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Daily Newsletter, Thursday, 12/19/2002

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The Option Investor Newsletter                Thursday 12-19-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Bah Humbug
Futures Markets: When Will This Pullback End?
Index Trader Wrap: Material Breach of Support
Market Sentiment: And the Wheels Came Off
Weekly Manager Microscope: John C. Hathaway: Tocqueville Gold
(TGLDX)


Updated on the site tonight:
Swing Trader Game Plan: Material Breach


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      12-19-2002           High     Low     Volume Advance/Decline
DJIA     8364.80 - 82.60  8505.23  8327.78 1.58 bln   1448/1770
NASDAQ   1354.16 -  7.40  1384.58  1346.18 1.58 bln   1479/1886
S&P 100   449.12 -  3.66   456.97   446.81   Totals   2927/3656
S&P 500   884.26 -  6.86   899.19   880.32
RUS 2000  383.42 -  0.51   387.69   381.29
DJ TRANS 2306.01 +  0.30  2336.37  2296.86
VIX        30.81 -  0.59    31.86    30.38
VXN        51.05 -  0.57    52.41    50.51
Total Vol   3,395M
Total UpVol 1,015M
Total DnVol 2,325M
52wk Highs   107
52wk Lows    186
TRIN        1.78
PUT/CALL    0.96
************************************************************

Bah Humbug

It may be starting to look a lot like Christmas in homes but
not in the markets. It appears to be turning into a jobless
holiday for more and more workers. Even more workers are
expected to be paying the holiday bills with unemployment
checks after the first of the year.

Dow Chart – Daily



Nasdaq Chart – Daily




The headline news that jobless claims for this week fell by
-11,000 to "only" 433,000 was not met with cheers. Actually
the numbers were worse. The 441,000 from last week was revised
up to 444,000 meaning this weeks 433,000 was only a drop of
-8,000 from the previously reported numbers. Using their logic
any upward revision does not count and they might as well just
report 250,000 each week and then upwardly revise it to 400+
the next week. That would always provide them with a strong
drop in jobless claims from the "revised" number. Yes, I am
griping about the number games. It is all scripted for the
uneducated investor that happens to hear a sound bite on a
news channel. OIN readers are hopefully more literate and can
see through this smoke screen. A better gauge for the real
numbers is the continuing claims which rose to 3,497,000 from
3,268,000 the week before. That +229,000 gain in the jobless
rolls is a clear sign of trouble. Those who dropped off the
list last week because their claim period expired are not
reported which makes the +229,000 jump even more drastic.
There is also a number of rumors of mass layoffs, which will
be announced after the holidays. Stay tuned.

Another indicator of the lack of recovery was the Chicago
Fed National Activity Index, which came in at -0.51. This is
the fourth consecutive month the index has been below zero
and indicating a pull back in economic activity. Specifically
weak were the employment and production categories. Hiring at
temporary agencies, which is a leading indicator of a rebounding
economy, fell for the third month in a row. The extended weakness
in the CFNAI for the last four months shows an increasing risk
of the economy slipping back into recession. The year-end boost
in production has passed and future production will require
new and currently unseen demand.

Contrary to the two items above the Philadelphia Fed Business
Outlook Survey for their region showed an increase from 6.1
to 7.2. This slight increase in their diffusion index indicated
a very slight pickup in manufacturing in their area. However,
shipments fell to a negative -3.4 and new orders fell from 11.0
to 9.3. Inventories rose to 13.9 from -6.1 but the gains came
mainly from a drop in orders and shipments. Only 30% of the
respondents said they were considering adding employees in the
1Q of 2003. The 1Q spending expectations component fell from
25.8 in November to only 9.1 in December indicating a significant
drop in plans to spend money for any reason. The Conference
Board's index of leading indicators also picked up very slightly
in November from 111.5 to 112.3. This index has been very flat
for the last eight months but may be showing early signs of
improvement.

More of a serious challenge to Americans is the current rise
in oil prices. With oil trading at $21 a barrel and not expected
to drop over the next 30 days consumers are faced with an
undeclared tax on almost everything they buy. For every $1
over $25 a barrel the US consumer will fork out about $7
billion more a month in energy related expenses. At $31 a
bbl this represents a extra $42 billion monthly drain on the
economy. Nobody is exempt since energy is required not only
to heat our homes but in some form for almost every product
we consume. This drain on the economy will drag on corporate
earnings and eventually the stock market. With the war not
likely to happen until February, after the Jan-27th report to
the UN Security Council, this means oil could go higher. The
situation in Venezuela is getting worse not better and there
is no resolution in sight.

Tech stocks tried to rally at the open on the Oracle earnings
news and the semi book-to-bill numbers. Oracle managed to gain
+.37 cents on their news. The semi B-T-B number rose only
slightly from 0.78 to 0.79 but orders were flat and shipments
fell -0.9%. The flat headline number for November was likely
related to last minute orders for rush holiday shipments for
computers and cell phones. There are no indications that there
are any new orders on the horizon and falling capital spending
will continue to drag on the sector. The latest CIO Magazine
Tech Poll in November showed more CIOs expected to cut spending
than increase spending in the current quarter. This was the
second consecutive month the trend was down. The long awaited
upgrade cycle for Y2K computers may be coming but it is still
too far in the distance to be seen.

Microsoft just keeps getting hit with security problems with
yet another warning today. Security holes in Windows XP make
playing media files off the Internet very risky. The same flaw
was found in WinAmp from Nullsoft, which is a unit of AOL. Both
programs would allow for an attacker to disguise his program
as a MP3 or WMA file with the same name as a popular music
download. Once the user clicks on the file the computer belongs
to the attacker and he could modify/delete anything on the PC
without the user being aware. Windows XP does not even require
a user to click on the icon. Just moving your mouse over it is
enough to trigger the program. This makes music file sharing over
the Internet even more risky. Both companies have posted fixes
on their websites. MSFT is hugging support at $53 and AOL is
still glued to $13.25. With multiple Internet companies running
very high profile attack ads against AOL on national TV the
odds are AOL will be looking up at $13 soon.

The market sell off on Thursday was primarily related to the
"material breach" claim against Iraq. The news brought to
reality what everyone knew was coming. We will be going to
war against Iraq in February. I had thought this news was
already priced into the market but obviously there were still
some traders with their head in the sand. The next deadline is
the Jan-27th report to the UN Security Council where the specific
material claims will be spelled out for all to see. There is
no doubt this will be played out in the media well in advance.
The US has already stationed 60,000 troops in the gulf and
authorized another 50,000 today. There are already enough men
and equipment in the gulf to start a war since the first 30
days are expected to be a series of surgical strike air attacks.
Those attacks will be carried out from air bases hundreds if
not thousands of miles from Iraq and with assets already in
place.

The markets on Thursday suffered from a series of attacks in
the form of sell programs. They were repulsed only when the
Dow neared last-ditch resistance near 8300. It was not a wave
of carpet bombing that drove the index down but several
lightning attacks by small sell programs that exploited the
thin ranks of buyers. Each penetration to a lower level
brought a rush of buyers to fill the gap but due to their
limited numbers they were not able to repulse the attacks
for more than a few minutes. The defensive lines at the 50
DMA of 8498 and the 100 DMA at 8408 failed. Only a valiant
stand at the 38% retracement level of 8344 prevented the
defenders from being overrun. The defenders were able to
mount a weak counter attack in the last 30 minutes and
managed to regain some of the ground lost earlier. The buyers
continually ran out of volume and were frantically trying to
induce others to join their cause to no avail. (I obviously
should not write war novels.)

The bulls are counting on historical trends to save them.
Since 1945 the Santa Claus rally has averaged a +10.6% gain
in the Dow from the Nov/Dec lows to the highs in late December
and early January. Since 1945 this string is unbroken. The
smallest gain recent times was 0.86% in 1968-69 and the
largest of +22.22% in 1974-75. The Nov/Dec low for this year
was 8298 on Nov-13th. Using the average gain of +10.6% that
would equate to a potential of 9177 on the Dow. Personally
I think this is not possible in the current state of pre-war.
Still only half of the average gain would put us back near
8750. While nobody can guarantee Santa will appear there is
ample historical evidence to suggest traders will see some
sort of bounce over the next couple of weeks. Since 1968
only five of the eventual highs occurred in December while
28 occurred in January. In our current bear market for the
last three years the highs occurred on Jan 8th, 14th and 3rd.

In 1990 when the US was preparing for the gulf war the Dow
sold off from its high of the year at 3010 to the October
low of 2344. A it became evident that the US and the growing
coalition was going to kick Iraq troops back to Baghdad the Dow
rebounded over the December holidays to 2662 but fell sharply
back to 2448 when the attack started. Within a week the Dow
began to rebound and hit 3017 again by March. That +20% rebound
began a new bull market that climaxed at 11,750 in Jan-2000.
We know that economic conditions were almost the same this
year as they were in 1990 and that our odds are significantly
better in Iraq now than they appeared to be then. A casual
observer would expect no further drops in the market due to
war sentiment since the massing of troops tends to build
patriotic spirit. Couple that with extreme oversold conditions
and the Dow at strong support and I would say the potential for
a Santa Claus rally is strong. That opinion and $4 will get
you a coffee at Starbucks but that is the way I see it. I
am still a buyer of the market below Dow 8450 with a stop
at 8250. My sell target is 8750. That is where I think the
economic issues will again take center stage.

Of note were the TRIN, which closed at 1.78 and the put/call
ratio which closed at .96. Both are indicating a level of
fear and oversold conditions which could produce a bounce
at Friday's open. It is a quadruple witching Friday but most
squaring of positions should already be complete. I expect
some strong volume on the Nasdaq as the rebalancing becomes
effective as of the close of business. Heavy selling in those
15 NDX stocks being removed should not significantly impact
any chance of a Nasdaq bounce at the close because they are
already nearing penny stock status.

Enter Very Passively, Exit Very 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
***************

When Will This Pullback End?
By John Seckinger
jseckinger@OptionInvestor.com

On Thursday, both the Dow and S&P 500 tested a popular
retracement level (38.2%) based off the move from October to
December.  What happens if these levels fail?  If a bounce
develops, what else needs to happen?

Thursday, December 19th at 4:15 P.M.

Contract          Net Change     High        Low        Volume

YM03H    8355.00    -80.00     8495.00     8307.00       21,834
NQ03H    1012.50    -22.00     1039.50     1002.00      318,724
ES03H     884.75    -10.50      900.25      878.75      543,027

ES03H  =  E-mini SP500 futures
YM03H  =  E-mini Dow $5 futures
NQ03H  =  E-mini NDX 100 futures

Note:  The 03H suffix stands for 2003, March, 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 Dec Contract is set to expire and settle on December 20th.  I
expect more volatility overnight due to Geopolitical events than
trades based off triple witching.

