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Daily Newsletter, Monday, 12/02/2002

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The Option Investor Newsletter                   Monday 12-02-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Not Quite There
Futures Wrap: Was that a Bull Trap?
Index Trader Wrap: Heartburn
Weekly Fund Wrap: Stock Funds Extend Gains
Traders Corner: Lessons From The Past

Updated on the site tonight:
Swing Trader Game Plan: Crucial Levels

Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
        12-02-2002        High      Low     Volume Advance/Decline
DJIA     8862.57 - 33.52  9043.37  8787.15 1668 mln   751/2400
NASDAQ   1484.78 +  6.00  1521.44  1474.59 1341 mln   954/2348
S&P 100   477.19 -  1.66   487.94   473.31  totals   1705/4748
S&P 500   934.53 -  1.78   954.28   927.72
RUS 2000  408.54 +  2.18   413.64   406.01
DJ TRANS 2381.43 + 20.81  2408.22  2361.35
VIX        30.05 -  1.03    31.64    29.97
VIXN       50.16 +  0.68    51.85    48.85
Put/Call Ratio      0.68
*******************************************************************


Not Quite There
by Steven Price

Have we finally run out of gas?  It is starting to feel that way, 
as we are approaching significant levels in all major indices.   
That's not to say we won't travel further into the green, but we 
may need to re-fill the tank in order to do so.  As we get to 
major resistance levels, not only has a whole bunch of cash 
been shifted from other assets into stocks, but shorts start to 
smell blood in the water, and begin picking tops.   

After a 1700 point gain in the Dow, we got a snapshot of how 
we'd react to the August high when we got there, with a blow-off 
top this morning. The Dow traded within 34 points of the August 
rally top at 9077, before pulling back hard; following 
manufacturing data that was released mid-morning. After topping 
at 9043.37, the blue chips pulled all the way back and re-tested 
support at 8800.  The approach to the August high provided a 
low/risk high reward short play that could be closed if that 
August high was broken.  And boy did the shorts play. 

Following last week's surprisingly strong Chicago PMI number, 
which indicated a shift from contraction to expansion, analysts 
were expecting The Institute for Supply Management (ISM) report 
to also show an increase. After two straight months under a 
reading of 50, which indicates manufacturing contraction, the 
number was expected to come in as 50.8.  The monthly diffusion 
index increased, but only to 49.2, indicating the manufacturing 
sector is still in contraction mode.  This was a big disappointment 
after most of last week's economic numbers were positive. While it 
led to a sell-off intraday, we still saw a higher low on the 
pullback, with buyers coming back at 8800, driving the average 
back up to a close of 8862.57, down only 33 points on the day.  
It makes sense that we would see some consolidation as we test 
that August high, with the 200-dma of 9177 also just above. We 
haven't seen the Dow above the 200-dma since the end of May, and 
it will take some real buying to get us over this next hump.  If 
we do, we could see blue skies above for a while, however, we need 
to crack that level first.  One more bullish sign we are seeing is 
a series of higher highs and higher lows.  

Daily Chart of the Dow



There are a number of other factors that could also weigh into a 
pullback, before we get that run.  First, the bullish 
percentages are all much extended from the recent rally. The 
bullish percent measures the percentage of stocks in a given 
index that are giving point and figure buy signals.  The Dow and 
NDX are in overbought territory at 72% and 80% respectively (70% 
is overbought), while the Nasdaq Composite is sitting on its 
bearish resistance line at 48% and the S&P 500 is sitting on its 
bearish resistance line at 66%.

We are also seeing the Dow run out of steam at the 38.2% 
retracement level from the all-time high, to July's recent low, 
for the second time at the same level. This would represent a 
more macro view of the action, and coincides with the other 
factors measured above.  Traders need to be aware of all of 
these barriers currently facing us at the end of a long rally.  
As we head deeper into the holiday season, we will see less and 
less trading activity, virtually coming to a halt between 
Christmas and New Year's Eve.   Therefore, we will require more 
than just aimless drifting to get over these levels.

Weekly Chart of the Dow 




The morning started out positive following good news from United 
Airlines, which submitted another tentative deal for a vote from 
its mechanics and Wal-Mart (WMT), which said it had experienced 
record one-day sales on November 29, the day after Thanksgiving.  
The retail behemoth registered domestic sales o $1.43 billion, 
compared to last year's day after Thanksgiving total of $1.25 
billion.  WMT cited more customers and higher average ticket 
price.  The Wall Street Journal said retail sales were better 
than expected, with a 12.3% increase on Friday and 9% on Saturday.  
There has been quite a bit of concern over whether the gains 
following recent positive news about unemployment and personal 
spending would be derailed with a slow holiday shopping season.  
Any broad based economic recovery will be highly dependent on 
consumer spending, which makes up 2/3 of GDP.  So far, the pre-
holiday shopping season had been disappointing, with several 
retailers, Wal-Mart included, saying November sales had come in 
below expectations.  

