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Daily Newsletter, Tuesday, 12/17/2002

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The Option Investor Newsletter                 Tuesday 12-17-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Quarter Pounded
Futures Markets: Simply Profit Taking?
Index Trader Wrap: Build inexpensive homes with little production
Market Sentiment: Holiday Markdown
Weekly Fund Screen: Best in Class: Domestic Stock


Updated on the site tonight:
Swing Trader Game Plan: Indigestion


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      12-17-2002           High     Low     Volume   Adv/Dcl
DJIA     8535.39 - 92.00  8638.64  8525.03 1.53 bln 1235/1964
NASDAQ   1391.85 -  8.50  1408.16  1385.37 1.29 bln 1430/2043
S&P 100   458.58 -  4.68   463.26   457.86   Totals 2665/4007
S&P 500   902.96 -  7.44   911.22   901.74             
RUS 2000  391.25 -  3.65   394.90   390.16
DJ TRANS 2343.38 - 15.60  2367.90  2338.56
VIX        30.16 +  0.17    30.70    29.59
VXN        48.14 -  1.70    50.50    47.81
Total Vol   3,004M
Total UpVol   998M
Total DnVol 1,963M
52wk Highs   135
52wk Lows    133
TRIN        1.49
PUT/CALL    0.76
************************************************************

Quarter Pounded 

McDonalds set the tone for trading on Tuesday with its eighth
profit warning in eight quarters and its first anticipated
quarterly loss ever. MCD gapped down to a seven year low below
$16 and took WEN with it. The slowing sales at burger outlets
are being blamed on competition and lower priced menus that
are making it tougher to turn a profit. 

Dow Chart – Daily


 
Nasdaq Chart – Daily


 


On the economic front the CPI managed only a modest +0.1% gain
and caused only a yawn among traders. Inflation is far from a
problem and is not expected to be a factor for at least six
months. Industrial Production was weaker than expected at only
+0.1% as demand across the manufacturing sector remains weak. 
However the prior months drop was revised up slightly. This
was not enough to energize traders but any positive numbers
weakens the possibility for a second dip. With capacity
utilization still low at 75.6% there is no need to invest in
business equipment and that means any recovery is also being
postponed. Looks like a deadlock. Until those utilization rates
lift off the 20 year lows there will not be any new cycle. 

Homebuilders have more lives than Morris the cat and the Energizer
bunny combined. Warning after warning about the bursting of the
housing bubble have passed but the new housing starts rose by
+2.4% for November to 1.70 million units. Critics claim that 
starts are different than sales but most builders are claiming
a backlog of orders. Nobody knows how many of those are due to
the down payment gifting which could go away soon. Watch for the
starts to turn into a glut once interest rates begin rising. 
Still the trend is clear in the stocks. They are well off their 
highs and most are showing slow downtrends. Sell the bounces on 
news event like today's and ride them down with stops. RYL has 
been trending down since May and would be my choice. NVR is the 
builder that refuses to die and continues to hover in the $340 
range. Sorry, no options. 

In a surprising contradiction of news the weekly chain store 
sales numbers came in slightly higher than expected at +1.9%
but comments from BBY, TGT and others pointed to a different
picture. The +1.9% gain reversed the prior weeks -2.3% loss
but only put the retailers back on track for a potential 2.5%
growth rate for December. Very disappointing for retailers
expecting a 2002 recovery. Dana Kelsey, a retail analyst, 
lowered her estimates from 2.5% growth in December to estimates
of flat to at most +2.0% growth based on in store surveys. 
Target a large discount retailer likely to be on the positive
side of the retail buying binge reported that month-to-date
sales were "well below plan" and threw cold water on holiday
sales hopes. 

Electronics retailer Best Buy warned that profits would be 
below prior estimates due to slow sales in home entertainment 
products and fierce price competition. They said the massive 
promotions necessary to attract buyers for the holiday would 
cut into margins. Circuit City posted a loss for last quarter 
and its stock hit a ten year low. Trends showed that consumers 
have cut spending on high priced digital satellite systems, 
wide screen TVs and expensive wireless phones due to the 
uncertain economy and fears of layoffs after the new year. 
BBY and CC also faced increased competition from Wal-Mart in
the electronics area. WMT slashes prices on big-ticket items
to get customers in the stores in hopes they will load baskets
on higher profit items. WMT also dropped -$1.00 on the news. 
It looks like our Market Monitor retail updates beat the street
by a couple weeks. 

Techs were weak today and tomorrow may be more of the same. 
Micron reported earnings after the bell and posted a -$.52 cent
loss compared with analyst estimates of only -.23 cents. Despite
the report by Gartner Dataquest that worldwide DRAM sales increased
+37% to $16 billion the sector is still dropping. The reason for
the drop is that they are selling +37% more chips but they are
selling them for a loss. Infineon (IFX) lost ground today after
they announced they won a $2.5 billion contract to make DRAM
chips for Kingston Memory. In this business it appears the more
contracts you win the more money you can lose. MU lost -1.50 in
after hours and helped drag down other stocks in the sector as
well. Nasdaq futures were down -9.00 as I write this. 

Tomorrow traders will be focused on ORCL, which announces earnings
after the bell. Analysts are worried that the lack of big orders
could cause them to miss their estimates. Either way their 
guidance will be critical to any holiday rally hopes. Larry
Ellison is known for great spin control and even weak guidance
will be played for all it is worth. 

GE affirmed lowered estimates of $1.51 today and said they 
expect to raise between $5 and $10 billion next year by selling
non-performing assets and shifting into higher growth technology
and consumer finance businesses. They are considering sales of
their insurance units after the big losses in the 9/11 attack. 
They lowered their growth estimates to only +7% for 2003, which
is down from the +15%-18% estimates earlier this year. The 
guidance was back end loaded and is predicated on a strong
second half of 2003. This was a negative for analysts since it
means GE is betting on the distant future instead of realistic
current conditions. GE said it did not see any future spark that
would enable it to raise estimates. GE fell on the news to $26.

Today's drop was just about half of yesterday's gains. Those 
gains were way overdone and included some strong short covering
from those who were expecting a continued drop this week. Just
like every one day wonder recently there was no follow though
and volume remained very light. The last nine days have been 
lackluster at best as traders position themselves for a potential
holiday rally. The afternoon drop broke just below support at 8550 
on the Dow and 1395 support on the Compx. Without the Micron news
after the bell I would have expected another rebound at the open. 
The Micron earnings has created a very negative cloud over the
chip sector and consequently the Nasdaq. The S&P futures are
surprisingly flat indicating a mixed view point. Several Dow 
stocks are still looking weak led by MMM, WMT, IP, KO, BA, GM,
MCD, HD, INTC. This means any gains will be hard fought unless
these companies turn around. 

With the exception of the MCD warning the news on Tuesday was
mostly good but stocks sold off anyway. With more bad news after
the close from Micron and others there is not likely to be a 
material change tomorrow. The prospect of a holiday rally is
probably the only thing that will keep us afloat for the rest
of the week unless good news breaks out somewhere. I would still
be a buyer of the broader market at 8450 or lower with a stop
loss at 8250. We could see another retest of that 8450 level 
before next week but with the 50 DMA at 8452 and the 100 DMA
at 8414 there is little risk of a serious drop before the 
holidays. I am counting on the retail traders to boost us back 
to 8750 by the end of next week. Time will tell. 

If you have not taken advantage of the annual renewal special 
the details are listed below. 

Enter Very Passively, Exit Aggressively!

Jim Brown
Editor


**********************  
Annual Renewal Special
**********************  

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/


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

Simply Profit Taking?  
By John Seckinger
jseckinger@OptionInvestor.com

With strong support just underneath Tuesday’s lows, bulls can win 
more than just a battle if prices go higher on Wednesday.  What 
about if prices fall?

Tuesday, December 17th at 4:15 P.M. 