Fundamental News:  Chief U.N. Arms Inspector Hans Blix confirmed
to the U.N. Security Council on Thursday that "not much
information about the weapons" is contained in Iraq's 12,000-page
arms declaration.  Afterwards, John Negropont, the U.S.
ambassador to the U.N., declared that Iraq's omissions
constituted a "material breach".  It was then Secretary of State
Colin Powell’s turn, who followed up in a press conference adding
that Iraq's weapons declaration "totally fails to meet the U.N.
resolution's requirements.”  It is now rumored that late January
could be the start of a war with Iraq.  Looking elsewhere,
Leading Indicators for November rose to 0.7% and above the
consensus estimate +0.6%.  Moreover, the Philadelphia Fed Index
for December rose 1.1 points to 7.2 versus the consensus of 5.0.
Note:  Fed Chairman Greenspan is scheduled to speak at the
Economic Club of New York tonight.

Technical News:  The 30-year (ZB03H) contract did rise
substantially (1’01) to 110’28; however, the high was right at
resistance at 111’00.  A move above should be viewed as bearish
for stocks.  Looking elsewhere, the Sox index is still setting
lower highs and lower lows; however, the 0.26% loss does signify
that indecision is entering into market participants’ minds.
Additionally, the US Dollar remained near the 103.50 area and
seems to be compressing before a next wave begins.  A move above
103.77 should be positive for both the dollar and stocks.  On the
other hand, a move under 103.40 would be viewed as a negative for
equities (and bullish for gold).

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

The December Mini-sized Dow Contract (YM03H)

Which is more powerful, a 38.2% retracement of the October to
December move, or the fact that the 8400 level was breached and a
sell signal was issued on a P&F chart?  Which will weigh more on
investors’ minds, the Dow testing the bottom of its daily
Bollinger Band, or the fact that equities are far underneath the
8515 intermediate pivotal level?  Under 8400, it did make sense
to put on a quarter short position.  Therefore, if short, stops
should be very close to breakeven, since a rally back through the
8400 area could become a catalyst for a move back to 8515.  On
the other hand, weakness under the 38.2% retracement level once
more can be viewed as an opportunity to add to a short position
and look for a move towards the 8200 area (ideally 8120).  If
long from bottom of Bollinger Band or retracement level, look to
exit once the Bollinger Band is beached.

Bollinger Bands (BB) combines a centered moving average that is part of
the indicator but usually NOT shown.  Since each Bollinger bands is
placed at a fluctuating line that is equal to two standard deviations,
95% of all price action will theoretically occur within the upper and
lower lines.  With that said, resistance could be found at the top of
the band, while support would be at the lower region.  Additionally, if
prices do break, they should stay under or over the outside band.
Remember, a break of the Bollinger Band is only viewed as an
opportunity to go long once prices come back inside this band.

Chart of Dow Jones, Daily




The YM contract traded outside both the bottom and top of its
Bollinger Band on a 10-minute chart during early trade on
Tuesday.  Volatility continued, as the contract fell under 8450
and 8400 and then used the mid-part of the band as resistance.
Note that the pivot going forward is at the top of the 10-minute
period band.  Also interesting to see how regression analysis and
Bollinger Band studies work well when they correspond to the same
level.  If a bearish scenario develops, the YM contract could
fall under 8300 and through the bottom of the band (oversold),
then rebound to the mid-part of the band before heading lower
once more.  On the other hand, the market could bid above both
the mid-point and top of regression channel, test the pivot and
contract, and then look to find support at current prices.

Chart of YM03H, 10-minute




YM03H

Support            Resistance         Pivot

8277.00             8465.00           8386.00
8198.00             8574.00

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

The December E-mini Nasdaq 100 Contract (NQ03H)

The NDX contract barely penetrated 1000 (most likely hitting
stops) before slightly recovering into the close and above the
mid point of a regression channel.  This can definitely be viewed
as positive; however, watch for selling pressure if the NDX falls
underneath 1000 once again.  The intermediate downward objective
remains at 973.  If support does hold and the index starts to
head higher, look for resistance at the 1022-25 area.  Thursday’s
price action would normally have definite bearish implications;
however, I would wait until 1000 is cleanly breached and MACD
rolls lower and confirms the bearish trend line within the oscillator.

Chart of NDX, 120 Minute




The chart of the NQ03H contact (30-minute basis) is pretty
simple, but states its point.  A move above the mid point of the
Bollinger Bands and 1018 should send the index towards 1034
before selling pressure takes over.  If the 996.50 support area
is tested, expect the mid-part of the Bollinger Bands to become
resistance and take an even more aggressive slope heading into
the weekend.  The first hour should be critical, because bulls
might lose confidence if red fills the screen and creates an almost
panic-like atmosphere during option expiration and worries over Iraq.

Chart of NQ03H, 30 Minute




NQ03H

Support            Resistance              Pivot

996.50             1034.00                 1018.00
980.50             1055.50

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

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

The SPX Index appeared to fall off the proverbial cliff on
Thursday, but will the 38.2% retracement area save longs and get
shorts to rethink their positions?  I don’t think so; however, a
move back above 900 would seem to do the trick.  Traders should
expect a bounce from the 38.2% area, albeit a small one.  If this
level does fail once more, the 50% retracement level will become
the next area discussed by technicians.  The MACD oscillator
could easily continue to fall, and prices falling underneath the
lower end of the Bollinger Band would not be uncommon.  Least
resistance is clearly lower, and the market will have to prove
(moving above 900 to say 905) that it doesn’t make sense to be
short.

Chart of S&P 500 Index, Daily




The pivot at 888 seems to perfectly highlight the risk/reward
scenario for being short.  At current levels, I think it makes
sense to keep a short position; however, a rally just above the
888 area and we could easily see a move to 897.25 before rolling
over again.  MACD has broken the upward trend and looks bearish
as well heading into Friday.  You could state the case that MACD
is setting a bullish divergence when compared to the low at 888,
and I would agree.  But the divergence does not override the
breakdown seen on Thursday.  As noted just above, a move over 900
and shorts might really have to rethink positions held over the
weekend.  I do believe the Dow at 8515 holds the most weight,
however.  On the other hand, if the downtrend continues early,
use all rebounds to the mid-point of the Band as an opportunity
to add to bearish positions.  If you go long from above 888 to
897, see if the mid-part of the band becomes support.  If it
does, prices might really rise.

Chart of ES03H, 120-minute




ES03H

Support            Resistance           Pivot

875.75             897.25               888.00
866.50             909.50

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/#m


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

Material Breach of Support

There were some interesting "thoughts" mentioned by investors,
traders and U.N. officials today.  Unfortunately, many of the
"thoughts" had investors, trader and officials putting a spin on
things as if to say things weren't really what they seemed and
not that big of a deal.

I hope that Chief U.N. inspector Hans Blix's comments
(approximately 10:50 EST) that he wasn't prepared to say that
Iraq was in violation on its weapons report, despite that report
not providing enough information, is true.  However, the Dow's
66-point decline to 8,400 had the Dow "materially breaching" the
8,400 level in 25-minutes time.

However, the U.S. Ambassador to the U.N said gaps in Iraq report
constituted "material breach." The "material breach" comments by
the U.S.'s Ambassador to the U.N. hit the newswires at
approximately 01:10 PM EST and that had the Dow giving up an
additional 27-points in about 5-minutes.

What some "bullish traders" once deemed important support at
8,500 and then 8,400 seemed to be brushed aside in today's trade.
Bulls are now saying a quick U.S. victory like the one a decade
ago would remove uncertainty holding back a market that should
trade higher.

After all, today's 10:00 AM EST release of the Conference Board's
index of leading economic indicators rose 0.7% in November after
gaining a revised 0.1% in October, and showed some economic
warming which had the Dow Industrials at its session high near
8,500 and the S&P 500 Index at 899 (where did we think intra-day
resistance was at? 900) and the NASDAQ 100 Trust (AMEX:QQQ)
surging to $25.77 (where was that downward trend? $25.75).

There was also some sign of economic improvement when the Philly
Fed's index rose to 7.2 in December from 6.1 in November.
However, the modes increase in the main number, the new orders,
shipments and employment portions all worsened in December.  The
new orders index dropped to 9.3 from 11.0, while the shipments
index fell to a negative 3.5 from +1.5.  Not too different from
this morning's weekly jobless claims, the employment portion of
the Philly Fed report fell to -5.7 from -0.5%.

The Philly Fed report is based on a survey of manufacturers in
the bank's district, including eastern Pennsylvania, Delaware and
southern New Jersey.

While today's economic data is rather mixed, economists remain
near-term positive, but expectations about hiring and capital
spending worsened.  Sixty percent of the firms surveyed expect
their business to get better in the next six months versus 10%
expecting business to get worse.

Forty-six percent of the firms expect to hire more workers in
2003, while 40% say that their payrolls will be unchanged and 14%
expected to cut workers.

Big bets on capital spending supporting technology stocks took a
blow as the future capital spending index fell to 9.1 from 25.8
in November.

A summary of today's action would certainly be that the economic
data wasn't purely ignored, but that geopolitical concerns appear
to be the overriding influence.

Last night, I was watching "Hardball" with Chris Mathews on his
college tour.  Last night's stop was the Air Force Academy in
Colorado Springs, CO.  I can't remember his panel guests by name,
but their general timeline for some type of "war with Iraq" or
resolution to things was in April.

Market History

Now.... I've said before that I am a believer in Market History,
or will at least use it as a SCENARIO for a market to trade a
particular direction.  One reason some BULLS are "ignoring"
today's technical action is this.

A study by William Lefever from the end of World War II to 1986
does have some historical credence/credibility to the proverbial
"Santa Claus Rally," which shows the Dow Industrials rallying an
average 9.15% from the LOW made in NOVEMBER (this would be Nov.
13th 8,299) or December (today's low was 8,327) to the high in
December or January.  This phenomenon has a perfect record since
1945 although the major bear market of 1968 saw the Dow gain just
0.86%.  Mr. Lefever's study ended in 1986, but a continuation
would have the average gain higher at 10.62% on average.

Using the more "conservative" 9.15% average gain, from 8,299,
such a reproduction of average market history gain could have a
Dow target of 9,058.

The question right now is this.  Has Santa already come and gone?
The December high has been 9,043, set on December 2nd.

I believe in market history, and I believe in the spirit of
Santa.  However, for Santa to put some presents under a bull's
tree, he's got to squeeze down the chimney.  In the scope of
technical analysis, for the Dow to reach 9,058, its got to get
through 8,700 first.