This morning's retail data was certainly a bullish sign, but we 
have to remember that comparing this year's sales to last is not 
an exact measure.  With a late Thanksgiving, and six fewer 
official shopping days between Thanksgiving and Christmas, the 
shift in sales from November to December is a reasonable 
expectation.  This weekend's big number was also somewhat 
expected, as shoppers who may have put off shopping to avoid the 
crowds, having one extra week last year, had a shorter time frame 
this year, with one less weekend. One note, however, is that the 
discounters saw much of the gain from last year, indicating 
shoppers shifting their budgets to the less expensive side this 
year.  That was apparent this weekend, as I traveled back to 
Chicago.  I stayed near my old condo just off Michigan Avenue, 
and this weekend's crowds were nothing like those of past years.  
In fact, there were NO LINES at Crate and Barrel on Sunday 
afternoon. In the past I can remember standing in line for 20 
minutes just to get up to the register.  This year I simply 
walked up and was helped immediately.  The Retail Index (RLX.X) 
finished up mildly, after an initial surge in the morning.  
There have been some cautious comments from retail groups, warning 
us not to get too excited just yet.  The Association of Shopping 
Centers warned that this weekend represented only 10% of total 
holiday sales and there was a long road before declaring the season 
a success.   The Bank of Tokyo, which puts out chain store sales 
numbers, made similar statements.  Certainly things could be 
worse, and this morning's data is a positive, but I'm not 
jumping on the retail bandwagon just yet.

We got some additional good news for the techs, after Intel 
(INTC) and Advanced Micro Devices (AMD) were upgraded by 
Lehman Brother's Dan Niles.  He cited the 180 million PCs 
that are now over four years old, which will most likely 
need replacing, as well as improving corporate profits 
that could drive business investment.  He also mentioned 
the fact that Windows 95 will enter the non-support phase 
for Microsoft at the end of the year and Windows 98 and NT 
will enter the non-support phase in June of next year. 
Those upgrades helped lift the Semiconductor Index to a 
morning high of 393.80, which was an 84% gain since the 
middle of October.  It also tested resistance at 400 from 
June and July, as well as the 200-dma at 407 and the PnF 
bullish vertical count of 412.  The group fell back to a 
close of 375 by the end of the day, but still showed a 
slight gain.  


This group helped the Nasdaq Composite break its 200-dma intraday 
once again, and post a small gain, which it held onto at the 
close.  The Nasdaq 100 closed just above its 200-dma for the 3rd 
time in the last 5 days, and these indices have been creeping 
and crawling around those 200-dmas for the last week now. Those 
gains could be extended after software maker Citrix Systems 
guided higher after the bell. It cited uncertainty in IT 
spending, which is a mantra we are hearing from virtually every 
tech, but nevertheless raised its earnings and revenue guidance, 
sending the stock up $1.43 (11.5%) after hours.  With the Dow
 testing its own this morning, look for a crossover and hold by 
all three before breathing a sigh of relief to the long side.  
While either the techs or the Dow cracking those averages looks 
bullish, one is bound to be an anchor for the others if they 
can't all accomplish the task. 

Chart of the Nasdaq Composite



Now that we are bumping our heads against that 200-dma in all 
three averages, traders can look for a decisive move above 
those levels as a signal to sharpen the horns.  However, the 
most prudent action would be to buy a pullback to support at 
those levels.  If we fail to hold the 200-dmas and head lower, 
then we don't want to get caught in a bull trap.  The trick 
then will be to find a higher low on the pullback.  If we get a 
lower low, trading down to Dow 8600 or Nasdaq 1350, then we 
will have broken the rising trend, and we can reassess overall 
market direction. It is rare that so many significant levels 
converge, so let's pay close attention and take advantage of 
the signals. 

 
************
FUTURES WRAP
************

Was that a Bull Trap?
By John Seckinger
jseckinger@OptionInvestor.com

The Dow set a new relative high at 9043 before coming under 
pressure and closing 33 points lower by session’s end.  This 
sounds bearish, but is it?

Monday, December 2nd at 4:15 P.M. 

Contract          Net Change     High        Low        Volume    

ES02Z     935.75     -0.25      955.25      926.75      653,891
YM02Z    8860.00    -10.00     9044.00     8780.00       21,744
NQ02Z    1126.50     +9.50     1157.50     1110.00      302,197

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 key economic report on Monday was the 
November ISM index rising to 49.2; however, economists were 
expecting a number closer to 50 to 51.  Note: A reading under 50 
marks a contraction in manufacturing, while a reading over 50 
signals expansion.  Weakness in new orders dragged the index 
lower, falling a point and once again questioning business 
involvement.  On the positive side, good reports from Wal-Mart 
and JC Penny helped the retail sector and stocks in general 
during early-morning trade.  Additionally, Lehman Brothers 
upgraded Intel and AMD; however, both companies failed to close 
above their opening levels.  

Technical News:  The Commodities Index (CRX) is looking to 
breakout higher from a channel that started back in July.  
Currently at 236, a move above its 200 DMA (exp) near 240 should 
become the catalyst for a rise towards 250.  Bond prices should 
trade inversely to this index, while equities usually trade in 
step with the CRX (historically).  

