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Daily Newsletter, Tuesday, 11/26/2002

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The Option Investor Newsletter                 Tuesday 11-26-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Hope Fades
Futures Markets: Testing the Trend
Index Trader Wrap: (See Note)
Market Sentiment: The Sky Is Falling, The Sky Is Falling!
Weekly Manager Microscope: 5-Star Rated Equity Income Funds


Updated on the site tonight:
Swing Trader Game Plan: Being Selective


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      11-26-2002           High     Low     Volume   Adv/Dcl
DJIA     8676.42 -173.00  8844.40  8670.18 1.89 bln 1117/2090
NASDAQ   1444.43 - 37.50  1478.73  1441.12 1.90 bln 1318/2086
S&P 100   467.08 -  9.87   476.95   466.34   Totals 2435/4176
S&P 500   913.31 - 19.56   932.87   912.10             
RUS 2000  398.32 -  6.53   404.85   397.15
DJ TRANS 2268.35 - 58.60  2327.18  2263.51
VIX        28.74 +  1.79    29.31    27.18
VXN        47.99 +  2.31    48.57    46.49
TRIN        1.84 
PUT/CALL    0.83
************************************************************

Hope Fades

The markets tripped over reality again this morning as the 
seven week old Dow rally faltered on good news. Yes, good 
news. Investors apparently were hoping for significantly 
better economic data and news that growth was still struggling
was not what they wanted to hear. With huge paper gains and
a what amounts to a week long holiday ahead they decided to 
cash out and take their chips off the table. 

Dow Chart – Daily


 

Nasdaq Chart – Daily


 

The markets were already looking for a softer open on news
of terrorist plots and arrests around the world and news that
there could be terrorist links to the Saudi royal family. For
investors who are holding their breath as we approach the 
holidays any terrorist news is unwelcome. The economic news
showed the economy growing but at a slower pace and there
were some unsettling trends beginning to be seen.

The GDP was revised upward for the 3Q from 3.1% to 4.0%. While
this was positive it was based on the stronger than expected
inventory accumulation. This accumulation could be seen two 
ways. It could be a buildup due to an expected increase in
orders in the 4Q or because sales are slowing. Obviously the
latter would be bad news. In the internal GDP numbers corporate
profits after adjustments fell and corporate cashflow was down. 
With this release it appears the odds of a double dip recession
have dropped but the chances of a robust recovery have dropped
as well. 

The Consumer Confidence number came in 84.1, which was a huge
bounce from last months 79.6 but less than analysts expected. 
This was the first bounce in the headline number in six months.
Almost all of the bounce came from a jump in expectations from
81.1 to 88.4. These expectations were boosted by a rising stock
market, the Fed rate cut, the capture of the snipers and the 
impending holiday season. The internal CC numbers painted a 
different picture. The number of people expecting to buy a
home or auto fell to six year lows. The index of people who
thought jobs were plentiful dropped to 14.1 and a major low. 
The long term out look remained flat. The biggest hurdle as
evidenced by the confidence report was the lack of pent up
demand. Almost everyone who wanted a new car or home has 
already bought it and there are no buyers left to consume 
the currently expanding supply. 

Adding to the confusion today was a jump in layoffs to 171,088
in October. This was 47,000 over the September number and with
the pace of layoffs expanding again it appears November could
be worse. With the health of the manufacturing sector still
weak there appears to be no employment rebound in sight.

These conditions prompted a decline in home sales of -4.5% from
September and inventory levels rose to a 4.1 month supply. The
low interest rates should continue to support sales but the
number of buyers as indicated by the confidence report has 
fallen to a six year low. With buyers shrinking and inventory
rising it does not take a rocket scientist to see the eventual
housing wreck. One thing between home builders and a vast
oversupply is the stock market. The negative wealth effect has
taken an entire segment of potential buyers out of the market. 
Until the market returns to bull status those investors will
be in conserve mode. Add in the longer-term impact of the baby
boomers selling their family homes over the next few years to 
move into smaller retirement homes and condos and the eventual
rise in rates and trouble is brewing. Mortgage applications have
already been trending down for several weeks. 

Due to the shortened week there are a flood of economic reports
due out on Wednesday. The Fed Beige Book, Chicago PMI, Durable 
Goods, Jobless Claims, Mortgage Applications, Personal Income
and Spending, Help Wanted Index and another Consumer Sentiment
report will be announced. This flurry of reports after today's
mixed numbers would have been enough to trigger profit taking
by many traders. 

Tech traders were also worried about the SUNW mid quarter 
update due out at 4:30 this afternoon. SUNW said it was expecting
a seasonal uptick in sales and affirmed it's revenue estimates 
for the current quarter. However, they said pricing was very
competitive and margins would be below last quarter's levels 
of 41.2%. SUNW refused to give any profit estimates saying the
conditions were still tough. Analysts expect them to post a
penny loss in the current quarter. This was actually an upbeat
report since they refused to give any visibility in last months
conference call. 

NVLS affirmed guidance for an +11 cent profit and said orders
for new equipment could exceed previous projections. The 
company said conservative scenarios were still being executed
by customers but the outlook was hopeful. CHRT gained ground
on news that it had a new deal with IBM for an advanced semi
manufacturing processes. 

The market the rest of the week is a toss up. Historically the
day before and after Thanksgiving is bullish. I outlined a 
scenario in the Market Monitor this afternoon that suggested
a bullish bounce was possible tomorrow. The reasoning behind
this is the "forced bottom" tactic by big money. Sometimes
when big money sees potential bullish conditions ahead but
are looking for a potential entry point they try to force a
bottom. They sell short stocks they want to buy to try and 
find a support level where buyers appear. Essentially they try 
and run the stops and take out all the weak holders and find 
out where the real buyers are lurking. When conditions are ripe
for profit taking they can accelerate this process and when 
the market stops falling they cover the shorts and go long. 
With historical trends favoring bullish conditions later this
week this was a good day to try and force an entry point. 

Nobody knows if this is what happened today and it could have
been just normal pre-holiday profit taking. However, if the
week has been bullish for the last nine years then why take
profits today and miss the buyers? You can easily see why 
trying to analyze daily market trends can drive you crazy. 
Fox Mulder would never have run out of X-Files plots if he
had been investigating the markets instead of aliens. 

Any rally later in the week will run into the beginning of
earnings warning season next week. This is where reality
will meet expectations once again and any flurry of negative
news could sink the current bullish sentiment. There will 
be the endless news stories about the success or failure of
retail sales over the holiday weekend. That will color
the market outlook going forward as it will be the first
real clue about the current strength and mindset of the 
consumer. It is time for consumers to stand up and vote 
for a recovery with their holiday dollars.  

Enter Very Passively, Exit Aggressively!

Jim Brown
Editor


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

Testing the Trend 
By John Seckinger
jseckinger@OptionInvestor.com

Bears finally had their way with the market on Tuesday; however,
history is clearly with the Bulls from Wednesday into early part 
of next week. 

Tuesday, November 26th at 4:15 P.M. 

