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Daily Newsletter, Thursday, 01/02/2003

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The Option Investor Newsletter                Thursday 01-02-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Up For The Year
Futures Markets: Still Range Trading
Index Trader Wrap: Bull's pop the cork on New Year's champagne
Market Sentiment: Out of the Blocks
Weekly Manager Microscope: Matthew Fruhan: Fidelity Select Defense &
Aerospace Portfolio (FSDAX)



Updated on the site tonight:
Swing Trader Game Plan: New Year's Bash


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      01-02-2003           High     Low     Volume Advance/Decline
DJIA     8607.52 +265.90  8608.27  8342.38 1.54 bln   2521/ 719
NASDAQ   1384.85 + 49.30  1384.91  1336.98 1.28 bln   2321/1064
S&P 100   459.50 + 14.75   459.50   444.75   Totals   4842/1783
S&P 500   909.03 + 29.21   929.03   879.82
RUS 2000  392.58 +  9.49   392.60   383.09
DJ TRANS 2372.75 + 62.80  2372.75  2305.45
VIX        28.52 -  3.51    32.98    28.37
VXN        47.05 +  0.11    49.53    46.58
Total Volume 2,999M
Total UpVol  2,737M
Total DnVol    221M
52wk Highs  141
52wk Lows    44
TRIN       0.22
PUT/CALL    .76
************************************************************

Up For The Year

Surprise, surprise! The markets reacted with shock after the ISM
numbers came in much stronger than expected. The Dow rebounded to
strong resistance with a +265 point gain and the Nasdaq brought
back memories of the 2002 open with a +49 point gain. On Jan-3rd
2002 the Nasdaq spurted to a +65 point gain. Unfortunately the
high for the year was only four days later.

Dow Chart



Nasdaq Chart




The ISM report got 2003 started off with a bang with a 54.7 headline
number compared to estimates of only 50. This was the highest number
in six months and the first positive after three months in the red.
Unfortunately it takes more than a one month aberration to break a
trend. There is a good possibility this was a simple dead cat bounce
prompted by inventory depletion from the last five months of dismal
performance. Eventually your shelves will go bare and you have to
order to stay in business. You may not order much but with the
current drought any increase is easy to see. The markets rallied
on strong short covering as this data was exactly opposite what
traders expected. There is a very good chance we will see a correction
in the January ISM next month.

The next most important number was the new Jobless Claims which
also came much higher than expected. Unfortunately that is not the
same good news direction as the ISM. The jobless claims jumped to
403,000 from 378,000 the prior week. The 378,000 number was also
revised up to 390,000. Considering prior week was a shortened
holiday week it is surprising that the new claims neared 400,000
again. Considering the trend to put off applying for unemployment
until January this spike in the last two weeks numbers are troubling.
I would expect to see a much higher level next week. The four-week
moving average rose to 418,750 from 407,500. The nonfarm payroll
report next Friday is not likely to show any increase in the
overall jobs numbers due to the rising jobless claims.

The ISM numbers also caused traders to ignore a survey by Goldman
Sachs that predicted trouble ahead. Goldman surveyed chief investment
officers in December and they now expect a further decline in
corporate spending in 2003 instead of the previous outlook for 2%
to 3% growth. They said the survey's outlook for long-term growth
also dropped -2% to an all time low of 5%. In the survey 66% of the
respondents expected cuts in their budgets and 43% were not expecting
any increase in spending until 2004 or later. Goldman warned that
earnings for the March quarter were at risk for the technology sector.
According to the survey the areas that will see the most gains
in spending over the next 12 months were security software, security
hardware, switches and routers, wireless LAN, storage software,
Windows Desktop 2000/XP software and midrange storage arrays. The
list was in descending order. Symantec and Microsoft both soared
over $2 on the news. VRNT gained +11% as well.

Earnings warnings began today and will accelerate substantially over
the next two weeks. PMTC, ADVS, CDN and HD headed the warning list
on Thursday. Not all news was bad with FRX and PFCB raising guidance
but the majority of guidance changes were down. Brokers were busy with
downgrades on stocks like CSCO, FHCC, LTD, TOO, MANH and others.
These are just a whisper of the flood we will be seeing next week.
With the Goldman Sachs survey echoing the same outlook as the SG
Cowen survey from last week there will be more tech downgrades
ahead.