Onto the Indexes

I couldn't buy today's 8,400 trade in the Dow, and while today's
close at 8,364 is just 36-points below that level, longer-term
technical damage has been done.  This I can't ignore and I won't
ignore.  I consider this a "material breach" and mark the last
upward trend I can come up with for the Dow Industrials.  This
doesn't mean the Dow can't put together a rally, but my
perspective on the major indexes shifts to "will trade bullish
short-term only, with a cognizant realization that the new trend
is lower."  While I feel this train of thought has been my
general belief for the past three weeks, due to the higher levels
of the bullish %, today's trade and 8,400 becomes technical
confirmation to what the bullish % had been alerting us to in
recent weeks.

I showed the p/f chart of the Dow last night, and again today in
the 01:00 Update.  While I haven't read Iraq's weapons report,
nor the Philly Fed report, I've seen the Dow's supply/demand
chart (black and white, X's an O's) and while it is just
representative of 30-stocks, it certainly appears to be
confirming the internal weakening of the various bullish %
charts.

Let's take a look at the Dow on our bar chart, with retracement
and Bollinger bands.

Dow Industrials Chart - Daily Intervals




Today's technicals look somewhat similar to that found back in
early September.  The Dow fell to lower Bollinger Band, MACD fell
below zero.  In early September (red 9 on a p/f chart) the Dow
tested and bounced from its bullish support trend.  However,
today, the Dow didn't bounce from its bullish support trend.

For me, "my" 8,400 level of critical support in the Dow
Industrials (INDU) was violated and therefore I must be defensive
toward the Dow Industrials.  I'm cognizant toward a potential
rally attempt SHORT-TERM, but with the bullish % charts showing
weakness building on a broader scale, I begin to question the
potential for Santa to show up in a meaningful way.

Stockcharts.com appears to be having some difficulty with their
bullish % charts tonight.  Dorsey Wright has the Dow Industrials
bullish % falling by 3.33% (net loss of 1 stock to a p/f sell
signal).  Status remains "bear alert" with bullish % falling to
56.67%.

S&P 500 (SPX.X) 884.25 -0.77%:  Today's action saw the SPX's $5-
box point and figure chart give a double-bottom sell signal at
885.  This sell signal comes after recent break of bullish
support trend at 890.  First sign of strength would be a trade at
915, which would be a double top buy signal.  Rally attempts
become suspect after yesterday's action had the bullish %
reversing into "bull correction" status.

S&P 500 Index Chart - Daily Interval




To tell the truth, I had no clue what was going on when the SPX
rallied to 899, stalled and then began falling back.  All I did
"know" was that it rallied to a level we looked for resistance
due to our scenario that index option expiration might have that
level as resistance.  Look for the SPX to begin finding willing
sellers into rallies in the 900-914 zone as risk is assessed on a
longer-term basis to 825, which is the p/f bearish vertical count
objective.  Until a reversing "buy signal" is given, this becomes
my longer-term objective.  It will be measured against the SPX's
internals, as depicted by the bullish %.

Today's action saw the S&P 500 Bullish % ($BPSPX) fall 0.63%, or
see a net loss of roughly 3 stocks to point and figure sell
signals.  Status remains "bull correction" at 60.17%.  It would
take a reversal back to 68% to have the bullish % back in "bull
confirmed" status, and I could tie that in currently with a trade
at SPX 915 or thereabouts.  Should the bullish % continue a
decline and reach the 18% level, which would be "bear confirmed"
status, I could envision the SPX trading 825 or lower.  This is
my current mindset as it relates to risk reward with the bullish
% and the SPX itself.

S&P 100 Index Chart - Daily Interval




Using the traditional $5 box scale of the OEX, we don't have a
bearish vertical count to work from at this point.  Our less
conventional $2.50 box scale of the OEX gave a double-bottom sell
signal at 450 and broke the bullish support trend and now sits on
447.50 support (445.00 would be spread-triple-bottom sell
signal).  Current levels are where the OEX did rebound from their
November lows to make a new high.  As such, if Santa is going to
make an appearance, then current OEX levels are the place to be
on the alert.  First sign of strength on the $2.5 box scale is a
trade at 465, and that's right near our retracement resistance of
468.30 and rounding 21-day SMA (middle Bollinger Band) of 465.

Today's action saw a net loss of 3 stocks to point and figure
sell signals.  Status remains "bear alert" and bullish $ falling
to 58%.

NASDAQ-100 Trust (QQQ) - Daily Interval




I'm willing to short-term trade the Q's for now, but I'm going to
lose my "predictability" of option expiration scenario tomorrow.
Then, for me at least, the addition of 15 new stocks and deletion
of 15 stocks gives the QQQ and the NASDAQ-100 enough of a "face
lift" to create some potentially different dynamics that will
take a week or so to get used to.

However, that's no different than what market makers will have in
some of the newly added NASDAQ-100 stocks.  Just remember, the
mindset for trading the QQQ and the NASDAQ-100 is to think like a
market maker and always think about levels of risk from the
retracement.  Today's trade at $25.00 to me means that market
makers are having to put on more hedges in the QQQ (shorting) and
this now has me looking at $26.18 as much firmer resistance as
the next level of risk to the downside becomes $23.82.  With the
bullish % still rather "high" and the broader SPX bullish %
showing weakness on a broader basis, the I'm more bearish than
bullish the QQQ, but just not overly comfortable with how QQQ
will trade with 15 new stocks.

Today's action saw a net loss of 2 stocks to point and figure
sell signals.  This has the bullish % falling to 62%.  In
December of last year, the NASDAQ-100 bullish % did fall from 78%
to 58%, then rebound to 68% by January (Santa Claus type of
rally?).

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/#m
**************************************************************

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

And the Wheels Came Off
by Steven Price

What started as a nice bounce in the markets into the green,
quickly turned south as world events took a turn for the worse.
We saw a move higher following good news from Oracle after the
bell on Wednesday, as the company beat earnings estimates and
guided slightly higher.  That was followed by mixed, but mostly
positive economic data, as the Philly Fed report came in at a
reading of 7.2, above expectations of 5.0.  The index of leading
economic indicators also jumped 0.7%, versus a consensus of 0.6%
and saw the October reading revised upward from a flat reading to
a gain of 0.1%.  The one piece of negative data was an important
one, as the initial claims number showed jobless claims jumped to
433,000 and the four-week average increased by 12,750 to 400,750.
That average is the highest since the first week of November.
The jobs report certainly looks bearish, but numbers out at this
time of the year are somewhat unreliable due to seasonal
fluctuations and the recent drop in the average as low as 377,250
may have been overly bullish, as well.   In any case, the market
shook off those numbers and rallied to a high of 8505 in the Dow
and 1384 in the Nasdaq Composite.

Then, the bleeding started.  News came out that Chief U.N.
inspector Hans Blix would tell the U.N. that the Iraqi weapons
declaration was lacking the answers he was looking for.  That
sent the ball rolling downhill and as more reports surfaced that
the U.S. would declare Iraq in "material breach" of the U.N.
agreement, that sell-off picked up steam.  The Dow gave up 140
points from its high, and fell through recent support at 8400.
The "material breach" term was the key phrase that puts us one
step closer to war. While not many traders predicted that Iraq
would fully comply with the UN resolution, the statement that it
had not sent us reeling.  It was not, however, a massive sell-off
and so far the heavy support at Dow 8300 has held up. If there is
going to be an end of year rally, it will have to come in spite
of the geo-political picture, which seems to be getting worse,
rather than better.

One political factor that has been weighing on the economy, but
may be seeing a glimmer of hope, is the general strike in
Venezuela.  Today Venezuela's Supreme Court issued an injunction
against the oil worker strike, sending oil prices lower after the
recent surge in oil futures up to $31.25.  The U.S. imports about
15% of its oil from Venezuela and the recent surge in prices has
mirrored the recent drop in equities. While that relationship
also mirrors Iraqi tensions, a drop in oil prices can only help
lower costs for industries across the board.

Much of the cash that came out of stocks today flowed into bonds,
as the five, ten and thirty-year treasuries were all green. The
five and ten-year notes have broken downward sloping trend lines
and are approaching horizontal resistance, while the thirty-year
has yet to break the trend.

While today certainly had a bearish tone, it is hard to make a
case that the stock market looks terrible.  The sell-off was in
concert with the Iraq news after a rally following the economic
data releases and Oracle news.  If not for the war talk, we may
very well have finished the day in the green.  Of course, coulda-
woulda-shoulda doesn't get us very far swimming against the tide.
Colin Powell's statements carried a lot of strong rhetoric about
what Iraq failed to include in its declaration.  However, he also
said that the ball is in their court to rectify the situation and
cooperate with inspections.  Sounds like yet another chance (17
now by the President's count in a previous speech) for Saddam to
avoid an immediate invasion. A law professor once told me that
when analyzing a Supreme Court decision I should look at what
they did, not what they said.  So far, we just gave Iraq more
time. That doesn't mean we aren't laying the foundation for an
invasion, but I was expecting a little more direct threat than
what we heard this afternoon, given the opportunity to side with
Blix and declare that Hussein had run out of chances.

If the Dow continues its slide below 8200, then all bets are off,
as this area of support may end up as resistance on a rebound
attempt.  However, the so-called traditional Santa Claus rally,
taken from a low made in November or December, to a high in
December or January, has averaged over 10% in the Dow since 1968.
That rally just might form a nice right shoulder if we rollover
following the rally.  With that data behind us, I would still
expect some type of bounce over the next few days.  If not, look
out below.


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  8364

Moving Averages:
(Simple)

 10-dma: 8522
 50-dma: 8493
200-dma: 9072



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  884

Moving Averages:
(Simple)

 10-dma:  899
 50-dma:  897
200-dma:  968



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1006

Moving Averages:
(Simple)

 10-dma: 1029
 50-dma: 1019
200-dma: 1094



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

The Semiconductor Index (SOX.X): The Semiconductor Index was
quite a surprise today.  After leading the broader markets lower
for the last couple of weeks, for once it wasn't the culprit on a
big drop.  Following Oracle's earnings release, the chip stocks
followed the software companies higher this morning for a brief
period of time.  When the Iraq news hit the wires, the bottom
fell out of the market.  By the end of the day, however, the SOX
gave up only -0.79, barely a blip on the radar screen.  As this
average has been very closely correlated with the S&P 500, having
matched drops of 2.5% or more on 53 of 55 days in the last year.
Is this telling us that the broad market drop was simply news
related and we can expect a bounce in the morning?  We can't be
sure, but the fact that the SOX failed to confirm the drop is
likely a bullish sign.

