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Daily Newsletter, Thursday, 12/26/2002

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The Option Investor Newsletter                Thursday 12-26-2002
Copyright 2002, All rights reserved.                       1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Holiday Ends Early
Futures Markets: When Will History Repeat?
Index Trader Wrap: Another late session fade
Market Sentiment: Head Scratcher
Weekly Manager Microscope: G. Paul Matthews: Matthews Asian Growth 
& Income Fund (MACSX)


Updated on the site tonight:
Swing Trader Game Plan: Where Is Everybody?


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      12-26-2002           High     Low     Volume Advance/Decline
DJIA     8432.61 - 15.50  8565.01  8408.71  .87 bln   1781/1371
NASDAQ   1367.89 -  4.60  1392.58  1363.61  .80 bln   1744/1575
S&P 100   450.60 -  2.67   458.57   449.48   Totals   3525/2946 
S&P 500   889.66 -  2.81   903.89   887.48 
RUS 2000  389.40 +  1.27   392.21   388.12 
DJ TRANS 2316.44 +  8.50  2344.45  2307.17   
VIX        31.08 +  1.07    31.61    30.10   
VXN        45.36 +  0.23    47.17    45.36
Total Vol   1,781M
Total UpVol   858M
Total DnVol   869M
52wk Highs   145
52wk Lows    116
TRIN        1.05
PUT/CALL    0.71
************************************************************

Holiday Ends Early

Traders who were looking for a post holiday rally missed it 
if they slept late. The triple digit bounce to 8565 failed
just before 11:AM and a -141 point drop followed. The Dow 
closed below critical support at 8450 and is threatening to 
retrace back to the 8328 levels from last week.

Dow Chart – Daily


 
Nasdaq Chart – Daily


 

The markets shot up at the open on the strength of the new
Jobless Claims, which came in at 378,000. This was significantly
below the consensus of 410,000 but as we have seen over the last
few weeks holiday reporting has been sketchy at best. With last
weeks number revised up +5,000 the odds are very good this number
will be revised up as well. Even if it isn't that number in a
holiday shortened week is significant. Many workers would likely
have postponed filing for benefits and job hunting until after 
the holidays. The jobless claims will not return to normal 
reporting until the Jan-9th release, which should be critical
for investor sentiment. 

Another number that was under reported was the drop in mortgage
applications. That number fell in the week ended Dec-20th by -8%
and indicates a continued weakening in housing. Over the last
five weeks only one week has shown growth in applications. Refi
applications also fell -9%. The overall mortgage application 
level is still high but the decline has definitely begun. Once 
the Fed starts raising rates the decline should be dramatic. 
The impact on the US in 2003 should be mild but we can no 
longer count on the boom to hold up the economy.

Also failing to do their part in holding up the economy were 
the consumers. According to the Wall Street Journal this holiday
posted the weakest growth in sales over the last 30 years. TGT,
WMT, JCP and FD were among the top retailers that have already
warned that sales would be at the low end of estimates. WMT
announced on Thursday that same store sales growth would now
be in the 2-3% range for December which is below their previous
guidance of +3-5%. Even Amazon got pounded for a -1.58 loss on
Thursday despite news that they sold over 56 million items 
since Nov-1st. This included 62,000 gift certificates purchased
on Dec-24th by shoppers out of delivery options. Analysts were 
worried that the huge number of sales were done at a loss in
order to gain market share. With free shipping offered until 
Dec-12th this additional transaction cost on 30 million items
could have accelerated those losses. I discussed AMZN on the
Market Monitor last week and the possibility for a coming 
sell off. It appears that has begun.

With holiday sales weaker than non-OIN readers expected there
is likely to be a new round of earnings warnings next week. 
Historically the trend is for the warnings to be delayed until
the first full week of the new year. The fourth quarter earning
announcements begin in earnest until the week of Jan-13th. This
leaves only two weeks for the majority of earnings warnings to
occur. Considering the economic reports over the last couple
of weeks this could be a very busy two week period. Corporate
earnings for 2003 are dropping faster than pine needles this
week. In July the earnings estimates for 2003 were for 20% 
growth for S&P companies. In October that was cut to +17.8%
and in December they were cut to 14.2%. First Call is now
saying they anticipate an additional cut to 11% once the January
warnings begin. Other analysts are expecting only 8-9% for 
all of 2003. This is exactly the same scenario we saw for 2002.
Remember the anticipated second half rebound for 2002? Now
those same forecasters are repeating their bullish forecasts
for 2003. "Strong second half rebound in corporate spending
will lead to strong profits." Time will tell but a survey of 
65 analysts was released this week and only two were expecting
the markets to close lower in 2003. The bullishness is rampant
for the long term but for the near term it is looking grim. 

The volume today was the lightest full day of the year with the
NYSE only trading 716 million shares during regular trading. 
Volume is never high the day after Christmas but there is
normally a sellers strike as well. Sellers were not on strike 
on Thursday and showed up in force when the Dow rose to 8550
just after the open. Besides the reasons mentioned earlier
there were continued geopolitical concerns. Oil rose to $32.65
a barrel and gold hit a new high as the US and Britain attacked
Iraq in retaliation for shooting down the observation plane.  
  
The very light volume makes it difficult to apply too much 
credibility to the sell off but the trend has not changed. 
For a normally bullish week we have seen three down days for
a -80 point total drop. There were strong rallies on Monday
and Thursday but both failed completely after hitting 8550. 
The lack of follow through in a bullish holiday week has 
prompted me to change my outlook. I had been expecting the 
Dow to retest 8750 before January 1st but now I think that 
is not going to happen. I am concerned now that the lack of 
follow through is an indication that we could retest the 8328
low from last week or even lower. We are obviously entering 
a very volatile period and there is nothing on the immediate 
horizon to provide the bulls with the hope needed to power a 
rally. There will be additional tax selling and portfolio 
balancing over the next three trading days and the outcome 
is far from certain. Be very careful with short term 
positions over the next couple weeks. 

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. 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 History Repeat?
By John Seckinger
jseckinger@OptionInvestor.com

Normally, this is a pretty bullish time of the year for equities.  
Is this simply softness due to weak retail sales on light volume, 
or are significant levels being taken out to the downside? 

Thursday, December 26th at 3:15 P.M. 

Contract     Last   Net Change     High        Low         Volume    

Dow Jones.. 8432.61   -15.50       8565.01     8408.71
YM03H       8434.00    +4.00       8545        8385        10,477

Nasdaq-100  1016.46   -6.83      1041.49      1013.30      
NQ03H       1020.00   -4.00      1045.50      1015.50     115,267

S&P 500    889.66     -2.81      903.89       887.48
ES03H      890.75     -0.75      903.25       885.75      193,489

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.  

Fundamental News:  Wal-Mart (WMT) reported on Thursday that same 
store sales will rise only 2-3% in December instead of the 
previous forecast of 3-5%.  Other news included the possibility 
that North Korea would restart its nuclear arms program, giving 
bids to bonds and getting some traders nervous.  Additionally, 
crude oil rose to a two-year high on speculation of war and the 
lingering strike in Venezuela.  There was also a WSJ article that 
indicated that Motorola could catch Nokia for the leader in 
market share within North America by the end of the year.  Both 
company shares rose on the session.  NOK was higher by 1% to 
15.93, while MOT gained 2.4% to 8.95.   