Contract          Net Change     High        Low        Volume    

ES02Z     912.25    -17.50      932.50      910.75      523,417
YM02Z    8665.00   -162.00     8844.00     8660.00       21,699
NQ02Z    1088.50    -37.50     1127.50     1088.50      219,653

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:  The first report traders had to digest was the 
3Q GDP revision release, which rose to 4.0% from the advance 
report of 3.1%.  Soon afterwards, it was reported that Consumer 
Confidence rose to 84.1 in October from 79.6, month prior; thus 
breaking a string of 5 consecutive declines.  At the same time, 
new home sales fell from 1.054 million to 1.007M.  Estimates were 
for a 985k number.  Nonetheless, traders seemed disregard the 
reports and take the market lower.  In other news, there was a 
report that mobile phone sales rose 7.8%; possibly signaling a 
rebound in the industry.  Additionally, Morgan Stanley raised 
Intel’s 4Q estimates and price target (from $22 to $25), while 
Legg Mason downgraded QCOM to “hold” and Deutsche lowered 
Emulex’s rating to Hold from Buy.  

Technical News:  The 30-year bond posted a strong gain on 
Tuesday, rising 1’05 to 111’00 and closing above both its 50 and 
22 DMA’s (110’18 and 110’28, respectively).  This rebound places 
the ZB02Z contract back on an upward trend line that has been 
significant since October 24th.  Additionally, it appears that the 
contract might be in the process of forming a right shoulder in a 
H&S formation.  This should imply that Treasuries are at a 
critical pivotal area.  It was rumored this morning that a West 
Coast Fund was buying ten-year calls (on price, looking for lower 
yields); most likely done as a way to hedge against equities 
continuing their rise.  

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

The December Mini-sized Dow Contract (YM02Z)

During the Wednesday-Monday period around Thanksgiving, only 
three years since 1987 has the Dow declined.  With the bullish 
intermediate trend still holding within the blue chips, light 
volume over the next few days should be in favor of bulls.  
Nevertheless, it always makes sense to look at what could happen.  
A daily chart of the Dow shows a bearish divergence in the MACD, 
as well as prices failing to test its 200 DMA above.  Both of 
these developments will certainly weigh on traders’ minds before 
taking on a long position.  

Amazingly, the longer bullish trend line (blue, more vertical) 
bisected the 8670 level (intra-day low) during trading on 
Tuesday.  Since this line is upward sloping, an unchanged Dow on 
Wednesday would actually be viewed as negative from a technical 
point of view.  If this trend line is not on traders’ minds (hard 
to know for sure since the Dow closed only 6 points above its 
low), then I will be looking to the 22 and 50 DMA’s, as well as 
the trend line that began on October 15th.  This line currently 
comes in at 8525 and slopes upward as well.  

Chart of Dow Jones, Daily 


 

A chart of the YM02Z contract shows prices falling back 
underneath 8684 (prior wedge objective) and towards the 8632 
area, which would close the gap left on November 21st.  Support 
underneath 8632 is seen at 8550.  If the YM does rise back above 
8684, there is a good chance shorts will cover and bulls will 
regain some lost confidence.  Resistance above 8684 is seen at 
8750 and 8800.  A close under 8550 would definitely be viewed as 
bearish, especially since the MACD continues to trade downward.  
A close between 8750 and 8825 would be neutral.  Between 8825 and 
8875, slightly bullish.  

Chart of YM02Z, 10-minute 


 

YM02Z

Support               Resistance                Pivot    
	
8684				8750				8800
8550				8000				8750
8425				8025				8632
8398				8875				8550



Bold signifies levels within the Dow Jones.  

The December E-mini Nasdaq 100 Contract (NQ02Z)

The Nasdaq-100 (NDX) settled exactly on its 200 DMA yesterday, 
only to fall on Tuesday back underneath 1100 and towards support 
between 1072 and 1079.  The bearish divergence with the RSI 
oscillator remains, but prices will have to fall under 1000 
before bears can mark an end to the recent rally.  On Wednesday, 
bulls will most likely not get aggressive until prices rise above 
1100, and traders could still be nervous about holding positions 
as long as the 200 DMA looms above.  Using the theory that prices 
will finish higher during the Wednesday-Monday timeframe, look 
for bids either in the 1070’s or above 1100.  If the market falls 
under 1070, watch volume carefully as there could be either a 
bear trap or the start of a significant decline.  

Chart of NDX, Daily 


 

A 10-minute chart of the Mini-Nasdaq 100 Contract (NQ02Z) shows 
prices breaking its regression channel and aggressively falling 
towards the 1072 area.  Note:  1065 in the NQ02Z closes the gap, 
while 1070 in the NDX accomplishes the same feat.  If the NQ can 
get back above 1100, look for a test of the bottom of the 
aforementioned channel, currently at 1122.  It would take a close 
above 1135 before bullish sentiment reaches levels seen just a 
few days back.  If that happens, talk of the 1172 level will 
resurface once more.  

Chart of NQ02Z, 10-minute 


 

NQ02Z

Support              Resistance                 Pivot 

	1072				1100				1122
1065				1110				1100
1053				1122				1088
1023				1131				1072
	1000				1154				1053

Bold signifies levels within the NDX.  

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

Failed again.  The S&P 500 index failed once again to close above 
the long-term bearish trend line that began in March.  Moreover, 
a 38.2% retracement level from March until October turned into 
resistance on Tuesday.  The S&P 500 contact is currently at a 
pivotal juncture, settling on the mid-point of a regression 
channel and riding a bullish trend line that began in early 
October (blue line).  Another close under this trend line should 
have negative implications, while bullish traders are most likely 
still waiting for a close above the 936 level before really 
jumping in with two feet.  Note:  If prices fail to hold to its
bullish trend line, solid support is not found until near the 890 
level.  More aggressive support is seen at 910 and 905. 

Chart of S&P 500 Index, Daily 


 

The ES02Z contract is also showing the same failure to hold onto 
its intermediate trend line.  Furthermore, solid support is not 
seen under this trend line until 901.75.  The contract’s 200 PMA 
comes in at 892.69 and should continue to trend higher as time 
passes.  This average usually holds solid significance on a 
closing basis.  A move above 926.50 should attract buying 
interest going forward, while a close above 926.50 would be 
viewed as slightly bullish.  A close under 908.50 would be 
bearish.  

Chart of ES02Z, 30-minute 


 

ES02Z

Support              Resistance                 Pivot    
									
910				927				937.50
905				930				926.50
901.75			937				923.50
	893				956				908.50

Bold signifies levels within the S&P 500.  

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/112602_1.asp


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

The Sky Is Falling, The Sky Is Falling!
by Steven Price

Was this the end of the rally?  It certainly felt like it as the 
markets were bleeding red around us.  However, after a 1500-point 
gain in the Dow since October 9, didn't it deserve a bit of a 
breather?  Markets rarely go straight up, without some type of 
pullback (excluding the late 1990s, but anyone seen CMGI lately).  
The day surrounding Thanksgiving are traditionally bullish, so 
don't go pulling on those shorts just yet. 