52-week High: 657
52-week Low : 214
Current     : 297

Moving Averages:
(Simple)

 10-dma: 315
 50-dma: 309
200-dma: 392

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



Market Volatility

The VIX popped to 34.55 today, as the Dow/OEX/SPX dropped on war-
related fears.  However, the VXN actually dropped slightly,
indicating the tech sell-off may be coming to an end, at least
temporarily.  The techs did not react violently to the Iraq news,
along with the blue chips, indicating the drop had less to do
with fundamentals than geo-political fears. In the past the techs
have led the broader markets, and although we saw a drop in the
NDX, the 1000 support level held up and the VXN reflects that
support.


CBOE Market Volatility Index (VIX) = 34.55 +2.80
Nasdaq-100 Volatility Index  (VXN) = 49.47 –0.17

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.95        599,998       572,089
Equity Only    0.81        395,592       320,754
OEX            1.10         43,956        48,303
QQQ            1.68         59,944       100,762


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

Bullish Percent Data

           Current   Change   Status
NYSE          49      - 1     Bull Confirmed
NASDAQ-100    62      - 2     Bear Alert
Dow Indust.   57      - 3     Bear Alert
S&P 500       60      - 3     Bull Confirmed
S&P 100       58      - 6     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   1.45
10-Day Arms Index  1.36
21-Day Arms Index  1.30
55-Day Arms Index  1.16


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       1290          1575
NASDAQ     1435          1749

        New Highs      New Lows
NYSE         42              47
NASDAQ       56              65

        Volume (in millions)
NYSE       1617
NASDAQ     1627


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

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/#m
**************************************************************


*************************
WEEKLY MANAGER MICROSCOPE
*************************

John C. Hathaway: Tocqueville Gold (TGLDX)

Risk-tolerant investors that believe the gold rally will continue
may want to consider the Tocqueville Gold Fund (TGLDX) managed by
John C. Hathaway with Tocqueville Asset Management.  This no-load
NTF fund with $144 million in assets is up 79.1% through December
18, 2002, and in its short history has outperformed its index and
fund peer benchmarks by wide margins.  If we had to vote for 2002
gold/precious metals manager of the year, John Hathaway would get
our vote.

Mr. Hathaway is a portfolio manager with New York-based
Tocqueville Asset Management, his employer since 1997.  Prior to
joining Tocqueville, he spent eight years with investment advisory
firm David J. Greene where he became a partner.  He then founded
and managed Hudson Capital Advisors, followed by 9 years as the
chief investment officer with Oak Hall Advisors.  Hathaway earned
his MBA from University of Virginia, his BA degree from Harvard
University, and is a Chartered Financial Analyst ("CFA").

Since the fund's inception (June 29, 1998), Hathaway has produced
an average annual total return of 17.6% through November 30, 2002
compared with a 1.0% average annual loss by the fund's benchmark,
the Philadelphia Stock Exchange Gold/Silver Index per the company
website (www.tocquevillefunds.com).  Morningstar shows Hathaway's
gold fund has risen over 79 percent since December 31, 2001 for a
10th percentile ranking in the Morningstar precious metals (gold)
category.

According to Morningstar, Hathaway's 79.1% YTD return topped both
index benchmarks they provide by huge margins.  Since December 31
the MSCI EAFE index has fallen 16.1% while the MSCI World Metal &
Mining Index is up just 27.3 percent; so, Hathaway has beat these
two benchmarks by 95.2% and 51.8%, respectively, in 2002.  Please
note that precious metals funds fall into the international stock
fund peer group for Morningstar ratings purposes, since most gold
funds invest in stocks of companies with mining operations across
the globe, including Canada and South Africa.

Tocqueville Gold Fund has a $1,000 minimum initial investment for
regular accounts, and just $250 for IRA's.  At 1.94%, its expense
ratio isn't cheap but it's still below the 2.06% category average
per Morningstar.  Like emerging-markets funds, gold fund expenses
are usually high because they invest in less-developed markets of
the world where entry and trading costs are greater.  But, if the
fund makes 81% in "gross" return and gives 2% of it back in fees,
no one is complaining.  Such is the case this year, with Hathaway
up 79.1% after deduction of all fees and expenses, ranking among
the category's best.

Investment Style/Strategy

Mr. Hathaway seeks the fund's long-term capital growth objective
by investing at least 65% of assets in gold and in securities of
companies worldwide that are engaged in the mining or processing
of gold.  A look at Morningstar's report shows that Hathaway had
81.1% of fund assets invested in stocks as of September 30, 2002,
with foreign stocks representing 62.6% of assets.  Hathaway will
allow the fund's cash position to rise as evidenced by the 18.1%
cash stake at the end of the third quarter.

In terms of regional exposure, nearly 66% of assets are invested
in North America (42.9% Canada and 22.8% U.S.), with the balance
invested mostly in South Africa.  Hathaway maintains a portfolio
of 63 stock holdings per Morningstar's report with 45% of assets
in the fund's top 10 holdings.  Gold Fields ADR, a South African
mining concern, was the fund's largest holding at quarter-end at
6.5% of assets.  The fund's annual turnover of 58% is relatively
low compared to other international funds.

At 0.21%, the Tocqueville Gold Fund's yield is pretty low so the
main focus here is long-term capital appreciation.  According to
Morningstar's report, Hathaway has maintained a consistent small-
cap growth style bias.  Essentially all of the fund's assets are
invested in the mid-cap, small-cap or micro-cap sectors.

As the Tocqueville Funds website cites, gold mutual funds can be
an important ingredient of a diversified portfolio and can offer
insurance against adverse financial climates.  Gold mutual funds
have typically performed best during periods of rising inflation
so they offer people a way of participating in gold as a "hedge"
against inflation.  However, gold fund returns have historically
been volatile, so unless you fully understand the risks involved,
and accept them, you may wish not to invest.

Fund Ratings and Performance

Since Tocqueville Gold Fund was launched in June 1998, it doesn't
have a Morningstar 5-star rating yet, but it does sport a highest
5-star overall rating for the trailing 3-year period.  During the
last three years, Hathaway has earned a "high" return relative to
his gold fund peers with "average" relative risk, producing a top
return-risk tradeoff for investors.  Hence, its 5-star rating for
risk-adjusted performance relative to category peers.

The 3-year chart below shows how well the fund has performed over
the past three years, but it also shows the kind of volatility it
can produce in the short-term (i.e. 2002).





For the 3-year period ended December 18, 2002, Hathaway produced
an average annual total return of 25.6% for shareholders to rank
in the category's 6th percentile.  His annualized rate of return
outperformed the average gold fund by 8.9% a year on average for
the same period.

In terms of year-to-year performance, the worst Hathaway did was
to rank in the 37th percentile in 2001.  His 21.9% annual return
in 2001 was still 3.1% above the category average.  In 1999, his
first full year, Hathaway put up a 21.7% annual return, followed
by a 10.7% annual loss in 2000.  In 2001, the fund rose 21.9% as
we just said, followed by an impressive YTD 2002 return of 79.1%.

To reduce risk, the fund can't invest more than 10% of assets in
gold bullion.  While Morningstar's style analysis suggest he has
a small-cap growth bias, the prospectus cites that Hathaway will
identify companies that are out of favor or undervalued in price
based on their growth potential.  Average P/E information wasn't
currently available, so it's hard to say with certainty how much
price risk Hathaway takes.  It would appear that Hathaway limits
how much he's willing to pay for growth, a GARP-like approach to
gold stock investing.

Conclusion

In four full years of operation (including 2002 we'll say), John
Hathaway has captured more return for shareholders than category
peers in three up-market years, and has preserved capital better
than peers in one down-market year.  Although this fund is still
relatively new, Hathaway has shot the lights out versus the gold
fund competition since starting the fund in 1998, and offers the
retail gold fund investor a compelling choice.

For his outstanding 79% total return through December 18, John C.
Hathaway gets our nod for gold stock manager of the year in 2002.
For more info or to download a prospectus, go to the Tocqueville
Funds website at www.tocquevillefunds.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/#m
**************************************************************


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

Material Breach

Quite a day of extremes for swing traders. Following positive news
from Oracle on Wednesday night, the market shook off a
disappointing jobs report to make a run in the Dow over 8500. Then
news began to trickle out that Chief U.N. inspector Hans Blix
would tell the U.N. that Iraq had breached its agreement and the
wheels came off.


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 12-19-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.
http://www.OptionInvestor.com/htmlemail/e19x_2.asp

In Section Two:

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

ISSX  $19.10 -1.03 (-3.20 for the week) ISSX rebounded strongly
after a downgrade on Monday.  The stock then found support at its
50-dma for the last few days, but fell below that level on
Thursday, as well as previous support at $20.  The sell-off in
the Nasdaq took down plenty of techs today and while we may see a
bounce in the broader market, ISSX's failure at crucial support
levels has shaken our confidence in the play and we'll close it
now, rather than hold it and hope for a bounce. Traders who want
to give it a little more time can keep an eye on the $19 support
level from Nov 11-12 and Dec 11-12.  However, if that level
fails, the next likely support comes at the converging 100-dma
and 200-dma around $18.

---

MERQ $29.09  (-1.22 for the week) MERQ has once again tested
support above $28 successfully.  While we like the show of
support, we don't like the fact that it continues to test that
level, while finding resistance at $32.  Another big push over
$32 could certainly see the stock head back to $35 and traders
who want to give this play some time can use the $28 stop.
However, we are going to move on and place our call money on an
issue that is spending more time testing its recent high, rather
than its recent low.   If the stock breaks support at $28, then
it could be a quick trip down to $25, so traders hanging onto the
play should keep a close eye on this one and close out quickly
below $28.

---

OVER $27.40 -2.60 (-1.59) Thomas Weisel initiating coverage with
a positive rating on Wednesday did nothing to help shares of OVER
on Thursday.  After opening flat, the stock dove underwater and
continued drilling lower throughout the session, ending just
above its low of the day.  The nearly 9% loss took out support
near $28, the ascending trendline and the 20-dma, all in the same
day.  With a violated stop ($28) coming on heavy volume, there
should be no question that the play is a drop.  The trend has
changed, and we don't want to stick around to see how bad things
might get.