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

It should be noted that there is currently a Bearish Divergence 
in the RSI Oscillator on a WEEKLY basis within both the Dow and 
S&P 500 Index (not Nasdaq 100 or Composite).  It is only the 
beginning of the week, but the last two weekly bearish 
divergences happened in May and March.  Both times provided a 
solid shorting opportunity.  I have noted that initiating a short 
without price confirmation is critical; however, risk/reward is 
very favorable when done from a weekly perspective.  The last 
bullish divergence on a weekly basis took place in mid-October.  

Longs were certainly caught above the 200 DMA (exp) at 8945 
during early trade on Monday, and bulls could state the case that 
the ISM report is backwards looking and that the technical 
breakout should have been more important than the economic event.  
The market has certainly disregarded bad economic data in the 
past, but not today.  The saving grace was a bullish trend line 
(see chart below) that has been successfully tested over and over 
again.  Because the trend line held, least resistance remains 
higher once again.  The bullish objective remains near 9077 and 
then 9350.  Of course, a move under this trend line without 
making a new high (will not take the RSI indicator higher) will 
certainly be viewed as bearish.  As traders, we can control risk 
rather effectively.  The upward trend line will rise from 8793 to 
8840 during trading on Tuesday.  If a trader decides to go long 
at current levels, stops should be under this trend line and 
tightened once above 9077.  If a short position were taken on a 
move under 8800, I would not expect the market to close above 
8800.  As always, traps have to looked out for via putting stops 
into the marketplace.  

The December Mini-sized Dow Contract (YM02Z)

Chart of Dow Jones, Daily 



A chart of the mini-Dow contract shows a similar picture.  The 
YM02Z contract did use the old relative high at 8778 as support, 
and is near the bottom of its rising channel.  If the bottom of 
the channel is broken, there is a good chance the 8663 area will 
come into play.  This level caught some shorts a few days ago, 
and traders should not forget that feeling.  Volatility should 
pick up as well, and shorts will definitely try to get that level 
to become resistance going forward.  On the upside, a move above 
9014 (opening on Monday) should temporarily have shorts conceding 
and waiting for a test of both 9044 and 9077.  Between 9014 and 
8778 seems tough to call, unless the YM contract closes at the 
lower end of this range and under the detailed channel.  

Chart of YM02Z, 120-minute 



YM02Z

Support               Resistance                Pivot    
	
8778				8900				9044
8750				9044				9014
8625				9077				8778
8425				9102				8750


Bold signifies levels within the Dow Jones.  

The December E-mini Nasdaq 100 Contract (NQ02Z)

Even though there are times of poor liquidity within the NQ02Z 
contract, this contract continues to trade in a fairly rational 
technical pattern.  Looking at the NDX, the 1142 area (previous 
relative low) did act as solid resistance, while 1110 contained 
the selling pressure rather effectively.  The index is currently 
above both 1100 and 1110 support areas, as well as being at the 
bottom of its recent upward channel.  Bulls should look for a 
test of 1155 again if the contract closes above 1142 going 
forward.  Shorts, on the other hand, will most likely get more 
aggressive if the index fails to hold 1100 on a closing basis.  
Support is seen near 1080, and that should have solid 
intermediate implications.  

Chart of NDX, 120-minute



Taking things to a more micro level, a 3-minute chart of the 
NQ02Z contract shows resistance near 1133.75 and then higher 
at 1144.  Ideally for shorts, the contract moves towards 1134 and 
then rolls over back under the 1110-1120 area.  For bulls, they 
most likely need a quick, explosive move above the 1134-1138 area 
in order to shift the psychology so that this level becomes 
support.  If done successfully, the 1142 to 1150 area can then be 
tested with a nice base behind them.  It is very hard to account 
for gaps; however, if the market gaps above 1140 or below 1110, 
conservative traders should make the market trade for about 30 
minutes to an hour outside of these levels to confirm the initial 
direction.  Yes, once again worried about traps.  

Chart of NQ02Z, 3-minute 



NQ02Z

Support              Resistance                 Pivot 

1120				1134				1142
1110				1144				1134
1100				1142				1120
1079				1145				1110
1065				1200				1100

Bold signifies levels within the NDX.  

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

Can you say apex?  A daily chart of the SPX contract shows prices 
using both the bearish trend line from March and bullish trend 
line from October as support.  Intuition says that things will 
get volatile from current levels.  The contract appears to be in 
a distribution pattern, and the 965 resistance area still remains 
in reach.  Underneath the upward trend line (blue), support on an 
intermediate basis is felt at 910 and then 902.  Note:  The 200 
DMA is almost exactly at the prior relative high.  Even though 
the close looks like a ‘bearish shooting star,’ it is important 
to let the market fail and confirm such a pattern.  This should 
be done on a close under 923.  A close above 942 should increase 
sentiment to more bullish levels (short term).  

Chart of S&P 500 Index, Daily 



A chart of the ES contract shows the gap higher and then 
beginning of long liquidation (lowercase “b” pattern); however, 
the contract currently remains in a tight stop (below 937-942 
area and above 923), offering little indication going forward.  
If the market does fall under 926.50, this should trigger stops 
and might give bears hope for a close under 923.  On the other 
hand, the next move above 942 should have bulls looking for a 
quick test between 950-960 once again.  Note:  If the market does 
not gap on Tuesday morning, look for consolidation around 930 and 
then a decisive breakout in either direction.  This breakout 
should then continue the entire session.  