Today's pullback was certainly more than a blip, but so was the 
recent rally.  On a percentage basis, we just gave back about 11% 
of the rally. While that is significant, if we gave back only 11% 
of most rallies, we wouldn't have been in a bear market the last 
couple of years. We may have more to give back, as well, so bulls 
and bears are both free to feel confused about where we're headed 
next.  One indication that it may be time for a pause is that the 
bullish percentages are all fairly extended, which can be 
expected after a 21% move in the Dow.  The Dow bullish percent, 
which bottomed at an extremely oversold (anything below 30 is 
oversold) 8% in October, has now rebounded into overbought 
territory at the threshold for that status of 70%. The NDX has 
bounced from 14% to 78%.  The SPX is right up against its bearish 
resistance line at 66% and the COMP, which registers a narrower 
range, is also against bearish resistance at 48%.  This tells us 
a couple of things.  First, it tells us that there are an awful 
lot of point and figure buy signals being given by stocks in the 
various indices.  Second, it tells us that it may be time for a 
pullback from overbought territory.   That doesn't mean the 
pullback has to be of enormous magnitude, but that we should be 
conscious of the downside risk after such a big run.   The key 
may be where that pullback stops.  In fact, the Dow could pull 
all the way back to 8500 and still constitute a higher high in 
the current rally pattern of higher highs and higher lows. The 
Nasdaq could make it back to 1400 and still not be a bearish 
indication.   Of course, if we actually saw some increase in 
spending by businesses, that would help the bullish theory.  

This morning's economic data showed a GDP revised upward in the 
third quarter, from 3.1% to 4%.  Good news, huh?  Well, it would 
have been better if economists hadn't also lowered expectations 
for the fourth quarter from 2.7% to 1.4% and for the first 
quarter of 2003 from 3.3% to 2.5%. Bah, humbug!    On the plus 
side (sort of), the Consumer Confidence number showed a gain from 
last month's reading of 79.6, to a November reading of 84.1.  The 
problem was that expectations were for a reading of 84.8.  We 
also saw new home sales drop 4.5% in October, but still came in 
above expectations and September's number was revised higher, as 
well.  

Apparently the big institutions aren't too worried about an 
extended drop, as the Market Volatility Index (VIX) remained 
under 30.  It gained a couple of points, as it does on most 
triple digit drops, but at 28.74 is still quite a bit lower than 
we've seen in recent months. 

We saw an across the board sell-off, with scant few sectors in 
the green.  The biggest winner was the HMO index, which bounced 
from an incredible sell-off the last week on concerns about 
pricing limitations and government investigations into industry 
practices. 

We also saw action in bonds as some of the cash flowing from 
equities found a new home.  Interestingly, one could argue that 
the recent bond sell-off just registered a double bottom (bearish 
for stocks). However, after its own bearish head and shoulders 
formation over the last month, equity bears will need a continued 
cash shift from equities to bonds to support the argument.  The 
other argument (hush, hush) is that the H&S formation failure in 
the Dow wasn't really a failure:  The "head" at 8800 was actually 
the left shoulder, and the recent rally to 8868 was the head.  
But you didn't hear that from me.

Get your trading out of the way in the morning, because the 
trading floors will empty out as the day wears on ahead of the 
holiday.  Friday's half-day should be a non-event, as well.  Eat 
well, and remember that turkeys with a few extra puts rarely get 
stuffed.


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  8676

Moving Averages:
(Simple)

 10-dma: 8627
 50-dma: 8211
200-dma: 9194



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  913

Moving Averages:
(Simple)

 10-dma:  911
 50-dma:  870
200-dma:  984



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1087

Moving Averages:
(Simple)

 10-dma: 1072
 50-dma:  953
200-dma: 1124



-----------------------------------------------------------------
The Semiconductor Index (SOX.X):  Is the party over?  I wouldn't 
panic just yet.  However, traders need to be aware that after a 
75% gain since the beginning of October, a pullback is expected.  
How much of a pullback?  Likely levels are 350 and 329.  if we get 
a bounce from the current reading of 357, then I expect to test 
400 again, which served as resistance in June and July.

52-week High: 657
52-week Low : 214
Current     : 357

Moving Averages:
(Simple)

 10-dma: 336
 50-dma: 280
200-dma: 409

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

We saw the expected bounce in volatility on a market sell-off.  
However, we didn't see the "pop" that comes with real fear in the 
marketplace.  It is unlikely we'll see a VIX over 30 by the 
weekend, as traders avoid purchasing premium before an extended 
weekend.  It is tough to absorb 5 days worth of premium decay, in 
exchange for 1 1/2 days of trading opportunity.


CBOE Market Volatility Index (VIX) = 28.74 +1.79
Nasdaq-100 Volatility Index  (VXN) = 47.99 +2.31

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.83        442,445       367,544
Equity Only    0.72        351,825       253,119
OEX            0.94         17,217        16,145
QQQ            2.36         23,595        55,801


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

Bullish Percent Data

           Current   Change   Status
NYSE          47      + 1     Bull Confirmed
NASDAQ-100    78      + 1     Bull Confirmed
Dow Indust.   70      + 0     Bull Confirmed
S&P 500       65      + 0     Bull Confirmed
S&P 100       71      + 1     Bull Confirmed

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

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

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

5-Day Arms Index   1.08
10-Day Arms Index  0.96
21-Day Arms Index  1.17
55-Day Arms Index  1.22


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        854          1889
NASDAQ     1233          1996

        New Highs      New Lows
NYSE         23              23
NASDAQ       66              28

        Volume (in millions)
NYSE     1,856
NASDAQ   1,888


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

Commitments Of Traders Report: 11/19/02

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

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

S&P 500

Commercials added 9,000 long contracts, while adding only 3,700 
shorts.  Small traders added 2,000 longs to their positions, while 
adding 7,000 short contracts.

Commercials   Long      Short      Net     % Of OI 
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%)
11/19/02      446,668   480,270   (33,602)   (3.6%)

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
10/29/02      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%
11/19/02      143,070    77,332    65,738     29.8%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 114,510 - 3/26/02
 
NASDAQ-100

Commercials reduced both long and short positions by approximately 
3,000 contracts.  Small traders added 4,000 to the long side and 
2,000 to the short side.


Commercials   Long      Short      Net     % of OI 
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%)
11/19/02       42,074     52,302   (10,228) (10.7%)

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
10/29/02       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%
11/19/02       16,292    10,540     5,752    21.4%

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:   8,460  -  3/13/02

DOW JONES INDUSTRIAL

Commercials added 1,000 contracts to both the long and short side, 
while small traders reduced the long side by 1,300 contracts and 
shorts by only 300.