PUTS:
*****

None


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

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

CALLS              Mon    Tue    Wed   Thu  Week

BSX      43.70    1.38  -0.33   0.97  0.45  New, Climbing
CTXS     13.15    0.62   0.49  -0.24  0.26  Relative strength
ISSX     19.10    0.42  -0.23  -0.16 –1.03  Drop, Broke support
MERQ     29.09    0.98  -0.22  -0.58 –1.32  Drop, Testing low end
OVER     27.40    1.04   0.69  -0.48 –2.60  Drop, Off the cliff
TRMS     42.45   -0.20   1.43  -1.38  2.49  New, News is out

PUTS

AIG      58.09    2.05  -0.73  -1.54 –0.95  Still dropping
COST     27.58    0.13  -0.97  -0.17  0.06  $27.50 next
DLX      40.09    0.19  -0.09  -0.45 –0.31  Slowly dripping
MMM     120.30    1.74  -2.15   0.11 –0.56  Tighten stops
RKY      60.88   -0.40  -1.15   0.31  0.17  Weak bounce
ROOM     58.50    2.59  -1.33  -0.20 –2.20  Got the breakdown


**************************************************************
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/#m
**************************************************************


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

CTXS $13.12 +0.23 (+1.03) Resilience is an apt description of
CTXS, as the stock continues to defy the weakness being found
in the broad market.  Support is gradually rising along with
the ascending trendline, which now comes in right at the $12.90
level.  The bulls actually got a little bit of excitement this
morning when the stock powered through recent resistance, moving
as high as $13.99 in the early going.  But with a lack of follow
through, CTXS fell back to earth, once again finding support
just above the bottom of the rising channel.  So long as the
stock continues to rise in the channel, bounces from the bottom
continue to be solid entry points.  But given the sharp
retracement of Thursday's breakout attempt, we want to limit our
risk in the event that the channel does fail to provide support.
Stops have now been raised to $12.50, just below today's intraday
lows.  The pullback from today's early rally attempt shows the
reason why we prefer entering the play on bounces from support,
rather than a breakout over resistance.


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

BSX - Boston Scientific - 43.70 +0.45 (+1.95 for the week)

Company Description:
Boston Scientific is a worldwide developer, manufacturer and
marketer of medical devices whose products are used in a broad
range of interventional medical specialties. (source: company
press release)

Why We Like It:
A glance at the daily chart for BSX reveals that investors have
had an insatiable appetitive for shares of this medical device
company.  What's driving the stock higher?  The current uptrend
can be traced back to early-October, when a federal judge ruled
against Guidant (GDT) in a case involving drug-coated heart
stents.  Guidant is competing with Boston Scientific to bring the
lucrative gizmos to market.  The judge's ruling significantly
delayed GDT's research, effectively leaving BSX and JNJ as the
only major players.  Meanwhile, BSX has moved ever-closer to FDA
approval of its own stents.  On November 18th the company
reported that its TAXUS IV product had shown positive results in
a safety study.  More positive news arrived nine days later, when
Guidant's appeal of the previous decision fell flat.  This second
ruling helped to propel the stock to new 52-week highs.
Technically, we like how BSX has bounced back after pulling back
to the bottom of its ascending regression channel.  The stock
showed good relative strength today and closed at levels not seen
since 1999.  The rising volume and MACD (which is poised to give
a bullish crossover) bode well for a continuation of the existing
uptrend.  In terms of upside potential, we'll be aiming for a
rally to the $50.00 level.  Shorter-term traders may want to
target a move to the all-time highs near $47.00.  Our entry
trigger for this play will be set at $44.01.  If shares reach
this level our stop will be located at $40.99, just below the
December lows.  This creates a risk/reward ratio of roughly 1:2.
Those with slightly more conservative strategy could use a stop
just below $41.50.

*** December contracts expire Friday***

BUY CALL JAN-40*BSX-AH OI=4527 at $4.50 SL=2.25
BUY CALL JAN-42.50 BSX-AV OI=828 at $2.85 SL=1.45
BUY CALL FEB-40 BSX-BH OI=1341 at $5.50 SL=2.25
BUY CALL FEB-42.50 BSX-AV OI=828 at $3.90 SL=2.00

Average Daily Volume = 2.59 mil


---

TRMS – Trimeris, Inc. $42.45 +2.49 (+2.11 this week)

Company Summary:
Trimeris is a biopharmaceutical company engaged in the
discovery and development of a class of antiviral therapeutics
called viral fusion inhibitors (Fis).  The company's most
advanced product candidates, T-20 and T-1249, are for the
treatment of human immunodeficiency virus (HIV), type I.
T-20 is a first-generation FI that prevents HIV from entering
and infecting cells, while T-1249 is a rationally designed
second-generation FI in an earlier stage of development.  Using
its proprietary viral fusion platform technology, TRMS has
identified and filed patent applications disclosing numerous
discrete peptide sequences that appear to inhibit fusion for
several viruses.

Why We Like It:
Volatility is the life-blood of options traders.  Those that
learn to dance to its tune can carve out a nice, regular
paycheck.  Those that don't, well, they don't last long in this
profession.  Frequently a stock will carve out an important
bottom (or top) marked by one day of heavy volume and wild
gyrations in price.  That certainly seemed to be the case with
TRMS today, as the stock traded in a $5.50 range in the opening
15 minutes.  Ever since rumors surfaced at the beginning of
December that the company was having production problems with
its AIDS drug Fuzeon, the stock has been in a steady downtrend.
Throughout the decline, TRMS' development partner, Roche had
been dismissing the rumors as speculation.  Well, last night
TRMS admitted that manufacturing problems have forced the
company to sharply lower their supply forecasts for the
soon-to-be-approved drug.  That combined with a Prudential
downgrade to HOLD sent the stock tumbling at the open, breaking
major support at $40 and trading as low as $38 in the opening
frenzy.  As quick as it materialized though, the selling
evaporated and by the end of the first 15 minutes of trading,
TRMS had surged back above $43.50.  That excitement soon faded
as well, with the stock falling back to the $40 support level
and then steadily marching higher throughout the day.  The
premise of the play is that the production problems had been
factored into the stock price over the past few weeks and now
that the news is out, buyers are ready to come back.  The
Prudential downgrade seems akin to closing the barn door after
all the animals have escaped.  The good news is that the wild
gyrations this morning likely did a good job of washing out any
near-by stops and we're looking for TRMS to work its way back
towards the $50 level over the next couple weeks.  Effectively,
today's wild range appears to have put in an important bottom
for the stock.  Entries are a bit tricky after today's wild
ride, but for now a dip and bounce near the $41 level looks
attractive for initiating new positions.  Momentum traders that
want to see strength proven before taking a position will want
to wait for a rally through $44.50, getting back over the 20-dma
before playing.  Initial stops are in place at $40.

BUY CALL JAN-40*RQM-AH OI=213 at $4.60 SL=2.75
BUY CALL JAN-45 RQM-AI OI=833 at $1.75 SL=0.75
BUY CALL APR-40 RQM-DH OI=210 at $7.50 SL=5.25
BUY CALL APR-45 RQM-DI OI=518 at $4.80 SL=3.00

Average Daily Volume = 581 K



**************************************************************
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/#m
**************************************************************


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

DLX $40.09 -0.31 (-1.90 for the week) A 15-minute chart for DLX
brings to mind images of sap on a tree, slooowly dripping lower.
This gradual downtrend has been intact ever since the stock
rolled over from its 200-dma earlier this month.  Shares haven't
been able to attract many buyers, and the recent broader market
weakness sure isn't helping matters.  The main challenge the
bears face is psychological support at $40.00, which was tested
at the tail-end of today's session.  If a bounce ensues from this
level we'll be looking for shares to find resistance at $41.00
and $41.50.  $42.00, which previously provided support, also
coincides with the top of DLX's descending regression channel.  A
move below $40.00 would provide an opportunity to consider new
short positions.  Our stop has been lowered to $42.50, just above
recent resistance. $42.00.

---

COST $27.58 +0.06 (-0.94 for the week) Our short play in COST was
triggered on Wednesday morning after shares dipped to new multi-
year lows.  The stock spent the remainder of the session trading
near $27.50.  Today's action was very similar, with the exception
of a brief move higher during the first hour of trading.  These
gains evaporated once the broader market started to drift lower.
Shares tagged a new relative low but managed to hold up pretty
well while the retail index drifted into negative territory.
Sector bears can be pleased with the fact that the RLX.X has
fallen below support near 270.  On Friday we'll be looking for
COST to abandon the $27.50 area and move under today's low of
$27.20.  New entries can be targeted if a breakdown does occur,
but be sure to first confirm weakness in the RLX.X.

---

AIG $58.09 -0.95 (-0.91 for the week) It's taken almost two weeks
but AIG is finally picking up some bearish momentum.  The recent
trend of lower highs gave the bulls a heads-up that the technical
picture was worsening, even though shares had continued to
gravitate towards $60.00.  Savvy bears may have been able to take
advantage of this morning's rollover from that level.  Today's
broader market weakness provided the perfect catalyst to take AIG
down to new lows.  Shares headed lower after topping out at
$59.97, moved below the relative low of $58.64, and finished with
a loss of 1.6%.  By way of comparison, the insurance index posted
a loss of 1.2%.  With the IUX.X also trading below support, we
think AIG will continue to move lower in the near-term.  New
entries can be gauged on another rollover from $60.00.  In the
news this afternoon, a New York judge denied a motion by several
insurance companies (including AIG) in a case related to the
World Trade Center attacks.  The issue at hand is whether the
terrorist acts count as one or two events.  If the judge rules
that the attacks were two separate events (two buildings targeted
by two different planes), the liable insurance companies would be
forced to pay a larger amount.

---

MMM $120.30 -0.56 (-1.47) Trader's that have gone along for the
ride have been treated to a consistent (if somewhat slow) decline
in MMM, as it has worked its way down to the $120 level since we
added it to the Put list last week.  Now we're coming up on a
significant inflection point, and our primary consideration is
to not give back those gains should the stock rebound from the
$120 level.  $120 is the 50% retracement of the stock's advance
from the October lows, and odds of a rebound from this level
after a more than $10 slide are good.  A breakdown below $120
(confirmed by more broad market weakness) would likely take the
stock down to the $116-117 level, where there is strong support.
In order to balance that possible downside, we're tightening up
our stop to $122.50, just above Thursday's intraday high.  With
the broad market near strong support, we want to get out of open
positions should we get a strong bounce and a rebound through
Thursday's intraday high would be a good signal that is what is
happening.  But if we get the breakdown, we want to still be in
the play, targeting the $116-117 level as a level to harvest
gains.  Simply put, if you're in the play, manage the position
with a tight stop.  But we aren't advocating new entries at
this time.

---

RKY $60.88 +0.17 (-0.61) RKY treated us pretty well earlier this
week as it broke down through several intermediate levels of
support, and we mentioned on Tuesday that it looked like the
stock was due for a break from the selling.  Sure enough, that's
been the case, as enough buyers have emerged from the woodwork to
keep it from falling below the strong $60 support level.  But
there hasn't been enough buying to clear any of the meaningful
resistance (broken support) levels overhead.  Note how the $61
level has kept the intraday rallies in check over the past 2 days.
With RKY so close to strong support, it's tough to find an
actionable entry point for new entries right here.  The best
approach would appear to be to enter on a rally failure in the
$61.50-62.00 area.  Otherwise we need to wait for a breakdown
below $59 (bullish support line on the PnF chart) before entering
on weakness.  Lower stops tonight to $62.25, which by tomorrow
will be just above both the 10-dma and Monday's intraday high.