Technical News:  As both the Dow and Nasdaq failed to attract 
volume of over 1 billion shares, it is hard to draw too many 
conclusions from Thursday’s session.  Nevertheless, Bonds did 
rally in price and the Sox index rose to 310 before failing 
dramatically and closing at 300.29 and near its session low 
(299.16).  Weakness under 295 should have negative implications 
on equities in general.  The XAU index also rose by 4.3% to 79.27 
as the dollar unexpectedly fell.  A follow-through in the Gold 
And Silver Index on Friday should be bearish for stocks, since it 
will most likely mean more weakness in the Greenback.  

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

The March Mini-sized Dow Contract (YM03H)

With the Dow under 8464, the next level that should be tested on 
the downside is 8372 and then the 38.2% retracement area of 8338.  
Stochastics are slightly oversold; however, there is certainly 
more room to the downside.  If the blue chips do find a bid, look 
for resistance at 8525 and then higher at 8625.  A close above 
the 8525 level would be viewed as a positive.  

Chart of Dow Jones, Daily


 

Dow Jones

Support              Resistance                 Pivot    

8372.54              8528.84                    8468.78
8312.47              8625.07

The YM contract failed to break out above its regression channel 
on Thursday, but did fine support at the mid-part of the channel 
near 8370.  Least resistance appears to be lower, but waiting 
until 8364 is taken out does seem appropriate.  The pivot on 
Friday comes in at 8484.75 and will come in just below the 
contract’s 50 PMA (exp) on a 120-minute chart.  Look for an 
extended move outside the first levels of support/resistance, but 
be careful about hoping for a follow-through below 8294 or above 
8614.  These levels should be played responsively (buy low, sell 
high).  

Chart of YM03H, 120-minute


 

YM03H

Support               Resistance                Pivot    

8364.25               8524.25                   8454.75
8294.75               8614.75

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

The March E-mini Nasdaq 100 Contract (NQ03H)

Looking at the NDX contract on a 120-minute chart, Thursday’s 
close puts the contract underneath the 22, 50, and 200 Period 
Moving Averages.  The pivot in the NDX is at 1023.75 on Friday 
and just underneath the closest PMA at 1024.50.  With that said, 
least resistance should be lower unless prices can get above 
these averages and begin using them as support.  Support should 
be found below at 1006 and 995, with 995 most likely a level 
buyers will aggressively get involved.  If bids do enter, we 
could see a rise towards 1034 before solid selling takes over.  

Chart of NDX, 120 Minute


 

Nasdaq-100

Support              Resistance                 Pivot    

1006.01              1034.20                    1023.75
 995.56              1051.94

The Mini-Nasdaq contract closed right on its 50 DMA (exp), but 
underneath the 38.2% retracement of December’s decline (1024.54).  
Friday’s pivot comes in at 1027 and just above this retracement 
level.  If the 50 PMA turns into resistance, look for support at 
1008.50 and 997, with the latter being more important.  There is 
the appearance of a “b” distribution, and there is a good chance 
the apex comes in at 1024.54; therefore, aggressive traders can 
use levels just above as an area to place stops.  Since it 
basically corresponds with the pivot, I would give more weight to 
Friday’s pivot.    

Chart of NQ03H, Daily


 

NQ03H

Support              Resistance                 Pivot 

1008.50              1038.50                    1027.00
 997.00              1057.00

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

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

A broken record:  Prices rise above both the 22 and 50 DMA’s only 
to fail and close underneath both.  Does this signal an oversold 
market?  It evidently did the last two times this happened; 
however, I would wait until a solid move above 894.50 before 
looking at things even in a neutral light.  Support should be 
found at 883.  A close below 883 would be bearish heading into 
Monday; however, a close above 900 would only take on a slightly 
bullish spin.  I would like to see a close above 910.  

Chart of S&P 500 Index, Daily


 

S&P 500

Support              Resistance                 Pivot    

883.46               899.87                     893.67
877.26               910.09

The ES contract once again failed to close above the 900 level; 
however, since their isn’t much technical damage to the upside, 
it is hard to get too bearish (especially will low volume).  
Support should be found at 883.25 and 875.75, while resistance is 
seen at 900.75 and above the 200 PMA at 910.  The pivot for 
Friday comes in at 893.25, which correlates to levels just under 
the 22 and 50 PMA.  

Chart of ES03H, 60-minute


 

ES03H

Support              Resistance                 Pivot    

883.25               900.75                     893.25
875.75               910.75

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

Another late session fade

For a second straight session, bulls saw early session gains fade 
to marginal losses on one of this year's lightest volume 
sessions.

NYSE volume was just barely above the 709 million-share mark, 
while NASDAQ volume was anemic at just over 814 million shares 
traded.  Today's volume leader on the NYSE (over $5) had shares 
of Pfizer (NYSE:PFE) $30.02 -4.33% turning 17.9 million shares 
after the New England Journal of Medicine reported that patients 
taking the company's Celebrex drug had a 5% greater chance of 
bleeding ulcers when taking the medication.  Considering a June 
10th article in the Wall Street Journal, which reported that 
federal drug regulators concluded that Celebrex (co-marketed by 
Pfizer and Pharmacia (PHA) $40.98 -4.69%) was no more effective 
than ibuprofen, sent both stocks reeling and had the 
Pharmaceutical Index (DRG.X) 297.23 -1.98% in the red for the 
bulk of the session and today's 2nd leading decliner.

Market breadth was positive, but surely hints that larger caps 
are under selling pressure.  The reason I say this is that 
today's positive breadth came while the OEX and SPX, both large 
cap indexes had the OEX down 0.58% compared to the SPX's -0.31%.  
This combined with positive breadth has the trader observing that 
the larger weighted stocks are having greater downside impact on 
the indexes.  The smaller-capped Russell 2000 Index (RUT.X) 
389.40 +0.32% was the only major market index to show a gain.  
While we don't discuss the Amex Composite (XAX.X) 830.91 +0.17% 
that much, its noted that this index is heavily concentrated in 
energy, gold and drug stocks and not necessarily as "diverse" 
with respect to various industry groups.

If I had to make a guess as to why the larger caps are under such 
pressure, its because institutions are taking a "sell side" 
approach to things.  While I don't believe there's a lot of 
institutional activity right now (noting very light volume) what 
activity there might be would most likely be focused on the 
larger and more liquid stocks, when liquidity may be limited 
during the holiday season.

Perhaps the last couple of trading sessions where we've seen a 
early half of bullish trading quickly turn to the downside could 
depict the artificial rally that then finds some downside room 
for institutional selling into strength.