Commercials   Long      Short      Net     % of OI
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%
11/19/02       23,535    15,741    7,794      19.8%

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
10/29/02        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%)
11/19/02        4,428     8,203    (3,775)   (29.9%)

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

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


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One of the principal tenets of these conservative stock funds is 
their emphasis on large, established companies with above-average 
dividend yields and growing dividend rates.  Dividends guarantee 
that one of the two components of "total return" will be positive 
(the income component).  When stock prices fall, having an income 
emphasis offers some cushion, partially offsetting the decline in 
stock price.  Further, dividends reinvested can also account for 
a substantial portion of one's long-term return.  T. Rowe Price's 
website states that 47% of the S&P 500 index total return during 
the 20-year period through December 31, 2000 was attributable to 
reinvested dividends.

A second tenet of conservative equity investing is often a value-
driven discipline.  These products emphasize "cheap" stocks with 
attractive, secure dividends - allowing investors to participate 
in bull markets, while minimizing potential losses in downswings.  
As T. Rowe Price portfolio manager Steve Boesel states, "Cutting 
off the downside is the real power of the conservative approach."

Third, dividends may also be a good indicator of a corporation's 
financial health.  Corporations are not obligated to share their 
earnings with stockholders, T. Rowe Price contends, so dividends 
and consistent dividend increases are important signs of company 
profitability, as well as management’s assessment of the future.  
To the degree that rising dividends reflect rising profits, they 
say, companies that consistently increase their dividends should 
enjoy rising share prices over time.  

In the next section, we show you how we identified these equity 
income best-fit matches.

Screen Process

Because we wanted to emphasize the power of reinvested dividends, 
our screen this week includes only equity income funds with more 
than 10 years of performance to evaluate.  In fact, we toughened 
our screen to yield only funds that have outperformed the market 
as measured by the S&P 500 index over the 10-year period through 
October 31, 2002.

In addition to the 10-year return requirement, we added other 
criteria to quickly narrow the field using Morningstar's Fund 
Selector tool available online (www.morningstar.com).

 Initial Screen Criteria:
 Fund Group = Domestic Stock
 Manager Tenure > or = Category average
 Minimum Initial Purchase < or = $3,000
 Expense Ratio < or = Category Average
 Morningstar Rating = 5 Stars (Highest)
 Morningstar Risk < or = Average
 10-Year Return > or = S&P 500

We included both load and no-load funds, and left the category 
field blank to give us all types of domestic stock funds.  The 
initial screen produced over 25 results, so we added two other 
criteria to make our screen more stringent.  In the "portfolio 
characteristics" section, we added:

 Additional Screen Criteria:
 Turnover Rates < or = 150%
 Average Market Capitalization > or = $10 billion

Here, we just wanted to make sure turnover wasn't too high and 
the portfolio was invested in established companies with large 
market capitalizations.  The revised criteria produced just 19 
results, which we next sorted by Morningstar category, to find 
the ones with equity income or large-cap value classifications, 
since some equity-income funds land in Morningstar's large-cap 
value category.  We identified three potential best-fit matches 
as follows:

 Potential Best Fit Matches:
 Van Kampen Growth & Income A (ACGIX)
 Parnassus Equity Income (PRBLX)
 T. Rowe Price Equity Income (PRFDX)

We next entered the three large-cap value funds into Lipper's 
Lipper Leader tool online (www.lipperleaders.com) to find out 
what classification they give the funds and how the funds are 
scored on return, preservation, expense and other performance 
measures.  According to Lipper, Van Kampen Growth & Income is 
classified as a "multi-cap" value fund, while Parnassus and T. 
Rowe Price are true "equity income" funds.  

Below is a summary of how Lipper scored for the three funds in 
different measures based on data effective October 31, 2002:

 Lipper Score for Total Return (1-Best):
 "2" Van Kampen Growth & Income A (ACGIX)
 "1" Parnassus Income Equity (PRBLX)
 "1" T. Rowe Price Equity Income (PRFDX)

 Lipper Score for Consistent Return (1-Best):
 "1" Van Kampen Growth & Income A (ACGIX)
 "1" Parnassus Equity Income (PRBLX)
 "1" T. Rowe Price Equity Income (PRFDX)

 Lipper Score for Preservation (1-Best):
 "1" Van Kampen Growth & Income A (ACGIX)
 "1" Parnassus Equity Income (PRBLX)
 "1" T. Rowe Price Equity Income (PRFDX)

 Lipper Score for Expense (1-Best):
 "1" Van Kampen Growth & Income A (ACGIX)
 "2" Parnassus Equity Income (PRBLX)
 "1" T. Rowe Price Equity Income (PRFDX)

You can see that each of the three funds either has the highest 
"1" score (i.e. Lipper Leader designation) or a close "2" grade 
in key areas.  However, the three are rated "4" or "5" for tax-
efficiency so they may be better suited to IRA and tax-deferred 
accounts, though they can certainly be used in taxable accounts.

To make sure we had funds with high dividend yields, we returned 
to Morningstar's screen results and scored the three funds using 
Morningstar's "Score These Results" tool.  We clicked the "Score" 
box and added "high yield" to the default criteria list to allow 
us to rank the funds by highest to lowest yields.  Each fund was 
among the yield leaders (out of the 19 Morningstar fund results).

The only funds with better yields that these funds were balanced 
funds that typically invest a considerable portion of net assets 
in fixed income securities.  Vanguard Wellesley Income Fund, for 
example, topped the list with a 4.7% yield, followed by Vanguard 
Wellington with a 3.4% yield.  The former normally invests about 
60% in fixed income securities, while the latter typically holds 
about a 40% position in bonds.  Both funds have solid records of 
total return performance over time.

In the next section, we take a closer look at the three best-fit 
matches.  All three are classified as "large-cap value" funds in 
Morningstar's system, and have the desired fund characteristics.

Van Kampen Growth & Income A (ACGIX)
Parnassus Equity Income (PRBLX)
T. Rowe Price Equity Income (PRFDX)

Each of these funds seeks income and long-term growth of income 
and capital by investing primarily in income-producing equities.  
Van Kampen's fund may purchase investment-grade bonds and limits 
its investment in foreign equities to 25% of assets.  Parnassus' 
fund normally invests at least 75% of assets in dividend paying 
equities and invests the balance of assets in stocks that do not 
pay dividends.  It may also invest in fixed income securities of 
investment-grade quality.  The stocks held in the Parnassus fund 
generally pay a dividend, which is at least equal to the average 
stock included in the S&P 500 index.  Parnussus' fund adheres to 
certain social criteria also - it won't invest in the stocks of 
companies producing alcohol, tobacco, weapons or nuclear energy.

T. Rowe Price's primary objective is dividend income; potential 
capital appreciation is a secondary consideration.  It puts at 
least 65% of assets in income-producing common stocks, looking 
for those with above-average yields and prospects for earnings 
and dividend growth.  T. Rowe Price also considers the stock's 
relative valuation, as well as the company's overall financial 
strength and competitiveness.  Like Van Kampen's product, this 
one may invest up to 25% of its assets in foreign securities.

A closer look at the funds' portfolio characteristics show how 
similarly they're invested.  Each fund's average P/E ratio and 
median market capitalization are summarized below.