---

ROOM $58.50 -2.20 (-0.95) After a precipitous fall from the
mid-$70s, ROOM came oh so close to stopping us out of our bearish
play on Tuesday when it briefly traded above our $63 stop.
Fortunately, the bears prevailed and drove the stock down below
$61 by the closing bell, keeping the play alive.  We've seen two
more intraday rally attempts turned back below the 10-dma
(currently $61.93) over the past two days and then this afternoon
we finally got what we were waiting for.  ROOM broke down below
the $59 level, breaking last week's intraday low and generating
another PnF Sell signal.  That Sell signal got reinforced late
in the day, with the stock briefly trading below $58 and adding
another O to the current column and removing all doubt about a
potential bear trap.  ROOM should now find solid resistance near
$61 and strong resistance at $62 on any subsequent oversold
bounce.  Traders still looking to enter the play will want to
target a failed rally in that area.  On the downside, since ROOM
has now broken near-term support, the next possible help for the
bulls comes from the $55 level, although the $53 level is more
likely.  That is the site of the 200-dma ($53.12) and the top
of the October 15th gap.  Momentum traders can look to enter new
positions on a continuation of the breakdown under $57.50, but
need to keep a watchful eye for a possible rebound from the
support levels listed above.  We want to see another day of
weakness before lowering our stop, so for now keep stops set
at $63.


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

None


**************************************************************
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/#m
**************************************************************


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

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


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

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The Option Investor Newsletter                 Thursday 12-19-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: CALL - BSX
Traders Corner: Temptations!  More Than Just A Motown Group
Traders Corner: Wave patterns to trends – using “Elliott
Wave” analysis; part 3
Options 101: More On Gold
Futures Corner: Playing Failures

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

BSX - Boston Scientific - 43.70 +0.45 (+1.95 for the week)

Company Description:
Boston Scientific is a worldwide developer, manufacturer and
marketer of medical devices whose products are used in a broad
range of interventional medical specialties. (source: company
press release)

Why We Like It:
A glance at the daily chart for BSX reveals that investors have
had an insatiable appetitive for shares of this medical device
company.  What's driving the stock higher?  The current uptrend
can be traced back to early-October, when a federal judge ruled
against Guidant (GDT) in a case involving drug-coated heart
stents.  Guidant is competing with Boston Scientific to bring the
lucrative gizmos to market.  The judge's ruling significantly
delayed GDT's research, effectively leaving BSX and JNJ as the
only major players.  Meanwhile, BSX has moved ever-closer to FDA
approval of its own stents.  On November 18th the company
reported that its TAXUS IV product had shown positive results in
a safety study.  More positive news arrived nine days later, when
Guidant's appeal of the previous decision fell flat.  This second
ruling helped to propel the stock to new 52-week highs.
Technically, we like how BSX has bounced back after pulling back
to the bottom of its ascending regression channel.  The stock
showed good relative strength today and closed at levels not seen
since 1999.  The rising volume and MACD (which is poised to give
a bullish crossover) bode well for a continuation of the existing
uptrend.  In terms of upside potential, we'll be aiming for a
rally to the $50.00 level.  Shorter-term traders may want to
target a move to the all-time highs near $47.00.  Our entry
trigger for this play will be set at $44.01.  If shares reach
this level our stop will be located at $40.99, just below the
December lows.  This creates a risk/reward ratio of roughly 1:2.
Those with slightly more conservative strategy could use a stop
just below $41.50.

*** December contracts expire Friday***

BUY CALL JAN-40*BSX-AH OI=4527 at $4.50 SL=2.25
BUY CALL JAN-42.50 BSX-AV OI=828 at $2.85 SL=1.45
BUY CALL FEB-40 BSX-BH OI=1341 at $5.50 SL=2.25
BUY CALL FEB-42.50 BSX-AV OI=828 at $3.90 SL=2.00

Average Daily Volume = 2.59 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/#m
**************************************************************


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

Temptations!  More Than Just A Motown Group
By Mike Parnos, Investing With Attitude

This is the time, just prior to expiration, that the temptation
arises.  I’m not talking about a pint of Haagen Daz or that or
that 22-year-old blonde that just moved into the house across the
street.  Now that’s a daily challenge. I’m talking about the
temptations that involve MONEY! – not the ones that involve
calories or a trip to Fantasy Island.

Expiration week is when traders are tempted to roll out their
positions.  “Rolling Out,” for CPTI newbies, simply means the
closing of a current position and re-establishing another
position, using the same underlying, for another option cycle.

Hi Mike,
I read about option strategies before, but your articles actually
got me to quit day-trading and put on some spreads.  Before it
didn't seem a fast enough way to make money, but after seeing
your first portfolio return, I ran some numbers and realized that
the trick is to build up the account and keep increasing the size
and number of positions.  I actually lost a lot of money this
year trading 1 E-mini contract trying to become consistent before
increasing my size, but with these strategies I can comfortably
trade more contracts per position and bring in more money instead
of the fewer contracts I would in a directional trade.  This
might be my first profitable month this year.

My question is whether it is a good idea to close out some of
these December trades that aren't going anywhere and put on some
new trades that expire in January and get some good premium
(especially with the weekend coming up).

Response:
I'm glad you're enjoying the column and benefiting from it as
well.  Many readers have been participating in the CPTI portfolio
and using the strategies to line their pockets with more than
lint and stale cough drops.   If I can help put some money in
your pockets and a smile on your face, I’m a happy camper.

Closing Trades
With regards to closing out trades, you could have closed out the
TTWO $35 short call (part of the CPTI Short Strangle) for a
nickel, but that would cost $50 (for a 10 contract position) plus
a commission.  If you close it out just one side of a strangle,
you're not freeing up any additional margin to put on another
trade.

For example:  As of Wednesday's close, to close out the BBH
spread would cost $.35 plus four commissions.  Can you make up
(take in) that much when putting on a new position?  Also, in the
old BBH position, we're pretty much (nothing is for certain)
assured that the condor will expire worthless.  So that $.35 is a
great bet to stay in our pocket.  However, if we put on a new
position, we're exposing ourselves to an additional 3-4 days of
market activity.  And the idea is to limit our exposure, not
increase it.

You have to:
1.  Weigh the cost of closing out an old position against how
much time value you would be sacrificing when establishing a new
position.
2.  You have to figure out how much maintenance will be freed up
to use in a new position.  Just how enticing is this new position
you’re considering?

It’s only during the afternoon (usually in the last hour) of the
Friday expiration, that a roll out would be advisable.  Then, the
time value of an OTM option is only a nickel.  If you like the
potential position, you can buy it back because the new option
will likely lose a nickel due to the erosion that takes place
over the weekend.

The same holds true for an ITM option.  If you have a covered
call or a calendar spread, late Friday afternoon the time value
disappears and it becomes reasonable to roll it out without
sacrificing more than a commission.

Other than that, I would rarely recommend rolling out a short
option while there is still time value.  The one thing you can be
sure of is that the time value will disappear.  That’s money that
is already in your pocket.  The whole idea is to keep it there!
________________________________________________________________

The Worst Traders
Did you ever notice that the worst traders (stock or option
traders) are professionals like doctors or lawyers?  Think about
it.  When is the last time you heard lawyers or doctors admit he
was wrong about anything?  I’ve been watching “ER” and “The
Practice” for years and they screw up plenty, but only admit it
about once a season.

It’s an ego thing.  They’ll hold onto a position for dear life
and become addicted to the drug we call “hopium.”  To be a
successful trader, you need to cut losses short and move on.
Their future as traders is about as promising as Trent Lot’s
political future.
_____________________________________________________________

Something Interesting
On occasion, while perusing option chains, you may stumble across
some unusual activity in the form of larger than normal volume.
It’s always interesting to speculate on what’s going on.

Today, while scanning the QQQs, I noticed the following:
1.  QQQ 2005 January 24 Calls – 5500 traded at $6.20
2.  QQQ 2005 January 24 Puts – 5200 traded at $4.20
3.  QQQ 2004 January 25 Puts – 5000 traded at $3.70

This is like a puzzle.  With all the option strategies, it’s
tough to figure out what they’re really up to – especially when
we don’t know if those trades were purchases or sales.

It’s often easier to figure it out when there are only two high
volume trades.  Then it can be a bull put, bear call, or calendar
spreads, straddles, strangles or any number of other strategies.
All we know is that someone – with deep pockets – is placing a
big bet.
_______________________________________________________________

Temptations . . . A Final Thought
Do I want to be delivered from temptations?  Absolutely not!  I
have important decisions to make and I’m perfectly capable.  Now,
what flavor of Haagen Daz to have and  wait a minute, there she
is . . . look at those . . . what the hell did I do with those
darn binoculars?
_______________________________________________________________

CPTI PORTFOLIO UPDATE – As Of Thursday’s Close

(REMINDER – This Sunday’s column be devoted to the new CPTI
Portfolio positions for the January cycle and a wrap-up of how we
fared in the December cycle.  Hint:  We did really well – again!)

BBH Iron Condor – Currently trading at $88.12.
We want BBH to finish the December option cycle anywhere between
$80 and $95.  We’re still looking good – still in mid-range.

TTWO Short Strangle – Currently trading at $23.33.
We want TTWO to finish the December option cycle anywhere between
$22.50 and $35.00. TTWO has pulled back with the market.  Even
though it came in with excellent earnings, other companies in the
sector did not and it has been pulling TTWO down.  On Wednesday,
the short strike ($22.50) was violated.  We shorted shares at
$22.50 and repurchased them as TTWO bounced back over $22.50.
Today, TTWO twice broke below $22.50 and we repeated the process.
Thus far, we’ve accumulated three round trip commissions and $150
of slippage for a total additional cost of $210.

I know that some traders who wisely, stuck to the 75% rule,
bought back the short call for $.25 yesterday.  That opportunity
again exists as of tonight’s closing.  Tomorrow morning, if TTWO
open’s near tonight’s closing price, you may be able to buy back
the same short call for $15-.20.

IMCL Covered Call – Currently trading at $11.91.
We want IMCL to finish the December option cycle over $10 so it
will be called away.  IMCL has pulled back from the $15 level,
but we still have a comfortable cushion with a day to go.

QQQ ITM Strangle – Currently trading at $25.05.  The QQQs
finished near their lows on Friday.  For the traders who were
still holding their long $26 or $25 put, it was a good profit-
taking opportunity.  I suspect that most CPTI students are
already out of the position.