Continued weakness in the U.S. dollar against major foreign 
currencies as depicted by the U.S. Dollar Index (dx00y) 102.82 
-0.41%, found the greenback index at new 52-week lows.  Gold 
stocks rallied strong and had the Gold/Silver Index (XAU.X) 79.27 
+4.3% taking today's top-performing sector position.  February 
Gold futures (gc03g) closed at a contract high of $349.40 as it 
added $3.80/ounce, or +1.09%.  As gold futures roll to tomorrow's 
trading, the contract built gains to as high as $351.00.  On 
December 19th, the February gold futures contract spiked to a 
high of $355.60 and with dollar weakness, traders are most likely 
looking for further upside action as sector shorts feel the heat.

The major notable technicals are that the Dow Industrials, S&P 
500 Index, S&P 100 Index, NASDAQ Composite, NYSE Composite and 
NASDAQ-100 Index are all finding some daily resistance at their 
still trending higher 50-day SMA's.  Only the Russell-2000 Index 
(RUT.X) 389.40 +0.32% is holding above its 50-day SMA, which 
resides at 384.70.

NASDAQ-100 Index Chart - Daily Interval


 

While an old trader's axiom is to never short a dull market, the 
NDX's rallies haven't seemed to have much "umph" behind them in 
recent sessions and this "index of momentum" has the shorter-term 
21-day and longer-term 200-day SMA's barreling down.  With the 
longer-term 200-day now at the 1,080 "pivot" where we saw some 
volume breakdown in the QQQ's, I'm looking for bears to begin 
getting a little braver and aggressive with shorting.  

I'd continue lean toward the bearish side in the indexes and 
since volume is light, I still suggest that traders keep 
positions rather light in order to withstand some of the intra-
day volatility we've seen during a light volume session.

While on a daily basis, breadth was positive for the NASDAQ, the 
NASDAQ-100 Bullish % ($BPNDX) was no net change and still remains 
"bear alert" at 63%.  In our Monday Index Trader Wrap, the 
bullish % stood at 62% bullish.  Still, a reading of 68% is 
needed to have this index reversing back up to "bull confirmed" 
status.

S&P 100 Index Chart - $2.5 box scale


 

In today's market monitor, I made note of a large block of stock 
that looked to have been crossed in Intl. Business Machines 
(NYSE:IBM) $78.50 -1.57% near the $80.50 level, which was just 
off of IBM's session high.  Weakness then prevailed as IBM sunk 
into the red and that did appear to have a negative trade begin 
to unfold in the Dow, SPX and OEX when all three were just off 
their highs.  With the OEX reversing back into O's from a lower 
rally under 460, traders are on the alert for an OEX trade at 
445, which would be a break of significant support dating back to 
mid-November.  A break lower at OEX 445 has bears leveraging from 
the lower 460 resistance.  

I've placed 3 "?" to the OEX 442.50 level as to envision how the 
OEX had tended to violate my "mid-point" of what I think could 
become a longer-term bearish channel by just one-box in recent 
declines.  Should we see a break at 445, I'd keep an eye on 
market volume and a bearish trader would like to see some volume 
come in at 445 to begin thinking a more sustainable move lower is 
underway.  Since I can't "predict" with certainty time of day of 
such a break, a shorter-term OEX trader needs a "key stock" to 
follow where volume there can be observed.  I like IBM as a 
bearish trader's "key stock" as it's point and figure chart is 
somewhat correlative to the Dow, OEX and SPX as a "large cap" 
stock and has correlative buy/sell signal levels with the OEX.

It's notable that the 442.50 OEX level was also reversal points 
to the upside dating back to mid-to-late October, but as we've 
noted, the bullish % chart for the OEX was reversing up from very 
oversold levels at that time.  In recent weeks, we've seen the 
OEX Bullish % ($BPOEX) reverse lower from more "overbought" 
level, thus the more defensive view toward the OEX since December 
4th, when the OEX reversed to "bear alert" status.

Today's action saw no net change in the S&P 100 Bullish % 
($BPOEX).  Status remains "bear alert" at 58%, which is just 1% 
higher than Monday's reading of 57%.

S&P 500 Index Chart - Daily Interval


 

Things were looking better for the SPX late this morning as a 
move above the 900 level found a session high of 903.89.  But 
another reversal and close near the lows weighs on a bull as 
another day of bullishness turns red by session's end.  With 
light market volume, stocks are being "pushed" around rather 
easily and makes for some sudden intra-day swings.  However, 
sellers seem to be winning out.  With the holiday shopping season 
just about "wrapped up," the news out of retailers has the market 
beginning to question the strength of the consumer, or at least 
its willingness to spend and hold the economy together.  With the 
SPX below its shorter-term 21-day SMA, momentum traders may be 
turning more bearish.  I'm not looking for any type of sharp 
decline in the SPX and would trade for profits on any type of 
quick drop to the 860 level.

Today's action did see a net loss of 1 stock to a p/f chart sell 
signal as the S&P 500 Bullish % (%BPSPX) slipped 0.2% to 59.80%.  
Status remains "bull correction" and would still take a reversal 
to 66% to have this group of stocks reversing back into "bull 
confirmed" status.

Dow Industrials Chart - Daily Interval


 

With a weaker U.S. Dollar, it should be the larger caps and 
multi-national type stocks of the Dow Industrials, SPX and OEX 
that should benefit as their products become "less expensive" on 
a dollar versus foreign currency translation, but that certainly 
doesn't seem to hold a rally together.  The Dow looks as 
technically weak as the other indexes and near-term vulnerable to 
the lower end of its Bollinger Band at 8,278.  

I did make a trading comparison in the Dow as it relates to this 
September when the Dow tested lower Bollinger Band, rallied to 
its 21-day SMA then failed and headed lower.  Still looking for a 
rebound test of the 21-day SMA and today would have been as good 
a day a day to have gotten it on the better-than-expected weekly 
jobless claims.  However, we didn't see that today and hints to 
me that bulls may simply have lost any type of conviction.

Today's action saw no net change in the Dow Industrials Bullish % 
($BPINDU).  Status remains "bear alert" at 56.67%.

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

Head Scratcher
by Steven Price

This morning's economic data showed that Santa dropped a few jobs 
down the chimney this year, with last week's initial unemployment 
claims number dropping by 60,000 to 378,000.  However, the four-
week moving average edged up slightly to 404,500.  The 400,000 
mark is usually the gauge as to whether the jobs market is 
improving or declining. The markets reacted positively to the 
data, starting the day strong with a gain in the Dow of 116.90 
points.  That gain came in spite of disappointing retail data 
that showed the last minute Christmas shopping rush did little to 
reverse a trend of disappointing retail sales leading into the 
holiday season. 