Contract          Net Change     High        Low        Volume    

YM03H    8518.00    -99.00     8629.00     8504.00       17,023
NQ03H    1046.00     +2.50     1057.00     1036.00      211,120
ES03H     902.00     -7.50      911.25      900.25      437,648

ES03H  =  E-mini SP500 futures    
YM03H  =  E-mini Dow $5 futures    
NQ03H  =  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.  

The December Contract is set to expire on December 20th.  Volume 
has picked up dramatically in the 03H contracts, and all 
contracts will now be quoted in March.  

Fundamental News:  Even though Housing Starts rose 2.4% to a 
1.697 mln annual rate during the month November, and better than 
the 1.68 mln consensus, traders didn’t seem too surprised.  The 
Consumer Price Index rose 0.1% (a core increase of 0.2%) and was 
tenth below consensus.  Other reports included Industrial 
Production rising 0.1% in November (estimates for a 0.2% 
increase), but the October report was revised higher to -0.6% 
from -0.8%. In company specific news, shares of McDonald’s (MCD) 
fell 8% to 15.99 after issuing Q4 guidance below consensus.  The 
company also expects margins for the quarter to be lower than the 
comparable period last year. Excluding charges, MCD expects Q4 
EPS of $0.25-$0.26 (Multex consensus is $0.32).  Interestingly, 
Lehman upgrades MCD to equal-weight from underweight due to P/E 
under 12x, 3 billion dollars in operating cash flow, and 
management changes.  Additionally, Goldman Sachs resumed coverage 
on General Motors (GM) with an In-Line rating and gave a target 
of $30 per share.  GM closed down 1.76% to 36.66.  

Technical News:  The Sox, bonds, XAU, and the dollar all came 
into play again during trading on Tuesday.  Starting with the 
Semiconductor Index, the 1.54% loss to 320.63 now has the sector 
using a daily bearish trend line as support for the first time in 
a number of sessions.  A rise back above 335 for the Sox should 
bode well for our futures contracts, while a move under 305 would 
almost certainly have negative implications.  The 30-year bond 
rose only ’02 ticks to 109’06 and failed to stay above the 50 and 
22 DMA’s (109’10 and 109’15, respectively) during an intra-day 
rise.  This should bode well for stocks.  The dollar closed on a 
new multi-year low at 103.59 and couldn’t be helped higher by 
‘strong dollar’ talk out of the White House.  This index will be 
negative towards stocks until a rise back above 104.50.  The XAU 
closed down 4.52% at 74.67 and didn’t find bids as the Greenback 
collapsed.  The 74.78 area seems pivotal, so we should get a good 
indication early on Wednesday.  Lower gold prices should help 
equities, but the correlation is not perfect. 

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

The December Mini-sized Dow Contract (YM03H)

Early on, it appeared that the Dow would trade in a range; 
especially when the 8625 was penetrated for a few minutes before 
prices fell back towards 8600.  The only problem for longs was 
prices kept falling until the close of trading.  As the chart 
shows, there wasn’t any technical damage done; however, a move 
under 8515 could be the beginning of another attempt at 8400 and 
solid support.  Tuesday’s profit taking, as of right now, appears 
to be just that.  The upward trend line (blue) remained untested, 
while the 50 DMA left unscathed as well.  This seems to be a 
common theme (Sunday and now today), but bulls really should not 
let prices fall during trading on Wednesday.  MACD appears to be 
finding support, and all Tuesday did was retrace roughly half of 
the move seen one day prior.  If 8625 is tested again on 
Wednesday, look for follow-through buying.  On the other hand, a 
move under 8500 should be met with an increased interest of 
traders looking to go short (read: down to 8400).  The ‘better’ 
trade seems to be if the market rallies, and it could be an 
opportunity to take a position overnight as triple witching takes 
hold.  

Chart of Dow Jones, Daily


 

The 50% retracement of Monday’s rally was met with some buyers on 
Tuesday, but will it hold?  For aggressive traders, look for a 
move above 8550 (pivot) to quickly send the index towards 8596 
and the first level of resistance.  For the longer-term move 
towards 8825 to materialize, bulls will need this 8550 area to be 
taken out with authority on Wednesday.  Once through, this level 
should become solid support.  As far as the downside is 
concerned, a move under 8500 should be enough to pressure the YM 
contract to 8471.50 and test the strength of bulls.  Remember, 
most days are profitable by selling resistance and buying 
support; however, with triple witching approaching, watch for an 
extended move.  The volatility index is right at 30 and at a 
pivotal area as well.  

Chart of YM03H, 8-minute


 

YM03H

Support             Resistance            Pivot    

8471.50             8596.50               8550.25
8425.25             8675.25

Bold signifies levels based on Pivot Analysis.

The December E-mini Nasdaq 100 Contract (NQ03H)

The NDX contract did manage to find resistance near 1050 on 
Tuesday, but pulled back shortly thereafter and now finds itself 
in the middle of the 22, 50, and 200 PMA’s (120-minute chart).  
This should portend an increase in volatility.  If weakness 
materializes, look for support to hold at 1025 (first level at 
1035) and correspond with the descending trend line (blue).  Odds 
do favor a rally, and the next move above 1050 (or pivot at 1046) 
should take the NDX towards the 1067 area and second level of 
resistance.  This level corresponds nicely to the 38.2% 
retracement level seen in the chart below.  It is interesting 
that the 50% retracement now lines up with 1082 and close to the 
1085 area widely-discussed not that long ago.  A move above 1085 
should be a big win for bulls and intermediate traders with long 
positions. 

Chart of NDX, 120 Minute


 

NQ03H

Support             Resistance             Pivot 

1035.50             1056.50                1046.25
1025.25             1067.25

Bold signifies levels based on Pivot Analysis (Globex included).  

The December E-mini S&P 500 Contract (ES03H)

The S&P 500 Index, like the Dow and NDX, also failed to rally 
through an important resistance area (910).  Moreover, the 
convergence of the three moving averages portends a volatile day 
during trading on Wednesday.  The rising blue trend line appears 
to hold a lot of significance for traders, but look for bulls to 
also defend the falling trend line that comes in at 900.  There 
should still be resistance at 911, but if the Dow powers through 
8625, this contract should follow.  This should correspond with 
the NDX at 1050 as well.  With the NQ02Z contract finishing 
higher on Tuesday as the other contracts under performed, look 
first at the NQ in case of a rally to see if it is relatively 
stronger once again.  

Chart of S&P 500 Index, 60-minute


 

We are seeing the same pattern in all three contracts, and it 
should not be long before we find out if Tuesday was simply 
profit taking or actually something more.  Stochastics, on a 30-
minute chart, appear oversold, while the appearance of a H&S 
formation during the last few days didn’t seem to make too many 
bulls nervous.  But should they be?  The objective on the H&S is 
exactly 893.50 and the second level of support listed.  
Coincidence?  I don’t think so.  Nevertheless, with the pivot at 
904.50, a move above here could easily begin to squeeze the 
shorts planning on the H&S and take the contract towards the 
915.50 level.  Most indicators point towards a higher session on 
Wednesday; however, it is the H&S in the SPX and ES contract that 
portends weakness.  Would that mean that a rally in the ES would 
propel the contract further because of shorts getting squeezed?  
Possibly, but shorts will most likely defend for a good period of 
time.    

Chart of ES03H, 30-minute


 

ES03H

Support             Resistance         Pivot

897.75              908.75             904.50
893.50              915.50

Bold signifies levels based on Pivot Analysis (Globex included).  

Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com 

**********************  
Annual Renewal Special
**********************  

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:

https://secure.sungrp.com/03renewal/


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

Build inexpensive homes with little production

Today's economic data could be summed up in a short sentence, 
"Building inexpensive homes with little production and plenty of 
capacity."

The building of homes saw housing starts in November grow at an 
annualized pace of 1.697 million, which was slightly better than 
consensus estimates.  While housing starts was a look back at 
what was, the look ahead of what could be had building permits 
rising to a 1.725 million rate, which was slightly ahead of 
consensus for 1.715 million.