Last week, the QQQs finally made its predicted 3-point move – and
then some – it turned out to be a $4.25 upward move.  CPTI
students, sold their long calls, covered the cost of the
strangle, and have profited (or are now profiting) handsomely
from the long puts as the market has reversed direction.
_________________________________________________________________

Happy trading! Remember the CPTI credo: May our remote batteries
and self-discipline last forever, but mierde happens. Be
prepared! In trading, as in life, it's not the cards we're dealt.
It's how we play them.
_________________________________________________________________

Your questions and comments are always welcome.
mparnos@OptionInvestor.com


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

Wave patterns to trends – using “Elliott Wave” analysis; part 3
By Leigh Stevens
lstevens@OptionInvestor.com

As I said in my last Trader’s Corner article, my last and
concluding part of this series on Elliott Wave analysis of market
trends finishs on how wave theory differs in defining
long-term trends, how to use wave analysis along with OTHER
technical analysis tools and also describes general wave
characteristics.

As I said in part 2 at -
http://www.OptionInvestor.com/traderscorner/tc_121202_2.asp

and in part 1, at -
http://www.OptionInvestor.com/traderscorner/tc_120502_2.asp

..... the best use of this information will be realized if you
read the Trader’s Corner articles that came before, and in
sequence.  Come on, it’s not THAT much material! The series taken
together helps you break down an important tool of trading –
looking at unfolding wave patterns – helpful in figuring out
whether a market index is at the beginning, middle or end of its
trend.

Longer-term trend definition in Elliott wave analysis is
different than the way that a primary bull market is defined in
Dow theory interpretation.

In the chart below, taken from my book (Essential Technical
Analysis), up wave 1 could be considered to be a “primary” bull
market, corrective wave 2, a primary bear market, up wave 3, a
primary bull market and so on in terms of how Charles Dow might
have defined it.  However, in terms of Elliott’s viewpoint (as I
interpret him), the entire sequence of wave 1 through wave (which
could also be termed a “component move”)5 constituted a bull
market –





The entire sequence of the correction that follows wave 5,
consisting of the large moves labeled A-B-C, is all part and
parcel of a major bear market trend and can go on for many years.
The up move of the down-up-down (A-B-C)bear market pattern would
be considered part of a bear market; wave B would be a bear
market rally, even if it was a year long and reflected a big
percentage rebound.

Elliott defined different degrees of bull and bear markets by
different terms than Dow’s simple use of primary bull or bear
markets – he related the type of bull or bear market to the
smaller or larger “degrees” of bull or bear markets and used
modifications of “cycle” to describe some of them; e.g.,
supercycle.

EMPLOYING WAVE ANALYSIS ALONG WITH OTHER TECHNICAL TOOLS -
Using the same chart as the first one above, I’ve added a bit
more explanation or text below –






My next chart shows a weekly time frame for just part of the
years shown above. In this chart the interpretation made was that
corrective wave 2 might have run its course – at such a juncture,
good use can be made of the next smaller time frame (weekly) and
then refined still some more with a daily chart, to arrive at an
entry decision -





For purposes of timing trade entry it’s valuable to use other
technical analysis “signals” such as a bullish moving average and
oscillator crossover and/or a breakout above the dominant down
trendline.



 I

We can often have higher confidence in the technical indicators
such as the ones above when there is also a fairly “clear” well-
defined wave pattern.  Having confidence in your trading decision
is very important early in a trend – it is the hardest to sit
tight in the early stages of a trend, as the business and
economic news, for the most part, rarely “supports” the side of
the market chosen.

If I expect that a corrective a-b-c pattern of a corrective wave
has ended, I have a reasonable expectation that the next move is
an impulse wave that will take the index or stock in question
well above where it went on the highest peak during the
correction.

As Dow said, early in any major bull market up swing there is
little bullish enthusiasm – in fact, the public is decidedly un-
enthusiastic about whichever market has been in a significant
decline.  Of course, it is not enough to be early, as prices
could always be heading into a multiyear sideways pattern, such
as seen with precious metals for most of the 80’s and 90’s. In
stocks, this was the case for much of the 60’s and 70’s.

However, if early in the trend even if it doesn’t carry all that
far and with an exit strategy, most of what move there is can be
captured.  With the interest in stocks of recent decades it seems
less likely that this market will be in the doldrums for years –
but never say never either.

WAVE CHARACTURISTICS -
R.N. Elliott, like Dow, saw that there is progression of human
emotions in the marketplace from pessimism to optimism and back
again – this pattern tends to repeat in a cyclical fashion such
that the characteristics and price pattern of the predictable
part of the “cycle” we are in can be recognized.

The “impulse” waves - the 3 up moves of waves 1-5, that make
up a typical bull market - behave differently than the 2
corrective downside moves of waves 1-5 of a bull market, or the
larger corrective bear market waves that follow a bull market
(wave 5) completion, known or labeled A, B and C.

In fact all the wave patterns from 1 through 5, and A through C
have their characteristic “flavor” or personality as highlighted
in the 3 charts that are included in the explanations that
follow:

1. First Waves – Many of these are the part of the basing process
and so, the second wave that follows, will often retrace much if
not all of wave one.  This explains a “double bottom” in Elliott
wave terms.  If wave one follows a “big base” pattern, than its
rise can be far stronger than the former case.

2. Second waves – With this corrective pattern, prices often
retrace much of the first advance or wave.  This corrective wave
pattern will often produce bullish divergences as prices, a key
average or indicators don’t decline as much as prior lows.

3. Third waves – As discussed previously, this advance is what
makes “believers” out of many investors, as it is a strong rally
and often prolonged.  In the stock market, this up move will have
see broad participation of stocks.





4. Forth waves – This is another corrective wave.  If the second
wave, also corrective in nature, was relatively simple and short-
lived, this wave will tend to be more complex and prolonged,
according to Elliott’s rule of “alternation”.  Stocks that lagged
the advance in wave three, will dip the most and start to build
tops.

5. Fifth waves - This advance will most often be less powerful
and prolonged as up wave three.  Sometimes, this wave will
extend, in time and price, relative to wave three, especially if
the third wave was relatively short-lived and carried prices less
far.  If so, wave five may look more like wave one – if wave one
was a good-sized advance, then this final (wave five) rally may
be also.  This advance completes the bull market trend.

A-B-C (or, a-b-c) CORRECTIONS –




“A” waves –
This is the first decline of a bear market trend.  As in the 2000
top of Nasdaq, investors tend to be convinced that this down move
will be a short-lived decline.  This wave is characterized, in
terms of the psychology of investors, by continued faith in a
longer-term “buy and hold” philosophy.

“B” waves –
A rally phase that typically that less volume and, in the stock
market, fewer stocks that rebound strongly.  Being a move
contrary (up) to the dominant down trend, it typically has three
parts – an “a-b-c” correction, but this pattern starts with a
rally and therefore usually follows an up-down-up sequence, which
is the reverse start and finish of the a-b-c (down-up-down)
correction of the corrective waves two and four.

A “B” wave advance may carry to as high as the levels previously
achieved by the market, but technical and volume indicators will
tend not to “confirm” as much strength as previously.  A double
top, relative to the top of wave five, is a possibility.  It is
during this rebound, that “non-confirmations” will occur in the
two Dow averages and/or in key bellwethers, such as related
market averages or key market segments.

“C” waves –
This decline, in the reverse direction but with similar intensity
to wave three on the upside, carries the market sharply lower.
The C wave decline will often be of longer duration and carry
prices significantly lower – a fibonacci relationship to the
first decline or A wave, suggests that this decline could carry
1.38, 1.5 or 1.62 times or more farther than the first downswing.

In stocks there are few sectors that offer much “shelter” to
investors when there is major and broad decline.  Fear and gloom
tends to build – at the bottom of this move, investor “sentiment”
has become very bearish and, as discussed by Dow, previous stock
market investors don’t want to own equities, no longer maintain
much interest in the market and are disillusioned with it.

Any correction (to an uptrend) will tend to break down into a
smaller a-b-c pattern -






SUMMARY OF ELLIOTT WAVE THEORY -
As with the theories of Charles Dow, the Elliott wave principles
cannot be “proven” according to any statistical proofs that I
know of.  There are too many variables and interpretations to
facilitate this effort.

Unlike Dow’s simple rule that holds that the averages much
confirm each other to maintain trend validity, Elliott wave
analysis can be complex and an unfolding price pattern can be
open to differing, but valid wave interpretations, according to
Elliott wave principles.

And, like Dow’s “non-confirmations”, understanding of the wave
pattern may occur only after a formation completes itself and too
late to take defensive or appropriate action.  That said, in its
simplest terms and used only when a wave pattern is well-defined
and “obvious”, Elliott’s rules of market behavior can lead to
some very profitable investments – and, to the avoidance of key
mistakes like staying fully invested in the market long past the
end of a bull market.

Use of Elliott wave principles has given me a useful identifier
for the “structure” or how to recognize the unfolding pattern of
a bull market, particularly the nature of wave 3 or the “2nd.
impulse” wave – when you know it is coming as part of the natural
unfolding of a bullish trend, it can greatly increases the
possibility of being invested when it gets underway.

Conversely, when you start to notice the number of times that a
correction, in an advancing trend, takes the threefold down-up-
down pattern, it allows an understanding of where the market is
in terms of this corrective cycle.

Cycles are trends that have a repetitive sequence depending on
the type of cycle.  Because the markets tend to repeat similar
patterns in a similar sequence, recognition of the current point
in this sequence will often have predictive and hence,
profitable, value.


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

More On Gold
Buzz Lynn
buzz@OptionInvestor.com

Did somebody say, "moron"?  While they didn't really say it,
that's what central bankers of the world - mostly the U.S. Federal
Reserve want us to accept as wisdom about those who believe that
gold is an outdated relic of the past. Oh wait, that's "More On",
as in additional subject matter.

But gold, as a relic of the past?  Sure. . .only if we block out
five thousand years of history and focus specifically on the
monetary system since 1973 when the U.S. effectively devalued it's
currency by eliminating gold reserves as the backing for dollar-
denominated currency.  In short, block all rational thought in
order to accept modern economists' and the Federal Reserves'
belief in gold's lack of importance.  If we can't do that - and
rational people shouldn't - we must accept that gold, like it or
not, is the only "true currency" of any enduring value.  Literal
paper money creation and electronic fund creation conjured up by
all central banks is by definition, "fiat" money.

No that's not an indictment of Italian automobiles or Lira, the
Italian currency.  The dictionary defines it as, 1) a decree;
order; 2) a sanction.  In other words, "because we said so".

Federal Reserve notes, aka paper money isn't real.  It's
government-sanctioned counterfeiting whose attempt to legitimize
is based on an immutable rule of law.  When the law becomes
mutable, and where "full faith and trust in the government"
becomes debatable in minds of people whose survival depends on it,
you can be sure that some will do everything in their power to
convert the fake currency into real currency.

