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Daily Newsletter, Tuesday, 12/10/2002

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The Option Investor Newsletter                 Tuesday 12-10-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Finally a Rebound
Futures Markets: On Thin Ice
Index Trader Wrap: A lack of enthusiasm
Market Sentiment: Is the Bounce for Real?
Weekly Fund Screen: Best in Class: International Stock


Updated on the site tonight:
Swing Trader Game Plan: Playing the Bounce


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      12-10-2002           High     Low     Volume   Adv/Dcl
DJIA     8574.26 +100.90  8578.99  8469.55 1.55 bln 2167/1011
NASDAQ   1390.52 + 23.40  1397.84  1373.89 1.45 bln 2030/1347
S&P 100   460.45 +  6.45   460.92   453.99   Totals 4197/2358
S&P 500   904.41 + 12.41   904.95   892.00             
RUS 2000  393.47 +  7.17   393.97   386.55
DJ TRANS 2353.38 + 30.70  2354.58  2318.55
VIX        31.67 -  2.80    34.11    31.44
VXN        51.75 -  1.23    54.28    49.48
Total Vol   3,171M
Total UpVol 2,486M
Total DnVol   640M
52wk Highs   105
52wk Lows    116
TRIN        0.60
PUT/CALL    0.89
************************************************************

Finally a Rebound

The markets shook off a weak open and an uneventful Fed meeting
and rallied at the close to put a green candle at the end of a
string of red ones. While red and green are holiday colors many
traders are wishing for a little less lopsided mix. 

Dow Chart – Daily


 

Nasdaq Chart – Daily


 

The day began with bad news on the economic front. Retail Sales
fell -2.3% last week according to the weekly chain store sales
report. Analysts were quick to blame the ice storm in the north
east but readers of the market monitor know the news has been 
bad pretty much all over with only a few pockets of strength. 
The weekly sales index fell to its low of the year at 393. The
Bank of Tokyo-Mitsubishi who produces these numbers said they
were lowering their estimates for the month of December to only
+2.5% growth from previous expectations of +5% growth. They 
claim that while the current pace of sales is enough to maintain
growth there is no pent up demand and low confidence. They feel
that while the season is only going to be slightly weaker than
last year the risks have intensified that spending is going to
fall even further below current expectations. They warned that
retail profits are likely to suffer as a result. 

Adding to the negativity from the Retail Sales report was the 
Richmond Fed manufacturing survey. The headline number fell to 
-1.0, a seven point drop with shipments and employment negative 
but orders improved to +4 after three months in negative 
territory. Prices continued to increase despite the drops 
in order backlog, capacity utilization and employment. The 
internal expectation components continue to reflect expectations 
for an increase in business in the next six months. The 
Wholesale Trade report showed a drop back to an inventory-to-
sales ratio of 1.22, which ties a record low. The -0.1% drop 
was far below expectations of a +0.3% gain. This was the first 
back to back monthly sales decline since 3Q-2001. 

The Fed meeting did not help the investor sentiment before the
announcement. Investors "knew" the box the FOMC members spent 
five hours wrapping today was going to be empty but they continued
to hold out hope that there was a surprise of some type inside. 
At 2:15 the Fed presented their holiday gift and it was indeed
empty. The official statement continued the party line. "The
limited number of incoming economic indicators since the November
meeting, taken together, are not inconsistent with the economy
working its way through its current soft spot." The Fed was
referring to the negative ISM numbers and the higher than
expected unemployment. The markets dipped right after the
announcement as if traders had expected another surprise cut. 
If so they needed serious psychological counseling. Volume 
buyers showed up to buy the dip around 3:15 and the Dow 
managed to close +100 for the day. 

Most of the buying was in the big caps and appeared to be
cautious despite the gain. Something unusual happened today. 
The 52-wk new lows beat the 52-wk new highs for the first time
Nov-20th 118 to 101. Why is this surprising? The last eight 
trading days the markets have been dropping but the new highs 
beat new lows every day. A stealth movement that suggested 
underlying strength. Those new highs peaked on Dec-2nd with 
202 stocks hitting the mark. New lows bottomed the prior day 
at 37. Since then the trends have been closing and today they 
crossed. Is it a one day wonder and if so why on a day that 
the markets rebounded? We have to remember that the market 
started the day weak and the Dow gained +72 points in the 
last hour. Did the trend change at 3:PM? I would be surprised 
if it did. We need to continue to watch these numbers as the 
week progresses. With big caps getting the most attention and 
internals weak it appears there is no conviction in today's 
move. A continued increase in new lows tomorrow could be a
warning signal of further underlying weakness. 

Much of the move was credited to a positive choice of William
Donaldson to head the SEC and replace Harvey Pitt. I would
not give this reason much credence even though institutions
were pleased with the appointment. A more likely reason for
the bounce was simply oversold conditions and strong support. 
The Dow dipped to around 8475 three times in the first hour
of trading but sellers were not able to push it any farther
below 8500 than that level. The 8500 level begins about 150
points of strong support for the Dow. The 50DMA at 8365, 100
DMA 8388 and the 38% Fib retracement level at 8344. It is 
going to be very difficult to break through this before the 
holidays. This underlying support and the failure to break
even the beginning layer at 8500 on bad economic news was a
sign to institutions that buying stocks could be a safe move.
They used the 3:PM dip to trigger their buy programs and the
rest is history. 

If you read between the lines above you probably picked up on
the "before the holidays" comment. I am becoming more concerned
about numerous declining internals and the eventual impact on
the broader market. I have been reporting on declining retail
sales for a couple weeks and the numbers today were no surprise.
Retailer profits are going to be tough to find in this post 
holiday season. Tech stocks drew some attention with the Nasdaq
rebounding +23 points but that is hardly a blip compared to the
recent losses. Chip stocks managed only a minor rally on the 
Taiwan Semiconductor news and positive comments from several 
other techs. There is simply no normal end of year budget flush 
that usually provides a 4Q lift to techs. WR Hambrecht reiterated 
a sell rating on JNPR with a $4 price target due to smaller than
expected orders from large customers. This syndrome bodes ill
for the entire tech sector. Companies are holding on to the
extra budget cash, if any, instead of spending it. 

Home builders, a staple in the current economy, took heat from
an article in the Wall Street Journal about donating money to
non-profit groups to be then given to home buyers as down 
payments. This donation scam helps to eliminate excess home
inventory by selling to people who would not normally be able
to afford it. According to the report 17,000 Americans per 
month have been buying homes with down payments from "gifting
groups" funded by homebuilders. It is feared now that these 
buyers are an increased credit risk because they do not have 
any of their own money at risk and a downturn in the economy 
could create a massive wave of foreclosures. If home builders 
are suddenly cut off from those 17,000 buyers per month then 
the inventory backlog will ripple down through the food chain. 
Prices will drop, layoffs will occur, suppliers will suffer, 
etc. Locally in Denver 38% of sales by KB Homes were funded 
with down payment gifts. If this program was to cease you can 
see the potential problems. Even worse, the builders have 
admitted raising the price of the homes to compensate for 
the gift program. Lenders are afraid that the houses are 
now over priced compared to normal houses bought in the 
area. This makes the loans even higher risk for foreclosure 
in any downturn because the loans exceed the value. 

Need more evidence of weak economic internals? Wendy's hit a
52-week low and other food retailers are not far behind due
to lagging sales and shrinking profit margins. Even Lance,
the vending machine snack company, warned tonight that they
were cutting 4Q earnings estimates by about -10% due to 
lower than expected 4Q sales. Think about this. They do not
rely on corporate budgets, IT spending and they are not
impacted by the IRAQ war or terrorists. This is spending at
the lowest level. Pocket change from consumers mostly in 
office buildings or convenience stores. We are not talking
about slowing sales of $1,000 workstations but slowing sales
of 75 cent cheese and crackers. At least there will be plenty
of excess inventory available to send to the troops in Iraq. 