Thursday was a good day but it was just a day. Followers of the
"first five days" trend indicator should be excited. The idea is
that the trend for the first five days will be the trend for the
year. Considering the first five days were up strongly in 2002
you can see how well that indicator works. It is more of a
superstition than an indicator. There was a parade of "technicians"
on stock TV today with mixed outlooks. Ralph Acampora returned to
CNBC as a forecaster and said the next couple of months could be
"jittery" but the second half of the year would be strong. I suspect
"jittery" is a new technical term for unstable with weak days ahead.
He said we could see a correction but he would advise buying the
dips. A successful market timer, Arch Crawford, who was rated
the number two market timer by Timer Digest the last six months,
said he expected a drop by March that would break the October lows.
He felt we would rally off the lows but fall back again in the
Oct/Nov time frame but a new bull market would begin with a
rebound in November. Arch has been pretty accurate as of late.
He was rated #1 timer for the first six months of 2002 by Timer
Digest.

Both of those forecasts and $4 will get you a cup of coffee at
Starbucks, which coincidentally said their same store sales were
up +7% in December. Now we know where everyone went when they were
supposed to be shopping. Friday is a tossup. I see strong resistance
above us from 8650 to 8950 and that should limit any further gains.
We could see a gap and crap where the market bounces at the open
only to fail shortly thereafter. It is also possible we could see
the inflow of new money from end of year retirement contributions
power the indexes even higher but the general consensus of opinion
is just like last year. An early rally followed by a couple weeks
of worry as warnings prepare us for the 4Q earnings parade. Just
like you can't determine a football game by the first possession
we cannot draw too many conclusions by the first day of trading.
The markets were very oversold coming into the holidays and we
were due for a bounce. The ISM just caught many shorts off guard
and the rest is history. Volume was still weak although it was
strongly positive. Friday could see a return of volatility which
was noticeable absent on Thursday with the VIX dropping -3.51 to
28.52. Also expected to be a factor at the open is the TRIN which
closed at an obscenely low .22 and the lowest close since
Oct-28-1997. This extreme overbought indication will be working
against traders at the open. Either way, do not apply too much
importance to Friday's outcome. Next week is when the real work
starts.

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

Still Range Trading
By John Seckinger
jseckinger@OptionInvestor.com

The NQ contract showed a Directional Movement (ADX) reading of
19.50 on Tuesday, but failed on Thursday to hit the magical 20
level from underneath and indicated that we are most likely still
in a range (buy low/sell high).

Tuesday, December 31st at 3:15 P.M.

Contract     Last     Net Change    High         Low       Volume

Dow Jones..  8607.52   +265.89     8608.27     8342.38
YM03H        8594.00   +263.00     8610.00     8316.00     25,403

Nasdaq-100   1027.86   +43.50     1027.91      984.59
NQ03H        1025.00   +38.00     1030.50      985.50     214,618

S&P 500      909.03    +29.21      909.03       873.82
ES03H        907.50    +27.75      909.75       882.50    469,365

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.

Notes:  Support, Resistance, and Pivotal level for Dow, SPX, and
NDX will be posted in the Market Monitor every morning at
approximately 9:30 a.m.

Notes:  At 10 a.m., the December ISM Index rose to 54.7% from
49.2% in November and easily beat estimates of 50.1%.  This
certainly was the catalyst for today’s rise.  The new orders
component rose 13.4 points to 63.3%, and is considered the
leading indicator of the index.  With the Dow coming off three
years of declines, the blue chips only once fell for four
consecutive years in a row (1929 to 1932).  In other news,
President Bush announced that he has plans to unveil a new
economic stimulus package.  Only shares of Philip Morris (MO)
closed lower within the Dow.

Bonds fell 2’17 to 110’05 and had one of its worst sessions in a
long time.  Support is at current 110 levels, with stronger bids
underneath at 108’16.  Also finding bids was the Utility Index
(UTY) (rising above 260 to 263) and the Sox index, leaping 6.67%
to 308.56 and getting back towards solid resistance levels (308
to 315 area).  Also noteworthy was the rise in the Dollar,
advancing 1.08% to 102.96 and finally confirming the weekly
bullish divergence noted during the last week.  Look for 104.25
as the near term objective.

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

The March Mini-sized Dow Contract (YM03H)

Whenever there is a move of this magnitude, I always look at
weekly levels first to see what exactly transpired.  Looking at
a weekly chart of the YM contract shows prices rising above both
the 8350 area (38.2% retracement level of the October to December
climb) and up to the 22 Weekly Moving Average.  It was a few
weeks ago when I wondered if this average would come back into
play.  It has now, and with weekly ADX levels declining from
above 40 there is once again the thought of a range trade.  Note:
The daily ADX level is still under 20, so looking at stochastics
and MACD makes sense until conditions change.  Bulls will like to
see the 22 WMA become support.