Chart of ES02Z, 30-minute 



ES02Z

Support              Resistance                 Pivot    
									
930.00			942				941.00
926.75			950				926.75
923.50			956				923.50
918.75			965				908.50

Bold signifies levels within the S&P 500.  

Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com 




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


Heartburn

I didn't sleep very well last night as I was kept awake, but what 
I'm pretty sure was a case of heartburn.  The thought that I was 
having a heart attack never crossed my mind and I was just pretty 
sure that I had eaten too much for dinner, as I had left the 
table not able to eat another bite.

This morning's upside action boosted by some strong post-
Thanksgiving sales number from the retailers and some positive 
comments regarding Intel (NASDAQ:INTC) $21.07 +0.91% saw stocks 
finish mixed by session's end after the ISM data showed the 
manufacturing sector still rather sluggish.

The Dow Industrials (INDU) 8,862 -0.37% gained 147 points at its 
best levels of the session, which was very close to the August 
22nd relative high of 9,077.  By session's end, the Dow did 
recover from a -109 point deficit to finish down just 33 points, 
but I sense some heartburn from bulls after the Dow reached the 
psychological 9,000 level and nearly full retracement of its 
August to October decline.  

Dow Industrials Chart - Daily Intervals



The Dow Industrials reached their intra-day peak right before the 
ISM Index was released at 10:00 AM EST.  I do think there were 
some "Elliott Wave" bears shorting just after the ISM data was 
released as the relative high of August 22nd was not violated to 
the upside.  While some economists feel that today's ISM Index 
data is a lagging indicator, it may well be that the higher level 
of bullish % and nearly full retracement by the Dow Industrials 
that had bulls looking to lock in some gains near-term, with the 
thought that they can always get back on board to the upside on 
some type of confirming move back above the August relative high 
of 9,077.

Today's actions saw the very narrow Dow Industrials Bullish % 
($BPINDU) see a net loss of 1 stock to a point and figure sell 
signal (Johnson & Johnson (JNJ)) which has the bullish % still 
"bull confirmed," but slipping marginally to 69.99%.  

S&P 500 Index Chart - Daily Interval



Today's disappointing ISM Index number made it very tough to 
bulls to continue a push higher and with no economic data 
tomorrow, may have the SPX pulling back into near-term support at 
the rising 21-day SMA.  Active trading bears might look for a 
break of today's low for a short-term trade to the downside.  
Economists are looking for the ISM Services Index to read 54.00 
for November, which would be an "expansion" number above 50.00 
and slightly above October's 53.1 reading.  Also due out on 
Wednesday is October Factory Orders with expectations for 1.7% 
growth.

S&P 100 Index Chart - Daily Interval



I think today marks the second day that the OEX has shown some 
marginal downside out performance when compared to the S&P 500 
Index on a lower session.  One subscriber made not of this to me 
in an e-mail today.  I don't go through the 100 or 500 stocks of 
the OEX/SPX to see what is causing this short-term divergence, 
but I do think the higher bullish % levels in the OEX (76%) 
compared to the SPX Bullish % (68.4%) might hint that 
institutions may be seeing some net inflows of capital and 
instead of "chasing" some of the bigger names found in the OEX, 
they may be picking away at some of the still beaten down names 
and looking for some shorts in those more beaten down stocks to 
bolster some near-term upside.  Still.... the OEX showed some 
minor technical superiority over the SPX when it was just barely 
able to achieve a new relative high when compared to the August 
22nd highs.  

Today's action saw a net gain of 3 stocks to reversing point and 
figure "buy signals" in S&P 100 Index.  Tonight's reading stands 
at "bull confirmed" and 76%.  It would take a reading of 70% to 
have this index turning "bear alert."  In a game of football, the 
bulls have scored a touchdown here and some profits should be 
taken off the table.

NASDAQ-100 Index Tracking Stock (QQQ) - Daily Interval



After hours action had the QQQ trading marginally higher at 
$28.18 and NASDAQ futures at 1,132.50 (up 5.5 points from 1,127 
close) when component Citrix Systems (NASDAQ:CTXS) $11.43 -2.72% 
said it now sees Q4 EPS of $0.12-$0.17 and revenues of $120-$130 
million versus consensus of $0.12 and $119.1 million respective.  
The news helped CTXS to $12.73 in post-market trading and gave a 
positive tone to stock futures.  

Today's action saw the NASDAQ-100 Bullish % ($BPNDX) see a net 
gain of 1 stock to a point and figure buy signal and grow to 82%.  
This exceeds last December's high reading of 78%.  When I looked 
at www.stockcharts.com NASDAQ-100 Bullish % ($BPNDX) and tried 
going back to 1990, I think they started tracking this bullish % 
starting in 1995.  The HIGHEST reading for this bullish % was in 
November of 1999 at 92%.  The way things are going and some 
fundamental analysts getting bullish on the wireless group, we 
could see 100%!  Citrix Systems (CTXS) wouldn't generate a 
reversing "buy signal" currently until it trades $13.50.  That 
would be an 18% gain from current levels and might have the QQQ 
still having upside to $30?  Bears will wait for some type of 
bullish % reversal despite the high level of bullish %.  
Meanwhile, bulls need to be very cognizant of trade/account 
management as risk runs high at these levels of bullishness.

