendline on the daily volume bars as the stock moves steadily up
–





However, OBV is in a confirming up trend.  But, price action is
far from bullish in that the stock has come right up to its down
trendline. Moreover, the bearish rising wedge pattern would
suggest that this rally is most likely going to fail – and is a
countertrend rally in a bear trend.  For more on the wedge
reversal pattern you can go to my earlier Trader’s Corner article
at –
http://www.OptionInvestor.com/traderscorner/082902_2.asp


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

Single Stock Futures: What's the Difference
by Steven Price

Single stock futures began trading just over a week ago.  The futures
have a few similarities to options, but are actually a very different
tool.   While an option gives you the right, but not the obligation to
purchase or sell the stock, the future obligates you to complete a
trade in an underlying product and take delivery at expiration.  The
current regulations allow cash settlement, but this option is not
currently offered by the listing exchange. Even if it were, it wouldn't
affect a trader's risk.

Let's start with risk. An option limits the option holder's risk to the
amount spent on the premium.  If you buy a call for $2.00 and the stock
moves against you, your maximum loss is $2.00.  If you buy a future on
a stock and the stock drops $40 (see Tenet Healthcare), you lose $40.
So the directional risk is much different between the two.

In trading futures, you don't necessarily have to deal with paying a
volatility premium, like you do in an option.  For instance, a call has
extra premium built in, depending on how volatile the stock is and how
much chance there is of that option being worth something by the time
it expires. So there is additional premium risk in an option if it
never moves in the money.  With a future, the premium is based on
interest and dividends.  If you spend only 20% of the stock price to
purchase a future (the current margin requirement), you get to earn
interest on the extra money you didn't have to spend to acquire the
stock. Therefore, that interest is added to the price of the future.
Also by owning a future, instead of stock, you forgo the right to
collect dividends, so the amount of a dividend is subtracted from the
price of a future.  This interest and dividend calculation also applies
to options, when comparing the premium in a call to the premium in a
put at the same strike.  Call premium is always [interest minus
dividend] more than put premium.

The aforementioned futures margin requirement is lower than it is for
stocks, with investors required to put up only 20% of the value of the
stock.  You only have to have $10 in your account for each $50 share of
stock. Most brokers require 50% from their clients for the purchase of
stock, so individuals should check with their broker for individual
margin requirements when trading futures.   The lower requirement
provides more leverage, allowing investors to put up less money to own
more shares.  This is similar to options, in that you use less to
control more.  However, because there is no risk reduction, investors
must be careful because it also allows them to lose more than they
would under normal margin requirements, or by trading options.

I talked about the volatility premium in options not being present in
futures.  While that is certainly true, there is another benefit to
futures that sticks out in the back of my mind as having the potential
to create a sort of "volatility premium" under certain circumstances.
That is the ability to sell these products short on a downtick.  The
current NYSE "uptick" rule prevents traders who currently have short
stock positions from selling downticks.  What this means is that if you
are short 1,000 shares of Wal-Mart, you cannot sell any more if it is
falling.  You must wait for it to trade upward, even if it is only by a
penny, from its last print. In a falling market, it may surprise many
traders just how few upticks occur.  This was instituted to prevent
short sellers from driving markets down in a crash scenario.  What it
also does is limit option traders' ability to hedge long positions in
options (long calls or short puts), as well as preventing program
traders who are long stock indices from selling the individual
components of that basket short as the market falls. With a future,
there is no uptick rule, so traders with short positions need not wait
for an uptick to sell the underlying future. In a falling market, often
puts trade at a premium, as investors or traders with long positions
will pay a higher price for protection.  While a future price is
supposedly based only on interest and dividends, the ability to short
them should carry some value in and of itself, which could be reflected
in a lower bid, or wider bid/ask spread in a falling market. Right now
the bid/ask spread is very narrow, but we haven't seen the behavior in
a crash. While we won't know if this will be true until it happens, it
is something to be aware of.

The current market for single stock futures is very thin, with even the
open interest in Microsoft currently only 1,512 for December, January
and February.  For the moment, the futures are too thin to use for our
purposes.  However, the product is new and it should begin to see more
volume, as more market makers participate.  The current set-up has a
specialist in each issue, but allows market makers to post bids and
offers.  From what I'm hearing, many of the clearing firms are still
setting up electronic access for traders and as the kinks are worked
out, we will see more participation and liquidity. One big issue to
watch will be whether or not the futures lead the underlying product,
as they do in many indices.  I'll be filling in our readers as I
receive more info.  I'll also share the experiences of the traders who
take part from the market-making end.  Right now many of them have
expressed frustration with access and many option traders say they
haven't yet heard them quoted on the trading floor with options, the
way that stock is. I expect these products to slowly grow and if the
market continues to advance, bringing in more investors, the money
should find its way into futures, especially considering the 20% margin
requirement.  Stay tuned for updates and send any questions to my email
and I'll try to answer them on the Market Monitor.


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

It’s all Relative
By John Seckinger
jseckinger@OptionInvestor.com

What happens when Relative Strength (RSI) shows a bearish
divergence in an index on a daily chart, but not from a weekly
standpoint?  How does execution come into play?