Traders are also starting to be more concerned about the 
IRAQ problem as well as new problems coming to light today.
The new high tech IRAQ war nerve center in Qatar, which is 
staffed by hundreds of U.S. Central Command officers went 
live today with a full test of command and control planned. 
U.S. troops have taken over one quarter of Kuwait and are 
conducting live fire exercises with tanks and planes this 
week. Warships intercepted a North Korean freighter today 
loaded with Scud missiles for Yemen. On Wednesday President 
Bush is expected to unveil a new plan for global policing of
weapons of mass destruction. He is expected to make the case 
for preemptive action against any nation that possesses or 
supplies them to another. With North Korea the number one 
supplier of weapons to smaller nations they are expected to 
be high on the hit list. Let's see, IRAQ, Afganistan, Yemen, 
North Korea, the number of battle zones is increasing daily. 
If the announcement is broad enough we could add another 
dozen countries to our list of potential targets. The markets 
are not likely to react positively to any administration 
announcement that sounds like "disarm now or we will disarm 
you" when he is talking about countries who have nuclear 
weapons like India and Pakistan. 

The Dow bounced +100 points above support on weak volume from 
very oversold conditions. Period. We need to be careful not to
read too much into this event. I think next year will be bullish
due to new tax breaks and economic stimulus finally taking
effect. However, we have to get past the next six weeks, which 
will include more earnings warnings, a likely war declaration,
end of year tax selling, portfolio rebalancing, S&P and Nasdaq
rebalancing and a good possibility of a terrorist attack over
the holidays. Sounds like a wall of worry to me but nothing 
the market can't conquer given time. Just don't expect the
rest of December to be full of long green candles. Buy the
red ones, sell the green ones!  

Enter Very Passively, Exit Aggressively!

Jim Brown
Editor


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

On Thin Ice
By John Seckinger
jseckinger@OptionInvestor.com

Support in the YM contract did come in near 8480, and the ES 
contract rose on Tuesday to test an important pivotal level once 
again.  In order for bulls to keep shorts on the sidelines, they 
are going to have to start to become aggressive.  

Tuesday, December 10th at 4:15 P.M. 

Contract          Net Change     High        Low        Volume    

ES02Z     889.50    +12.00      905.25      888.75      536,345
YM02Z    8560.00    +66.00     8578.00     8467.00       20,670
NQ02Z    1030.00    +15.00     1044.50     1020.00      207,095

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:  William Donaldson was nominated on Tuesday to 
run the Securities and Exchange Commission (SEC), and the equity 
markets seemed to applaud the announcement.  In other news, Nokia 
(NOK) stated that profits were in-line with expectations and 
sales were soft.  Shares of NOK closed lower by 3.27% at 17.43.  
Amazon.com (AMZN) noted that revenues were in line with prior 
guidance, while Merck (MRK) reaffirmed earnings guidance for 
2003.  Shares of AMZN closed up fractionally to 21.86, while MRK 
also closed barely higher to 59.  Homebuilders came under 
pressure on Tuesday; following a downgrade of Beazer (BZH) and KB 
Home (KBH) to “market perform” from “strong buy”.  BZH fell 1.89% 
to 59.40, while KBH lost 2.26% to 41.08.  Almost as a side note, 
the Fed announced rates would be left unchanged and maintained a 
balanced policy stance.  

Note:  According to Thomson Financial, insider selling in 
November rose 125 percent to $2.6 billion.  This is compared to a 
$1.2 billion figure during the month of October.  Selling from 
insiders of technology rose to $861 million from $244 million.  
Also noted was insider buying, rising 5 percent to $193 million 
from $184 million. 

Technical News:  Both the Utilities (UTY) and Oil (XOI) Index 
appear ready to break out higher; however, the operative word is 
“appear”.  Note:  A breakout should help equities.  The XOI is 
currently at 446.85 after a 1.35% gain on Tuesday, and a move 
above Monday’s high of 449.66 should get some more buyers 
involved.  The objective would be for a move to 460.  The UTY, on 
the other hand, has been doing some price compression and is 
right at the top of a down trending channel at 246.  A move above 
249 should be viewed as a breakout, and the objective would be 
for a move to 260.    

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

The December Mini-sized Dow Contract (YM02Z)

The Dow did begin higher on Tuesday, and I am now convinced that 
other traders were looking at the 8480 level as support.  As a 
daily chart of the Dow shows, a diagonal trend line (see chart) 
would have been the neckline of the H&S formation profiled many 
weeks ago.  Evidently, traders are still watching this line as a 
gauge of sentiment as well.  During the next few days, traders 
can use the neckline and the 8480 area as a way of estimating 
risk.  Note:  The Dow still managed to set a lower low and lower 
high, and there is always the risk that Tuesday’s rally was just 
a normal pullback in a trend of long liquidation (seen if the 
chart produces a “b” formation).  It is also interesting that the 
highly watched 8625 level now coincides with the 22 PMA.  If 
prices take out Tuesday’s high at 8579 (read: not a one-tick new 
high), expect 8625 to be tested soon thereafter.  If 8625 is 
taken out, look for a test of 8700.  On the other hand, a move 
under the 8480 area should send the Dow back towards 8400.  As 
the chart shows and was noted yesterday, 8400 is another 
“efficient” area (like 8480) that became rather pivotal during 
the rise towards 9000.  

Chart of Dow Jones, Daily


 

It was also nice to see the 8515 area act pivotal on Tuesday 
within the YM contract, as well as witnessing prices rising off 
the diagonal neckline shown below.  Noted yesterday, a move above 
the 200 PMA (8577) could spark a rally back up to 8625.  Well, 
the 200 PMA on a 60-minute chart actually proved to be the high 
of the session and was not broken.  If this average is cleared on 
Wednesday, I still expect the YM contract will test 8625 in the 
near term.  Note:  A close above 8632 should have traders 
expecting a move towards 8725 and then 8825.  Traders looking for 
a move downward can use the 8515 pivot and then get aggressive 
once under 8450.  At current levels, bears seem to be holding 
slightly more risk; however, if the “ice” (read: support) breaks, 
prices will quickly become submerged in a sea of red.  

Chart of YM02Z, Daily 


 

YM02Z

Support          Resistance                Pivot    

8515			8625-32		8480
8480			8700-25		8632
8400			8825				
8350								



The December E-mini Nasdaq 100 Contract (NQ02Z)

The NDX contract did in fact rally on Tuesday, and tiered 
resistance was there to greet the contract at 1030 (pivot) and 
1044.  Moreover, since 1015 was not tested, the 1000 level fell 
off the radar screen during trading on Tuesday.  The downside 
levels remain the same; once under 1015, expect a test of 1000.  
Moreover, the main downward objective is still 973 and only a 
close above 1085 will send this level deep into the back of my 
mind.  For a number of charts on the NQ contract, turn to 
tonight’s Futures Corner article (link at this time not 
available).  Going forward, a move above 1050 should be a 
catalyst for more buying, while a close above 1060 can be reason 
to hold bullish positions overnight (since going against the 
trend, risk is greater than normal).  Aggressive bullish traders 
can use the 200 PMA (exp) on a 60-minute chart for a pivot (once 
above, go long and use a tight stop), while looking for more 
weakness once underneath 1023.  Note:  Watch for traps; meaning 
watch the contract when a noted level is taken out and look for 
confirmation (good MACD, solid volume, etc.).  If simply using 
price levels, ‘massage’ the levels either upwards or downwards 
(for support) by a few points.  

Chart of NDX, 60-minute


 


NQ02Z

Support              Resistance                 Pivot 

1020				1040			1050
1000				1050			1017
973				1085				
				


Bold signifies levels within the NDX.  

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

No man’s land.  The SPX index did rise above 900 and hit the 905 
area; however, solid resistance is now roughly 10 points higher 
with support almost 20 points lower.  Short-term traders can use 
the 200 PMA and 22 PMA as well, which reside at 898 and 907, 
respectively.  If long, expect the 910-915 level to not give up 
easily.  A close above 915 should portend a move to 927, while 
underneath 892 will bring back the potential for at test of the 
38.2% retracement at 883.  Least resistance continues to be 
lower; however, the bulls on Tuesday seemed to get some footing 
and will try to definitely try to defend the 892 level.  