The "inexpensive" isn't necessarily factual as it relates to new 
home prices, but November's consumer price index rose a modest 
0.1%, which was slightly below forecast for 0.2% and the core 
rate, which excludes the more volatile food and energy components 
rose just 0.2% and was in line with estimates.

A "little production" had November's industrial production 
inching higher by 0.1%, which was slightly below consensus of 
0.2%, but better than October's 0.6% decline.  

November's capacity utilization of 75.6% showed investors that 
there's plenty of excess capacity yet to be utilized and with 
production rising modestly, it doesn't look as if capacity will 
be a problem anytime soon.

In all, there was little in the way of surprises, at least from 
economist's forecast that made a case for traders to push the 
major indexes in any particular direction.  

The "lack of inflationary" data in the consumer price index 
readings for November did take its toll on the Gold/Silver Index 
(XAU.X) 74.67 -4.52% today.  The XAU.X hit a 5-month high and the 
December Gold futures (gc02z) $337.40 +0.11% traded a contract 
high of $342 as the dollar continued to decline.  However, 
comments out of the White House's spokesman Ari Fleischer saying 
the government supports a strong dollar, saw some gold and 
currency traders sell gold and Japanese yen toward the close.

Still, one comment I find interesting is that of Weiss Research's 
financial analyst Kevin Kerr saying he could envision a scenario 
in which "investment banks with huge short positions (in gold) 
are going to start feeling the worst kind of squeeze imaginable, 
and they should have to start unwinding their short positions in 
a hurry."

James Moore, an analyst at TheBullionDesk.com in London, said 
that he felt there is limited physical buying in the market at 
the moment, but with the dollar weakness making it less favorable 
for gold producers to sell their commodity, gold prices are 
"going higher and ... next year will be very interesting."  

I (Jeff Bailey) would point out that James Moore's, might be 
slightly biased to the bullish side of gold, but gives us some 
backdrop of what could be in play going forward.  I'm looking for 
some formidable support at the 71.84-72.00 area in the XAU.X on 
any type of further pullback in the sector.

Dow Industrials (INDU) 8,535 -1.06%:  The Dow gave back about 2/3 
of yesterday's gains, but there wasn't enough movement to have a 
p/f chartist making any entries on the Dow's $50-box scale chart.  
Bulls were able to defend the 8,400 level again today, which 
would be a negative technical break longer-term in the Dow.

Dow Industrials Chart ($INDU) - 50-box scale


 

If there's one week I don't like to try and trade index options, 
its "triple-witching" week when some weird things can happen as 
institutions and option's market makers can push the indexes 
around to suit their pleasure and take as much option money "out 
of the money" as possible.  There may be no better time than the 
present with the markets experiencing light volume.  I was a bit 
surprised when I looked at open interest in the Dow DIAMONDS 
(AMEX:DIA) $85.57 -1.3% and saw the heaviest open interest in the 
85, 86, and 87 PUTS.  On a short-term basis, a move above today's 
high or the starting to round flat 21-day SMA of $86.78 (8,665 on 
the Dow Industrials) could trigger a move higher and take nearly 
30,000 puts out of the money.  Some refer to this type of action 
as "maximum pain theory" regarding option open interest.  As 
such, I'd caution index traders holding current month expiration 
to not try and squeeze blood out of the turnip.  With daily 
market volume rather light, it's highly likely we could see some 
manipulation into the end of the week and this makes for even 
more difficult trading.

Today's action saw no net change in the very narrow Dow 
Industrials Bullish % ($BPINDU) and status remains "bear alert" 
at 60%.  Dow component McDonalds (NYSE:MCD) $15.99 -7.99% was 
crushed to a new 52-week low, but was a stock that was already on 
a point and figure sell signal dating back to July, when the 
stock traded a spread-triple-bottom sell signal at $24.

S&P 500 (SPX.X) 902.99 -0.81% :  Today's trading saw no chart 
entries on the 5-point box scale of the SPX as a trade at 915 was 
needed to extend the current column of X, and a trade at 895 was 
not found to have the SPX chart reversing 3-boxes.  In essence, 
no meaningful price action took place today.

The daily interval bar chart of the SPX also shows "nothing new" 
so lets introduce some noise to the chart and take a look at the 
60-minute chart.  We'll not the SPX slipped back below our 
"cheater's trend," and closed right on converging 21-hour SMA and 
50-hour SMA's.

S&P 500 Index Chart - 60-minute intervals


 

There is no such thing as "complacency" for index option traders 
holding current month expiration with just 2 sessions left in 
trading when index options expire.  We can establish a tight 
range between 912 and 900 and a move "outside of this range" 
could trigger option related movement and near-term volatility.  
With open interest at 70,000 plus in each of the 900 calls/puts, 
there's some premiums at risk should the SPX settle at 900.  

As I write, I'm just noticing that Monday's low of 888.48 is 
juuuust about 12-point from 900 and may match this morning's high 
tick of 911.22, also roughly 12-points from the 900 level.  For 
me, the SPX is a coin toss and very difficult to trade into 
expiration.  SPY traders may look to trade the out-edge of the 
912-888 range, looking for gravitation back toward 900, but would 
suggest doing so with smaller positions at first and see how 
things trade.  Any type of break from this type of range could 
trigger an unraveling of positions and drive index action.

Again... I don't like to try and trade option expiration week as 
market action can become too "unpredictable" if large positions 
are suddenly unwound.

Today's action saw the S&P 500 Bullish % ($BPSPX) inch up 0.4%, 
meaning 2 stocks generated reversing point and figure buy 
signals.  No status change and still "bull confirmed" at 62.8%, 
with a reading of 62.0% needed for a reversal lower into "bull 
correction" status.

S&P 100 Index Chart - 60-minute interval


 

A quick check of the OEX December open interest shows the top 3 
open interest well out of the money in the 500, 480 and 520 
calls.  There's about an evenly matched 8,000 open interest in 
the 450 puts and 460 calls, where "max pain" would be a 
settlement at 450, but with SPX open interest heavy at 900, then 
we might look for an OEX settlement of 455 or at least below 460 
to take the calls out of the running.

NASDAQ-100 Trust (QQQ) - 60-minute interval


 

Today's high trade in the Q's was 2-cents above our market maker 
resistance of $26.18.  A quick glance at open interest has the 
top 6 contracts all worthless if the Q's close $25.01 on 
expiration.  This may be part of the reason that the Q's have 
found some resistance at $26.18 in recent sessions, and found 
suspicious support and closing trade of $25.01 on Friday.  Short-
term bear might look to scalp a bearish trade on a break below 
the 21-hour SMA of $25.60 with target of $25.05 on an intra-day 
basis.

Jeff Bailey


**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/
**************************************************************


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

Holiday Markdown
by Steven Price

After Monday's big rally, the markets paused for some digestion 
today, with the Dow and SPX giving back 92 and 7 points, 
respectively.  The Nasdaq Composite hovered close to unchanged 
for most of the day, but eventually gave in and lost 8 points. 
Today's drop in the Dow and SPX amounted to just less than half 
of the previous day's gains and the loss in the Nasdaq registered 
a pullback of about 20%.

The pullback came in spite of positive economic data that came in 
close to expectations.  We saw an increase in housing sales, 
continuing the strong effect low interest rates have had on the 
sector over the past year.  The Consumer Price Index rose a mild 
0.1%, which was expected and indicates that inflation is not yet 
a concern. Industrial production also showed a slight gain, its 
first since July. This follows increases in the Chicago PMI and 
ISM surveys that indicate manufacturing is still showing a 
rebound, albeit a small one. 