 Average P/E Ratio:
 25.1x Van Kampen Growth & Income A (ACGIX)
 22.5x Parnassus Equity Income (PRBLX)
 22.1x T. Rowe Price Equity Income (PRFDX)

 Median Market Capitalization:
 $18.6 Bil. Van Kampen Growth & Income A (ACGIX)
 $25.4 Bil. Parnassus Equity Income (PRBLX)
 $18.0 Bil. T. Rowe Price Equity Income (PRFDX)

Those numbers compare to an average P/E of 25.4x and average 
market capitalization of $44.2 billion for the S&P 500 index, 
using Vanguard's 500 Index Fund as the proxy.  Each fund also 
sports a yield comparable to that of the S&P 500 index (1.61%).  
Parnassus' fund has the highest yield of three funds at 1.73%, 
followed by T. Rowe Price at 1.66%.  Van Kampen's fund has an 
average yield of 1.34%, slightly below that of the market and 
other two funds, but still in the ballpark.

With similar portfolio characteristics, you would expect fund 
performance to be comparable, and investment results over the 
long term have indeed been good across all three fund options.  
According to Morningstar, the three funds sport the following 
average 10-year returns (October 31, 2002) and category ranks:

 Annualized 10-Year Return:
 +11.6% Van Kampen Growth & Income A (ACGIX)
 +11.3% Parnassus Equity Income (PRBLX)
 +11.1% T. Rowe Price Equity Income (PRFDX)

 Percentile Rank in Category:
 "8th" Van Kampen Growth & Income A (ACGIX)
 "11th" Parnassus Equity Income (PRBLX)
 +14th" T. Rowe Price Equity Income (PRFDX)

Each fund beat the S&P 500 index over the 10-year period by a 
wide margin.  Vanguard 500 Index Fund, which tracks the total 
return performance of the S&P 500 large-cap index, produced a 
9.9% annualized return during the same period.  

Through disciplined active management, these three funds have 
also been successful at lowering fund risk.  Each is rated by 
Morningstar as having "below average" risk versus their peers; 
each is a Lipper Leader for "preservation."  All three equity 
income funds are managed by seasoned investment professionals.  
Brian C. Rogers has managed T. Rowe Price Equity Income Fund 
since its October 31, 1985 inception date.  Jerome Dodson has 
managed Parnassus Equity Income Fund since its September 1992 
inception.  James Gilligan of Van Kampen Growth & Income Fund 
started on August 2, 1993.  The Van Kampen equity-income fund 
started operations on August 1, 1946.

Conclusion

Van Kampen Growth & Income Fund, Parnassus Equity Fund, and T. 
Rowe Price Equity Income Fund are three income-producing stock 
funds worth considering for investors whose priority is income.  
These conservative stock funds have the potential to be a more 
stable income source than a portfolio of bonds or money market 
securities, T. Rowe Price asserts, particularly now that rates 
(yields) are at 40-year lows.  

Another potential benefit is "inflation" protection.  Dividends 
have historically grown faster than inflation over long periods 
of time.  T. Rowe Price's website states that from 1980 through 
2000, dividends paid on S&P 500 index stocks rose at an average 
annual rate of 5 percent, from $6.16 to $16.27 per share, while 
inflation averaged 3.6% for the same period.  Inflation isn't a 
worry today, but over the next 20 years, it could rear its ugly 
head again.

The key to success for equity-income strategies is "staying the 
course."  If you have a long-term horizon and can let the power 
of compounding dividend income go to work for you over the long 
run, these strategies can over time produce solid total returns 
for investors, often with below average relative risk.  As such, 
they can serve the "core" equity investment role in a long-term 
financial plan.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

Being Selective

What to do with a rising market? That was the big question today, 
as we got a significant sell-off in the OEX, SPX , COMPX and NDX. 
We have been in a clearly rising market for the last couple of 
weeks.


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The Option Investor Newsletter                  Tuesday 11-26-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: ETN
Dropped Puts: None
Daily Results
Call Play Updates: ADBE, ICOS, IMCL, GNSS, MSFT
New Calls Plays: QCOM
Put Play Updates: JBLU, SLM, HSIC
New Put Plays: BDK


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

ETN $73.39 -2.33 (-2.03) There's profit taking and then there's
outright selling.  ETN was looking good on Monday, but the
sellers really piled on today with the weakness in the broad
markets.  The stock slid more than 3% and although the stock
ended above our $72 stop, the action did not look good.  Selling
off on above average volume, combined with a violation of the
200-dma and a close at the low of the day does not paint a
bullish picture.  Rather than hold on for a possible bounce, we
want to cut our losses and exit the play ahead of the holiday
weekend.  If holding open positions, use any pre-holiday bounce
as an opportunity to exit the play at a better level.


PUTS:
*****

None


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

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

CALLS              Mon    Tue    Wed   Thu  Week

ADBE     28.87    0.47  -1.40  pullback w/market weakness
ETN      73.99    0.17  -2.33  Drop, too much 
GNSS     19.50    2.21  -1.91  Above PnF breakout
ICOS     30.21    1.37  -1.91  Holding over $30
IMCL     13.67   -0.78  -1.04  $13 buyers?
MSFT     56.90    0.17  -1.33  Still over consolidation
QCOM     40.45    1.24  -1.45  New, Entry Point


PUTS               

BDK      42.17   -0.20  -1.33  New, severe rollover
HSIC     41.06   -1.76  -0.47  Bounce failed
JBLU     35.31    0.99   0.46  No reversal yet
SLM      97.85    1.76  -2.91  New relative low


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

ADBE $28.91 -1.37 (-0.90) After testing its 200-dma on Monday,
the NASDAQ-100 earned a rest and Technology shares were sold
throughout the day on Tuesday, with the NDX shedding a fat 3.5%
by the closing bell. As one of the leading sectors on the way up,
it should be no surprise that the Software index (GSO.X) was one
of the leaders when profit taking arrived.  For the day, the GSO
index gave up just over 3.6%, falling back under its own 200-dma.
Making the trifecta complete, our ADBE play succumbed to the
market and sector weakness, losing 4.5% and closing back under
its own 200-dma.  While ADBE did finish near its low of the day,
such a move still fits within our bullish scenario, as a bit of
profit taking was necessary to give us an attractive entry into
the play.  While some intraday support began to form near $28.50
late in the day, if the broad market continues to be weak on
Wednesday, we wouldn't be surprised to see a pullback into the
$27.50-28.00 range.  A rebound from that area would set up a nice
entry point into the play, as risk is easy to manage with our
stop resting at $27.  Momentum traders are going to have to wait
for a bit, as they won't see a solid entry into our ADBE play
until the stock rallies through the $30.50 level, the site of the
recent highs.