Chart of S&P 500 Index, 120-minute


 

It is interesting how the 905.38 pivotal area basically became 
the high during trading on Tuesday.  If this area is taken out in 
the near term, look for a move back towards 915 and the 38.2% 
retracement level shown (not 50% as noted).  Aggressive bearish 
traders can look for a move under 900 as a catalyst for a fall to 
892.  Unfortunately, with no economic reports scheduled for 
Wednesday (Retail Sales, Initial Claims, and FOMC minutes on 
Thursday), price action would have to be very significant by 
Wednesday’s close to warrant a full position being held overnight 
into these numbers.  

Chart of ES02Z, 30-minute 


 

ES02Z

Support              Resistance                 Pivot    

900				905.50		905
880-885			910-915		880
869				922			

Bold signifies levels within the S&P 500.  

Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com 


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

A lack of enthusiasm

Stocks opened modestly higher in the early going, added some 
gains by noon, which built to session highs by the close on what 
most would characterize as a market that lacked enthusiasm from 
traders in both the bullish and bearish camps.

The day's economic news had wholesale inventories falling -0.3%, 
which was below (better than) consensus for a 0.2% rise.  I say 
"better" as the depletion in October inventories may be rebuilt 
in the November/December time periods.  Still, not much weight 
was put into today's numbers as many business look to par down 
inventories into the end of the calendar year, especially those 
with fiscal year's ending in December.

Retailers as depicted by the Retail HOLDRS (AMEX:RTH) 74.10 
+1.92% shrugged of some early morning blues after this morning's 
notes out of Bank of Tokyo-Mitsubishi and UBS Warburg said their 
weekly retail sales index showed a -2.3% decline from 
Thanksgiving week sales, but was still above year-go-levels by 
2%.  The BofTM/UBSW weekly data serves as a warm up to Thursday's 
release of November's Retail Sales data, which has economists 
looking for a 0.4% rise, while the excluding autos sales data is 
expected to gain just 0.2%.  After dipping to a morning low of 
$51.55 a level not seen since early October, shares of Dow 
component Wal-Mart (NYSE:WMT) $52.49 +1.23% reversed a loss into 
a 64-cent gain by session's end, while Home Depot (NYSE:HD) 
$26.90 +4.46% lead today's Dow percentage gainers.

Today's bullishness saw most sectors recouping the bulk of 
yesterday's losses, but few regained all of Monday's losses.  
Only the S&P Banks Index (BIX.X) 284 +1.91%, S&P Insurance Index 
(IUX.X) 261.47 +1.8%, Pharmaceutical Index (DRG.X) 307.76 +0.54% 
and Natural Gas Index (XNG.X) 141.65 +1.23% finished today's 
session higher than Friday's close.  The Utility Sector Index 
(UTY.X) 246.06 +1.06%, which was one of the lone sectors posting 
a gain on Monday, added 2.5 points of upside action today.

After Paul O'Neill resigned as Treasury Secretary last Friday, 
which found stocks recovering from their lows on an intra-day 
basis, the major market averages appeared pleased, but not 
euphoric with President Bush's nomination of William Donaldson as 
new SEC chief.  Benchmarked from Friday's announcement, one might 
conclude the recent shakeup at the top of the SEC was worth a 
break-even in the Dow Industrials and major indexes.

Dow Industrials (INDU) 8,574 +1.19%:  On traditional $50 box 
scale, the Dow Industrials 100-point gain wasn't enough to have 
the point and figure chartist making any entries on their chart.  
The recent double-bottom sell signal at 8,650 has the longer-term 
bullish support trend at 8,350 in play, while near-term 
resistance forms at the 8,650-8,700 level.  Current range as 
defined by Bollinger Bands with 21-day SMA and 2 standard 
deviations are 8,300-8,950, with mid-range at 8,600.

Dow Industrials Chart - Daily Interval


 

Using the 21-day SMA as a benchmark, we can look back to early 
August and see the Dow closing below its 21-day SMA for four 
session, but closed back above this short-term SMA and proceeded 
to rally to the 9,055 level, which is where we anchored the top 
of our retracement.  Then, in early September, the Dow closed 
below the 21-day SMA for 5-sessions.  The rebound from the lower 
end of the Bollinger Band then found formidable selling at both 
the 21-day SMA and 80.9% retracement.  With bullish % readings 
near "overbought" levels on the bullish % charts, it would take 
some blockbuster retail sales numbers on Wednesday in my opinion 
to get the Dow much above the 8,717 level.  On an intra-day 
basis, watch the 8,640-8,650 levels for any type of sharp turn 
lower or program trading executions on the sell side.

Today's action saw a net loss of 1 stock to a point and figure 
sell signal and the VERY narrow Dow Industrials Bullish % 
($BPINDU) reverses into "bear alert" status.  This now has all 
three of our "narrower" Dow, S&P100 and NASDAQ-100 Bullish % 
charts in a more near-term weakening phase as the markets begin 
to digest gains.  Again, the Dow is just 30 stocks and it only 
takes 2 stocks to have the bullish % reversing the needed 6%, or 
2-box reversal.  However, it is often times the narrower bullish 
% that give traders the "heads up" for potential weakness in the 
broader market bullish % after a more meaningful decline would 
take place.

S&P 500 Index (SPX.X) 904.45 +1.39%:  On conventional $5 box, 
there was no meaningful movement in the SPX.  Monday's trade at 
895 had the SPX testing its longer-term bullish support trend, 
and it is at these levels of trend where institutional bulls 
would most likely be found.  A trade at 890 would break the 
bullish trend and then have the 875 level in play.  SPX looks a 
little overextended on the downside from the p/f perspective and 
would look for resistance to come into play in the 910-915 range.  
With the S&P 500 Bullish % ($BPSPX) still bull confirmed, bulls 
can play long with a tight stop at 890.  Should the bullish % not 
"confirm" bullishness on an SPX rally to 940, bulls entering 
positions here most likely sell strength and establish offsetting 
bearish trades.

S&P 500 Index Chart - Daily Interval


 

I'm thinking that bears short from 915 before the recent highs of 
950 in the SPX probably took an opportunity to cover some 
positions on the recent decline and get things squared up.  
Today's market volume was light and action hinted that the only 
aggressive buyers were from the bearish camp as profits eroded 
marginally on an hour-by-hour basis.  The rally building into the 
close hints that bears wanted to close out and not risk some type 
of gap higher tomorrow morning.  From a swing-trader's 
perspective, I'm short-term bullish (1-2 days) while 
intermediate-term bearish (3-days to 7 days) in the indexes.

The broader S&P 500 Bullish % ($BPSPX) from www.stockcharts.com 
shows a net loss of 6 stocks to point and figure sell signals 
today as the bullish % inches lower to 64%.  Current status 
remains "bull confirmed," but a 62% reading would have this 
broader market indicator reversing to "bull correction" status.  
Should that take place, it is often found that a 50% reading 
would be normal.  In January of this year, the SPX bullish % 
reversed from 68% to 54%, before rebounding to a March high 
reading of 76%.

S&P 100 Index (OEX.X) 460.49 +1.43%:  Conventional $5 box of the 
OEX p/f chart shows a normal pullback has been taking place.  
First sign of trouble for bulls on the $5 box is an OEX trade at 
445, while bears assess risk to a fourth consecutive double-top 
buy signal at 490.  However, given the higher levels of bullish % 
in the OEX, a trade at 490 seems unlikely.  A normal 3-box 
reversal back to the upside would have OEX.X trading 470.

The less conventional $2.50 box scale of the OEX shows p/f chart 
of the OEX looking more overextended to the downside with 13 
boxes of O (supply).  This hints of some meaningful 
distribution/selling from the recent highs and had overhead-
supply coming into play at 465-467.50.  Longer-term bullish 
support trend currently resides at 442.50.

Today's action saw a net loss of 2 stocks to point and figure 
sell signals as the S&P 100 Bullish % ($BPOEX) continues to slip 
lower at 65% bullish, after early December's more "overbought" 
76% level.  Status remains "bear alert," which was established on 
Wednesday, December 4th.  A reading of 72% bullish is needed for 
a reverse back higher to "bull confirmed" status, while a current 
decline to 16% is needed for this market to turn "bear 
confirmed."