Chart of Mini-sized Dow Contract, Weekly
j



A 120-minute chart of the YM contract shows both retracement
levels used from Tuesday’s R2/S2 levels (right side) as well as
retracement levels for Friday (left side).  Since the range was
significant, market makers might still be looking at such levels.
I will keep them in to be safe.  With that said, I will not
become short-term bearish until at least 8505 is taken out.  If
long and the 70.7% area is taken out, begin to use tight stops.
Remember, when trading retracement levels, once one level is
taken out, the next level becomes the objective.  If prices fail
to reach the next level, begin to think of failure.  It is
interesting how the first Resistance area comes in at 9700, near
the 84.1% level and pretty important for short term traders.
Moreover, R2 is at 8800 and is also psychologically important for
all blue chip traders during the last few months.  There are no
coincidences.

Chart of YM03H, 120-minute




Bullish Percent of Dow Jones:  50% (Recent High at 72%, last
Significant Low at 10%).  The recent column of O’s is now at 11
and still in “Bear Alert” Status.  This indicator is just saying
that risk buying is still at relatively high levels.  Note:  A
P&F chart gave a buy signal today and shows a bullish price
objective of 9350.  I put more weight in the bullish percent.

YM03H

Support               Resistance                Pivot

8403.25               8697.25                   8506.75
8212.75               8800.67

Bold signifies levels based on Pivot Analysis (All Sessions).

The March E-mini Nasdaq 100 Contract (NQ03H)

Starting with a weekly chart of the NQ contract, prices seem to
have set a double bottom and then came back to the 38.2%
retracement level relating to the move from October to December.
Longs should make sure this 1024 area becomes support, because
failure here will have technicians looking for a test of 983 once
again.  Note the MACD oscillator looking to cross lower from very
high levels, a bearish sign (not yet, though).   The weekly lower
low and lower high doesn’t help a bullish case either.
Nevertheless, look to see if the week can close above 1024.  If
it does, the market is telling traders that it might make sense
to wait before blindly selling.

Chart of NQ03H, Weekly




A 60-minute chart of the NQ contract shows prices at the top of a
regression channel.  This area will have to become support in
order for longs to get more aggressive.  The main intermediate
resistance is still much higher at 1083.  The pivot on Friday is
at 1013.75 and lines up with the 50 PMA.  The mid-point of the
Bollinger Band comes in at 1000, and should be support in case
weakness does take over.  With this said, look for more weakness
under 1013.75, and if the 1024 area become support, expect more
upside.

Chart of NQ03H, 60-minute chart




Bullish Percent for NDX:  60% (Recent High at 82%, last
Significant Low at 14%)  The recent column of O’s stands at 11.
This indicator still shows risk buying the contract.

NQ03H

Support              Resistance                 Pivot

996.75               1041.75                    1013.75
968.75               1058.75

Bold signifies levels based on Pivot Analysis (All Sessions).

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

A daily chart of the ES contract has prices moving above a few
moving averages and the mid-point of a Bollinger Band all in one
session.  Like the NQ contract, resistance is seen near current
levels (matching the October 28th high).  The pivot is lower at
the psychologically important 900 level.  If the 910 area is
taken out, look for a move to 917.  There should be good sellers
there.  Under 900, I will expect sellers to take over as well.
So, what is a long to do?  Possibly play a move from 911 to 917,
but keep the stops tight.

Chart of ES03H, Daily




A 60-minute chart has prices above the top of a regression
channel, and the 900 pivot comes right back to the top of the
channel.  Therefore, a move under 900 should pressure prices to
move back into the regression channel and gets longs worried
about a possible range trade (read: back to 890).  It is nice to
see both the 78.6 and 84.1% retracement levels match R1 at 917.
This level should be a challenge to penetrate.

Chart of ES03H, 60-minute




Bullish Percent of SPX:  58% (Recent High at 66%, Last
Significant Low at 20%).  Note:  On a P&F chart, the contact did
give a buy signal with a price objective of 980.  A sell signal
would be given on a move to 865.

ES03H

Support              Resistance                 Pivot

890.00               917.34                     900.00
872.75               927.17

Bold signifies levels based on Pivot Analysis (All Sessions).

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

Bull's pop the cork on New Year's champagne

Fueled by a strong-than forecasted ISM Index number, which for
the first time in five months that expansion took place at the
industrial level, investors popped the cork on a New Year's
bottle of champagne by sending the Dow Industrials (INDU) 8,607
+3.18% on a 265-point celebratory bullish rebound as if to say
this year will be different than the previous two years of
declines.

All market participants look to be back from an extended weekly
holiday vacation as volume at both the NYSE and NASDAQ reached
the 1.2 billion and 1.29 billion level respectively, and its been
about a week since we've seen that type of volume.