Jeff Bailey


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****************
WEEKLY FUND WRAP
****************

Stock Funds Extend Gains


All of Lipper's equity fund indices, except for gold funds, ended 
the Thanksgiving week higher as upbeat economic reports suggested 
the economy is recovering.  The Wilshire 5000 index, the broadest 
measure of U.S. stocks, had a 0.8% weekly return using Vanguard's 
index fund as the proxy.  Large-cap stocks (S&P 500 index) picked 
up 0.7% over the week, while the next 4,500 stocks (Wilshire 4500 
index) surpassed that, finishing the week up 1.3%.  

 


Roughly half of the Lipper equity fund indices had weekly returns 
in excess of 1 percent.  Small-cap value funds increased 1.8% for 
the week, according to Lipper, best in the U.S. stock fund group, 
while emerging markets funds (+1.7%) were the best international 
equity fund performers.  For the week, technology funds rose 1.3% 
on average, extending their recent gains.

Vanguard Total Bond Market Fund, a proxy for the Lehman Aggregate 
Bond index, eked out a narrow 0.1% gain for the week.  The short-
term and intermediate-term bond sectors were also 0.1% higher for 
the week, while the long-term bond sector was 0.3% lower over the 
5-day period.  High current yield funds were once again among the 
week's best relative performers in the bond fund group, returning 
0.6% on average.  GNMA funds rose by an average of 0.2% last week 
while some categories, such as international income funds, closed 
the week lower by 0.2 percent.

The average 7-day simple yield for all taxable money market funds 
dipped below 1 percent last week, as money funds continue to turn 
over their portfolios following the recent Fed rate cut of a half 
percentage point.  According to iMoneyNet, the average money fund 
yielded 0.96% as of November 26, 2002.  


Lipper Mutual Fund Indices


Below are selected Lipper fund indices for the week ended Friday, 
November 29, 2002, reflecting the positive market conditions last 
week for global equities.  The story last week was similar to the 
prior week with all Lipper stock fund indices in the black except 
for gold funds, which declined 1.5% on average.

 Selected Lipper Equity Fund Indices:
 +0.6% Balanced Fund (YTD -8.2%)
 +0.9% Equity Income Fund (YTD -13.2%)
 +1.0% Large-Cap Value Fund (YTD -15.7%)
 +0.4% Large-Cap Core Fund (YTD -16.9%)
 +0.0% Large-Cap Growth Fund (YTD -22.7%)
 +1.3% Science & Technology Fund (YTD -32.9%)
 +0.7% International Equity Fund (YTD -11.0%)

 Selected Lipper Income Fund Indices:
 -0.0% U.S. Government Fund (YTD +7.9%)
 +0.2% GNMA Fund (YTD +7.4%)
 +0.1% Short Investment-Grade Fund (YTD +3.3%)
 -0.1% Intermediate Investment-Grade Fund (YTD +6.1%)
 +0.0% Corporate A-Rated Debt Fund (YTD +6.3%)
 +0.6% High Current Yield Fund (YTD -3.4%)
 -0.2% International Income Fund (YTD +12.4%) 

In the equity fund group, value-driven funds outperformed those 
with growth styles, producing weekly total returns of 1 percent 
or greater.  Mid-cap value funds and small-cap value funds were 
the week's top two performing U.S. fund indices, returning 1.5% 
and 1.8%, respectively.  The $5 billion Longleaf Partners Fund, 
which has a mid-cap value style bias, generated a weekly return 
of 4.0% to lead the way; its small-cap sibling was 3.7% higher.  
Legg Mason Opportunity, a $1.8 billion mid-blend fund, finished 
the week with a nifty 5.5% total return.

There were values to be found in the technology sector as well, 
as evidenced by the 4.1% weekly return put up by the Firsthand 
Technology Value Fund.  The value-disciplined First Eagle SoGen 
Overseas Fund ended the week with a 2.9% return, for one of the 
week's better performances in the international equity category.

A look at the week's fund map shows that some health-care funds 
struggled last week.  Putnam Health Sciences, Janus Global Life 
Sciences and Fidelity Select Biotechnology were among the funds 
in the sector losing 1.5% or more for the week, and lagging the 
market overall.

Vanguard Long-Term U.S. Treasury Fund lost 0.5% during the week, 
evidence of the modest losses generated by long-term bond funds.  
The average intermediate-term, investment-grade fund lost 0.1%, 
according to Lipper, while the average short-term bond fund was 
0.1% higher for the most recent weekly period.  

The taxable high yield market remained upbeat, with the popular 
Fidelity Capital & Income Fund posting a 0.9% weekly return and 
some funds gaining in excess of 1 percent.  MainStay High Yield 
Corporate Bond and Merrill Lynch High Income Bond returned 1.0% 
and 1.1%, respectively, to lead the way in the high yield group.  