The bad news came from the retail sector, as Target warned that 
sales from last week, as well as for the month, are tracking 
below expectations. These comments simply reinforced cautious 
statements yesterday from Wal-Mart and indicate that the holiday 
shopping season has not been kind to most department stores.  
Best Buy (BBY) also released earnings, but warned that the fourth 
quarter would come in $0.05 below previous expectations. The 
company blamed the lower guidance on losses from its Musicland 
stores. Nike also took a hit after Foot Locker said it was 
lowering its planned purchasing of Nike products for 2003 by 
$300-$00 million. After two years of a strained economy, and with 
unemployment that still remains high, it certainly makes sense 
that consumers are spending less on gifts and I expect earnings 
warnings to be frequent from this sector after holiday sales 
totals are complete. 

McDonald's also weighed on the market today, as it announced it 
would post its first quarterly loss ever in the fourth quarter. 
It is the eighth warning in the last eight quarters and is the 
result of sagging sales.  It is also the eighth time in nine 
quarters that the company has missed estimates.   The company's 
recent menu change has not helped improve sales and a drop off in 
service has turned customers away.  Former Vice Chairman   James 
Cantalupo is coming out of retirement to take over as Chairman in 
2003. The stock lost 8% to close at $15.99.


Today's drop did not affect the point and figure reversals in the 
Dow and SPX into columns of "X" that were registered on Monday's 
rally, but the OEX has yet to confirm the reversal. Even when we 
got a boost this morning, with all indices slightly in the green 
at one point, the OEX could not hit that reversal level at 464 
(high of 463.26).  One thing to note is that we did get a higher 
high today, with the small early gains, as well as a higher low, 
with the Dow bouncing at 8525 and the SPX bouncing at 901. We are 
seeing some tremendous intraday trading ranges, so the intraday 
patterns are hard to define.  However, when looking at daily 
ranges, the pattern of lower highs and lower lows was interrupted 
yesterday and if we are now seeing support above Dow 8500 and SPX 
900, then we could be building a base for an end of the year 
holiday rally.  

We are seeing consistently low volumes, with the NYSE extending 
its streak of 1.2 billion share days, and the Nasdaq coming in at 
only 1.3 billion.  While that can make sentiment hard to judge, 
it doesn't mean we won't get some decent moves, as there are 
fewer orders to offer support and resistance in between major 
levels. Expect the volume drop-off to continue through the end of 
the year as more funds wrap up their buying and traders take off 
for the holidays.  As we get closer to vacation time, traders 
also need to be aware of the extra time decay in December options 
that won't be tradable on holidays, or likely do them much good 
on the half days surrounding them. 



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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  8535

Moving Averages:
(Simple)

 10-dma: 8577
 50-dma: 8452
200-dma: 9093



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  902

Moving Averages:
(Simple)

 10-dma:  904
 50-dma:  893
200-dma:  970



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1040

Moving Averages:
(Simple)

 10-dma: 1040
 50-dma: 1011
200-dma: 1099



-----------------------------------------------------------------
The Retail Index (RLX.X):  The retailers got more bad news today, 
as Target said that not only were sales numbers below 
expectations for last week, but also for the month of December. 
This underscored cautious statements earlier in the week from 
Wal-Mart, which also said sales were tracking at the low end of 
guidance. As we get closer to Christmas, deep discounts should 
offset some of the pick up in sales, leading to bottom line 
damage that could be revealed in upcoming earnings releases.  The 
RLX is now finding resistance at the 280 level, as well as 
support just above 272.  A break under 272 could lead the group 
quickly to 260, as there is little recent support between those 
levels.

52-week High: N/A
52-week Low : 244
Current     : 273

Moving Averages:
(Simple)

 10-dma: 280
 50-dma: 282
200-dma: 311

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



Market Volatility 

The VIX posted a small gain today, adding 0.22 to get the average 
back over 30.  However, given a big drop in the Dow, traders and 
institutions don't appear overly worried about a continued 
pullback following Monday's rally. If that were the case, we'd 
likely see a bigger increase, as put buyers would be more 
aggressive. We may also be seeing the result of consolidation in 
the recent range from Dow 8400-8625, as traders don't want to get 
caught holding long premium (read: time decay) ahead of a short 
week.


CBOE Market Volatility Index (VIX) = 30.16 +0.18
Nasdaq-100 Volatility Index  (VXN) = 48.15 –1.69

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.76        483,133       367,649
Equity Only    0.59        353,553       206,959
OEX            0.77         31,623        24,396
QQQ            0.55         64,128        35,037


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

Bullish Percent Data

           Current   Change   Status
NYSE          50      + 0     Bull Confirmed
NASDAQ-100    64      - 2     Bear Alert
Dow Indust.   60      - 3     Bear Alert
S&P 500       63      - 1     Bull Confirmed
S&P 100       64      + 0     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   1.13
10-Day Arms Index  1.30
21-Day Arms Index  1.22
55-Day Arms Index  1.13


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       1090          1739
NASDAQ     1360          1962

        New Highs      New Lows
NYSE         45              28
NASDAQ       72              36

        Volume (in millions)
NYSE       1536
NASDAQ     1307


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

Commitments Of Traders Report: 12/10/02

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

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

S&P 500

Commercials added 2,000 long contracts and 16,000 shorts, leading 
to a 30% increase in the net short position. Small traders took 
the opposite approach, leaving the net long position unchanged, 
while reducing shorts by 9,000 contracts. 

Commercials   Long      Short      Net     % Of OI 
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%)
12/10/02      446,831   503,583   (56,752)   (5.9%)

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
11/19/02      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%
12/10/02      162,115    71,505    90,610     38.8%

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

Commercials saw a small gain to the long side, but left shorts 
virtually unchanged.  Small traders increased long positions by 
1,300 contracts, while slightly reducing the short side. 


Commercials   Long      Short      Net     % of OI 
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%)
12/10/02       44,651     51,716   ( 7,065) ( 7.3%)

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
11/19/02       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%
12/10/02       15,026     9,242     5,784    23.8%

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, with no significant 
changes to positions.  Small traders followed suit, making only 
slight reductions to both the long and short side. 

Commercials   Long      Short      Net     % of OI
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%
12/10/02       19,953    15,759    4,194      11.7%

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
11/19/02        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%)
12/10/02        5,394     9,499    (4,105)   (27.6%)

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

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


**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/
**************************************************************


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

Best in Class: Domestic Stock

These five Morningstar nominees for 2002 domestic equity manager 
of the year have excelled at preserving capital this year versus 
their peers.  Each of these veteran managers or management teams 
has lost ground this year, but has limited capital losses versus 
similar funds, proving that it's not what you make, but what you 
don't lose that matters in the investment world.

As Morningstar's Russ Kinnel points out, preserving capital in a 
declining market "takes skill, prudence and a sound strategy for 
limiting risk."  The fact that three of the Morningstar nominees 
are also Lipper Leaders for preservation should not surprise you.  
While the other two finalists don't have Lipper's highest scores 
for preservation over the past 36 months, they have done a solid 
job of limiting losses this year compared to funds of their kind.

By limiting losses, Morningstar contends, shareholders were able 
to ride out the bear market when other funds were digging a deep 
hole that might takes years or decades to get out of.  With that 
said, below are the 2002 finalists for Morningstar domestic stock 
manager of the year.