Translation:  The Fed is increasing the supply of money with the
unintended result that the monetarily-informed recognize the Fed's
action for what it is - counterfeiting - and who have taken steps
to preserve the value of what they still own.  Increasing the
money supply is, by definition, inflation.

It should be no surprise then that gold demand is rising as people
seek to protect their wealth and keep it from eroding against an
onslaught of fake dollars.  Take my word for it, the Fed hates
this and would love nothing more to see gold banished from the
kingdom.  No wonder they call it a relic - they'd like us to
believe that.  Facts suggest otherwise when the dollar is eroding
and people seek the protection of gold.  Hence, the dollar falls
in relation to other currencies and especially gold.  People who
steward their capital well are merely "stewarding capital well"
when they exit dollars in favor of real money.

Don't get me wrong, I'm not talking about anarchy in the morning,
or shopping with wheelbarrows of cash for a carton of milk.  We're
a long way from that.  But flight from fiat money into gold cannot
be ignored.  It is a trend in motion born of a bigger cycle from
financial assets into tangible assets.  If you doubt that, go back
in time and re-read an article penned earlier this year on the
subject.  You can find it here:

http://www.OptionInvestor.com/traderscorner/tc_050202_1.asp

That's the big picture.  Now follow me into the current conditions
of the gold market.  I'll keep this short and sweet.  The Fed's
printing presses are turning out money at an annualized growth
rate of 17.4% in order to keep consumers spending. Their hope is
that the country will not fall into deflation - "inflate or die'
being the secret battle call of the Fed.

Furthermore, there are now 125,000 short commercial gold contracts
out there, at least as of December 10th.  We won't know the new
number until late tomorrow.  Anyway, that is a heavy bet by
commercials (aka big money institutions) who WANT the price of
gold to fall so they can cover at a cheaper price.  Still, gold
struggles to fall against its primary bullish trend.  For the
moment it isn't working.

As noted in last week's article, (http://members.OptionInvestor.com/options101/opt_121202_1.asp)
gold confirmed its primary trend by breaking out of its neutral
wedge formed over the last nine months.  $330 was the magic
resistance level.  With 125K contracts short on gold by the
commercials, you might think that gold would be turned back from
that level after a mild gain - you know, to test the $330 level as
a new point of support.

Oops!  Those short at $330 pressed their luck, and gold has not
come back.  Why is that?  Well, in my sometimes never to be humble
opinion, there are obvious signs, like tire tracks or footprints,
that can be nothing but short covering.  That's exactly what I
think happened.  My evidence is as follows.  Look at this chart
from the February 2003 gold futures contract late last night.  As
a note for reference, at 4:00 p.m. ET, the gold futures contracts
begin trading with the next trading day's date stamp.  In other
words, "after hours" trades such as those following December
18th's close will show up as December 19th.

So anyway, the chart. . .

February 2003 Gold Futures Chart - GC03G (weekly/daily):





Wow, look at that!  The weekly chart has gone vertical, and look
at that huge volume, which all took place between 4:00 p.m. ET and
roughly 1:00 a.m. ET last night.  The major contract purchases
were all at the highs of the day where gold actually reached
nearly $356, far surpassing the $344 resistance that occurred last
June.  I had figured $344 would turn the bulls back and shorts
would short more at that level, but it didn't happen that way.

No, shorts went nuts in covering, which we can tell from the
circled area of the volume chart 7500+ contracts purchased
overnight.  The norm from the chart appears to be roughly 1000-
2000 per day.  There were over 10,000 contracts purchased by the
time the clock rolled at today's 4:00 p.m. close.

What I take away from this is that commercials are scared and
have, for once, been caught on the wrong side of the trade - a
real rarity.  They have not been able to repress the power of
gold's primary bullish trend.  Look for that to continue, but not
for long before taking a breather.

While I remain bullish on gold as a long-term investment (and an
integral part of Fundamentals Guy's financial ark), I sense there
is a short-trading opportunity at hand.  Gold has come along way
in a hurry and has "gravity play" written all over it.  While
covering shorts has been the name of the game, shorts may take a
more aggressive approach now that price targets have been met.
How so?

Take a look at this chart done earlier today in the Market Monitor
by John Seckinger.  Nice work, John!

February 2003 Gold price target - GC03G (daily):





If the theory holds, the near-term trading top is between $356.60
and $356.80.  Gold hit $355.70, which is close enough in my book.
On a trading basis, it's nearly topped out and time for a little
backtracking.  I'd be a long-term buyer again at $330.  I'd cover
my short with any signs of support at $344.

Already based on tonight's action, price is up after today's
close.  The point is to trade it right now.  Otherwise, this is in
my opinion, the wrong time to make a gold investment, as we'd be
buying at a temporary top.  Patience - let it come to us.  But be
willing to bet on the primary trend - bullish.

Until next time, and at the risk of offending those who would take
the following wish out of the context in which it's intended, make
the Merriest Christmas ever for yourselves and your families.
It's why we trade.  See you next week!

Buzz


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

Playing Failures
By John Seckinger
jseckinger@OptionInvestor.com

Things look good, but then all of a sudden the contract begins to
fall back towards support.  Traders then wonder, “Is this a
normal correction, or has something happened and I should go
short instead?

Have you ever told yourself, “If the ES contract breaks about
902, I will go long without question.”  Then, after contract goes
to 902.25, still no trade and then you sit and watch it go to 907
and wonder how you let a winning trade get away?  Now the
contract starts to fall.  905, 903, 902; do you buy?

Staying with the ES example, as the contract begins to fall from
907, theory states that the first pullback from a breakout has
high odds of bouncing back and testing the 907 area once more.
The key is watching the depth of the correction. If the pullback
breaks below several minor support levels before reversing,
sellers will likely emerge when price tests the short term high.

The market does have a natural tendency of pulling back,
bouncing, and then pullback again until support is found.  But,
once again, it has to deal with the depth.  Even if the
corrective move is slight, traders will often go long on the
first bounce, rather than waiting for the corrective move to take
form.  And then, if the corrective move is too great, going long
is the wrong course of action.  Yes, this gets tricky.

So, I am sure you are asking yourself “How do we gauge depth in
order to know if the move lower is significant?”  As usual, there
is some art involved, a few oscillators, and some patience thrown
into the mix.

As far as oscillators are concerned, a popular one I use with
this strategy is stochastics, which measures an intra-day rally's
duration.  Oscillators measure the depth of this overbought
condition and provide early warning when a pullback lasts too
long and “depth” becomes too great.  As in the example below, the
oscillator appeared overbought and had some distance to fall
before recovering.

Another oscillator that is important to use is Bollinger Bands.
I must preface by saying that Leigh Stevens did a nice article on
Bollinger Bands, found here:

http://www.OptionInvestor.com/traderscorner/tc_071102_1.asp

Bollinger Bands (BB), as defined by Leigh, combines a centered
moving average that is part of the indicator but usually NOT
shown.  Since each Bollinger bands is placed at a fluctuating
line that is equal to two standard deviations, 95% of all price
action will theoretically occur within the upper and lower lines.
With that said, resistance could be found at the top of the band,
while support would be at the lower region.  Additionally, if
prices do break, they should stay under or over the outside band.

Ok, time for some illustrations.  Heading into trading on
Thursday, the pivot in the ES03H contract was established at
893.50 and the market started at 9:30 with the contract under the
pivot and on the bottom of the Bollinger Bands.  There was a move
above prior resistance, which corresponded nicely to the pivot
listed.  Resistance higher, as outlined in the futures wrap, came
in at 901.  There was also a daily trend that fell at the 897.50
area.  For the purpose of this article, we are debating whether
it makes sense to buy a natural’ pullback, as well as
understanding when the “depth” of the pullback becomes a little
too deep.

The first thing I notice:  Prices are outside the Bollinger Bands
and now in the “5 percent zone”.  Additionally, the daily trend
line and 901 begins to come into play (high at 900.25).  Then
prices began to show lower highs and a few higher lows as a small
pennant was formed near 895.  Is that pull back fine?  I would
say so, since still above the pivot and not under the mid-point
of the regression channel.

Of course, I just answered the depth question for this contract.
Without touching on Stochastics, which comes into play last.
When the ES contract falls under the mid-part of the Regression
Channel and under the pivot (which nicely corresponds with each
other), time to look at stochastics to see if a good downdraft is
possible.  Since stochastics got relatively overbought (as prices
were near 900), initiating a short position makes sense.  Stop:
I like to use 5-points above, so 898 (if short at 893.50).

A part of the art’ comes into reading the stochastics.  I
understand that there is a lot of noise on stochastics on a five-
minute chart (and in hindsight I should have used MACD); however,
just make sure to look at stochastics in order to make sure they
are not buried and signaling a possible rise in the contract in
the near term (read: buried).  It stochastics were buried, then
it would make sense to look for a bounce and then a fall from
higher levels.  If MACD was used, the oscillator crossed from
relatively high levels at the same time stochastics broke lower;
however, MACD appears to be a little more polished.
The point with stochastics is to make sure there is some momentum
left in the contract.

How do we know there is momentum left?  Here is a great rule-of-
thumb:  If the bottom of the Bollinger Bands is equal to or
greater than your objective, go for it.  If equal or less than
your objective, start worrying about risk/reward scenarios.  In
the lesson below, we had a little bit more than 5-points to the
downside; therefore, meets the objective.

Chart of ES03H, 5-minute




The next chart is an example without the use of a pivot and when
a correction can be viewed as a normal pullback.  The NQ03H
contract forms a wedge pattern and looks to break out higher.
However, the market does come back and test the bottom of the
wedge before really rocketing to the upside.  The purpose of the
article is to look for a reverse trend scenario, so lets do that.
We do have a significant contraction from 1055 to near 1040 and
the bottom of the wedge again, which makes me wonder why this
article isn’t on buying dips.  Just kidding.  Ok, since prices
went outside the Bollinger Bands and (here is part of the key)
increased volatility to allow for the lower band to fall and give
more reward, a collapse back under the mid-part and a previous
relative high allowed for the strong possibility that “ sellers
will likely emerge when price tests the short term high.”

In order to find a place to start a short, since 1055 will most
likely not be tested, use the top of the Bollinger Band.  We
already established that we wanted to go short, and a stop can be
easily placed above the 1055 high.  If the contract then falls
back under the mid-part of the channel, look to add to the short
position.

The difference between the two examples is that the first one
didn’t have obvious support below like seen at 1040, and there
were better odds getting a five-point move out of the ES from
under the pivot then getting a 10-point move from near 1047 in
the second example.  Therefore, it made more sense to look for a
rally and then sell into strength and near the old high.

Chart of NQ03H, 5-minute




Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com


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