Every single sector turned in a positive trade, including the
Gold/Silver Index (XAU.X) 77.82 +1.38%.  On price basis, only
Treasuries finished the session lower some stronger selling being
witnessed in the longer-dated maturities.  I say this as the 30-
year Treasury March futures (us03h) 110'05 -2.25% declines
outpaced the 10-year Treasury March futures (ty03h) 113'13 -
1.42%, which in turn outpaced the declines in the 5-year Treasury
March futures (fv03h) 112'05 -0.96%.  This shorter-term
observation has the bond market selling the "riskier" and longer-
dated maturities with some vigor.  Here too we could see some
type of "tax gain" selling taking place in the new year (if
memory serves me correct, settlement on Treasury bonds themselves
is trade date + 1 day), but the bond market reaction to today's
economic data can also be interpreted as a longer-term bullish
thought as it relates to equities.  This is one-day's
observation, but may tie in to some comments regarding 30-year
YIELD calls made several weeks ago.  This will be something I
continue to follow in the weeks and months ahead.

The ability for gold equities as depicted by the Gold/Silver
Index (XAU.X) is a bit "confusing" and I can only interpret this
as some short covering today.  The U.S. Dollar Index (dx00y)
102.86 +0.99% had the dollar showing some strength today, and
that has found gold equities usually showing weakness.  Gold
equities opened the session lower, but rebounded from XAU.X 75.13
to close at their session high.  It's notable that the XAU.X has
found sellers right at this 78.00 level on Monday and Tuesday.
One thing to watch tomorrow is any type of break above XAU.X
78.00 and then 80, which would be a multi-month relative high,
combined with any type of broader market weakness tomorrow.

Should that type of action take place, then today's broader
market rally becomes suspect.

Dow Industrials Chart Comparisons - 5-min. and Daily




Today's stronger than expected ISM data saw the Dow Industrials
jump above their first 5-minute high (left chart) and build gain
into their close.  While I'm "anxious" to short the indexes, one
thing I'll be looking for on a short-term basis is come type of
intra-day technical break of support, which gets some type of
confirmation from the intra-day stochastics.  I'll be using
today's example on the 5-minute chart that showed Stochastics
oscillator dipping below "oversold" territory, both near Dow
8,520 as technical reasons NOT to have tried to short today's
powerful rally on what may have looked to be Dow consolidation
around 8,550.  With the Dow holding an impressive close near
today's high, we may well see the 8,700 level from the daily bar
chart and retracement, combined with upper Bollinger Band as
resistance levels for bears to be shorting.

In today's 03:15 EST Update, I also discussed the 8,700 level
from the point and figure chart perspective.

Today's action saw no net change in the very narrow Dow
Industrials Bullish % ($BPINDU) and status remains "bear alert"
at 50%.

I do think that today's ISM data caught some bears by surprise
and played against some more bearish scenarios for December's ISM
industrial reading.

I also thing that the turn of a new year had the bulk of tax loss
selling being done in December (I can't quantitatively back this
up with hard numbers), but in Monday's wrap, we thought this
week's trading might be "taxing" to traders.

Today's stronger than expected ISM data got the ball rolling in
bull's favor and perhaps "lack of selling" from any lack of tax-
loss selling may indeed have added to today's bullishness.

S&P 500 Index Chart - $5 box




Today's trade at 905 gets the SPX's "traditional" $5-box chart
back on a "buy signal."  In my opinion, I'm a bit surprised that
the SPX was able to trade that level, REGARDLESS of what type of
economic data was released.  As such, a bearish trader holding
full position short/put, ESPECIALLY for January expiration wants
to see SPX hold resistance at 915.

One thing I'm on the lookout for tomorrow is some type of "pop"
at the open as today's bullishness gets some follow through, but
then a "drop" toward the close.

Today's action saw the S&P 500 Bullish % ($BPSPX) gain 1%, which
means a net gain of 5 stocks to reversing point and figure buy
signal.  This still has the SPX Bullish % in "bull correction"
status and would currently take a reading of 64% to reverse back
into "bull confirmed" status.

S&P 100 Index Chart - Daily Interval




In Tuesday night's wrap, we only looked at the traditional $5 box
of the OEX and "envisioned" a 3-box reversal back to 455.  It
would have taken a trade at 460 to have the $5-box scale p/f
chart reversing to 460, and the OEX missed it by another
"fraction" today.  This is perhaps where I view the "pop" and
"drop" type of action described earlier in the wrap.  Here, in
the OEX, a bear could look to play the "pop" and "drop" with a
stop just above the 475 level.  For weakness, an OEX bear and
perhaps broader market bear wants to see an OEX close back below
the trending lower 21-day SMA in the next day or so to keep the
Bollinger Band channel trending lower with the 21-day SMA, which
is the middle of our Bollinger Band.