 Calamos Growth (CVGRX):
 John Calamos, Nick Calamos & John Calamos Jr. (Since 
 YTD -12.7% / 1Yr -11.4% / 3Yr Avg +5.7% / 5Yr Avg +18.8%
 
 Torray Fund (TORYX):
 Robert Torray & Doug Eby (Since
 YTD -10.9% / 1 Yr -7.5% / 3Yr Avg -3.0% / 5Yr Avg +3.0%

 Longleaf Partners Small-Cap (LLSCX):
 Mason Hawkins, Staley Cates & John Buford (Since
 YTD -1.2% / 1 Yr +0.3% / 3Yr Avg +5.8% / 5Yr Avg +7.3%

 Fidelity Low-Priced Stock (FLPSX):
 Joel Tillinghast (Since 
 YTD -4.6% / 1 Yr -1.4% / 3Yr Avg +14.6% / 5Yr Avg +9.0%

 Vanguard Health Care (VGHCX):
 Edward Owens (Since
 YTD -10.3% / 1 Yr -8.6% / 3Yr Avg +11.4% / 5Yr Avg +15.5%

For comparison purposes, Vanguard Total Stock Market Index Fund 
(VTSMX) which tracks the Wilshire 5000 index, has a YTD loss of 
18.5%, and has decreased in value by 16.4% during the past year.  
The broadest measure of U.S. stocks has a negative average rate 
of return of 12.1% over the past three years and is essentially 
flat (zero total return) for the trailing 5-year period through 
December 16, 2002, per Morningstar.  So, each of the stock fund 
managers (or teams) has been successful in minimizing losses in 
relation to the overall market during this bear market, in some 
cases by a wide margin.

Interestingly, the group's small-cap finalist Longleaf Partners 
Small-Cap Fund has the highest yield (1.10%) among them.  Large-
cap value oriented Torray Fund, which you'd think would have an 
above average yield, sports just a 0.48% yield, per Morningstar. 
Even Vanguard Total Market Stock Index Fund (i.e. Wilshire 5000 
index) has a higher trailing 12-month yield of 1.36% using data 
from Morningstar.     

Each of the finalists has different portfolio, risk, and return 
characteristics.  For example, Vanguard Health Care Fund favors 
large-cap growth stocks in healthcare and related sectors while 
Longleaf Partners Small-Cap Fund emphasizes small/mid-cap value 
stocks across various sectors.  Both Torray Fund and Fidelity's 
Low Priced Stock Fund have been categorized as "value" oriented 
in the past, but currently have "blend" styles, per Morningstar.  

Torray Fund is still categorized as large-cap value for ratings 
purposes while Fidelity Low Priced Stock now finds itself rated 
against other small-cap blend funds.  In our opinion it's still 
"value" oriented as its low average P/E of 18.2x would indicate.  
The average P/E of the S&P 500 is 26.5x, using Morningstar data.  

Vanguard Health Care and Calamos Growth funds both have greater 
than average earnings growth potential.  Vanguard's fund sports 
an earnings growth rate of 21.3%, while Calamos' mid-cap growth 
fund has an average 3-year earnings growth rate of 24.2%, above 
the 8.5% average earnings growth rate for the S&P 500 large-cap 
index.  Even Fidelity's Low Priced Stock Fund has a higher rate 
of earnings growth (14.3%) than the popular large-cap benchmark.  

Below is a summary of the current Morningstar classification of 
each finalist for 2002 domestic stock manager of the year using 
fund information per the Morningstar website.

 Large-Cap Value: Torray
 Large-Cap Growth: Vanguard Health Care
 Mid-Cap Growth: Calamos Growth
 Small-Cap Value: Longleaf Small Cap
 Small-Cap Blend: Fidelity Low Priced Stock
 
Both Vanguard Health Care and Fidelity Low Priced Stock have had 
"low" risk relative to their category peers over the past 3-year 
period, per Morningstar.  Longleaf Partners Small Cap Fund has a 
"below average" risk profile compared to other small-value funds, 
while Calamos Growth Fund has "average" risk relative to its mid-
cap growth fund peers.  Morningstar grades Torray as "high" risk 
within the large-cap value category, so it is fair to view it as 
an aggressive large-value fund.

The only sector fund of the finalists, Vanguard Health Care Fund, 
has had the lowest volatility of returns over the trailing 3-year 
period.  The fund's average standard deviation of 14.9% is "below 
average" compared with the Vanguard Total Stock Market Index Fund 
(17.8%).

In terms of performance, Longleaf Partners Small-Cap and Fidelity 
Low Priced Stock have done the best this year, keeping their 2002 
losses to single digits.  Longleaf Partners' fund has fallen just 
1.2% in 2002, while Fidelity's Joel Tillinghast has given up only 
4.6% this year.  Torray Fund and Vanguard Health Care have fallen 
by little more than 10% in 2002, shaving around 8 full percentage 
points off the total stock market's decline (using Vanguard Total 
Stock Market Index Fund).  Considering its generally riskier mid-
cap growth characteristics, the Calamos management team has truly 
done a fine job of limiting this year's decline to 12.7%, roughly 
half that of the mid-cap growth category average.

So far, we've thrown out a lot of facts and figures.  In the next 
section, we tell you which of the five finalists we would pick if 
we had a vote in Morningstar's 2002 domestic stock manager of the 
year competition.

Edward Owens, Vanguard Health Care Fund (VGHCX)

Edward Owens gets our vote for domestic stock manager of 2002 for 
his excellence in preserving capital relative to his growth peers 
and other healthcare sector funds.  Considering the average large 
growth fund and average health sector fund has declined 25.1% and 
28.4%, respectively, in 2002, Owens has done well to hold his YTD 
loss to 10.3 percent.  For a fund that is restricted to one stock 
sector (healthcare), Owens has exhibited less volatility than the 
market as a whole and its category peer group over the past year.

Owens' long-term record is superior, generating an average annual 
total return of 18.8% for the trailing 10-year period through the 
end of November 2002.  The fund sits atop all mutual funds with a 
20.6% average annual total return over the past 15 years, per the 
NYTimes.com website.  The fund's superior long-term record is the 
result of Owens' consistent, strong returns combined with capital 
preservation in bear markets.  Preservation in the form of losing 
less than half of what comparable funds have lost in 2002; that's 
helping shareholders stay the course.




 


The 1-year chart above lets you see that this fund isn't without 
risk (volatility).  Its net asset value may be subject to larger 
fluctuations in the short term, but still relative to its health 
sector peers and the market overall its "downside risk" has been 
relatively low.  You have to give some credit to Owens' seasoned 
judgment, having worked for Wellington Management Company, which 
serves as the fund's investment subadviser, since 1974.  He also 
has guided the Vanguard Health Care Fund since its 1984 start-up.

Owens has a M.B.A. from Harvard Business School and today serves 
as a senior vice president and portfolio manager with Wellington 
Management Company, a leading money manager that has had a long-
term investment subadvisory relationship with the Vanguard Funds.  

Owens seeks to reduce risk by investing primarily in established 
mid-to-large capitalization stocks, which are reasonably priced, 
and by maintaining a diversified healthcare portfolio of roughly 
120 stocks.  Investments are made with a long-term view, as the 
fund's low annual turnover of 13% per Morningstar would indicate.  

In pursuing the fund's long-term growth objective, Owens usually 
invests at least 80% of assets in equities of companies engaged 
in the development, production, and/or distribution of products 
and services related to the treatment or prevention of diseases 
and other medical ailments.  This includes pharmaceutical firms, 
medical-supply firms and firms operating in hospitals and other 
healthcare facilities.  Owens may invest up to 30% of assets in 
foreign securities.  According to Morningstar, Owens had around 
21% of assets in foreign securities at September 30, 2002.  The 
foreign exposure offers greater return potential but is usually 
associated with higher risk.  But, like most Wellington-advised 
funds, risk management is a strength as well as a primary focus.

Conclusion

Each of the finalists for Morningstar domestic stock manager of 
the year 2002 can make a strong case for why they deserve to be 
winner.  Like Edward Owens of Wellington Management Co. and the 
Vanguard Health Care Fund, the portfolio management team behind 
the Calamos Growth Fund did a stellar job of limiting losses vs. 
their mid-cap growth peers, and deserve recognition.  And, it's 
amazing that Joel Tillinghast can manage the huge $15.5 billion 
Fidelity Low Priced Stock Fund the way he does, since small-cap 
funds often close before their net asset bases reach $1 billion.  
Low Priced Stock Fund has lost less than 5 percent in 2002, and 
like Owens (Vanguard), Tillinghast has a fine record of capital 
preservation to go along with consistent, strong returns.