---

ICOS $30.21 -1.91 (-0.45) To say that the Biotechnology sector
was a little weak on Tuesday would be quite the understatement,
as the BTK index was the sector loser with a 5.15% slide.  The
day started off badly for the sector, with BGEN cut to a Sell by
Merrill Lynch.  While the firm was at it, they also dropped their
rating on IDPH from Buy to Neutral, and the bearish tone in the
sector was set for the day.  Following the action in the BTK
pretty much sums up what happened to our ICOS play, as the stock
started out at the high of the day and ended very near the low,
giving up nearly 6% as traders harvested some of their recent
gains.  The stock got a bit of a late day pop from just below
the $30 level, and that sets the stage for the action for the
remainder of the week.  The BTK index will need to hold above
the $350 level to keep the string of higher lows intact and ICOS
needs to find willing buyers above the $29 support level.  Note
that our stop is now at $28.50 as that level shouldn't be
violated if the bullish trend is to remain intact.  Look for a
rebound from support to provide entry into the play, but make
sure the BTK is showing renewed signs of strength before
plunging in.  After midday on Wednesday, be aware that trading
volume will likely slacken considerably for the remainder of the
week.

---

IMCL $13.67 -1.04 (-1.37) While we aren't yet ready to throw in
the towel on our IMCL play, the momentum run that the stock has
been enjoying for the past few weeks may be in trouble.  With
downgrades of BGEN and IDPH before the open on Tuesday, the
Biotechnology index (BTK.X) was under heavy selling pressure
throughout the day and went out near the low of the day with a
more than 5% loss.  The loss of sector strength led momentum
investors to harvest some of their recent gains in IMCL, knocking
our play down for a 7% loss on the day.  But before you panic,
take note of the fact that the stock halted its slide just above
$13, a former level of resistance that is now looking like
support.  The key will be to see how IMCL and the BTK behave
going into the long weekend.  If the sellers disappear back into
the woodwork and IMCL finds support above the $13 level, this
pullback will provide us with another entry into the play.  We
need to be careful beyond midday on Wednesday though, as volume
is likely to dry up considerably, making it harder to quantify
the strength of any move.  Trade the bounce if it fits your
risk profile, but if it lacks strength, the prudent move will be
to wait until next week before gaming new entries.  Because of
the possibility of a continued slide, we're raising our stop to
$12.50.  A close below that level would go a long ways towards
confirming the rally has come to at least a temporary end.

---

GNSS $19.49 -1.92 (+0.51 for the week) Genesis reached another 
new high on Monday, trading as high as $21.49 intraday, before 
settling in at $21.42.  Tuesday, the stock pulled back on an ugly 
day for the broader markets, establishing a PnF reversal down 
into a column of "O."  In our last write-up we talked about a 
possible entry on a pullback as low as $18.  However, after the 
big run, following a breakout from resistance at $19.00, we like 
the bounce today above that previous resistance level. In fact, 
the stock found decisive buying in the last couple of hours, 
setting a series of higher highs and higher lows on the intraday 
chart, in spite of the Nasdaq selling off through that period of 
time.  A look at the point and figure chart  shows the pullback 
stopping at the last buy signal of $19 and we could simply be 
seeing a new buying opportunity on the dip.  New entries can look 
for continued support over that $19 level.  If the stock trades 
as low as $18, we'll reconsider the long play here, but until 
that time, the trend is still up. The recent run has included 
three previous PnF reversals after big legs up and this appears 
to be a repeat of that pattern. After a tremendous run in the 
SOX, the chip index also got a pullback today.   However, markets 
do not go straight up, and after a 75% gain since October 9, this 
pullback was to be expected. 

---

MSFT $56.90 -1.33 (-1.32 for the week) Microsoft pulled back 
today, after the last four days of gains, along with the rest of 
the market. After a big run in the last week, the market was due 
for some profit taking ahead of the holiday weekend and it 
appears we got that Tuesday.  After breaking out from 
consolidation under $57 on November 21, MSFT found support at 
$56.78 and a top just under $59.  The 50-dma of $56.75 has been 
rising and provided the stock with support today.  In fact, the 
stock bounced just 0.03 above that average, at the same $56.78 
level.  We like the fact that the stock continues to find buyers 
on the pullbacks, but we are going to raise our stop to $56.00, 
which would be a break under recent support and the 50-dma. MSFT 
remains on a double top buy signal on the PnF chart, with a 
bullish vertical count of $84, even after today's action.  We 
don't want to panic and close a long play on one of the strongest 
stocks in the market.  With the recent success of MSFT's Xbox 
live, the company should see another revenue boost as we head 
into the Christmas season.  A look at the ascending regression 
channel that has contained the stock since its break above $50 
shows several successful tests of the bottom trend line, which 
right now is sitting at $56.00, coinciding with our stop loss. 
We'll hang on long here as long as that channel remains in tact 
and new entries can initiate with a trade back over the recent 
high of $58.64.


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

QCOM – Qualcomm, Inc. $40.45 -1.45 (-0.23 this week)

Company Summary:
Based on its proprietary CDMA technology, QCOM is engaged in
developing and delivering digital wireless communications
services.  The company's business areas include integrated
CDMA chipsets and system software and technology licensing.
QCOM owns patents that are essential to all of the CDMA
wireless telecommunications standards that have been adopted
or proposed for adoption by the worldwide standards-setting
bodies.  Currently, QCOM has licensed its CDMA patent portfolio
to more than 80 telecommunications equipment manufacturers
around the world.

Why We Like It:
While it is now common knowledge that Technology stocks have been
leading the recent market rally, many investors have missed the
fact that the Wireless Telecom index (YLS.X) was the first
sub-sector to rise above its 200-dma (currently $51).  Since that
breakout, the YLS rose through the $60 level, led in part by
strong stocks like QCOM.  Showing strength relative even to the
YLS index, QCOM broke out above its 200-dma in mid-October, and
once the sector caught up, it helped to propel QCOM through
resistance at $37, and then again at $40.  That initial surge off
the October lows generated a strong Buy signal on the PnF chart,
with a corresponding bullish price target of $60.  Combining
fundamentals with technicals, QCOM has been propelled higher by
positive news in recent weeks, capped off by last Wednesday's news
that Samsung will be using QCOM chips in its new wireless phone.
Since its breakout, we've been looking for a pullback to allow us
to initiate a bullish play on this strong stock, and with today's
bout of profit taking, it looks like our opportunity has arrived.
While the YLS index slid by 4.5% on profit taking, QCOM only gave
up 3.5% and held above the important $40 support level.  This is
particularly impressive when you consider the Legg Mason downgrade
this morning from Buy to Hold due to valuation.  While a rebound
from the $40 level might make for a favorable entry point into the
play, the severity of the broad market weakness on Tuesday has us
thinking that a dip and rebound from the $39 support level is more
likely.  We want to give this play some room to move due to its
sometimes volatile nature, so we're initially setting a fairly
wide stop at $36.75, just below last week's lows.  Any
volume-backed rebound from above that level can be used for
initiating new positions, provided the YLS index is also showing
positive price action.  If momentum trading is your strategy,
then you'll want to wait for QCOM to rally through the $42 level
before playing.