S&P 100 Index Chart - Daily Interval


 

Oscillators in all of the major indexes show a Stochastics 
recently reaching "oversold" levels, while MACD trends lower to 
zero.  These technicals aren't all that different than those 
found November 11, 12 and 13, when a rebound from 3 closes below 
the OEX built to a new session high.  With option expiration 
rapidly approaching, bears holding current month puts most likely 
lock in gains or close out premiums with some formidable support 
near 450 and weighing it against rally back toward 470.

NASDAQ-100 Index (NDX.X) 1,033 +1.79%:  Using conventional $25 
box scale, there was no chartable action in the NDX.X point and 
figure chart.  Thursday evening, I thought bears, specifically 
institutional bears, would be looking to short/put with stop at 
1,175 and a near-term target of 1,000 as support.  Monday's lows 
only came to 1,014.  From 1,025, a normal 3-box reversal would 
come to 1,100 and that would tie in nicely with a rally challenge 
of the 200-day SMA where a bearish trader might leg from 1/4 to 
1/2 position, or bearish trader holding 1/2 might ease into 3/4 
position, while looking for further deterioration in bullish % as 
confirmation of internal weakness.

Today's 1.79% gain surprises me a bit and I would have thought 
more after 5-days of selling.  Sectors hit hardest to the 
downside in the past 5-sessions saw the greatest amount of buying 
today, and certainly depicts short-term bears locking in some 
gains, but not at an alarming pace on a NASDAQ broader scale.  In 
today's 01:00 update, we made note that the NASDAQ-Composite 
showed a lesser number of stocks making new highs.  This perhaps 
goes hand in hand with recent comments of the higher bullish % 
hinting that bulls carry bulk of risk and no longer willing to 
press the issue to the upside.  Bears may pick up on this and 
start gaining some confidence in coming weeks.

NASDAQ-100 Tracking Stocks (QQQ) - Daily Interval


 

I'm sticking with the above retracement we've been using, but 
"conventional" retracement taken from the October lows to recent 
highs will also show retracement support near $25, which is a 
level I think market makers will be sitting some bids.  Today's 
trading range was "inside" of Friday's and a break above today's 
high of $25.95 might just gets some bears a little jittery and 
get a rally building back near $27.

Today's action saw a net loss of two stocks to point and figure 
sell signals in the NASDAQ-100.  Current status remains "bull 
correction," but a decline in the bullish % to 69% would have 
this market then entering the "bear alert" status.  From its 
recent relative high reading of 82% on December 2nd, a net loss 
of 12 stocks to sell signals have been found as the market begins 
to systematically reduce risk from a more "overbought" condition.  

Jeff Bailey


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

Is the Bounce for Real?
by Steven Price

The markets finally got a reprieve from the recent sell-off, 
bouncing around the Dow 8500 mark after re-testing Monday's low 
of 8475.  As we head into the end of the year, which is 
traditionally a bullish time of the year, we are left to ponder 
whether there is another leg down, or if we have truly built a 
base off of which to rally.  

With strong support in the 8350-8400 range, we could certainly 
see another pullback, but if we don't get a bounce at the current 
level, we should do so in that range.  However, the speed of the 
drop is bound to slow after a drop of over 500 points in a week 
and traders may want to start thinking about picking up some 
calls for a bounce. The SPX is also hovering around the 900 
level, which has been pivotal in the past.

The FOMC met today and for the first time in several months, 
there was no speculation over there would be another rate cut.  
Last month the fed dropped rates 50 basis points, surprising most 
traders that were looking for a move of 25 basis points.  It did 
not do much to help the markets at that time, with a subsequent 
drop, rally and then almost complete erasure of that rally in the 
last week.  However, most rate cuts take 6-9 months to work there 
way through the economy and the immediate reaction is more of a 
psychological one. In any case, today's meeting was expected to 
be a non-event and went according to that plan.  Following the 
announcement that there would be no action, the markets pulled 
back, tested support at 8500 and rallied for a 100-point gain in 
the Dow.

President Bush nominated investment banker William Donaldson as 
chairman of the Securities and Exchange Commission.  He was one 
of the founders of Donaldson, Lufkin & Jenrette and has been a 
friend of the Bush family for years. He served in the Ford 
administration as general counsel to Vice President Nelson 
Rockefeller and was Undersecretary of State to Henry Kissinger.  
Donaldson was also chairman of the NYSE from 1990 to 1995, as 
well as chairman of Aetna until March 2001.  The President also 
said he would seek to double the SEC's budget for fiscal 2004, as 
it continues pursuing several very public fraud cases.

We got some negative news regarding the retail shopping season as 
we head closer to Christmas. According to Bank of Tokyo-
Mitsubishi and UBS Warburg, who compile weekly retail sales data, 
sales last week were down 2.3% from the previous week. Not a good 
sign heading into Christmas, since retailers rely on this time of 
the year for a large percentage of their sales. BTM economist 
Mike Niemira said, "Unfortunately, it's beginning to look a lot 
like Christmas 2000, which was a dismal season." The Retail Index 
finished up slightly on the day, following yesterday's big drop, 
but is still down 23 points from its big rally following record 
setting sales on the day after Thanksgiving.  That rally came 
last Monday following Wal-Mart's announcement that it saw record 
revenues for domestic sales on Friday, November 29.  However, 
since that time, several retailers have said that even the big 
finish to November was not enough to make up for a slow month. 

There was some good news after the bell, as Xilinx said that 
their December quarter revenues would be up 1-3% sequentially, 
slightly above previous guidance by $5-$9 million.  They 
cautioned, however, that North American and European revenues 
would be flat, while Japan and Asia would be up. 

The Dow's pullback to 8500, along with the SPX pullback to 900 
and then, and subsequent rally may indicate that we have found a 
short-term bottom from which today's rally can build.  However, 
there is significant resistance above just under 8700 (around 
8680) and at 8800.  Long players should look to tighten stops as 
we approach those numbers and lock in gains toward the end of the 
year. It is likely that institutions will be balancing their 
portfolios with stock purchases in the next couple of weeks, but 
after the first of the year, we will need to see continued 
economic improvement to avoid more profit taking after the rally 
that began in October. We have not yet broken the recent trend of 
lower highs and lower lows in the Dow or Nasdaq and it would take 
a trade of 8650 and 1415, respectively, to do so.  Even then we 
need to be careful, as the recent prevailing trend still remains 
down.


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  8574

Moving Averages:
(Simple)

 10-dma: 8716
 50-dma: 8365
200-dma: 9138



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  904

Moving Averages:
(Simple)

 10-dma:  917
 50-dma:  884
200-dma:  976



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1033

Moving Averages:
(Simple)

 10-dma: 1077
 50-dma:  992
200-dma: 1109



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



The Semiconductor Index (SOX.X): The SOX bounced after the sell-
off of the last week, making up 15.39 points, but falling short 
of resistance at 329.  The intraday high was 325 and index 
finished near its high of the day. The intraday chart shows a run 
up over 320 and then a rangebound afternoon between 320 and 325.  
If the index consolidates at that level, then breaks out above 
330, another leg up to 360 looks possible.  However, if it fails 
to crack 330, then this may simply be a shorting opportunity. 
Keep an eye on that 330 mark for short-term long plays, but look 
to tighten stops or take profits if the run makes its way back to 
the August highs of 363-366.  Shorts on a failed rally at 329 
will have support between 300-310 to contend with and can look to 
tighten stops in that area.

52-week High: 657
52-week Low : 214
Current     : 323

Moving Averages:
(Simple)

 10-dma: 347
 50-dma: 298
200-dma: 401


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

Market Volatility

The VIX gave up almost 3 points today, as the rally off Dow 8500 
gained steam.  On a low volume day in the broader markets, it is 
hard to attach a lot of significance to the move, but it is clear 
that there were far more sellers than buyers of options today. I 
see that as a bullish short-term signal, as long as the U.S. 
declaration tomorrow about pre-emptive strikes and the discovery 
of a North Korean ship full of SCUD missiles headed for the 
Persian Gulf does not derail the markets.