Wal-Mart cut its December sales estimate this morning, saying it 
now expects growth of only 2-3%, instead of previously indicated 
3-5% growth.  This is now fully half of its traditional growth 
rate of 4-6% during most months the previous few years and that 
reduction came during the holiday months.  I can only imagine 
what we are in store for after the holiday sales have ended. I 
was beginning to think all of the doomsayers (myself included) 
had overestimated just how poor a Christmas season the retailers 
would have, as the comments about poor sales traffic seemed 
almost too negative, but after this morning's warning, I'm 
wondering if we may have underestimated just how poor a season it 
was.   Investors who were expecting even worse numbers did dip 
their toes back in the water, with the Retail Index (RLX.X) 
finishing up slightly on the day.  This was most likely a relief 
rally, with traders who sold off the group last week buying in 
positions after numbers were not as bad as those shorts had 
hoped. However, I think the already poor sales numbers that have 
been released were done on lower margins, as a result of 
aggressive markdowns, and we may be getting some disappointing 
earnings when those numbers come out in a couple of months. There 
has been some debate over whether this season's sales will show a 
gain as low as 1.5% (which would be the lowest in 30 years), or 
as much as 4% (which would be the lowest in 5 years).  Either 
number would still be a disappointment, and if the trend of 
lowering estimates continues, it may be closer to the former. 

The morning rally certainly made it appear as though the Santa 
Claus rally had finally arrived.  However, by late afternoon, it 
had faded all the way into the red for a few brief moments.   
What is most disturbing about the fade is that after taking out 
significant resistance levels, none of those levels served as 
support on the way down.  The SPX fought the 900 level on the way 
up, but the bears were able to overcome support there this 
afternoon and leave us scratching our heads in search of a 
pivotal level.  Dow 8500-8525 served a similar purpose.  What we 
did see, however, was the growing importance of using the OEX for 
confirmation of action in the Dow and SPX.  While the Dow and SPX 
have both turned up and given point and figure buy signals, the 
OEX has lagged, establishing itself as the fly in the ointment.   
It was also the only index not to cross its 50-dma today, before 
the rally faded. We are seeing a definite lack of continued trend 
right now, and confirmation is becoming more important for 
traders looking to capture a move. The Santa Claus rally had been 
remarkably consistent for the last 34 years, however we are also 
seeing one of the worst years for consumer and business spending 
in recent history. All trends eventually come to an end and given 
the recent downtrend since we topped out in most major indices on 
December 2, we may be looking at the inevitable end of this one.  
It will still take an awful lot of selling pressure to break down 
below those late October, early November lows, which we re-
visited last Thursday.  The highest percentage plays may 
currently be playing bounces from those lows, with a tight stop.  
While I'd also like to short the failed rallies, it is becoming 
increasingly difficult to pick the tops, as there has been no 
consistent rollover level. We are most likely in for a period of 
range bound activity until we hit the next earnings cycle in 
February and we need to trade what we see.  Right now what we see 
are repeated bounces from the Dow 8300-8400 range. 

The Semiconductor Index (SOX), which has, been leading the 
broader indices recently, also finished the day in the red, but 
managed to hold above the pivotal 300 level. The failure of the 
big rally that took the SOX up to 310.84, which is a previous 
resistance point, is certainly bearish.  However, it did hold 
above support and currently suggests that investors are fighting 
closely over recent upturns in demand, coupled with warnings from 
some of the largest chipmakers that we are not yet out of the 
woods when it comes to IT spending. 

Another gauge that has been somewhat reliable, if not an exact 
correlation, is the oil market.  I have pointed out in a graph in 
my December 18 Market Wrap that the increase/decrease in the 
price of oil has had an inverse relationship to the stock market 
in recent months.  This reflects not only added costs to almost 
all businesses, but also the fear of war, which directly affects 
investor confidence.  Oil finished up once again today, with 
Crude Oil Futures (Feb 2003) breaking the $32 level for the first 
time this year.  

The factor that makes today's action difficult to gauge is the 
extremely low-volume across both major exchanges.  Volume on the 
NYSE was only 709 million shares, by far the lowest volume of the 
year for a full trading day.  The Nasdaq saw extremely light 
volume, as well, with only 811 million shares.  That means that 
none of the moves today came with much conviction.  It becomes 
harder to gauge just what the moves mean when many traders are 
gone for the holidays.  However, the aforementioned support 
levels were solid and based on higher trading volumes earlier in 
the year. For now, traders can rely on those levels and look for 
the high percentage play at those points.  


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  8432

Moving Averages:
(Simple)

 10-dma: 8480
 50-dma: 8538
200-dma: 9027



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  889

Moving Averages:
(Simple)

 10-dma:  895
 50-dma:  901
200-dma:  962



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1016

Moving Averages:
(Simple)

 10-dma: 1023
 50-dma: 1029
200-dma: 1084



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

The Retail Index (RLX.X): The Retail Index (RLX.X) eked out a 
gain today, in spite of Wal-Mart's announcement that sales once 
again came in below previous estimates.  The trend disappointing 
sales results has continued since the summer and there is little 
reason to believe that trend will reverse itself anytime soon.  
This morning's jobs data was encouraging and a decline in 
unemployment claims certainly bodes well for the economy and for 
post-holiday shopping trends.  However, those numbers are very 
unreliable this time of year and what we are left with are the 
hard sales results - which have been less than mediocre.  The 
bounce today was likely a relief bounce, as some traders were 
expecting even worse results, but the downward trend for the RLX 
is still in tact. If the best expectations are for the worst 
holiday shopping season in five years, then traders should 
probably be leaning to the short side in the retail sector

52-week High: n/a
52-week Low : 244
Current     : 263

Moving Averages:
(Simple)

 10-dma: 270
 50-dma: 282
200-dma: 308

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

Market Volatility

The VIX was the first clue today that the morning rally may not 
have been for real. In spite of a triple digit gain in the Dow, 
the VIX actually posted a gain and held above support at 30.  We 
usually see the VIX drop on rallies, but in this case we saw the 
opposite, indicating there were still put buyers out there who 
did not believe in the early gains. Sure enough, the broader 
markets gave up the entire gain and finished the day in the red. 
Traders should keep an eye on this index, as it measures activity 
in the OEX options market.  If it fails to drop on a market gain, 
then there are still enough institutional bears supporting put 
premiums to put traders on alert that someone is planning on 
there being some downside in the near future.


CBOE Market Volatility Index (VIX) = 31.09 +1.07
Nasdaq-100 Volatility Index  (VXN) = 45.36 +0.23

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.71        256,440       182,962
Equity Only    0.68        212,140       143,690
OEX            1.66          4,469         7,430
QQQ            1.25          8,992        11,231


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

Bullish Percent Data

           Current   Change   Status
NYSE          49      - 0     Bull Confirmed
NASDAQ-100    63      + 1     Bear Alert
Dow Indust.   57      - 1     Bear Alert
S&P 500       60      - 0     Bull Correction
S&P 100       58      - 0     Bear Alert

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

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

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

5-Day Arms Index   1.44
10-Day Arms Index  1.35
21-Day Arms Index  1.39
55-Day Arms Index  1.15


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       1611          1177
NASDAQ     1689          1467

        New Highs      New Lows
NYSE         65              37
NASDAQ       61              35

        Volume (in millions)
NYSE        862
NASDAQ      798


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

Commitments Of Traders Report: 12/17/02

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 significantly to both long and short positions, 
however added 7,000 more short contracts.  Small traders took a 
similar approach in adding to both sides, but came out decidedly 
longer, by about 13,000 contracts.