BUY CALL DEC-37 AAW-LU OI=15135 at $4.10 SL=2.50
BUY CALL DEC-40*AAW-LH OI=11254 at $2.40 SL=1.25
BUY CALL DEC-42 AAO-LV OI= 5194 at $1.30 SL=0.75
BUY CALL JAN-40 AAW-AH OI=18779 at $3.70 SL=2.00
BUY CALL JAN-42 AAO-AV OI= 5689 at $2.40 SL=1.25

Average Daily Volume = 16.5 mln



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

JBLU  $35.31 +0.46 (+2.29 for the week) Jet Blue has continued to 
act contrary to the market around it.  Following a major 
breakdown the last week and a half, it has bounced the last two 
days.  After giving a fresh sell signal at $34.00 and breaking 
down below its bullish support line on the point and figure 
chart, the recent bounce has fallen short of a reversal up and 
still looks bearish.  The recent announcement from Delta that it 
would venture into the low cost airline segment, competing 
directly with airlines such as Jet Blue and Southwest, kept the 
stock tumbling last week and after losing more than $6 in a week, 
we are most likely seeing an oversold bounce.  The MACD still 
looks bearish, although the stochastics are turning up.  The 
descending bearish resistance line is above at $39.00, but we 
don't want to give the stock that much room to move against us.  
A PnF reversal into a column of "X" could signal a move up to 
that level, so we'll set our stop at $36 to avoid that risk. New 
entries should wait for a break back below Tuesday's low of 
$34.50 for evidence that the bounce has run its course and rolled 
over again. 

---

SLM $97.85 -2.91 (-0.75 for the week) Sallie Mae got a bounce 
from Friday's sell-off, only to fall short of the $101.00 
resistance level and tumble back through the 50-dma with a $2.91 
loss on Tuesday.  We identified our ideal entry point in the 
original play write up as a bounce under $101, and got that entry 
on Monday, with a high of $100.99.  Today's drop fell below the 
lows of both Friday and Monday and finished the session near its 
low of the day, indicating more sellers piling on.  The 200-dma 
sits at $95.30 and is the next likely support level for SLM.  
There is also some support on the daily chart at 94, 93 and 90.  
The recent sell-off came after statements from Senator John 
Edwards that he would propose a program to make the first year of 
college free.  This would heavily affect profits from educational 
lending, which is the company's primary source of income.  The 
stock's PnF chart shows some support at a rising trendline where 
the stock currently sits at $98.  A trade of $97 would be 
required to add another "O" and break that trendline.  The 
bullish support line coincides with the 200-dma at $95.  Those 
traders who did not enter on the bounce can look for a break 
under $97, but should be aware of support at $95 and reduced 
risk/reward with the recent bounce over $100.  Conservative 
traders can look for a break under the $95 support level.

---

HSIC $41.06 -0.47 (-2.54) After falling off a cliff last week,
shares of HSIC were due for a bit of an oversold rebound, and
if the action of the past 2 days is any indication, we're not
going to get much of a rebound.  Monday's positive action
continued this morning, with HSIC rising as high as $42.75
before the broad market really started to weaken.  When it
became clear that the broad market was heading south for the
day, the weak bounce in HSIC came to an abrupt end, sending
the stock back near the site of its recent lows near $41.
Entries taken on the rollover this morning are looking good
and if the broad market continues to be week into the end of
the week, momentum traders can look to enter the play on a drop
under Monday's intraday low at $40.50.  If we get another bounce
near current levels, then new positions can be initiated on a
rollover below the $44 level, which is now shaping up as
stronger resistance.  Keep stops set at $45.


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

BDK – Black & Decker Corporation $42.17 -1.33 (-1.53 this week)

Company Summary:
Black & Decker is a global manufacturer and marketer of power
tools and accessories, hardware and home improvement products,
and technology-based fastening systems.  BDK operates in three
reportable business segments: Power Tools and Accessories,
Hardware and Home Improvement and Fastening and Assembly
Systems.  The Tools and Accessories segment includes consumer
and professional power tools and accessories, electric lawn an
 garden tools, electric cleaning and lighting products and
product service.  Hardware and Home Improvement includes
security hardware and plumbing products.  The company's
products and services are marketed in over 100 countries.

Why We Like It:
Hey buddy, can you spare a tool?  If the home refinancing and
home remodeling boom is slowing, as indicated by the recent
price weakness in shares of companies like LOW and HD, it would
seem to make sense that the companies supplying those chains
might be seeing some weakness as well.  That certainly seems to
be the case with BDK, which has broken down twice in the past 2
weeks.  The breakdown under the 200-dma seemed to coincide with
the company's announcement that they would be cutting 1300 jobs.
But the selling didn't end there, as the price continued to fall,
slicing below the 50-dma on the same day.  That opened the door
for some sideways consolidation, before the bears reasserted
their authority today, knocking the stock down for a 3% loss on
heavy volume.  While today's slide looks like it could be the
beginning of another leg down, we need to be cautious of the $42
level.  This is where price came to rest today and it is a prior
area of support and resistance.  Momentum traders will want to
trade a breakdown under $41.75 (just below Tuesday's low),
targeting an initial drop to $40 and then possibly to $38, the
site of the bullish support line on the PnF chart.  Traders
willing to exercise a bit more patience can look for a failed
rally in the $43-44 area as a good point to enter the play.
We're initially placing our stop at $44.50, just above the
intraday highs of the past week.

BUY PUT DEC-45*BDK-XI OI=282 at $3.70 SL=2.00
BUY PUT DEC-40 BDK-XH OI= 35 at $1.15 SL=0.50

Average Daily Volume = 774 K



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The Option Investor Newsletter                  Tuesday 11-26-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three: 

Play of the Day: PUT - BDK
Futures Corner: Got a Minute

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

BDK – Black & Decker Corporation $42.17 -1.33 (-1.53 this week)

Company Summary:
Black & Decker is a global manufacturer and marketer of power
tools and accessories, hardware and home improvement products,
and technology-based fastening systems.  BDK operates in three
reportable business segments: Power Tools and Accessories,
Hardware and Home Improvement and Fastening and Assembly
Systems.  The Tools and Accessories segment includes consumer
and professional power tools and accessories, electric lawn an
 garden tools, electric cleaning and lighting products and
product service.  Hardware and Home Improvement includes
security hardware and plumbing products.  The company's
products and services are marketed in over 100 countries.

Why We Like It:
Hey buddy, can you spare a tool?  If the home refinancing and
home remodeling boom is slowing, as indicated by the recent
price weakness in shares of companies like LOW and HD, it would
seem to make sense that the companies supplying those chains
might be seeing some weakness as well.  That certainly seems to
be the case with BDK, which has broken down twice in the past 2
weeks.  The breakdown under the 200-dma seemed to coincide with
the company's announcement that they would be cutting 1300 jobs.
But the selling didn't end there, as the price continued to fall,
slicing below the 50-dma on the same day.  That opened the door
for some sideways consolidation, before the bears reasserted
their authority today, knocking the stock down for a 3% loss on
heavy volume.  While today's slide looks like it could be the
beginning of another leg down, we need to be cautious of the $42
level.  This is where price came to rest today and it is a prior
area of support and resistance.  Momentum traders will want to
trade a breakdown under $41.75 (just below Tuesday's low),
targeting an initial drop to $40 and then possibly to $38, the
site of the bullish support line on the PnF chart.  Traders
willing to exercise a bit more patience can look for a failed
rally in the $43-44 area as a good point to enter the play.
We're initially placing our stop at $44.50, just above the
intraday highs of the past week.