CBOE Market Volatility Index (VIX) = 31.67 –2.80
Nasdaq-100 Volatility Index  (VXN) = 51.75 –1.23

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.89        473,620       419,592
Equity Only    0.71        382,748       270,550
OEX            0.96         17,132        16,462
QQQ            1.34         25,649        34,316


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

Bullish Percent Data

           Current   Change   Status
NYSE          49      - 1     Bull Confirmed
NASDAQ-100    70      - 5     Bull Correction
Dow Indust.   63      - 7     Bear Alert
S&P 500       64      - 3     Bull Confirmed
S&P 100       65      - 3     Bear Alert

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   1.47
10-Day Arms Index  1.44
21-Day Arms Index  1.20
55-Day Arms Index  1.18


Extreme readings above 1.5 are bullish, and readings below .85 
are bearish.  These signals don't occur often and tend be early, 
but when they do, they can signal significant market turning 
points.

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

Market Internals

        Advancers     Decliners
NYSE       1962          1973
NASDAQ      854          1251

        New Highs      New Lows
NYSE         39              29
NASDAQ       48              31

        Volume (in millions)
NYSE       1527
NASDAQ     1438


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

Commitments Of Traders Report: 12/03/02

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 reduced long positions by about 3,000 contracts, while 
reducing shorts by only 800. Small traders increased long 
positions by 6,000 contracts and shorts by 600.

Commercials   Long      Short      Net     % Of OI 
11/12/02      437,683   476,540   (38,857)   (4.3%)
11/19/02      446,668   480,270   (33,602)   (3.6%)
11/26/02      447,024   488,250   (41,226)   (4.4%)
12/03/02      444,345   487,411   (43,066)   (4.6%)

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
11/12/02      141,389    70,624    70,765     33.4%
11/19/02      143,070    77,332    65,738     29.8%
11/26/02      155,975    81,962    74,013     31.1%
12/03/02      162,192    82,584    79,608     32.5%

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

Commercials left positions mostly unchanged with a small 
percentage increase to the long side and a small decrease to the 
short position. Small traders reduced long positions by 4,000 
contracts, while reducing shorts by 2,500. 


Commercials   Long      Short      Net     % of OI 
11/12/02       45,647     55,892   (10,245) (10.1%)
11/19/02       42,074     52,302   (10,228) (10.7%)
11/26/02       43,231     52,425   ( 9,194) ( 9.6%)
12/03/02       43,709     51,977   ( 8,268) ( 8.6%)

Most bearish reading of the year: (15,521) -  3/13/02
Most bullish reading of the year:   9,068  - 06/11/02

Small Traders  Long     Short      Net     % of OI
11/12/02       12,698     8,801     3,897    18.1%
11/19/02       16,292    10,540     5,752    21.4%
11/26/02       17,574    12,329     5,245    17.5%
12/03/02       13,749     9,869     3,880    16.4%

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 maintained the status quo, while small traders showed 
small reductions to long and short positions. 

Commercials   Long      Short      Net     % of OI
11/12/02       22,283    14,953    7,330      19.6%
11/19/02       23,535    15,741    7,794      19.8%
11/26/02       20,499    15,015    5,484      15.4%
12/03/02       20,176    15,427    4,749      13.3%

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
11/12/02        5,736     8,513    (2,777)   (19.5%)
11/19/02        4,428     8,203    (3,775)   (29.9%)
11/26/02        6,544    10,350    (3,806)   (22.5%)
12/03/02        5,885     9,781    (3,896)   (24.9%)

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

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


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******************
WEEKLY FUND SCREEN
******************

Best in Class: International Stock

This week, we look at the five Morningstar candidates for foreign 
stock manager of the year in 2002.  Morningstar's Fund Spy report 
Monday indicated they will announce their winner January 2, 2003, 
but in the meantime have narrowed the field to five international 
equity fund managers/teams.  Each finalist uses active management 
to enhance return and reduce risk relative to market indices and 
fund benchmarks and was selected based on their 2002 performance.  

After we compare the five finalists, we'll tell you which foreign 
stock manager we would pick if we had a vote.  Each fund has been 
profiled on this site before but is worthy of an update; together 
they make an excellent short list in the international stock fund 
group.  

Morningstar's five finalists for top international stock manager 
of 2002 are as follows (Morningstar data as of December 9, 2002):

 Julius Baer International Equity A (BJBIX):
 Richard Pell & Rudolph-Riad Younes (Since April 1995)
 YTD -5.4% / 1 Year -6.6% / 3 Year Avg -7.9% / 5 Year Avg +9.5%

 William Blair International Growth (WBIGX):
 George Greig (Since July 1996)
 YTD -15.1% / 1 Year -14.9% / 3 Year Avg -9.2% / 5 Year Avg +7.9%

 First Eagle SoGen Overseas (SGOVX):
 Jean-Marie Eveillard and Charles de Vaulx (Since August 1993)
 YTD +9.5% / 1 Year +12.0% / 3 Year Avg +8.6% / 5 Year Avg +10.6%

 Harbor International (HAINX):
 Hakan Castegren (Since December 1987)
 YTD -7.7% / 1 Year -7.7% / 3 Year Avg -6.8% / 5 Year Avg +0.8% 

 American Funds' Capital World Growth & Income A (CWGIX):
 Management Team (Since March 1993) 
 YTD -8.1% / 1 Year -8.3% / 3 Year Avg -2.0% / 5 Year Avg +5.5%

The first four funds on the short list are foreign equity funds, 
which generally exclude U.S. stocks.  The American Funds Capital 
World Growth & Income Fund is a global equity fund that includes 
U.S. securities.  Last year's winners, Eveillard and de Vaulx of 
First Eagle SoGen Overseas Fund might make it two years in a row, 
with the fund up 9.5% since December 31 versus YTD losses by the 
other four finalists.

Three of the funds have "core" characteristics and fall into the 
large-cap blend style box per Morningstar, including Julius Baer 
International Equity, Harbor International and the Capital World 
Growth & Income Fund.  First Eagle SoGen Overseas Fund primarily 
invests in equities of small- and mid-sized foreign companies in 
developed and emerging markets.  The William Blair International 
Growth Fund, the only growth-oriented fund on the list, invests 
in a diversified portfolio of common stocks of foreign companies 
of all sizes, but overall has a large-cap growth style bias, per 
Morningstar.  It has generated greater losses this year than the 
other four other finalists, but has held up fairly well relative 
to foreign stock managers with growth-oriented styles.

Four of the funds have YTD 2002 performance results that rank in 
the top decile of their respective fund categories, according to 
Morningstar data through Monday, December 9, 2002.  The declines 
sustained by Pell & Younes (Julius Baer International) and Hakan 
Castegren (Harbor International) this year are considerably less 
than the average foreign stock fund's 16.9% year-to-date decline.  
The American Funds Capital World Growth & Income management team 
has limited its YTD decline relative to the average global stock 
fund's 19.7% YTD loss.

Only one fund finalist bucking the negative trend has been First 
Eagle SoGen Overseas Fund co-managed by Jean-Marie Eveillard and 
Charles de Vaulx since August 1993.  Since December 31, the fund 
is up 9.5% compared with a negative 16.9% return for the average 
foreign stock fund, per Morningstar.  While its desirable for an 
international equity fund to limit its losses in a downturn, the 
ideal goal is to make money even in bad times.  Eveillard and de 
Vaulx have done that and more, generating an annual total return 
of 33.2% in 1999, and then following it up gains of 5.7% in 2000, 
5.4% in 2001, and 9.5% in 2002 (YTD).

While Morningstar prefers not to give their "manager of the year" 
award to the same people twice in a row, they say, Eveillard and 
de Vaulx have to be the top candidates at this time on the basis 
of their ability to produce positive results in an otherwise bad 
market environment.  By investing in overlooked (and undervalued) 
foreign stocks in the small-to-mid capitalization range, the two 
managers have been able to find opportunities for capital growth.