Commercials   Long      Short      Net     % Of OI 
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%)
12/17/02      465,361   528,896   (63,535)   (6.4%)

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
11/26/02      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%
12/17/02      194,740    90,803   103,937     36.4%

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

Commercials reduced the net short position by about 5,000 
contracts, while small traders left positions relatively
 unchanged, with a net reduction in the long position of about 
800 contracts.


Commercials   Long      Short      Net     % of OI 
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%)
12/17/02       51,999     54,383   ( 2,384) ( 2.2%)

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
11/26/02       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%
12/17/02       23,027    18,027     5,000    12.2%

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

DOW JONES INDUSTRIAL

Commercials added to both sides of the position in approximately 
equal numbers, while small traders cut down on the short position 
by about 400 contracts.


Commercials   Long      Short      Net     % of OI
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%
12/17/02       23,782    20,605    3,177       7.2%

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
11/26/02        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%)
12/17/02        5,498     9,045    (3,547)   (24.4%)

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

G. Paul Matthews: Matthews Asian Growth & Income Fund (MACSX) 

This little Pacific/Asia ex-Japan stock fund deserves recognition 
for its outstanding performances in 2000, 2001 and again in 2002, 
where it is up 11.2% through December 20, 2002.  G. Paul Matthews 
is both chief executive officer and chief investment officer with 
Matthews International Capital Management, the firm he founded in 
April 1991, which serves as investment adviser to the Morningstar 
5-star rated Matthews Asian Growth & Income Fund (MACSX).

Previously, Mr. Matthews was president with G.T. Capital Holdings 
from 1988 to 1989 and managing director with G.T. Management Asia 
in Hong Kong from 1986 to 1988.  He founded his own advisory firm 
in 1991 on the belief that Asia will be the most dynamic "growth" 
region of the 21st century.  Matthews' firm invests solely in the 
markets of Asia and currently manages six no-load Asian funds for 
shareholders.  

As an Asian specialist, Matthews combines intensive "fundamental 
research" and "bottom-up" stock picking, an approach he feels is 
best suited to capturing the investment opportunities offered by 
the dynamic Asian markets.  Each of the six Matthews Asian funds 
focuses on a different area within the Asian investment universe, 
the website states.

The "no-load" Matthews Asian Funds were launched in 1994.  Prior 
to that, Matthews's firm managed Asian investment portfolios for 
high net worth individuals.  The fund we want to focus on herein 
(Matthews Asian Growth & Income Fund) opened to new investors on 
September 12, 1994 along with the firm's flagship product called 
Matthews Pacific Tiger Fund (MAPTX).  Matthews has since started 
four more funds: Korea (MAKOX), China (MCHFX), Japan (MJFOX) and 
Asian Technology (MATFX).  

The Matthews Asian Funds website (www.matthewsasianfunds.com) is 
a good source of additional fund information.  They cite some of 
the additional risks that are associated with single country and 
sector funds that make them subject to a higher degree of market 
risk than diversified funds (because of their concentration in a 
specific area or sector).  However, in the Matthews Asian Growth 
and Income Fund, Matthews invests mainly in convertible bond and 
preferred stock securities, hybrids instruments that are usually 
less volatile than the issuer's equity securities.

Matthews' conservative approach in managing the Asian Growth and 
Income portfolio has resulted in a low risk level in relation to 
his Asia/Pacific ex-Japan stock fund peers.  The fund's trailing 
3-year standard deviation of 11.9% is very low compared to 19.7% 
for the average international stock fund and 23.1% for the Asia-
Pacific ex-Japan stock fund average, using Morningstar's numbers.  
Standard deviation measures a fund's volatility of returns.

Investment Performance

Investors of the Matthews Asian Growth & Income Fund have earned 
an 11.2% return on their investment this year (as of December 20, 
2002).  In addition to ranking in the top 10% of the Asia/Pacific 
ex-Japan stock category in 2002, Matthews has produced "positive" 
investment results in a poor market environment that has seen the 
MSCI EAFE index fall by more than 17 percent and MSCI AC Far East 
Ex-Japan Free index move 4.6% lower.




 


The 3-year chart above gives a graphical depiction of the fund's 
NAV movements over the past three years.  During this period, Mr. 
Matthews produced an average annual total return of 9.9% for his 
shareholders, ranking in the top 1% of the Asia/Pacific ex-Japan 
stock category per Morningstar.  

The fund's trailing 5-year performance is equally impressive.  In 
the last five years, Matthews Asian Growth & Income Fund has seen 
its value increase by an average 14.6% a year, beating respective 
indices and fund category peers by big margins.  The best part is 
Matthews did it with considerably less risk than comparable funds 
have exhibited, producing an exceptional risk-reward tradeoff for 
investors.

Conclusion

Matthews Asian Growth & Income Fund isn't tax-efficient nor does 
it have low operating expenses, but it is offered on a "no-load" 
cost basis through leading fund supermarkets and sports terrific 
absolute and relative performance numbers.  The fund is a Lipper 
Leader for Total Return, Consistent Return and Preservation, and 
is an appropriate choice for long-term investors seeking dynamic 
growth potential offered by Asia/Pacific (ex-Japan) securities. 

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

Where Is Everybody?

Schizophrenia Rules! At least it did today. This morning's big 
rally on light volume found little support as the day wore on and 
we eventually ended the day in the red.


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                 Thursday 12-26-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Three: 

Traders Corner: Born Again Option Traders Welcome
Traders Corner: Reversals: “Key” versus other short-term reversal 
patterns
Futures Corner: Matter of Importance


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

Born Again Option Traders Welcome
By Mike Parnos, Investing With Attitude

I spent some time on the OI Market Monitor this past week.  We 
may soon have some CPTI converts.  There are OI subscribers who 
weren’t aware of the “other” way to trade – the profitable way – 
with the percentages and with minimal risk.    

They were only using OI as a tout sheet.  They have been 
introduced to the Couch Potato Trading Institute.  It’s like born 
again option trading.  Once they’ve seen the light . . .  We 
won’t put the Jehovah Witnesses out of business quite yet.  The 
day you find me on your doorstep in a suit with pamphlets is the 
day I turn in my remote control, unplug the refrigerator, become 
a vegetarian, and sign up for an aerobics class.  In other words, 
don’t hold your breath.

Born again option traders are always welcome at the CPTI.  We 
meet every Thursdays and Sundays.  The only requirements are an 
open mind and a willingness to learn.  Amen and pass the Doritos.
_____________________________________________________________

I hope all members of our CPTI family had a wonderful Christmas.  
The best present you can give to anyone is the gift of knowledge.   
And it’s still here to give.  OptionInvestor.com is an 
unparalleled resource for the kind of knowledge that can 
potentially change a person’s life.  Jim Brown currently has a 
terrific subscription renewal offer along with a great price for 
new subscribers.  Remember what Yogi Berra said, “When you come 
to a fork in the road, pick it up.”  This may be your fork. 
_____________________________________________________________

Mike,
Do you think the reasons more people don’t use the trading 
techniques you use are because they need to have that feeling of 
always having to do something each day in terms of trading?  
Having the adrenaline rush of waking up each day and figuring out 
what to do?  