Largest Mutual Funds


Below are 5-day and year-to-date investment results as of Friday, 
November 29 for America's largest mutual funds.  We use the class 
A shares of the American Funds and the institutional class shares 
of the PIMCo Total Return Fund for comparison purposes. 

 Largest Vanguard Funds:
 +1.0% Wellington (VWELX) YTD -5.1% 
 +0.7% 500 Index (VFINX) YTD -17.3% 
 +0.6% Wellesley Income (VWINX) YTD +3.8%  
 +0.4% Windsor II (VWNFX) YTD -14.0% 
 -0.7% Health Care (VGHCX) YTD -9.5%   

 Largest Fidelity Funds:
 +0.7% Magellan (FMAGX) YTD -18.4%
 -0.2% Contrafund (FCNTX) YTD -9.1%
 +0.1% Growth & Income (FGRIX) YTD -15.4%
 +0.8% Puritan (FPURX) YTD -5.9%
 +1.2% Equity Income (FEQIX) YTD -13.1%
 
 Largest American Funds:
 +1.1% Investment Company of America (AIVSX) YTD -11.2%
 +1.1% Washington Mutual Investors (AWSHX) YTD -11.6%
 +1.1% Growth Fund of America (AGTHX) YTD -15.6%
 +1.0% EuroPacific Growth (AEPGX) YTD -11.3%
 +1.1% New Perspective (ANWPX) YTD -12.0%

 Largest PIMCo Funds:
 -0.1% PIMCo Total Return I (PTTRX) YTD +8.0%
 
You can see the equity market last week favored the disciplined 
value approach employed by the American Funds.  The five mutual 
fund bellwethers each gained at least 1 percent during the week. 
Vanguard Wellington, America's largest and oldest balanced fund, 
and Fidelity Equity Income Fund produced similar weekly results.

PIMCo Total Return, the nation's largest bond fund, produced a 
negative 0.1% return for the week, but remains up 8 percent in 
2002.  Vanguard High-Yield Corporate, the largest high current 
yield fund in the country, had a positive 0.3% return over the 
weekly period, but other high yield funds did better.  Merrill 
Lynch High-Income Bond Fund led the way in the category with a 
1.1% weekly total return.

Other funds of note included Vanguard Pacific Stock Index Fund, 
which had a 5-day total return of 2.9%.  Fidelity Japan Smaller 
Companies Fund finished the week 3.5% higher.  

 
Money Market Funds


The iMoneyNet all taxable money market fund average stood at just 
0.96% as of Tuesday, November 26, down 5 basis points compared to 
the prior week.  The top current 7-day simple yields among prime-
retail money market funds are PayPal MMF at 1.60% and Bunker Hill 
MMF at 1.52%.  McMorgan Principal Preservation Fund is third with 
a current 7-day yield of 1.45%, per iMoneyNet.com.

The $57 billion Fidelity Cash Reserves Fund sports a 7-day simple 
yield of 1.29%, while the $50 billion Vanguard Prime Money Market 
Fund has a current yield of 1.36%.


Mutual Fund News


The month of November 2002 was good for long-term investors, with 
most diversified stock funds returning between 3% and 5% and tech 
sector funds averaging over 13 percent for the 1-month period per 
Morningstar.  For the 1-month period ended November 29, 2002, the 
best Morningstar equity fund categories were as follows:

 +13.2% Specialty-Technology (YTD -34.3%)
 +10.3% Specialty-Communications (YTD -35.3%)
 +5.4% Mid-Cap Value (YTD -10.0%)
 +5.4% Small-Cap Growth (YTD -23.4%)
 +5.1% Small-Cap Value (YTD -7.6%)

Fund categories not participating in the November rally included 
specialty-precious metals funds (-2.2%) and the three government 
bond fund categories, which declined around 0.4% to 0.5% for the 
month.  Municipal bond funds struggled also, producing losses of 
up to 0.5% in November.

A new study by Standard & Poor's indicates that in the last five 
years its 1500 "SuperComposite" index outpaced 62% of all equity 
funds.  The crux of the problem remains fund expense levels with 
the average stock fund deducting about 1.40% of assets a year in 
operating expenses.  That means a stock fund with a 1.4% expense 
ratio has to increase in value by 11.4% to produce a 10.0% total 
return.  

Equity index advocates can simply look at the Vanguard 500 Index 
Fund's performance over the past 10 years to see how well a low-
cost index fund has performed relative to its category peers and 
broad peer group.  The fund's 10-year annualized total return of 
9.8% through November 29, 2002 matched the S&P 500 index return 
and was good enough to rank in the top quartile of the large-cap 
blend category, per Morningstar.  Vanguard 500's 9.8% annualized 
return was 1.4% better than the average U.S. stock fund over the 
same period.   

If you have a long-term horizon, you may want to consider equity 
index products such as the Vanguard 500 Index Fund for the "core" 
equity component of your long-term financial plan; explore later.     