BUY PUT DEC-45*BDK-XI OI=282 at $3.70 SL=2.00
BUY PUT DEC-40 BDK-XH OI= 35 at $1.15 SL=0.50

Average Daily Volume = 774 K



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

Got a Minute
By John Seckinger
jseckinger@OptionInvestor.com

Traders can use a one-minute chart to either help with execution 
for a long-term trade, or simply look to capture a quick move in 
a short period of time.  In futures trading, every point helps.

When taking things to a micro level, it doesn’t mean to forget 
about levels mapped out from a weekly or daily chart.  Moreover, 
if you are looking to capture a quick 5 points in the ES or 50 in 
the YM, it is ok to close a position at the close if the market 
didn’t give you your objective by session’s end.  This is good 
account management, and anything otherwise changes the scope of 
the trade (read: from day trading to swing trading).  If the 
intention is to keep the trade on overnight, fine.  

When a one-minute chart is pulled up and used to trade with, I 
have found that using MACD, retracement analysis, and the 22, 50, 
and 200 PMA’s are the best-accompanied tools.  On the other hand, 
looking at bid/ask quotes all day long seems to be more maddening 
than anything else.  There seems to be so many games going on, 
that I have not been able to use this tool effectively.  The same 
goes for RSI and stochastics, since there becomes a lot of noise 
when dealing with price changes on a minute-to-minute basis.  If 
it works for you, fantastic, stick with it.  

Getting to an example, I like to start out with the Dow because I 
feel that this market usually leads all others.  Moreover, it 
seems to trade more technically sound.  This is not always the 
case, but a good rule of thumb.  Case-in-point:  The Dow opened 
lower and never took out its open; however, both the ES and NQ 
contract fell, then rose, and then fell again.  

I have a tendency to wait for relative lows, highs, and then the 
200 PMA.  Moreover, I like to use MACD for divergences and 
a signal that either a bottom or top is forming.  With that said, 
let us dissect the chart below.  The Dow opened lower and quickly 
fell under 8800.  I suspected that 8750 would act as support, but 
a relative low of 8770 was formed.  Once a relative low is formed 
(read: I let the market trade until I can see one clearly), I 
begin to look into retracement analysis.  Note:  I only use a 50% 
retracement.  Anything more and my mind becomes overloaded.  The 
50% level comes in at 8806 and that is the pivot.  It is ok if 
the market already rose to 8809 and started to fall before the 
retracement was performed.  We need a bearish confirmation 
anyhow.  Once the Dow fell under 8809, a trader could look to 
enter a short position, either immediately or until 8770 is taken 
out.

Now that we have established a short strategy, when should we 
exit?  I could give you the “John Rule” now and we could project 
an objective, but that will come later.  For now, let us use only 
the MACD and price action.  The key will be to find a bullish 
divergence, meaning that prices are falling to new lows while 
MACD fails to make a new low.  On Tuesday, there were many 
bullish divergences early on.  One at 8735, but the key one 
seemed to happen at 8700.  I pinpoint 8700 because it has a solid 
significance beyond a one-minute chart.  Once the divergence is 
seen, traders using a one-minute chart must put in a tight stop 
and look to cover.  I would have used 8725, since that is when 
prices rose above both the 22 and 50 Period Moving Averages. 

Trade Two takes place when the 200 PMA is tested near 8750, which 
is a great level because it holds significance on a daily chart. 
Ideally, the trade would be to sell the market (read: YM 
contract) when the Dow is at 8766 (50% retracement of range so 
far); however, using the 200 DMA and then putting a stop over the 
50% area.  Once above the 200 PMA, traders taking heat on the 
short position do not have to worry too much because the MACD is 
in a bearish divergence and prices soon afterwards breaks a 
short-term bullish trend line.  It isn’t entirely necessary to 
show the rest of the chart, because the objective would be for a 
test of 8687 (second relative low) with a stop near 8775.   If 
neither is hit, I would close the position at the close.  

Chart of Dow Jones Industrial Average, 1-minute 


 

I have found that an ideal micro strategy lets a trader put his 
5-point stop in the ES (or 25 point stop in YM) at a significant 
level on more longer term charts.  Of course, sometimes 
everything does not line up perfectly.  This allows for a good 
risk/reward trade, but usually turns out to be a secondary 
thought.  I used to think the following “If it is almost 
impossible to know where to put a stop and still manage risk, 
then it probably doesn’t make sense to trade at that particular 
time.”  It makes common sense, but goes against what I have 
learned what actually works when day trading.  

The next illustration deals with the ES contract on Tuesday, 
November 26.  The bid after the opening was not expected, but 
with the gap from the previous day not closed, quickly taking a 
bearish reading was a good start (other reasons for being bearish 
had to do with the Dow’s lower opening).  

The same rules apply with both the ES and NQ contract.  With the 
ES, a trader could short underneath the first relative low at 
924.25; however, it would then require a stop at 930.  I like a 
five-point stop, but it does depend on the situation.  If not 
short at 924, a trader would then have to wait until the bullish 
divergence in MACD and test of 200 PMA at 923.  Note:  I don’t 
want to be as bearish as I seem; however, I like to go with the 
trend unless (a) a significant daily level is broken and then the 
markets rally for at least 30 minutes, or (b) I am stopped out 
and forced to re-think the daily sentiment.  After getting short 
at 923, a stop at 928 is placed and the current low becomes the 
objective.  Note:  Using that calculation for the Dow example 
would give an objective of 8696.  The actual low was 8687.  Not 
too bad.  

Chart of ES02Z, 1-minute


 

The chart below pretty much is self-explanatory; however, I now 
want to go over the “John Rule” (I am sure it is called something 
else, but I don’t hear traders discuss it too often).  This rule 
consists of taking the first relative low (or high) and 
subtracting (or adding) the range to the bottom (top) for an 
objective.  Example in the NQ: A relative high of 1123 and 
relative low of 1113.50 was clearly established early on.  The 
market fell under 1113.50 and the objective becomes 1104 (1123 
minus 1113.50, or 9.5 points subtracted from 113.50).  Ok, ok... 
the actual relative low was 1103.  With that said, it is simple 
to figure out the 50% retracement.  It is right at 1113.50, and 
that is our level to short if the market rallies.  It was nice 
that the 200 PMA was also near there, but that is probably no 
coincidence.  Moreover, the MACD showed a bearish divergence.  

Chart of NQ02Z, 1-minute


 

Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com 


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