To be honest, that was me in the past, but not anymore.  I choose 
to get my rush on the golf course while your simple, low risk 
trades make money!  Hoping to have enough money made in two 
years, to quit working full time, and retiring to the golf course 
at age 36! 

Response:
I think it's a combination of things.  Many traders don't 
consider themselves traders unless they're buying and selling all 
the time -- making multiple decisions.  That's to our benefit 
because they're wrong most of the time.
 
Then, there are other retail traders who are too lazy or are 
intimidated by the strategies we use at the CPTI.  It's the path 
of least resistance for them is to just buy and sell puts and 
calls.  Bless their hearts, we love them too because they're also 
wrong most of the time.
 
I’m very proud of our CPTI students.  Our strategies require 
a more than superficial understanding of how options work -- both 
separately and in conjunction with one another.  That takes 
thought.  That takes effort.  And that takes a reshuffling of 
one's priorities, which, in turn, requires change. 

People are afraid to change.  They're afraid of the "unknown" – 
so much so that they're willing to continue a particular behavior 
simply because there's a comfort level.  The outcome, good or 
bad, is predictable.  It's something they can rely on.  That's 
why many abused women remain with their husbands.  They're afraid 
to be alone or that their next husbands may be even worse.   It 
takes courage to change -- and, unfortunately, courage is too 
often in short supply.
____________________________________________________________

Hi Mike,
I saw your comments on the Market Monitor and really appreciate 
your writing and attitude towards trading. You must really enjoy 
life as CPTI chief.

Your strategies are very interesting.  The idea of low 
maintenance is very appealing. I find that I have less and less 
time to follow closely (hours/day) the markets and swing trades.

I've recently become interested in spreads as a more conservative 
approach, although I have yet to really get my feet wet. Do you 
have any other strategies left under your sleeve that you can 
share with us? Can you elaborate more on spread related 
techniques?

Response:
Actually, almost all the strategies that we've discussed are 
considered "spread" strategies.  Options are a wonderful tool.  
There are strategies for almost every scenario.  We've covered 
most of the best ones.

Look back in the OI archives under "Traders Corner" in the 
“Education” category. That's where you'll find previous CPTI 
articles dating back to July 2002.   They’re under my byline.  
I'm in the process of going back over, and re-discussing, the 
best strategies and including checklists that will help in 
assessing the validity of using certain strategies at various 
times.

If you need any of the checklists, don't hesitate to request 
them.  Or, if any other questions come to mind, please send them 
along.  I will continue to write about spreads, and, hopefully, 
come up with something new from time to time.
_____________________________________________________________

Mike,
I am curious what your opinion is of legging into the positions 
that you recommend in the CPTI. Are there benefits?  What are the 
dangers? Or is it too much like work?

Response:
There's nothing wrong with legging into positions if you have the 
ability to direct your order to the appropriate exchange.  With 
Preferred Trade I can see the best bid and ask.  When I put in 
the number of contracts and hit "send," the order is filled 
usually in less than 5 seconds.  Then I do the same thing with 
the other side of the spread.  Unless it's a fast moving stock 
(or index), the real time prices you see should be available for 
the 15-20 seconds that it takes to place and fill the two 
orders.  That's why it's best to take control of your trading by 
using that type of broker. It's one less variable.

This, however, is tougher if you are placing orders by phone or 
through a site where it takes minutes to get a confirmation.  A 
lot can happen to a stock in minutes.  Sometimes it's good and 
other times it's not.

The prices I include in my column are based on Friday's closing 
prices.  The best prices are rarely on the same exchange.  Also, 
by Monday, they will vary a little depending on the opening price 
of the underlying plus two more days of premium erosion.
_____________________________________________________________

Hi Mike,
Your articles have been great -- instructive and profitable.  
Thanks for taking the time to share your knowledge.

If no one else has pointed this out yet, you might want to check 
the risk for the January BBH condor. I do a lot of spreads and my 
take is a risk of $8.50, not $3.50 since we're doing two spreads. 
Return goes from 42% to 17%.  There’s nothing wrong with that for 
30 days, but understanding risk I feel is critical. 

Response:
On a condor, you can only be wrong in one direction.  In a 
catastrophic situation, you can only lose the difference between 
the strike prices ($5,000) less the credit taken in ($1,500) = 
$3,500.  So, $1,500 is a 42% return on a risk of $3,500.

Actually, there is a remote chance that a stock could spike so 
far in one direction that the short option could be assigned and 
then reverse and spike so far in the other direction that the 
other short option would be exercised.  But there’s a better 
chance of the UN finding Iraq’s nuclear weapons, so I wouldn’t 
sweat it.

If you can figure out a way to lose more than $3,500 on this 
condor, be sure to let me know.  I can always learn something 
new.
____________________________________________________________

CPTI PORTFOLIO UPDATE – As Of Thursday’s Close

BBH Iron Condor – Currently trading at $88.93.
We want BBH to finish the January option cycle anywhere between 
$80 and $95.  We’re still looking good – still in mid-range.

XAU Calendar Spread  –  Currently trading at $79.27
We bought the June $80 call for $7.20 and sold the January $80 
call for $2.20.  Our debit (or cost basis) is $5.00.  We want XAU 
(Gold & Silver Index) to move up slowly and finish as close as 
possible to $80.  This is a longer term cash flow generating 
strategy in which we sell against the June $80 call as many times 
as we can.  It’s a neutral to bullish strategy on gold.  Gold is 
moving up, perhaps a little too rapidly.  We’ll keep an eye on 
it.

QQQ ITM Strangle  – Currently trading at $25.28.
This is another long-term position to generate a monthly cash 
flow.  We own the January 2005 $21 LEAPS call and the January 
2005 $29 LEAPS puts.  We’ve sold the February $29 calls and 
February $21 puts.  Now, it’s just a matter of being patient.
____________________________________________________________

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 


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

Reversals: “Key” versus other short-term reversal patterns
By Leigh Stevens
lstevens@OptionInvestor.com

Some reversal patterns are formed in only 1-2 sessions of 
whatever time duration (e.g., hourly, daily, weekly) being 
watched and you may hear the term “key” upside or downside 
reversals used for these situations.  Sometimes a price spike, 
where the high or low is noticeably above or below the close, 
warns of a trend reversal.  Certain candlestick patterns that 
form in one session are anticipated to mark a trend reversal; 
e.g., the “hanging man” or “hammer”.  At the opposite extreme are 
patterns that form over an extended duration such as are 
described in technical analysis as “broadening” tops or bottoms. 

I will use this Trader’s Corner to talk about key reversals and 
some other types of short-term reversals as would be seen on bar 
charts; i.e., a bar measures the High, Low and Close (HLC) and 
often the Open as well (OHLC charts). 

What may be the “strongest” short-term trend reversal pattern and 
which is sometimes the start of a significant change or 
turnaround in the dominant trend, is contained in the formation 
of what are called 1 and 2-day key reversals.  What has to happen 
to fulfill the conditions that are part of short-term reversal 
patterns? And, I might add, the definitions of a key reversal is 
typically only loosely defined in technical analysis.