Today's action saw no net change in the S&P 100 Bullish %
($BPOEX).  Status remains "bear alert" at 55%, and would
currently take a reading of 62% for a reversal back into "bull
confirmed" status.

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




While the Dow, SPX closed above their 21-day SMA's and 50-day
SMA's, and the OEX challenges both at their close, the QQQ and
NDX seem to lag just marginally.  As such, this becomes the
"weaker" index right now to monitor near-term for any type of
"failed" rally.  I made some notes as to the "volume breakdown"
back from $27, which came on a day when the QQQ traded 130
million shares.  Today's 4.2% gain is nothing to sneeze at, but
came on volume of just 66 million shares.  I'm still looking for
resistance near $26.18 or 61.8% retracement and a target of 38.2%
retracement over the next 10 or so trading sessions.

Today's action saw no net change in the NASDAQ-100 Bullish %
($BPNDX).  Still "bear alert" status at 59% and would take a
reading of 66% to see a reversal back into "bull confirmed"
status.

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

Out of the Blocks
by Steven Price

Talk about starting the year off with a bang!  The Dow exploded
after a better than expected ISM report, which showed expansion
in the manufacturing sector for the month of December after
contracting in November.  The Institute of Supply Management
released its reading of 54.7, which was well above expectations
for a reading of 50.1, and what started as a faded rally in the
broader indices regained strength, powering the Dow 265.89
points, the SPX 29.21 points and the Nasdaq Composite 49.34
points.  That move took us through numerous levels of intraday
resistance in the major averages and is the most bullish signal
we've had in the recent declining market.

The move leaves us almost back to the point we were in the middle
of December, before the sell-off of the last couple weeks.  That
leaves us debating whether this move is truly a trend reversal,
or simply an oversold bounce after two weeks of tax selling and
an 800-point drop from the high of December 2 to the low of
December 31.  There were a couple of significant developments, as
the Dow and SPX both closed well above their 50-dmas, which had
failed on previous rallies during the last month.  The OEX and
Nasdaq Composite also managed to close above those levels, but
just barely and the breaks were not as decisive.    A look at the
daily charts also shows the Dow, SPX and OEX all breaking
descending channels and making up over 45% of that December drop
in a single rally. The index finished the day at 8608, with the
50% retracement coming at 8649. The COMP, which previously fell
below its 38.2% retracement of the gain from October through
December 2, also bounced back above it, but into heavy
resistance.

Horizontal resistance comes in the Dow at 8625-8650, in addition
to that 50% retracement and at 910 in the SPX, which closed at
909.03.  A move through those levels could signal another run at
9000, while a failure may signal an oversold bounce and possible
re-test of Friday's lows at Dow 8242 and SPX 869.  The VIX seems
to be signaling a continuing rally, as it has bottomed below the
December levels, and reflects a lack of downside fear.  While
some traders use this as a contra-indicator when it gets to
extreme levels, it is based on action in OEX options and
indicates to me that institutions are not afraid of a sell-off
and are selling premium. That volatility contraction also occurs
as equities are bought and upside calls are sold to reduce the
cost of purchases, so there are more factors involved than just
fear.  The second reason would give bears hope to enter short
positions from strong areas of resistance, which is where we are
now.  The first reason gives bulls ammo to jump in as the VIX is
telling us that the big boys are no longer betting on the
downside.

It is unlikely that the manufacturing data was solely responsible
for the rally, since the morning actually started off with a
negative jobs report.  That report showed the four-week moving
average for initial claims at its highest level in 3 months, as
it rose by 11,250 to 418,750.  The holiday season can be volatile
for the initial claims number so economists tend to discount its
results this time of the year.  With dueling economic data, it
appears that a big bounce was already in the cards and simply
waiting to make sure there were no catastrophes in the
manufacturing data.  Once that news was out of the way, the rally
cap was on and we finished at the highs of the day.   The $64,000
question is whether the rally will break through the resistance
levels we are currently facing.

The point and figure charts are showing the first buy signals in
the Dow and SPX since December, but both are also approaching
resistance on those charts both horizontally and from descending
bearish resistance lines.  The OEX failed to confirm with its own
buy signal and has been the laggard when it comes to
confirmation.  It could also be a sign that the rally is just
another shorting opportunity on the way to yet another lower low.

Right now the high percentage plays may be from the short side as
we run into the 50% retracement levels of the recent drop in the
SPX, Dow and OEX.  That 50% retracement coincides with heavy
horizontal resistance and could be shorted with a tight stop just
above the congestion.  Those levels are OEX 463.75, Dow 8649, SPX
911.95.   If we gap higher once again, and clear those levels on
tomorrow's open, then I'll wait until we reach Dow 8800, SPX 925,
OEX 472 before looking for an entry.   We are currently in
between plenty of levels of support/resistance, as highlighted
above, so the best entries will be at the extremes and traders
will need to keep an obey very tight stops.