  

Steve Wagner
Editor, Mutual Investor 
steve@mutualinvestor.com




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

Lessons From The Past
by Mark Phillips
mphillips@OptionInvestor.com

Have you ever been looking for something, where you don't know
exactly what it is you're looking for, but you know you'll
recognize it when you see it?  Maybe it's just me suffering the
early stages of memory loss, but perhaps today's adventure will
strike a chord with you as well.  If so, then we'll have a
win-win situation!

From time to time, I like to peruse the Trader's Corner and
Options 101 archives.  Sometimes I'm looking for something that
I know I've read but can't remember where, sometimes I'm looking
to see if I've missed any important articles and sometimes I'm
looking for inspiration for a future article.  Sometimes all
three converge in symbiotic fashion, and that's certainly the
case today.

The article that caught my attention was one I wrote back in
early May, where I was looking at some solid descending
trendlines on the NASDAQ Composite (COMPX) and Brocade
Communications (BRCD).  Perhaps you remember it, but if not I
think you may find it instructive to take a look real quick.
The article can be accessed at the following link:

Anatomy of a Trade

The particular feature of that article that caught my attention
is that of the predictable nature of the chart patterns.  The
COMPX had hit its descending trendline in late April and I
thought that pattern might continue to play out in the future.
BRCD looked even more compelling as it had tested its trendline
(and failed on each test) on four separate occasions and looked
like a high odds short if it broke down under the $21.50 level.
Pull up historical charts on both those symbols and you can see
how the patterns played out.

The COMPX rose up to kiss its descending trendline in mid-May
before the bottom fell out, resulting in a 31% slide over the
next 10 weeks.  Shorting that fourth failure at the descending
trendline would have made for a great trade heading into the
summer.  What about the pattern on BRCD?  After the article was
written, BRCD staged a couple of false breakdowns before finally
getting with the program in late May and breaking down to around
the $18 level.  But the important point was that the stock never
violated its descending trendline throughout the process, making
for a solid trade each time it failed to penetrate that trendline.
My favorite setup came in mid-July, as the stock pushed up to the
$21.50 level, which at the time was the converged site of prior
support (broken support becomes resistance) and the descending
trendline.  I call this pattern the 'kiss of death' and you can
look at the chart of BRCD to see what happened.  In the space of
less than 3 months, BRCD fell from above $21 to below $6.  And
here's the kicker -- BRCD hasn't challenged that descending
trendline since mid-July!

Alright, so what does this have to do with the here and now, you
ask?  Well, I've been paying more attention to pattern recognition
lately, as many of the profitable trades I'm finding are cropping
up from this analysis method, rather than following other studies
we're all familiar with, like Stochastics, MACD and RSI.  The
pattern that has been nagging at the back of my mind is the way
in which the NASDAQ indices have been dueling with their
respective 200-dmas.  For the sake of simplicity, let's focus on
the NASDAQ-100 (NDX.X).  Let's take a look.

NASDAQ-100 (NDX.X) Daily Chart



Today marked the 4th out of the past five sessions that the NDX
has touched it's 200-dma, and the 3rd (as noted on the chart
above) out of those same five days that it has actually closed
above this important moving average.  The last time the NDX
closed above the 200-dma was last January, and it turned out to
not be a positive event.  To be fair, the pattern really got
started with the push through the 200-dma in early December of
2001.  That up-thrust failed, leading to another breakout
attempt in early January of this year.  That rally attempt
likewise failed, resulting in a 20% slide in the index in about
6 weeks.

NASDAQ-100 (NDX) Daily Chart From Dec 2001 - May 2002



Now I'm not saying that the pattern we saw just about a year
ago is going to play out the same way this time around.  But,
it is worth noting that each of the breakout moves above the
200-dma in December of 2001 and January of this year turned out
to be high-odds shorting opportunities.  If nothing else, this
provides a launching point to look for other similarities as the
battle around the 200-dma continues.

Let's look at some of those similarities:

1. The NDX has just experienced a 45% rally off the early October
lows.  In early December of 2001, the NDX had rallied 59% off of
the September lows.  The bulk of the fuel for each of these
rallies was short-covering.

2. The NDX has risen in staccato fashion, preventing the daily
Stochastics (10,5,3) from giving a reliable sell signal since
the bottom in early October.  Stochastics haven't been anywhere
near oversold in that period of time.  In early December of last
year, the NDX had been rising in a similar price pattern for
about 10 weeks, while daily Stochastics had persistently failed
to give a reliable sell signal, all the while avoiding oversold
territory.

3. The Bullish Percent for the NDX is currently at 81% (Friday's
close), having risen from a low of 13% in early October.  In
early December of 2001, the NDX Bullish Percent was sitting at
78%, having risen from a low of only 1%.  The starting points
for the Bullish Percent in both cases was deep in oversold
territory and the current reading (as well as that of December
2001) is well into overbought territory, making the index ripe
for a significant correction, if not a reversal of trend.