The following is the definition for what is usually called a 
reversal up day or reversal down day and also sometimes called a 
“’key’ reversal up” or “’key’ reversal down” day:

1. Reversal up day – a day where there is a lower intraday low 
than the prior day, followed by a close above the prior day’s 
CLOSE.  Such days are fairly common and I resist calling this set 
of conditions, a “key” reversal – actually there is no agreed 
upon “textbook” definition of what exactly makes a reversal a 
“key” reversal.  I learned it one way, others another way. 

2. Reversal down day – a day where there is higher high than the 
prior day, followed by close that is below the prior day’s close.  
There is a limitation to also adding the descriptive term “key” 
to this concept of a downside reversal as its too “common” an 
event.   

What I consider to be a more significant event is where the 
reversal conditions are more restrictive. What makes a reversal 
closer to a KEY reversal event, either up or down, is a different 
definition:

1. Upside “key reversal” day (or week, if the weekly range is 
used) – a day where there is a lower intraday low than the prior 
day or past 2 days – this is the same as the above “reversal up” 
definition - AND the close is above the high of the prior day (a 
“1-day key reversal” up) or, of the prior 2-days (a “2-day key 
reversal” up). 

2. Downside key reversal day (or week, if the weekly range is 
used) – a day where there is a higher intraday high than the 
prior day (same as the above “reversal down” definition) OR prior 
2-days AND the close is below the prior day’s LOW (a “1-day key 
reversal” down) or, of the prior 2-days (a “2-day key reversal” 
down). 

The preceding descriptions would also apply to intraday periods 
where each bar was 15, 30 or 60 minutes, etc. only we would not 
of course call it a 1/2-DAY “key reversal”; on a 60-min chart, 
such a reversal would be a key hourly reversal for example. The 
key reversal term does tend to be applied most often to a daily 
time frame or daily chart however. 

My more restrictive definition for a “key” reversal involving not 
only a move to new high (or low), followed by a reversal that is  
above (or below) the prior 1-2 bar’s LOW (or HIGH) and not just 
the prior bar’s close, is for the simple reason that this pattern 
is a more definitive reversal type pattern generally. 

This criteria relating to exceeding the prior high or low of the 
preceding day is similar to an up/down “thrust day” definition – 
where there is move beyond the prior day’s price range. However, 
a thrust day definition implies nothing about first making a new 
high or low, but does mean that the close is also above or well 
above; or, below or well below the prior day’s high or low.  

A 2-day key reversal tends to be a stronger “signal” than a 1-day 
“key” reversal or a simple 1-day upside reversal.  The same is 
true for a 2-week, versus a 1-week, key reversal.  



 

To eliminate a tendency to think only in terms of a daily or 
weekly time period or whatever specific time period is measured, 
you’ll notice that I often use the non period-specific word “bar” 
rather than hour, day or week; e.g., a downside key reversal is a 
move to a new high, followed by a close below the prior bar’s (or 
2-bars’) low. 

To rank reversal criteria a bit more, we can bring in one other 
aspects relevant to potential trend reversals that occur over 1-2 
“bars” (whatever time duration – day, week, etc. -- being 
measured).  Besides the concept of a “spike” high or low followed 
by an upside or downside reversal, it’s useful to look at whether 
we are also seeing an ALL-TIME high or low, such as seen in the 
“simple” 1-day upside reversal in Microsoft’s chart above.  The 
fact that a move to a new low for the move, followed by a close 
so substantially above the prior close (even though not above the 
prior bar’s high) AND with the bullish spike in volume or jump in 
trading activity, makes for a “stronger” signal so to speak – 
than if it was simply a move to a new low (e.g., for the past 1-5 
days), followed by a move to above the prior close and without 
much jump in trading volume.

This aspect of whether there is a new all-time high or low or a 
new high or low for the intermediate-term move or trend that has 
been ongoing, can help define a type of “ranking” scheme useful 
for determining the “degree” of likelihood that reversals also 
mark FINAL tops or bottoms of a secondary or primary trend; e.g., 
such as one taking the form of a “V” bottom or top.  

Repeated examples of types of reversals or I should say differing  
characteristics of the reversals seen on bar charts will help 
give you a feeling about what potential short-term reversal 
patterns look like.  To this end I pull in some examples from my 
book (Essential Technical Analysis) and list some different 
possible aspects to short-term reversal patterns. Trends tend to 
end in similar ways and the types of short-term reversal patterns 
demonstrated are useful alerts for that possibility.

HIGHEST PROBABILITY FOR A REVERSAL (#1):  
DOWNSIDE – A key reversal where prices go to a new 
SUBSTANTIALLY above the prior bar’s high (a “spike”) and this 
high is either an ALL-TIME new high or a new high for the 
secondary trend, followed by a close that is BELOW the prior 1 or 
2-bars’ low.  A similar jump in volume would be a good secondary 
confirmation.  

UPSIDE - A key upside reversal that first went to a new low 
substantially below the prior bar’s low (a spike) where this low 
was also an ALL-TIME new low or a new low for the secondary 
trend, but which is then followed by a close that was above the 
prior 1 or 2-bars’ high.  A jump in volume helps confirm the 
turning point.  

In stocks the chance of hitting a low or high that is truly a 
record peak or record low is slim – whereas, it is more likely in 
a futures contract for example.  With stocks we are usually 
looking at new low or new high for the dominant trend; e.g., for 
the past several weeks or months. 

We can seek evidence of 1-2 week reversal patterns by use of the 
longer-term weekly charts. The next two charts demonstrate the 
pattern described (#1) here. 



 

  
AND .........


 

HIGH PROBABILITY FOR A REVERSAL (#2):  
The same as the above conditions where the new high or low in 
question is both a “spike” and a new ALL-TIME high or low (or, a 
new high or low within a secondary trend), except the criteria 
regarding the close is that it is below/above the CLOSE of the 
prior bar or prior 2 bars – not the low or high of the prior bar.  
The next two charts from a prior period – what, Apple at $70! – 
illustrate the pattern described (#2) – 



    
 

AND .........


 

A SUBSTANTIAL PROBABILITY FOR A REVERSAL (#3): 
A spike to a new all-time high or a new high in ongoing or the 
intermediate trend, followed by a close that is nearer the low of 
that bar than to the high OR a spike to new all-time low or new 
low in the secondary trend, followed by a close nearer the high 
of the bar than to the low.  The following two historical charts 
below are examples of this pattern (#3) – 



 


AND .........


 


A GOOD PROBABILITY FOR A REVERSAL (#4): 
The last type of short-term reversal pattern is where a new high 
or low is made and this price is substantially above or below the 
bar that preceded it (i.e., it’s a price “spike”) – but this new 
high or low is NOT a new high or low for the move, but the close 
of the bar is below the prior close or prior 2 consecutive 
closes.  

There are more examples of market reversals seen with this set of 
criteria, especially at bottoms, than the first 3 cases 
described.  Tops are more likely to see both a spike up and a 
resulting new high that is an all-time peak – this due to the 
emotional excesses of major price peaks made after a bull market 
is mature.  