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  8607

Moving Averages:
(Simple)

 10-dma: 8428
 50-dma: 8548
200-dma: 8986



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  909

Moving Averages:
(Simple)

 10-dma:  889
 50-dma:  902
200-dma:  957



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1027

Moving Averages:
(Simple)

 10-dma: 1010
 50-dma: 1033
200-dma: 1074



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

The Semiconductor Index (SOX.X):  The SOX got a boost on the
broad market rally and crossed over several resistance levels.
However, it stopped dead at a big one, failing to break through
310, although it finished on its highs of the day. The 50-dma is
directly above at 316 and there is additional strong horizontal
resistance at 330, as well. Keep an eye on these levels, as this
index has tended to lead the broader markets with a strong
correlation over the last year. There wasn't any real news in the
sector, so we may be seeing a technical bounce after losing over
100 points in less than a month.   However, that's what we
thought when it bottomed at 211, so we'll step out of the way on
a break above 310 and wait for a test of 330 before going short.

52-week High: 657
52-week Low : 214
Current     : 308

Moving Averages:
(Simple)

 10-dma: 298
 50-dma: 316
200-dma: 379

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


The VIX fell to new relative lows on the broad market rally
today.  It not only broke below 30, but fell below recent support
at 29, as well.  It now sits at its lowest level in over a month
on the biggest one-day move since October.  This indicates a
couple of things.  We normally see a VIX contraction on market
upswings, as out of the money calls are sold to finance equity
purchases.  However, the big drop may also suggest that
institutions are getting out of premium positions as fear of the
downside abates. If the big boys aren't worried, then maybe
investors can believe in a continued rally.


CBOE Market Volatility Index (VIX) = 28.52 –3.51
Nasdaq-100 Volatility Index  (VXN) = 47.05 +0.11

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.76        541,057       410,730
Equity Only    0.62        405,880       250,780
OEX            1.35         22,410        30,171
QQQ            0.98         39,156        38,379


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

Bullish Percent Data

           Current   Change   Status
NYSE          50      + 1     Bull Confirmed
NASDAQ-100    59      - 2     Bear Alert
Dow Indust.   50      - 3     Bear Alert
S&P 500       59      - 1     Bull Correction
S&P 100       55      - 2     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  1.36
10-Day Arms Index  1.47
21-Day Arms Index  1.42
55-Day Arms Index  1.20


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       2290           576
NASDAQ     2242           994

        New Highs      New Lows
NYSE         57              15
NASDAQ       40              14

        Volume (in millions)
NYSE       1,513
NASDAQ     1,264


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

Commitments Of Traders Report: 12/23/02

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

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

S&P 500
Commercials reduced both sides of their positions, shaving 57,000
contracts off the long side and 61,000 contracts off the short
side.  Small traders also reduced significantly, with long
positions losing 56,000 contracts and short positions dropping by
32,000.

Commercials   Long      Short      Net     % Of OI
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%)
12/23/02      408,592   467,259   (58,667)   (6.7%)

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
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%
12/23/02      138,756    58,236    80,520     40.9%

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 long positions by 20,000 contracts and shorts
by 10,000.  Small traders, on the other hand, got longer,
reducing the long side by 6,000 contracts, while closing 12,000
on the short side.


Commercials   Long      Short      Net     % of OI
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%)
12/23/02       32,067     44,451   (12,384) (16.2%)

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
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%
12/23/02       17,009     5,865    11,144

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:  11,144  - 12/23/02

DOW JONES INDUSTRIAL

Commercials reduced both long and short positions by about 9,000
contracts, Small traders got slightly longer, losing 900 long
contracts and 3,000 shorts.

Commercials   Long      Short      Net     % of OI
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%
12/23/02       14,991    11,103    3,888      14.9%

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
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%)
12/23/02        4,584     6,296    (1,712)   (15.7%)

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

Matthew Fruhan: Fidelity Select Defense & Aerospace Portfolio
(FSDAX)

If you're looking for a mutual fund that seeks growth of capital
by investing in defense stocks, there's only one fund out there,
the Fidelity Select Defense & Aerospace Portfolio (FSDAX) run by
Matthew Fruhan (since January 2001).

Matthew Fruhan is a portfolio manager with Boston-based Fidelity
Investments, his employer since 1995.  He joined the mutual fund
giant as an equity research associate and followed the specialty
retail, automotive supply and transportation industries at first.