For more information on the Vanguard Health Care Fund, Ed Owens 
and Wellington Management Company, visit the Vanguard Funds web 
site at www.vanguard.com.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/
**************************************************************


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

Indigestion

We saw some serious market indigestion today. What started as 
simple rally digestion quickly turned disagreeable as the 
Dow/SPX/OEX all gave back almost half of their previous days 
gains.


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 12-17-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: CPS, OMC
Dropped Puts: None
Daily Results
Call Play Updates: CTXS, MERQ, ISSX
New Calls Plays: OVER
Put Play Updates: MMM, RKY, ROOM, DLX, AIG
New Put Plays: COST


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

CPS $38.49 -0.96 (-0.42) Despite a solid attempt at a rebound on
Monday, it appears that CPS' breakout over the $39 level has
failed.  Rather than build on yesterday's rebound from $39, the
stock reversed course at the open, violated that support level
and appears destined for a retest of the ascending trendline,
which is now at $37.50.  While a rebound from that level might
make for a solid bullish entry, the catalyst that first attracted
us to the play has been nullified with the stock retracing its
breakout move.  We would recommend using a move back over the $39
level as an opportunity to exit open positions.

---

OMC $66.17 -0.68 (-0.74) After a couple of attempts at clearing
the 200-dma, it appears that OMC is losing its grip on the
relative strength that had been propping it up recently.  Rather
than surging with the rest of the market on Monday, the stock
actually lost ground and then drifted further south on Tuesday.
In the process of falling back towards the $66 support level, OMC
broke and closed below the ascending trendline that has been in
place since early October.  Rather than hold on for one more
bounce, we're cutting the play loose tonight for lack of
performance.  If holding open positions, use another rebound as
an opportunity to exit the play at a more favorable price.


PUTS:
*****

None


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

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

CALLS              Mon    Tue    Wed   Thu  Week

CPS      38.49    0.53  -0.96  Drop, Lost steam
CTXS     13.29    0.62   0.49  approaching relative highs
ISSX     21.02    0.42  -0.23  Good relative strength
MERQ     31.51    0.98  -0.22  Testing higher ground
OMC      66.17   -0.06  -0.68  Drop, 200-dma too tough
OVER     30.79    1.04   0.69  New, support at $30

PUTS

AIG      60.57    2.05  -0.73  Rollover from trend line
COST     27.71    0.13  -0.97  New, triple bottom
DLX      40.80    0.19  -0.09  Still weak
MMM     121.50    1.74  -2.15  Failed 200-dma
RKY      60.35   -0.40  -1.15  Still dropping
ROOM     61.16    2.59  -1.33  Failed bounce


**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/
**************************************************************


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

CTXS $13.29 +0.49 (+1.20) It doesn't get any better than this.
That is in terms of price patterns working out to our advantage.
After charging to the $13.50 level a couple weeks ago, shares of
CTXS have been consolidating for the next push higher. 
Overlaying an ascending channel on the hourly chart showed that
the stock had been trading consistently within that channel
since starting its upward trek in October.  So when the stock
tipped over at the top of the channel on December 6th, we had a
pretty good idea of where the profit taking would end -- at the
bottom of the channel.  Sure enough, after dancing around the
$12 level (which at the time was right at the bottom of the
channel) last Friday, the stock did an about face and charged
higher throughout the day, both yesterday and today.  Closing
very near the high of the day, CTXS is just below the December
6th high of $13.48 and the center-line of the channel (currently
$13.62).  New entries make sense either on another rebound from
the bottom of the channel or a breakout over the $13.50 level.
More cautious traders may want to wait for a break above the
center of the channel, which would likely lead to another trip
to the top of the channel, currently $14.60.  Due to holding
support at that level last week, let's raise the stop to $12.

---

ISSX $21.02 -0.23 (-1.23 for the week)  ISSX tested its rising
50-dma successfully after a downgrade on Monday morning.  The 
bounce was actually quite impressive, as it held up over support 
and then showed a gain throughout most of the day on Tuesday, a 
big down day for the broader market. It did give up just under a 
quarter at the end of the day as the market sell-off picked up 
steam, but still showed great relative strength. That bounce on 
Monday also came above what would have been a point ad figure 
reversal down, at $20 and ISSX remains in the current bullish 
column of "X."  The stock has been forming a bullish triangle on 
the point and figure chart, which contrasts the short-term 
bearishness of the triangle forming on the daily chart.   The 
other interesting aspect of the triangles is the containment 
between the rising 50-dma and sinking 10-dma.  The 10-dma is 
currently at $12.59, while the 50-dma sits at $20.17.  We would 
suggest new entries back over $22, which has served as a ceiling 
the last two day, and would place the stock well above the 10-
dma. 

---

MERQ $31.51 -0.22 (+1.20 for the week) Shares of MERQ have 
performed well this week thus far.  The strong rally in the 
market on Monday help shares of this software company bounce 
strongly off the $30 level and close within striking distance of 
short-term overhead resistance near $32.  The rally continued 
early this morning before blue chips reversed course and 
succumbed to some profit taking on the McDonalds warning.  We're 
encouraged by the strength we see in MERQ and the stock's MACD 
oscillator is looking ready to give us a bullish signal soon.  
Considering that the GSO.X software index also appears ready to 
give us another run at its 200-dma near 113 and historical price 
resistance at 110, this could be a decent spot to watch for a 
continued run up in MERQ.  The GSO is also showing a MACD that 
looks ready to give a bullish reversal soon.  What would 
seriously help this sector get moving would be some leadership by 
MSFT.  The software giant's shares have been in a slump and a 
breakout above $55 and $56 would really fuel a move higher in the 
group.  Conservative traders still looking for a short-term trade 
in MERQ should look for a move back over $32 and evidence of 
intraday support there, as well.  While we like the move to a new 
relative high today, traders initiating the play from here should 
watch for staying power above that level.


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

OVER – Overture Services, Inc. $30.79 +0.69 (+1.80 this week)

Company Summary:
Overture Services, Inc. is engaged in the provision of
pay-for-performance search services on the Internet.  OVER
operates an online marketplace that introduces consumers and
businesses that search the Internet to advertisers that
provide products, services and information.  Advertisers
participating in the company's marketplace include retail
merchants, wholesale and service businesses and manufacturers.
OVER facilitates these introductions through its search service,
which enables advertisers to bid in an ongoing auction for
priority placement in the company's search results after
editorial approval.

Why We Like It:
Anecdotal evidence of improving conditions in the advertising
market has been trickling out of the newswires in recent weeks,
with the most recent announcement coming from YHOO.  The company
announced late last week that it sees advertising revenue growth
of 20% for 2003.  If revenue is rising for those posting the ads,
that must mean there are more ads being posted.  That's where our
new Call play, OVER comes in.  The company doesn't directly sell
advertising, but links company's Internet-based content with
their desired audience for a competitive fee.  Based on the
stock's recent action, things must be improving in that area of
Internet commerce, as the price is up by nearly 50% in just the
past month.  In the process of moving from $21 to just below $31,
the price has moved through all of its moving averages, and the
50-dma ($26.49) is above the 200-dma ($24.15) and climbing.
Adding to the bullish picture, the PnF chart just recently issued
a new Buy signal when the stock crested the $30 level.  That came
close on the heels of OVER pushing through its bearish resistance
line on the PnF chart.  Yesterday the stock broke above recent
resistance to generate that Buy signal and the bulls appear to
have their sights set on the mid-October highs near $31.30.
Momentum traders will want to wait for a rally through the $31.50
level before taking a position, while a dip and bounce back near
the $28.50 level (the site of the month-long ascending trendline)
can be used for entering the play as well.  We are initially
setting our stop at $28, just below the 10-dma.