RSI is simply defined as a momentum indicator that measures an
equity's price relative to itself.  RSI is relative to its past
performance, while being front weighted in its calculation.
Therefore, it gives a better velocity reading than other
indicators.  Moreover, RSI is less affected by sharp rises or
drops in an equity's price performance; therefore, it filters out
some of the 'noise' in a security's trading activity.

I currently use a length of 14 (which is the default on Q-
charts), while having the upper line set at 70 and the lower one
at 30.  Note:  A shorter length will result in a more volatile
indicator that reaches further extremes, while a longer amount of
days used in the calculation results in a less volatile reading
which reaches extremes far less often.  Makes sense.

Now lets look at the overbought (70) and oversold (30) ratings.
As a blanket statement, I really don’t worry too much about a
move above 70 or under 30, since I think that is all relative
too.  Some securities may pull back at a level of 67.5, others at
73, etc.  Different securities seem to have slightly different
levels at which the price changes direction.  But they seem to be
particular to each equity.

When calculating RSI and using a length of 14, the following are
the steps involved:

Add the closing values for the up days and divide this total by
14.

Add the closing values for the down days and divide this total by
14.

Divide the up day average by the down day average. This results
in the RS factor in the formula.

Add 1 to the RS.

Divide 100 by the number arrived at in step 4 above.

Subtract the number arrived at in step 5 above from 100.

Repeat steps 1-6 for day number 15. Drop day number 1 from the
calculation. As enough days are accumulated, the results can be
plotted in graphical format.

There is also discussion that a move over or under 50 can give a
security a slant towards either being bullish or bearish.  This
makes common sense, since a reading above 50 indicates that
average gains are higher than average losses, while a reading
below 50 indicates that losses are winning the battle.  I look at
the number 50 in the same light.

Ok, time for an illustration.  The contact in question is the
Nasdaq 100 (NDX), and a weekly chart shows that the RSI
oscillator is above all other RSI numbers seen during the last
two years.  Therefore, in order for a bearish divergence to take
place, prices in the future would have to continue to rally and
the RSI would have to fail to make a new high.

If bearish (since this article is on divergences, we will assume
only a bearish perspective), we still have some important
information in front of us.  The red horizontal line at 53.76 can
become support going forward, and bears could state the case that
a move under 53.76 would trigger long liquidation pressure.

Chart of Nasdaq 100, Weekly




A daily chart of the Nasdaq 100 Index clearly shows the
divergence taking place.  However, there was a divergence during
Thursday’s opening, and selling the contract at 1081 would not be
beneficial to one’s trading account.  Therefore, all we can do
now is note an area where the market might be susceptible to a
fall.  Does this mean to sell resistance?  I wouldn’t recommend
that course of action, since we need an area that bulls will get
out and shorts have a clear shot at pressuring longs.  The
pivotal area appears to be at 1073.  Not only would it be a
failed wedge (since objective of 1173 not hit – see Futures Wrap
column), but it also would have hedge funds sensing the
opportunity to take on a bigger than normal position (based on my
experiences with a few hedge funds).

Chart of Nasdaq 100, Daily




What about a 30-minute chart, in case a trader wanted to use the
recognition of such a bearish divergence during the day?  The
chart below shows the divergence, and all a trader needs to do is
wait for a new high and look at the RSI for lack of confirmation.
Remember, put in a normal stop (10-points for NQ) and actively
watch the trade unless a significant technical level is taken out
(1073).

Chart of Nasdaq-100, 30 minute




Speaking of actively watching a trade, I would recommend looking
at a five-minute chart for an exit.  As far as today’s price
action is concerned, the objective would be at 1106.  When that
did not materialize (most likely seen at 115), it would make
sense to head to the sidelines and either look for another
divergence in the morning or a breakdown in prices.  As far as
holding a position overnight, that is up to one’s risk tolerance.
Personally, I might hold half a position because of the
divergence in the daily; however, the other half would be taken
off because the weekly chart is still relatively strong.

Chart of Nasdaq 100, 5 minute




Good luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com


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

Divergence (Again)
Buzz Lynn
buzz@OptionInvestor.com

Please pass the crow.  Some days we get it right.  Some days we
don't.  Thanks God Options 101 is an education column and not "Mr.
Market's Crystal Ball Minute", whose most obvious viewers would be
soothsayers, witchdoctors, and a bucket of Wall Street analysts.
Like Scott McNealy said a few years ago, "If they didn't see the
cliff coming, how do they know we've hit bottom?"  Good question.

From last weeks column, you may recall that we spent a great deal
of time going over what bearish divergence looks like on a chart
and how it might be useful in determining future market direction.
We determined that based on the divergence of price vs.
oscillators in an overbought condition, the markets looked poised
to roll over and die again.  What a difference a week makes!  The
only saving grace was using the words, "possibility" and
"probability" of a market reversal.  The truth is that we never
know for sure.  And the last two days of action, especially today,
proved that point.