Prior to his current assignments, Fruhan ran the Fidelity Select
Air Transportation (FSAIX) and Fidelity Select Food & Agriculture
(FDFAX) portfolios.  He is also current managing Fidelity Select
Cyclical Industries Portfolio.  Fruhan holds a B.A. from Harvard
College and a M.B.A. degree from Harvard Business School, one of
Fidelity's favorite recruiting spots.

Fidelity Select Defense & Aerospace (FSDAX) has a 3.00% front-end
sales load and a minimum initial investment of $2,500 for regular
accounts and $500 for IRA accounts.  At 1.19%, the fund's current
expense ratio is below average relative to the average stock fund
per Morningstar.  The fund is available directly from Fidelity as
well as through other distribution channels.

Management Approach

Fruhan seeks to achieve the fund's capital appreciation objective
by investing at least 80% of assets in common stocks of companies
principally engaged in the research, manufacturing and/or sale of
products or services related to the defense or aerospace sectors.

Since there aren't any other defense funds out there, Morningstar
classifies Fidelity Select Defense & Aerospace Portfolio as a mid
capitalization value fund.  That fits Fruhan's style alright, but
note that the fund is registered as a "non-diversified" fund with
the SEC.

Compared to the typical diversified equity fund, Fruhan manages a
more concentrated portfolio of defense and aerospace stocks, with
just 38 stock holdings, and nearly 62 percent of portfolio assets
represented by the fund's top 10 holdings.  As of August 31, 2002
the fund's two largest holdings were Northrop Grumman (NOC) 11.3%
of assets and Lockheed Martin (LMT) 11.0% of assets.

Compared to the S&P 500 index, Fruhan had significant overweight
positions in software, hardware, media, and industrial-materials
sectors at the end of August 2002, using data from Morningstar.

At $9.9 billion, the fund's average market cap is greater than a
lot of mid-cap funds.  The term "multi-cap" is probably a better
description of Fruhan's capital sector allocation, with some 57%
of assets invested in large-cap stocks, 25% in mid-caps, and the
remainder in small/micro-cap issues.

Stylewise the fund currently lands in the mid-cap blend box, but
is still classified and rated against the mid-cap value category
by Morningstar.  In the next section, we see how well the Select
Defense & Aerospace portfolio has performed relative to its fund
benchmarks.

Fund Performance

Fruhan has a done a relatively good job in 2002 of limiting fund
losses in 2002 to about 8 percent as of December 30, 2002.  That
was 14.3% better than the S&P 500 index and 1.4% better than the
Russell Midcap Value index, using Morningstar's numbers.  Strong
enough to rank the fund in the top 17% of the Morningstar midcap
value category for the 2002 period.







Over the years, Fidelity Select Defense & Aerospace has seen its
share of portfolio managers come and go, but still sports a fine
long-term track record.  According to Morningstar, the portfolio
sports a trailing 10-year average annual return through November
30, 2002 of 15.3 percent, ranking in the top 5% of the mid-value
category.  That beat the S&P 500 index by 5.1% a year on average
and the Russell Midcap Value index by an average of 3.6% a year.

Fidelity Investments does a good job of hiring research analysts
and grooming them to be portfolio managers.  New managers get to
manage one or more Fidelity Select portfolios before being given
the opportunity to run one of the diversified equity funds.  The
rising stars eventually move up the ranks to become the managers
of Fidelity's largest, most prized funds.  Fruhan is now running
two Fidelity Select Portfolios, having previously run two others
covering different industry sectors.

Conclusion

The threat of war today may make Fidelity Select Defense a good
short-term play, but as Morningstar's analyst report points out,
the fund has "long-term appeal" as well.  Remember too the fund
is not a pure play on defense, since it includes aerospace also.

However, those looking for this specific type of exposure as we
move tentatively into 2003 should find this to be an attractive
fund option.  Its non-diversified status and concentrated stock
holdings make it suitable as an "explore" fund, not as a "core"
equity investment.

For more information or to download a prospectus, log on to the
Fidelity website at www.fidelity.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
***********************

New Year's Bash

Whether it was simply tax-loss sellers getting back in at reduced
levels, or an oversold bounce, the rally made up nearly two weeks
of losses and was the most bullish sign we've seen in a month.


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 01-02-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: TRMS
Dropped Puts: AIG, COST
Daily Results
Call Play Updates: ACS, BEAS, SNPS
New Calls Plays: SYK
Put Play Updates: CEPH, BSC
New Put Plays: IBM


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

TRMS $42.82 -0.35 (-0.49) Despite the broad-based rally that
greeted investors to kick off the New Year, shares of TRMS just
couldn't get moving on Thursday.  With even the Biotechnology
index (BTK.X) gaining better than 3%, TRMS' fractional loss is
rather disturbing.  We got the rebound we were looking for a
couple weeks ago, but since then, the stock has been
languishing, drifting lower along its 20-dma.  While that level
held as support today, the stock's bullish prospects appear to
have been significantly diminished based on today's relative
weakness.  Rather than wait for our stop to be triggered, we're
dropping TRMS tonight.  Traders with open positions can use an
intraday rebound on Friday to exit the play at a more favorable
level.