BUY CALL JAN-30*GUO-AF OI=2125 at $2.80 SL=1.50
BUY CALL JAN-35 GUO-AG OI= 134 at $0.80 SL=0.40
BUY CALL FEB-30 GUO-BF OI=2084 at $4.00 SL=2.50
BUY CALL FEB-35 GUO-BG OI=4479 at $1.80 SL=1.00

Average Daily Volume = 1.91 mln



**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/
**************************************************************


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

MMM $121.50 -2.15 (-0.27) Just like clockwork, MMM gave us
another opportunity to enter to the short side this morning.
Recall last Friday when the stock broke below $123.50, we
pointed out in the Market Monitor that it looked good for new
entries.  Yesterday's rebound topped out right at $123.50, and
after a failed attempt to build on those gains this morning,
MMM proceeded down to close one penny below last Friday's
intraday low.  The series of lower highs and lower lows
continues to build, with resistance now firming up near
today's highs.  Another failed rally near that level or even
near $123 should make for another solid entry.  But if today's
close is any indication, the next entry point may be a breakdown
under the $120.75 level.  That's just below the bottom of the
October 15th gap.  If that level fails to hold as support, then
look for MMM to quickly seek out the next level of support at
the October 11th gap (top at $118.13, bottom at $116.50).  Look
for confirmation of broad market weakness before opening new
positions.  Lower stops to $126 tonight.

---

RKY $60.35 -1.15 (-1.14) The broad market may be gyrating around
in volatile fashion, but our RKY play is grinding lower in a very
predictable manner.  After dropping back under the $64 level last
week, the stock has continued to post a series of lower highs
right along the descending trendline.  In the process, the stock
has taken out support at $62 and $61 and has found intraday
resistance at each of those levels.  On Tuesday, after rolling
over just above $61, RKY proceeded to break yesterday's intraday
low and is now closing in on significant support at $60.  After 7
consecutive days in the red, RKY is due for an oversold bounce and
the first test at $60 (with the PnF bullish support line at $59)
is likely to provide the catalyst for that move.  Traders already
in the play will want to use a rebound from that level to lock in
profits and look to re-enter on the next failed rebound.  The $62
level should be firm resistance now, and a rollover near there
can be used to enter new positions.  Given the significance of
the $59-60 support level, momentum traders will want to wait for
a break below the bottom of that zone on strong volume before
chasing the stock lower.  Lower stops to $63.50, just above the
200-dma.

---

ROOM $61.16 -1.33 (+1.71) After the gyrations in price seen in
shares of ROOM over the prior two days, Tuesday's action could
have gone either way.  As it turned out, the attempt to extend
Monday's rally was promptly rebuffed by the bears when the stock
ran into resistance at $63.40, the site of intraday resistance
over the past several days, and the 10-dma ($63.44).  Today's
initial drop paused just below $62, where the stock gyrated in
a tight range for the remainder of the day.  That is until the
final 30 minutes of the session, when ROOM plunged another dollar
on a surge in selling volume.  Now resting just above $61, ROOM
is once again testing that support level and without a return of
solid buying interest, a retest of last week's lows near $59.50
seems a sure bet.  This is the stock's 2nd close below the 50-dma
in the past 3 days, and it now looks like that level of support
could finally give way for good later this week.  Another failed
rally below the $63.50 level can be used for opening new
positions, although we'd prefer to see that failure occur at a
lower level than Tuesday's intraday high of $63.39.  Momentum
traders will want to see ROOM break the $59 level before entering
the play.  Keep stops set at $63, as a close above that level
will tip the scales back in favor of the bulls.

---

AIG $60.57 -0.73 (+1.57 for the week)  With no major news moving 
the insurance group this week, AIG has followed the broader 
market.  On Monday shares reclaimed the $60.00 level after 
bouncing from the relative lows.  But despite a triple-digit Dow 
rally, the stock wasn't able to approach last week's high of 
$62.38.  AIG also failed to move above the 100-dma at $61.80.  An 
industry survey released last night said that property and 
liability insurance prices will continue to rise in 2003.  This 
report echoes recent comments from AIG's Chairman, and doesn't 
really come as any surprise.  AIG moved in a narrow range before 
drifting lower with the market during the final 90 minutes of 
trading.  As far as this play is concerned, we're encouraged by 
the stock's rollover from short-term resistance.  It's also nice 
to see that the IUX.X insurance index wasn't able to hold above 
its 50-day and 100-day moving averages.    A downside violation 
of today's Inside Day formation could send AIG back towards the 
relative low of $58.86.  A move under this level would provide a 
potential action point to enter new short positions.  Our stop is 
currently at $62.76.  More aggressive traders may want to use a 
stop above the rising 50-dma at $62.93.

---

DLX $40.85 -0.05 (-0.15 for the week) Deluxe sank to fresh 
relative lows on Monday, despite a powerful rally in the equity 
market.  A downward gap was met with buyers but this positive 
momentum quickly faded when shares ran into short-term resistance 
at $41.50.  In a blatant display of relative weakness, DLX 
actually finished the session with a small loss.  Today's action 
saw the stock trade an Inside Day after moving in a narrow 50-
cent range.  A breakdown out of this consolidation pattern on 
Wednesday would set the stage for a test of psychological support 
at $40.00.  Should the stock break to the upside, we'd expect the 
bears to defend resistance at $41.50 and $42.00.  Conservative 
traders may want to use a stop just above the latter level.  New 
entries can be gauged on another rollover from $41.50 or on a 
move below $40.00.


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

COST - Costco Wholesale Corp - $27.71 -0.97 (-0.81 for the week)

Company Description:
Costco Wholesale Corporation operates an international chain of 
membership warehouses, mainly under the "Costco Wholesale" name, 
that carry quality, brand name merchandise at substantially lower 
prices than are typically found at conventional wholesale or 
retail sources. The warehouses are designed to help small-to-
medium-sized businesses reduce costs in purchasing for resale and 
for everyday business use. Individuals belonging to certain 
qualified groups are also able to purchase for their personal 
needs. (source: company website)

Why We Like It:
Business is not booming at Costco.  The company reported earlier 
this month that November same-store sales rose by 2%, 
significantly less than the 3.7% improvement that was forecast by 
analysts.  More evidence of fundamental weakness was on display 
last Thursday, when Costco issued a cautious outlook during its 
quarterly earnings report.  The company lowered its earnings 
expectations for the fiscal second quarter to the $0.42-
$0.44/share range.  Analysts were expecting an EPS result of 
$0.45 per share.  While news of a difficult retail environment 
doesn't come as a huge revelation, COST has faced the additional 
difficulty of increased competition from Wal-Mart's Sam's Club 
and BJ's Wholesale Club.

The daily chart for COST reflects these recent developments.  At 
first glance, the stock looks like it might be overextended.  
Shares have lost more than 15% since the weak sales numbers were 
released on December 5th.  However, the deteriorating technical 
picture suggests that the stock could have plenty of downside 
remaining.  Today's 3.3% decline took COST below the $28.25-
$28.50 area, which provided support during the previous four 
sessions.  This breakdown (which came on brisk volume of 9.2M 
shares) created a triple-bottom sell signal on the point-and-
figure chart.  Interestingly, the retail sector's bullish percent 
has just reversed into "bear alert" status.  This indicates that 
retail stocks (as a whole) are beginning to show relative 
weakness versus the overall market.  The retail index is looking 
bearish as well, with the RLX.X threatening to break support near 
272.  Zooming out to a weekly chart, we see that COST is trading 
at levels not seen since May of 2000, when shares spiked down to 
the $26.00 area.  You'd have to look all the way back to 1998 to 
find the next level of substantial support at $20.00.  
Interestingly, the p-n-f chart shows a bearish vertical count of 
$18.  For the purposes of this play we'll be targeting a decline 
to the $21-$22 area.  Shorter-term traders could aim for a move 
to $25.00.  