Not only did price action not decay, it took off to new recent
highs today.  And therein lies the practical lesson that no single
indicator should be used to determine market direction let alone a
single trade.

As a side note before we get back to divergence - bullish
divergence - today's market rally looked rather convincing in
helping me change my temporary market bias (read that trading
bias) to bullish for two reasons.  First, volume was the highest
we've seen on the NYSE since July 26th, a sell-off day back then.
The same is true for NASDAQ stocks.  High volume has typically
happened on down days lately.  But today marks a change in favor
of the bulls.

Second, many "pointy finger" charts, actually called "point and
figure" charts, broke through their bearish resistance lines.
While that can happen on any given day, it happened on large box
sizes with the SPX and NDX.  Institutions must have been
slobbering all over themselves.  And judging by the volume, they
let their presence be known.  Accumulation in strong hands appears
to be taking place.

That said, I am no market wizard.  I've been wrong before and I'll
be wrong again - maybe as early as tomorrow.  It's when I've been
the cockiest in any facet in life that I've also been one day away
from getting knocked down a few notches.  One thing a playground
fight teaches the young, let alone what the market teaches adults
who care to learn, is humility.  Just when we think we've got it
nailed, it nails us first.

OK, back to bullish divergence.  We promised that we would talk
about it when we finally saw a chart that accurately reflected its
presence.  Well, as noted above, what a difference a week makes.
Just when we had given up the retail sector or the NASDAQ for
dead, we now see the slightest hint of bullishness.  Admittedly,
this is a weak example, but it's there, if only to the slightest
degree.

Again, do not use divergence as an isolated trigger for play
entries.  It is only a technical pattern that makes market
direction change a little more probable.  It is not a guaranty;
just another arrow for the quiver.  Shall we take a peek at a
previous Limburger cheese of a security?  Note the NASDAQ-100 as
shown by the QQQ (AMEX:QQQ).

NASDAQ-100 chart - QQQ (AMEX:QQQ):





Remember that divergence happens when the slope of 2 lines - price
and oscillator - diverge.  Bearish divergence happens when
oscillators are overbought (see 11-14-2002 Options 101).  Bullish
divergence happens when the oscillator is oversold.  In bullish
divergence, a lower price low is accompanied by a higher
stochastic value, as in the chart above.  But as we noted last
week, the opposite can be true too.  We could have a higher price
low accompanied by a lower low stochastic value.  Either way, it's
bullish as long as the price and oscillator slopes oppose each
other as the oscillator emerges from oversold.

Granted, I took a little liberty with the chart above.  Normally,
I'd use two oscillators - a five and a ten period stochastic
lookback.  However, I only used a ten period lookback for the
above example.  Why?  The five period lookback didn't show any
divergence, which makes this a weak example of a potential bullish
move.  Similarly, I could have used the five period lookback on
another chart to suit my purpose instead of the ten period.  It
too would be equally weak without confirmation by the other.  But
it does demonstrate what bullish divergence looks like on a chart,
which is all we're after tonight.

Note that since the divergence took place, there has been a nice
bullish move in the QQQ.  However, it is entering overbought
again.  Now is not the time to abandon good money management and
squander thy whole wad on the QQQ.  There is NEVER a time to
abandon good money management for any play.  Don't start now!

OK, here's another example of bullish divergence, but requires an
even further stretch of imagination.  Again, focus on the pattern,
not the actual sector.

Retail Index - RLX (INDEX:RLX.X):





See that?  Once again, two opposing lines from an oversold
oscillator signifying possible directional change.  Is retail
actually looking bullish?  Only with an active imagination!
Translation:  Don't go open positions on the retail sector just
because you saw the chart here tonight.  Note that the only reason
we see divergence here is because price action dipped to intraweek
lows caused by a few mid-week hours or minutes of bearish market
action.  Using the wicks, we can make the argument for bullish
divergence.  However, using the candle bodies only, divergence
does not exist.

So why show it as an example?  One - to demonstrate the chart
pattern.  Two - there is a never-ending debate among technicians
(published authors on the subject included) as to what really
constitutes a good data point.  Some argue that wicks count.  Some
say only to acknowledge the candle body at the end of the time
period.  My personal preference is to use whatever fits with the
other 100 sets of facts/indicators surrounding the trade.  Talk
about non-committal!  Sometimes I include wicks, sometimes not,
depending on many other market factors.  It comes down to a matter
of personal preference.  In other words, art, not science.

Well, if this business were any easier, everyone would do it.  If
it were any harder, no one would do it.  Anyway, now we have
another tool to help us determine the ultimate direction of which
way we'll trade.  We won't always be correct in our trading
decisions, but divergence, especially strong divergence signals,
can tilt the odds slightly in our favor.

Until next time, make a great weekend for yourselves!  Oh, and
since next Thursday is Thanksgiving, be sure to give a few moments
of thanks for all the abundance and blessings we still enjoy.
It's a far cry from the harsh conditions encountered by those
landing on Plymouth Rock over 350 years ago.  And for that alone,
I am thankful.

Buzz


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