These two co-managers also run the First Eagle SoGen Global Fund 
A (SGENX), a global stock fund that includes U.S. securities and 
has a longer track record.  Eveillard has managed the fund since 
January 1979, and was joined by de Vaulx in March 1987.  The co-
managers deserve credit here also for their YTD 2002 performance, 
producing a positive 7.8% total return for investors compared to 
a 5.9% loss for the average international hybrid fund, where the 
fund is categorized by Morningstar.  The co-managers' 7.8% total 
return in 2002 looks even better versus the average global stock 
fund, which has lost 19.6% since December 31.

In the next section, we profile Jean-Marie Eveillard and Charles 
de Vaulx and the First Eagle SoGen Overseas Fund Class A (SGOVX), 
who we would pick for international stock manager of the year in 
2002 if we had to vote.

First Eagle SoGen Overseas A (SGOVX)   

Jean-Marie Eveillard and Charles de Vaulx have managed this fund 
together since its launch on August 31, 1993.  The managers seek 
the fund's long-term capital appreciation objective by investing 
primarily in the stocks of small- and mid-sized foreign companies 
in developed and emerging markets. 

When selecting stocks, Eveillard and de Vaulx emphasize companies 
that are financially strong, have growth potential, stability and 
strong management, and represent strong fundamental value.  There 
are no prescribed limits on geographical allocation, but normally 
assets are invested in more than three countries.  Western Europe 
(including U.K.) represented 48.3% of fund assets as of September 
30, 2002, while Japan comprised 24.8% of assets, per Morningstar. 

Eveillard and de Vaulx may invest up to 20% of net assets in debt 
securities including lower quality, higher yielding bonds.  As of 
September 30, 2002, the fund had 75% of assets invested in stocks 
with the remainder invested in cash securities, bonds and "other" 
securities.  Because they're frugal shoppers, the two co-managers 
will let the fund's fixed income allocation rise when they are no 
bargains to be found.  Note that in their other charge, the First 
Eagle SoGen Global Fund, their greater-than-average allocation to 
money market and fixed income securities has resulted in the fund 
landing in the Morningstar international hybrid category.  It has 
the characteristics of a conservative global equity fund as well.

Below is a 1-year chart for First Eagle SoGen Overseas A (SGOVX), 
a period in which the managers earned a 12 percent total return.




 


Eveillard and de Vaulx balance risk and reward about as well as 
any international equity manager has since 2000.  The fund is a 
"Lipper Leader" for total return, consistent return and capital 
preservation, Lipper's highest designations in those categories.  

For the trailing 1-year period through December 9, 2002, the co-
managers increased the value of the First Eagle SoGen Overseas A 
fund by 12 percent.  That is pretty remarkable when you consider 
that the MSCI EAFE index of developed foreign markets lost 17.9% 
over the same period and the average foreign stock fund declined 
by 17.6 percent, using Morningstar's numbers.

Whether you look at Eveillard and de Vaulx's 2001 or 2002 return 
performance versus indices and peers, or their 3-year annualized 
total return of 8.6% through December 9, 2002, their performance 
ranks in the top 1% of Morningstar's foreign stock fund category.  

Better yet, they did so while producing a "low" level of risk in 
relation to other international stock funds.  If Morningstar had 
1-year ratings, First Eagle SoGen Overseas would be 5-star rated 
on a risk-adjusted return basis.

The co-managers' conservative value approach has produced strong, 
consistent returns over longer periods of time.  For the trailing 
5-year period through December 9, Eveillard and de Vaulx produced 
an average annual return of 10.6%, ranking the fund in the top 2% 
of the foreign stock fund category per Morningstar.  The positive 
results generated by the co-managers compare to annualized losses 
of 3.2% for the MSCI EAFE index and 2.5% for the average foreign 
stock fund.

Since 1995, Eveillard and de Vaulx have not experienced an annual 
loss for shareholders.  Although they did lag their international 
stock manager peers during the growth-led bull advance of 1997 to 
1999, the two managers have shined since the markets turned south 
in 2000.  The two have produced little downside risk (volatility) 
relative to other international stock managers.

Conclusion

When you look at what Jean-Marie Eveillard and Charles de Vaulx 
have done in both charges (First Eagle SoGen Overseas and First 
Eagle SoGen Global) since 2000, you'd have to say they hold the 
pole position for international stock manager of the new decade.

Because they deploy their value style to the mid- and small-cap 
sectors abroad, the First Eagle SoGen Overseas fund may provide 
greater international diversification than funds with global or 
large-cap characteristics, adding to its appeal.  But, it is no 
"core" international fund holding with an average market cap of 
just $1.2 billion and a value style bias.   

Eveillard and de Vaulx are one of only four international stock 
managers to generate positive results so far in 2002.  The next 
best YTD performer in the international stock category has been 
DFA International Small Cap Value Fund (DISVX), up 3.4% through 
December 9, 2002.  Two other international small-cap funds have 
also remained above water this year, but by only a small margin 
using Morningstar's numbers. 
  
My vote for 2002 international stock manager of the year goes to 
Jean-Marie Eveillard and Charles de Vaulx for their performances 
on First Eagle SoGen Overseas Fund (SGOVX) and First Eagle SoGen 
Global Fund (SGENX).

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

Playing the Bounce

We saw what appears to be at least a short-term trend reversal 
today, with the Dow re-testing Monday's low and staging an 
afternoon rally. That action was mimicked in the SPX and OEX, as 
well.


To read the rest of the Swing Trader Game Plan Click here:
http://www.OptionInvestor.com/itrader/indexes/swing.asp


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The Option Investor Newsletter                  Tuesday 12-10-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: ICOS
Dropped Puts: None
Daily Results
Call Play Updates: CTXS, OMC
New Calls Plays: MERQ, CPS
Put Play Updates: AIG, DLX, CDWC
New Put Plays: None


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

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


CALLS:
*****

ICOS $29.82 +0.04 (-1.19) Biotechnology stocks have been losing
strength this week, with our ICOS play finally starting to fray
around the edges.  That $30 support level had held up pretty
well up until now, but we saw it start to crack yesterday.
While there wasn't any sharp selloff today, the stock once again
posted a lower high and then failed to rebound in the final hour.
With the sector weak and important support looking more like
resistance now, we're cutting our losses and dropping ICOS from
the playlist tonight.  If still holding open positions, use a
rebound back over $30 to manage a more favorable exit.


PUTS:
*****

None


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

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

CALLS              Mon    Tue    Wed   Thu  Week

CPS      39.28    0.46   1.22  New, Triple top breakout
CTXS     12.52   -0.26  -0.13  Pullback to support
ICOS     29.82   -0.91   0.04  Drop, time to go
MERQ     29.80   -0.80   0.99  New, bounce from 200-dma
OMC      67.10   -2.34   1.88  Bounce off $65

PUTS

AIG      60.75   -0.68   1.18  PnF support breakdown
CDWC     47.04   -1.83   1.30  Inside day
DLX      42.23   -1.26  -0.22  Rollover from 200-dma


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

CTXS $12.52 -0.13 (-0.48) Since probing up to significant
resistance near $13.50 late last week, CTXS is finally relaxing
from its hard charge up the charts.  This is precisely what we
were looking for to allow us a decent entry into the play.
Recall that the stock has more than doubled since early October,
but it has done so by riding up its ascending channel.  Last
Friday's run up near the $13.50 level tested the top of that
channel and the stock has been working off its near-term
overbought condition this week as it drifts down towards the
bottom of the channel, currently at $12.  The next high-odds
entry point will come when the stock rebounds from the
$12.00-12.50 area and heads back towards the top of the channel.
Traders looking for confirmation of renewed strength will want
to see CTXS rally through intraday resistance near $12.85 and
then crest the $13 level (the site of the channel center-line)
before taking a position.  Since a continued rally will most
likely need the stock to remain in its ascending channel, we're
raising our stop to $11.50.