BUY PUT DEC 30 PRQ-XF OI=4658 at $2.50 SL=1.25
BUY PUT JAN 30 PRQ-MF OI=5121 at $3.10 SL=1.55

Average Daily Volume = 5.82 mil



**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/
**************************************************************


**********
DISCLAIMER
**********

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


**************************************************************
ADVERTISING INFORMATION

For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support
The Option Investor Newsletter                  Tuesday 12-17-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: PUT - COST
Futures Corner: Account Management

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

COST - Costco Wholesale Corp - $27.71 -0.97 (-0.81 for the week)

Company Description:
Costco Wholesale Corporation operates an international chain of 
membership warehouses, mainly under the "Costco Wholesale" name, 
that carry quality, brand name merchandise at substantially lower 
prices than are typically found at conventional wholesale or 
retail sources. The warehouses are designed to help small-to-
medium-sized businesses reduce costs in purchasing for resale and 
for everyday business use. Individuals belonging to certain 
qualified groups are also able to purchase for their personal 
needs. (source: company website)

Why We Like It:
Business is not booming at Costco.  The company reported earlier 
this month that November same-store sales rose by 2%, 
significantly less than the 3.7% improvement that was forecast by 
analysts.  More evidence of fundamental weakness was on display 
last Thursday, when Costco issued a cautious outlook during its 
quarterly earnings report.  The company lowered its earnings 
expectations for the fiscal second quarter to the $0.42-
$0.44/share range.  Analysts were expecting an EPS result of 
$0.45 per share.  While news of a difficult retail environment 
doesn't come as a huge revelation, COST has faced the additional 
difficulty of increased competition from Wal-Mart's Sam's Club 
and BJ's Wholesale Club.

The daily chart for COST reflects these recent developments.  At 
first glance, the stock looks like it might be overextended.  
Shares have lost more than 15% since the weak sales numbers were 
released on December 5th.  However, the deteriorating technical 
picture suggests that the stock could have plenty of downside 
remaining.  Today's 3.3% decline took COST below the $28.25-
$28.50 area, which provided support during the previous four 
sessions.  This breakdown (which came on brisk volume of 9.2M 
shares) created a triple-bottom sell signal on the point-and-
figure chart.  Interestingly, the retail sector's bullish percent 
has just reversed into "bear alert" status.  This indicates that 
retail stocks (as a whole) are beginning to show relative 
weakness versus the overall market.  The retail index is looking 
bearish as well, with the RLX.X threatening to break support near 
272.  Zooming out to a weekly chart, we see that COST is trading 
at levels not seen since May of 2000, when shares spiked down to 
the $26.00 area.  You'd have to look all the way back to 1998 to 
find the next level of substantial support at $20.00.  
Interestingly, the p-n-f chart shows a bearish vertical count of 
$18.  For the purposes of this play we'll be targeting a decline 
to the $21-$22 area.  Shorter-term traders could aim for a move 
to $25.00.  

BUY PUT DEC 30 PRQ-XF OI=4658 at $2.50 SL=1.25
BUY PUT JAN 30 PRQ-MF OI=5121 at $3.10 SL=1.55

Average Daily Volume = 5.82 mil



**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/
**************************************************************


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

Account Management 
By John Seckinger
jseckinger@OptionInvestor.com 

Trading futures requires intense disciple and passion in order to 
be successful, especially during the first year when bad habits 
can ruin a trading account.

Here are some staggering statistics:  Over 80% of day-traders in 
stocks lose money in a bull market; moreover, most on-line day-
trading companies were not able to survive the 2000/2001 bear 
market.  Additionally, very few futures traders that enter with 
less than $10,000 remain in the market for a full year.  A few of 
the reasons for failure included, but limited to, overtrading, 
lack of working capital (money tied up when a great potential 
trade starts to materialize), expectations so great that 
confidence suffers when goals not immediately realized, in-
consistency with writing down (a) goals, (b) learned experiences, 
and (c) patterns that turned out to be common market traps.  With 
proper account management and a few simple rules, smart trading 
can take place and probabilities for successful trading greatly 
increases.  It takes a lot of hard work, but well worth it.

Patience, education, and a healthy dose of skepticism about what 
the chart is telling you comes to mind whenever I begin 
explaining how one becomes a professional trader.  It is very 
hard to swing or day trade before learning longer holding 
techniques learned from position trading.  Why?  The amount of 
information that needs to be immediately processed is at times 
overwhelming when looking at things from a short-term 
perspective.  What is a solution?  Maybe putting on one YM 
contract and, if profitable on the close, holding it overnight in 
an attempt to conditioning your mind and body about what could 
happen the following morning.  I still wake up at times with an 
accelerated heart rate and some hope that the market will trend 
in my favor.  The key is, if the trade is a loser, I knew that I 
believed in my system and did everything with patience and as 
unemotional as possible.  

Here are some things to ponder while exploring the world of 
futures.  Conservative money managers will never risk more than 5 
percent of total capital on a single trade.  I understand that 
this is impossible for some traders, but just think of this fact 
when contemplating if it makes sense to put 90% of your capital 
on one trade.  If not totally comfortable, start small.  Also, if 
comfortable about trading but looking to buy levels just above 
resistance, maybe put on a quarter of a position and then add to 
it as it goes profitable. 

Additionally, it is important to know exactly how much money is 
at risk at any single time.  Always think about what could happen 
if everything goes wrong?  Knowing this answer is just good risk 
management.  How to practice solid risk management?  Stops, of 
course.  Note:  I read a study that said slippage on round 
numbered levels actually increase slippage.  Just something to 
think about.  

Here is another pitfall when trading futures:  Excessive 
confidence in one's forecasting ability. I have learned that over 
confidence usually leads to over trading, and the market is more 
than happy to transfer money from the impatient investor to the 
patient investor.  Always think of every possible scenario, 
evaluate risk, and then be patient with entry.  The futures 
market loves to show a buy signal and then take it away after 
getting impatient traders involved 

Another way to gauge risk is via bullish percent indicators.  
Using www.stockcharts.com FREE service, a trader can look up 
Bullish Percents (BP) by using the designation $BP before the 
proper index.  Example:  $BPSPX would be bullish percent for S&P 
500, while $BPNDX would be the ticker for the Nasdaq-100.  If the 
bullish percents are at extreme bullish levels, maybe put on only 
a quarter bearish position and add if the market does in fact 
begin to correct.  If this is done properly, execution will be 
much better and trades will have a much longer life span.  When 
buying extreme bullish percentages, definitely look for explosive 
moves and a quick exit as optimism gets overextended.  

Since 75% of trading days are more range bound than truly 
directional, how can a trader begin to think with a “buy low, 
sell high” mentality.  This is much easier said then done.  One 
such contrarian indicator is Bollinger Bands.  These bands 
normally have a default setting of 2 standard deviations around a 
21 period length.  Current prices crossing an upper Bollinger 
Band to the upside would be a "sell" signal, whereas crossing a 
lower Bollinger Band moving downward would be a "buy" signal.   

Bollinger Bands, NQ03H, 60 to 5 minute


 

Using Bollinger bands can take some of the emotion out of 
trading, because it is an oscillator that signals “buy” when a 
normal reaction might be to sell.  Remember, check to see how 
Bollinger Bands look on the Dow first.  Things currently appear 
to line up, since a rise in the Dow could place the blue chips in 
the middle of the channel while the NQ hits the upper end.  With 
the 60-minute in the middle of the channel, but both 5 and 30-
minute prices near the bottom, buyers might want to look for 
entries on weakness or a an opening not too much higher than 
Tuesday’s close.   

Bollinger Bands, Dow, 60 to 5 minute


 

In conclusion, remember to think almost opposite of what the 
chart is trying to convince to you.  Be patient, and let the 
proper execution come to you.  Use stops to protect your account, 
and always think “buy low, sell high” before all else.  Begin 
using bullish percentages as a gauge of risk, and feel free to 
decrease size of position if looking for the true breakout.  
Above all, relax and learn as much as possible.  Be a sponge and 
absorb everything.   

Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com 


**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/
**************************************************************


**********
DISCLAIMER
**********

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


**************************************************************
ADVERTISING INFORMATION

For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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