4. Finally, the VIX.  I know the VXN is really the more
appropriate measure for trading of the NDX, but I'm sticking
with the VIX due to having a better intuitive feel for the
way it behaves and a much longer historical database to work
with.  My comments should translate fairly well to the VXN.  In
late-November/early December of last year, the VIX had finally
fallen back below 30 after an extended period of time (about 2
months) above 30, which is the top of its historical normal
range.  A couple weeks ago, the VIX finally fell back under 30,
after spending more than 4 months up in the ozone.  Just as
reduced levels of volatility roughly a year ago didn't guarantee
a continuation of the rally, I think it is entirely possible for
the VIX to remain fairly benign, while at the same time the NDX
heads south again.

Patterns seem to repeat, as we've seen numerous times throughout
this bear market.  The way to use that knowledge is to look for
a pattern in the past that looks similar to the current
conditions and then factor that into your trading strategy.
Just as patterns rarely repeat in every detail, I don't expect
the near- or intermediate-term future of the NDX to exactly
follow the pattern of roughly a year ago.  But I think there are
enough commonalities between the current market situation and
what we saw heading into the holidays last year that bullish
traders would be well-served by paying attention to the lessons
of history.

Based on the patterns highlighted here, the bullish trend that
we've been enjoying over the past 8 weeks could be due for a bit
of a pause, as the bears once again flex their muscles.  Make
sure to protect your gains just in case history (and the patterns
we've talked about here today) decide to provide us with a bit
of deja vu.

Have a great week!

Mark



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The Option Investor Newsletter                   Monday 12-02-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:

Stop Loss Updates: QCOM
Dropped Calls: GNSS
Dropped Puts: 
Play of the Day: Call - QCOM

Updated on the site tonight:
Market Watch
Market Posture

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***********************************************************
Stop-Loss Adjustments
***********************************************************

QCOM - call
Adjust from $36.75 up to $39

***********************************************************
DROPS
***********************************************************

calls
^^^^^

GNSS $18.96 -0.94 (-0.94) The bulls tried to get the wagon
rolling higher this morning, but the weaker-than-expected ISM
report was too much to handle.  After the early pop up near
the $21 level, the bottom fell out of GNSS, with the stock
quickly falling back to the $19 support level.  The stock then
spent the remainder of the day drifting around this level,
finally closing just below it at the end of the day.  With our
stop sitting at $19, we are now stopped out of the play.  If
still holding open positions, use any early strength tomorrow
to make your exit.



puts
^^^^

none


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**********************
PLAY OF THE DAY - Call
**********************

QCOM – Qualcomm, Inc. $41.30 (+0.62 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:
One thing is certain and that is that Friday's session failed
to shed any light on what the markets might do next week.  All
of the major indices vacillated in very narrow ranges, and when
you look at the price action of individual equities, the reason
becomes clear.  There just wasn't much trading interest and as
a result, not much happened.  QCOM gave back a portion of
Wednesday's gains, but still is looking strong.  The $40 level
is shaping up as pretty decent support now, with the backing of
the 10-dma at $40.06.  Intraday dips and rebounds from the
$39-40 area can be used for new entry points, provided the
Wireless Telecom index (YLS.X) continues to show strength.
Without a pullback first, new entries are going to fall into the
realm of the momentum traders, as QCOM breaks out over the $42
level.  Of course, we'll need to keep an eye out for a head-fake
move, as there is more resistance up near $44.  A breakout over
$45 will take out another important level of resistance and
bring the stock's PnF vertical count of $60 that much closer to
reality.  Until we get the breakout over $42, keep stops set at
$36.75.

Why This is our Play of the Day

Monday's early move higher at the open was quickly dashed by a
worse than expected ISM report, and the market quickly gave back
the early gains and then spent the bulk of the session chewing
through some of the gains from last week.  But QCOM refused to
go along with the broad market weakness.  After shrugging off
the early dip to around $41.50, the stock built a base near $42
and then chugged higher through the afternoon, closing near the
high of the day with a 3.44% gain.  A quick look at the action
in the Wireless Telecom index (YLS.X) gives a hint as to the
cause, as this was the sector leader to the upside today.
Despite giving back a large chunk of the early morning gains,
the YLS index finished with a very respectable 4.16% advance, on
a day that saw the NASDAQ only eke out a fractional gain.  It
doesn't take a rocket scientist to see the relative strength
being exhibited, both by the YLS and QCOM.  The next overhead
objective for QCOM will be resistance near $44.  Traders holding
open long positions from lower levels can look to book partial
gains on any sign of weakness near that level.  On the other hand,
if we see weakness tomorrow, a rebound from the $41 level or even
$40 could make for a solid entry point for the next leg up the
charts.  Now that the $42 resistance level has been solidly
broken, we can raise our stop to $39, just below the bottom of
the gap left behind on November 21st.

BUY CALL DEC-42 AAO-LV OI= 5440 at $2.10 SL=1.00
BUY CALL DEC-45 AAO-LI OI= 7252 at $0.95 SL=0.50
BUY CALL JAN-42*AAO-AV OI= 5690 at $3.40 SL=1.75
BUY CALL JAN-45 AAO-AI OI=13125 at $2.20 SL=1.00

Average Daily Volume = 16.6 mln




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**************
MARKET POSTURE
**************

Tricky Trading

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/mp_120202.asp


************
MARKET WATCH
************

Flexibility

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