OMC $67.10 +1.88 (-0.80) When we began coverage of OMC, the
optimum entry point seemed to be a rebound from the $65 area and
the market delivered that to us over the past 2 days.  With
broad market weakness still the theme on Monday, the stock slid
sharply, only to reverse course today, catching that bounce right
at the $65 level.  While the past week has seen some price
weakness, OMC has really held up very well compared to the broad
market, and today's rebound hints that the stock's relative
strength is setting us up for another run up to the recent highs.
Of course, one day does not make a trend, and OMC needs to provide
some confirmation by pushing back over near-term resistance near
$68.50.  That move should produce a bullish crossover on the
daily Stochastics, providing the impetus for the stock to once
again challenge the declining 200-dma (currently $69.44).
Momentum entries will need to wait for the stock to rally through
$70.50 (last Monday's intraday high) on strong volume.  Keep
stops in place at $64.


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

MERQ - Mercury Interactive - $29.80 +0.99 (-0.22 for the week)

Company Description:
Mercury Interactive, the leading provider of software and 
services that optimize automated business processes, delivers a 
complete, integrated family of enterprise testing, production 
tuning and performance management solutions that enable customers 
to optimize business processes and maximize business results. 
(source: company press release)

Why We Like It:
Software bulls haven't had much to cheer about over the past 
week.  Pressured by a weakening NASDAQ, the GSO.X moved steadily 
lower after it spiked above 120 on December 2nd.  The subsequent 
breakdown below the 200-dma sent the software index plummeting 
towards the 50-dma at 100.  Now that the GSO has started to 
rebound above this level of support, it looks like the short-term 
downtrend may have come to an end.  Sector behemoth MSFT is also 
above support at its converging 50-day and 200-day moving 
averages.  This should help to put a floor under the software 
group.  We're picking MERQ as a bullish sector play because of 
the way shares have pulled back to support at the 200-dma.  The 
stock leveled out at this moving average after a rapid decline 
from the relative high of $35.68.  The company's CEO commented 
this weekend that he expected the company's annual sales to grow 
to $1 billion over the next 3-5 years.  By contrast, reported 
revenue for the first nine months of 2002 has ticked in at $282 
million.  While that bullish forecast hasn't led to any explosive 
upside movement, it seemed to effectively halt the two-week 
decline.  Shares outperformed both the NASDAQ and GSO.X on 
Tuesday after successfully testing the 200-dma ($28.97).  The 
daily stochastics, which are just beginning to reverse from 
oversold levels, offer technical encouragement for the bulls.  
With no significant levels of overhead resistance, we think MERQ 
could quickly reach the $35.00 area.  Traders can look for a move 
over $30 and intraday support over that level for entry.   Our 
stop will be placed at $28.00, slightly under today's low. 

****** December Contracts Expire Next Week ***************

BUY CALL DEC-25 RQB-LE OI=1746 at $5.10 SL=2.60
BUY CALL DEC-30*RQB-LF OI=4290 at $1.45 SL=0.70
BUY CALL JAN-25 RQB-AE OI= 712 at $6.10 SL=3.00
BUY CALL JAN-30 RQB-AF OI=2259 at $2.90 SL=1.50

Average Daily Volume = 3.88 mil


---

CPS – ChoicePoint, Inc. $39.28 +1.22 (+1.45 this week)

Company Summary:
ChoicePoint is a provider of identification and credential
verification services.  The company provides risk management
and fraud prevention information and related technology solutions
to the insurance industry.  CPS also offers risk management and
fraud prevention solutions to organizations in other industries.
The company operates its business through two primary service
groups, Insurance Services, and Business & Government Services.
The Insurance Services group provides information products and
services used in the underwriting, claims and marketing
processes by property and casualty insurers.  The Business &
Government Services group provides information products and
services and direct marketing services primarily to Fortune
1000 corporations, consumer finance companies, asset-based
lenders, legal and professional service providers, healthcare
service providers and federal, state and local government
agencies.

Why We Like It:
Managing risks is the key to any successful endeavor, and if
that weren't true, we wouldn't need insurance and government
regulatory agencies.  Insurance premiums are based on reams of
statistical data, and with the heightened risks in our
ever-changing world, it is more critical than ever that
companies insuring against those risks have the best data
available.  CPS is a key provider of that data, serving both
the business and government sectors.  After the sharp rebound
from the October lows, the stock has been consolidating in an
ever-tightening range for almost 2 months.  With the highs
being capped near the $39 level and the lows consistently moving
higher, the stock has traced out a classic bullish triangle
formation.  Until today that is.  Following last Friday's
upgrade to Outperform from Barrington Research, buying volume
picked up this week and today the stock broke out of its
consolidation pattern, gaining more than 3% in the process.
Not only does that look bullish, but the PnF chart confirms
this strength with the trade at $39 generating a triple-top
breakout.  Additionally, moving above $39 broke through the
bearish resistance line.  The current PnF vertical count
projects up to $55, but we aren't likely to see that level any
time soon.  What it tells us is that the stock has some room to
run.  It is unlikely that CPS is going to just charge up the
chart without some confirmation of today's breakout.  We want
to target new entries into the play on a dip and rebound from
the vicinity of $38, which now appears to be very strong
support.  Momentum traders can enter on a continuation of today's
rally, with a push through the $39.50 level (just above Tuesday's
intraday high), but need to watch out for possible resistance at
the 200-dma at $41.12.  If trading on the breakout, make sure
that any further upside is accompanied by strong buying volume.
Place stops initially at $37, just below the ascending trendline
that has been supporting on the stock on pullbacks for the past
2 months.

*** December contracts expire in less than two weeks ***

BUY CALL DEC-35 CPS-LG OI=  5 at $4.60 SL=2.75
BUY CALL DEC-40 CPS-LH OI= 17 at $0.55 SL=0.25
BUY CALL JAN-35 CPS-AG OI= 25 at $4.90 SL=3.00
BUY CALL JAN-40*CPS-AH OI=104 at $1.15 SL=0.50

Average Daily Volume = 500 K



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

AIG $60.75 +1.18 (+0.26 for the week) AIG finally managed to post 
a gain today after moving lower for six straight sessions.  
Shares benefited from a 1.8% rebound in the IUX.X insurance 
index, which closed slightly above its 50-dma.  Speaking at a 
conference in New York this afternoon, AIG Chairman Hank 
Greenberg said he believes that property insurance rates should 
continue to increase in 2003.  This appeared to spark a powerful 
rally during the final hour of trading.  Shares finished with a 
gain of nearly 2% but were unable to break through short-term 
resistance at $61.00.  Additional resistance lies overhead at the 
50-dma ($62.36) and $63.00.  Pulling back to a daily chart, 
today's rebound looks pretty weak - AIG wasn't even able to trade 
above the previous session's high.  Shares traded an inside day 
on average volume.  On Wednesday we'll be looking for shares to 
move out this consolidation pattern and break under the relative 
low of $59.42.  For the time being we're keeping our stop set at 
$66.51.  Traders looking for a little less upside risk could use 
a stop just above the 200-dma at $65.28.

---

DLX $42.23 -0.22 (-1.58 for the week) A nice reversal for this 
short play, albeit one that wasn't totally unexpected.  We'd been 
looking for any rebound in DLX to peter out below the 200-dma 
($43.97) and short-term resistance at $44.00.  That's exactly 
what happened during the past two sessions, as shares rolled over 
from a short-term high of $43.95.  A 100-point rally on the Dow 
Jones wasn't enough to keep DLX from drifting lower throughout 
the day.  Although it's a little early to say whether or not this 
reversal is the beginning of another downward leg, bears can be 
pleased that the volume that accompanied the rebound was 
relatively light.  Volume seems to be picking back up now that 
shares are heading lower.  We're also encouraged by the daily 
stochastics (5,3,3), which are beginning to head lower near the 
mid-level.  Overall it looks like DLX is poised to continue its 
downward journey, now that the stock has bounced off the top of 
its descending channel.  New entries can be targeted on a move 
below $41.00.