Bottoms will see downward spikes, but a new low is less likely to 
be a new all-time low.  The next 2 charts are examples of the 
facets described in this set of conditions (#4) – 



 

AND ........


 
  
 
And last but not least – 

LOWEST PROBABILITY FOR A SHORT-TERM REVERSAL AS A START OF A 
REVERSAL TO THE DOMINENT TREND:  
A new high is followed by a close below the prior day’s close or 
a new low is followed by a close above the prior day’s close.  
This pattern is the simple reversal up or reversal down day or 
week but does not constitute a “key” 1 or 2-bar reversals 
according to the criteria I have suggested.  

This pattern occurs fairly frequently as can be seen in our last 
charts but is correlated with a significant top or bottom only 
infrequently as can be determined from these chart examples which 
are typical. I can set up my TradeStation application to “show 
me” (such as by marking a large dot on the bottom of the bar) all 
the times that the above described reversal situation happens on 
any given chart – 



 

AND ......... 


 


I hope that all the sample charts will give you the flavor and 
feeling for what is likely to constitute a trend reversal.  
Getting in early in a trend is the “position” that you want to be 
in, especially if you trade stock or index options.  Timing is, 
as they say, EVERYTHING! 


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

Matter of Importance
By John Seckinger
jseckinger@OptionInvestor.com

With all the possible trading tools, it is time to rank the ones that I 
believe should be watched most closely.

I have made it fairly well known that the Dow, to me, holds a great 
influence when trading futures, especially the YM contract.  Watching 
the Dow for guidance and then trading the YM contract for leverage 
makes a lot of sense.  Note:  The below patterns can also be performed 
on the SPX, NDX, NQ or ES contract; however, it is very nice that the 
Dow doesn’t leave a gap and provides a clear candle during the first 
five minutes of trading (since I use this for short-term pattern 
recognition).  

Let us start with a weekly chart of the Dow and work our way towards 
shorter time frames.  The very first thing I do is look for either a 
“b” (long liquidation pattern) or “P” (short covering pattern) and try 
to figure out the apex and relative lows and highs.  Looking below, 
there is the chance the Dow is forming a massive “b” formation with an 
apex at either 8000 or 7500.  I see that the there is a popular 
retracement at 8525 while the middle of the Bollinger Band sits at 
8431.  Ok, now I can start to get a bias if a few things happen.  A 
close above 8525 gets me a little bullish, while a close under 8431 
would be viewed as slightly bearish (note:  because it is a moving 
average, this number will change).  If you missed by “From b to P”, 
here is the link:

http://www.OptionInvestor.com/traderscorner/tc_081302_1.asp 

Chart of Dow Jones Industrial Average, Weekly


 

Seeing the “b” pattern and thinking long liquidation really is the most 
important, since it allows me to gauge risk and allows for an overall 
sense of what traders might expect.  I believe traders now expect a 
move back down to 8000 and this should mean some solid short covering 
on a close back above 8525.  Getting to a daily chart, using Bollinger 
Bands and retracement analysis becomes crucial.  Seeing a lot of 
congestion at current levels is fine for a trader looking to play a 
range until the dust settles.  Based on this chart, I will look for 
resistance at the 22 DMA (8553) with support most likely holding at the 
38.2% area (8338).  The 19.1% retracement level can then be pivotal;
support if prices above, resistance if prices below.  

Ok, now we have different levels from a weekly and daily chart.  What 
do we do?  Since the weekly overrides the daily, look to take a quarter 
position if the levels in the weekly chart are taken out.  Then use the 
daily chart as more stop levels or confirmation.  If short from a 
weekly under 8431 and the Dow closes under the 38.2% level of 8338, 
look to move the trailing stop down near 8338 just in case and add to a 
current short position.  Then, if weekly shows an oversold market, turn 
to even shorter-term time frames for execution when exiting.  

Chart of Dow Jones, Daily


 

The next chart to focus on is the 30-minute bar chart.  Notice how I 
try to see everything in either “P” or “b” patterns and try to figure 
out apexes that will most likely be defended by prior market 
participants.  As seen on the 17th, the Dow formed a “P” pattern and 
broke lower from near 8583; therefore, I believe shorts will defend 
this area and try to keep profits.  On the other hand, there appears to 
be a “b” formation on the 19th with an apex at 8446.  This level should 
be protected by longs.  For traders looking to tighten levels up, a 30-
minute chart works extremely well.  Remember to wait until the 30-
minute candles closes before jumping to conclusions.  When the Dow 
closed under 8338 on one candle, only to close back above as the next 
candle ended, thoughts of a bear trap begin to enter one’s minds.  It 
is then the next candle when prices close above 8450 that a trap can be 
fully seen.  Note:  Once a relative high and low becomes obvious, start 
using retracement analysis.

Chart of Dow Jones Industrial Average, 30 minute


 

To take things to a more micro level, I look for simple patterns on a 
five-minute chart.  On Monday, December 23rd, the Dow traded in a range 
during the first five minutes from 8464 to 8510.  Remember those two 
numbers.  I then take a 50% retracement of that range and get 8487.  
Almost as soon as the first five minutes ended, the Dow came back into 
the 8464-8510 range and traded above the 8487 level.  The rule-of-thumb 
is that once above the 50%, look for a test of 8510 before prices hit 
8487 again.  When the Dow came back and tested 8487 before hitting 
8510, we have a failure.  In that case, odds are great that the low 
during the first five minutes will be hit (8464).  This was the case on 
the 23rd.  

The next pattern to look for is a break above either 8464 or 8510.  I 
like to use 10-point cushion (8454 or 8520 as confirmation).  Once the 
Dow did rise higher, an objective can be found by doubling the range 
during the first five minutes – 8556.  This should mean that risk going 
long is starting to increase.  So, how can this information be used?  
Well, if we wait until 8520 to confirm and only have an objective of 
8556, maybe it makes sense to wait until a failure (back under 8510)?  
To answer this, look back at longer-term charts.  A weekly had 8525 as 
good resistance, while a daily used 8553 (22 DMA); therefore, looking 
at a failure might make sense.  If the market does close above 8525, 
then we can re-evaluate.  

Chart of Dow Jones Industrial Average, 5-minute


 

Chart of Dow Jones, 5-minute 


 

Another way to calculate level is from using pivotal analysis.  The 
below formula can be used on the Dow, YM, SPX, ES, NDX, and NQ for any 
time frame.  In the futures wrap, I use the Daily highs, lows, and 
closes (all trading sessions included).  I strongly encourage traders 
to do these calculations and use the levels as confirmation when 
looking at a 30-minute chart.  If it matches up with a 30-minute or 
longer, I give it more weight.  The calculation is listed below:

Pivot point (P) = (H + L + C) / 3

First resistance level (R1) = (2 * P) – L

First support level (S1) = (2 * P) – H

Second resistance level (R2) = P + (R1 - S1)

Second support level (S2) = P - (R1 - S1)

Note: H, L, C are the previous day's high, low and close, respectively:

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


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


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