---

CDWC $47.04 +1.30 (-0.69) The bears finally took a break on
Tuesday, potentially halting the slide that has been dominating
the broad market action for over a week.  As has been the
pattern lately, Technology stocks outperformed on the upside,
with the SOX gaining a healthy 5%.  Even the lagging Retail
index (RLX.X) managed to advance by almost 2%, so with those
factors at work, it is no surprise that CDWC managed to post
its first daily gain in 2 weeks.  What was surprising was the
fact that it came on rather strong volume (nearly 50% over the
ADV).  While that may be encouraging to the bulls, we're looking
at the rebound as setting up the next solid entry point.  CDWC
now has strong overhead resistance at $48 and then again up at
$49.50.  A failed rally near either of these levels is likely to
usher in a fresh wave of selling and a fresh test of the recent
lows near $45.  Keep in mind that the PnF chart gave a solid
double-bottom Sell signal has a bearish price target of $35 in
play.  Our stop remains at $50.


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

None


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

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


**************************************************************
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Contact Support
The Option Investor Newsletter                  Tuesday 12-10-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: CALL - CPS
Futures Corner: Tracking the NQ

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

CPS – ChoicePoint, Inc. $39.28 +1.22 (+1.45 this week)

Company Summary:
ChoicePoint is a provider of identification and credential
verification services.  The company provides risk management
and fraud prevention information and related technology solutions
to the insurance industry.  CPS also offers risk management and
fraud prevention solutions to organizations in other industries.
The company operates its business through two primary service
groups, Insurance Services, and Business & Government Services.
The Insurance Services group provides information products and
services used in the underwriting, claims and marketing
processes by property and casualty insurers.  The Business &
Government Services group provides information products and
services and direct marketing services primarily to Fortune
1000 corporations, consumer finance companies, asset-based
lenders, legal and professional service providers, healthcare
service providers and federal, state and local government
agencies.

Why We Like It:
Managing risks is the key to any successful endeavor, and if
that weren't true, we wouldn't need insurance and government
regulatory agencies.  Insurance premiums are based on reams of
statistical data, and with the heightened risks in our
ever-changing world, it is more critical than ever that
companies insuring against those risks have the best data
available.  CPS is a key provider of that data, serving both
the business and government sectors.  After the sharp rebound
from the October lows, the stock has been consolidating in an
ever-tightening range for almost 2 months.  With the highs
being capped near the $39 level and the lows consistently moving
higher, the stock has traced out a classic bullish triangle
formation.  Until today that is.  Following last Friday's
upgrade to Outperform from Barrington Research, buying volume
picked up this week and today the stock broke out of its
consolidation pattern, gaining more than 3% in the process.
Not only does that look bullish, but the PnF chart confirms
this strength with the trade at $39 generating a triple-top
breakout.  Additionally, moving above $39 broke through the
bearish resistance line.  The current PnF vertical count
projects up to $55, but we aren't likely to see that level any
time soon.  What it tells us is that the stock has some room to
run.  It is unlikely that CPS is going to just charge up the
chart without some confirmation of today's breakout.  We want
to target new entries into the play on a dip and rebound from
the vicinity of $38, which now appears to be very strong
support.  Momentum traders can enter on a continuation of today's
rally, with a push through the $39.50 level (just above Tuesday's
intraday high), but need to watch out for possible resistance at
the 200-dma at $41.12.  If trading on the breakout, make sure
that any further upside is accompanied by strong buying volume.
Place stops initially at $37, just below the ascending trendline
that has been supporting on the stock on pullbacks for the past
2 months.

*** December contracts expire in less than two weeks ***

BUY CALL DEC-35 CPS-LG OI=  5 at $4.60 SL=2.75
BUY CALL DEC-40 CPS-LH OI= 17 at $0.55 SL=0.25
BUY CALL JAN-35 CPS-AG OI= 25 at $4.90 SL=3.00
BUY CALL JAN-40*CPS-AH OI=104 at $1.15 SL=0.50

Average Daily Volume = 500 K



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


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

Tracking the NQ
By John Seckinger
jseckinger@OptionInvestor.com

Pattern recognition is critical, and it certainly helps if the 
contract has some room to run once a particular pattern is 
spotted.

As a trader, it is important to wake up with a clear mind and 
expect absolutely anything to happen.  I did just that on 
Tuesday, but was not too shocked to see futures showing a higher 
opening.  As the chart shows, the market did not trade under 1019 
during the first hour, and was by definition above the mentioned 
1017 pivot (futures wrap column) as well.  Ok, so I wanted to 
look towards taking a long position; however, the 1036.50 
relative low stood in my way.  I needed confirmation.  Note also 
the 200 and 22 PMA’s are right below resistance at 1050.  That 
should cap the upside; however, I need to do some more research 
since it is only  10:30 a.m.  Maybe a shorter time frame will 
give a better execution level.  They usually do.  

Chart of the NQ02Z, 60-minute 


 

Roughly one hour later, the NQ contract rose above the 1036.50 
area and gave a buy signal for those only looking at a 60-minute 
chart.  However, it was the break of the bearish regression trend 
line within in a 5-minute chart that certainly would have 
provided a better long entry.  This break, to me, occurred at 
1028, and risk to the downside would be for a move to 1016.  With 
12-points of downside, what is the objective?  The 200 PMA is the 
most obvious, currently at 1043.  This is 15-points of upside, so 
is the trade worth it?  I think it would be.  Note:  Most traders 
would have gone long above 1036.50 (say 1038), which was the 
initial thought; therefore, let us also monitor what it would be 
like with execution at 1038.  Also, if long at 1028, I do think 
it would make sense to add a quarter of a position above 1036.50.   

Chart of the NQ02Z, 5-minute


 

As the chart below shows, we now we have a rising channel that 
needs to be monitored.  There is a trend line from the break out 
that took the contract over 1036.50, and also a bullish 
regression channel that should be watched.  MACD also looks like 
it might roll higher.  Note how the 200 PMA did act as 
resistance, and the thinking is that a solid move above (when I 
say solid, I mean the average will become support) should place 
the NQ at 1050.  So, we got our initial objective at the 200 PMA.  
That should take care of half of our long position.  Why?  Well, 
a rise in the NQ is going against the recent trend, and there is 
not strong confirmation either in the bond market or the Dow to 
warrant a very aggressive bullish trade with a lot of conviction.  
If the 200 PMA does become support, then adding to the remaining 
long position would make sense.  

Chart of the NQ02Z, 5-minute


 

Now it is time to go to a one-minute chart and look for more 
patterns.  Notice how the 1044.50 level is starting to look like 
a trap.  Also, the contract is back below the apex of 1038.50 and 
under 1035 as well.  1035 was the low pullback after hitting the 
200 PMA, and this price action definitely gets me a little 
nervous.  Stop is below at 1028, not 1032 as listed.  Also 
worrying is the fact that the contract is below all three period 
moving averages.  A “smart” trader would have probably gotten out 
at 1038 (or even 1035) on the move lower, but that is all under 
the bridge now.  

Chart of the NQ02Z, 1-minute


 

Looking at the last chart that ends at 4:15 p.m., prices did 
manage to get back above the 1038.50 apex once more; however, 
late day weakness (as the Dow rallied) pressured the contract 
into the close.  With the MACD unable to break out higher, I have 
a feeling that holding a long heading into Wednesday is a little 
too risky.  Moreover, I don’t mind buying a move higher if 1050 
is cleared and internals look promising.  When it was realized 
that the MACD was not breaking out, the contract fell back under 
1038.50 for the second time.  It was then that the 1028 stop 
should probably be moved up to 1034.50 and just under the 1035 
support area.  At the close, I wondered about the index not 
testing the 50% retracement level and if this means longs hold 
the upper hand.  We should know very soon.  Now it is time to go 
to sleep and wake up expecting anything and everything.  

Chart of the NQ02Z,5-minute


 

Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com 


************************Advertisement*************************
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traded options,” claims author Larry Spears in his new compact 
guide book:  

“7 Steps to Success – Trading Options Online”.  

Order today and save 25% (only $15) by clicking on PreferredTrade 
and clicking on the link to the book on its home page.

http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN
**************************************************************


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

Please read our disclaimer at:
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