PUTS:
*****

AIG $60.30 +2.45 (+3.62 for the week)  We've been playing AIG 
short for almost a month now and although we got a breakdown as 
low as $56.05 intraday on Tuesday, it has bounced once again and 
premium decay is becoming a more serious issue.  With today's 
move back over $60, we'll let this one go and look for better 
shorts that are in the process of breaking down.  Those traders 
who would like to hold onto AIG can look for a move back under 
$60 and target the recent low at $56.05 as a level at which to 
tighten up stops and take profits. A move back over the 50-dma 
(currently $62.63) would be a definite signal to punt on the 
short possibilities here. 

---

COST  $29.01 +0.95 (+1.62 for the week)  The holiday shopping 
season has come and gone and the retail sales data has been 
nothing short of ugly.  However, the stocks in the sector appear 
to have seen most of their sell-off prior to the sales releases 
and have hung on in spite of the bad news. The Retail Index 
(RLX.X) found support at 260 at about the same time COST found 
support above $27.00.  With the bounce back toward $30 and the 
news behind us, we are giving up on a breakdown here and letting 
this one go.


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

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

CALLS              Mon    Tue    Wed   Thu

ACS      53.98    0.26   0.15   0.00  1.33  Climbing
BEAS     11.95   -0.38  -0.02   0.00  0.48  Found support
SYK      68.02    1.22   0.33   0.00  0.90  New, New highs
TRMS     42.82   -0.55   0.36   0.00 –0.35  Drop, sideways


PUTS

AIG      60.30    0.48   0.49   0.00  2.45  Drop, too long 
BSC      61.48    0.05  -0.61   0.00  2.08  market reaction
CEPH     49.77   -0.26  -0.58   0.00  1.10  Under $50
COST     29.01    0.72   0.03   0.00  0.95  Drop, no break
IBM      80.57   -0.75   0.40   0.00  3.07  New, Pullback time


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

ACS $53.98 +1.33 (+2.25) Following an uneventful New Year's
holiday, investors returned to the markets in a bullish mood,
sending all the major indices sharply higher.  Shares of ACS have
been holding up fairly well over the past couple weeks,
demonstrating the stock's relative strength by continuing upwards,
while the broad market declined.  Today's broad rally was almost
enough for ACS to clear the $54 resistance level, but not quite.
While it did trade $54.04 intraday, the closing print of $53.98
hints that there are still some skeptics out there.  But with
higher highs and higher lows since the stock's breakout a couple
weeks ago, we still have a solid bullish trend to work with.  The
best entries have been coming on intraday pullbacks to support, so
we'll continue to employ that strategy.  Another rebound from the
2-week ascending trendline (currently $52.50) would make for a
solid entry, although we might be fortunate enough to get a
slightly deeper pullback to the trendline from the October lows
(now at $51.50), which is just below the 10-dma at $51.80.
Those willing to buy a breakout over resistance are welcome to
do so, but need to confirm any breakout with stronger volume than
we've seen lately, as there is significant resistance also at $55
and then $56.00-56.50.  We're raising our stop tonight to $51,
just below Monday's intraday high.

---

BEAS $11.95 +0.48 (+0.10) After a quick dip at the open, BEAS
found support near $11.50 before rallying throughout the day
with the rest of the broad market.  In the context of the big
picture, the stock is stuck right now between support in the
$11.00-11.50 area and resistance near $12.50.12.60.  That range
defines the likely action points for traders.  Those looking to
open new positions will want to continue to use intraday rebounds
from support to add to their positions, while momentum investors
will want to wait for a volume-backed move through the $12.75
level.  The ascending trendline from the October lows has now
risen to $10.65, while the 20-dma has moved up to $11.01.  Those
two levels of support give us enough confidence to raise our stop
to $10.50 tonight.  If that level is violated on a closing basis,
it will be a sure sign that the bullish trend is in deep trouble,
and we'll want to exit the play post-haste.

---

SNPS $46.92 +0.77 (+0.68) Since we began coverage of SNPS, this
play has been all about slow and steady progress, as the stock
has spent the past month gradually climbing from the $43 level to
its intraday high of $47.13 today.  All was looking good until
about a half hour after the closing bell, and judging by the
after-hours trading activity, there's trouble in paradise.  INTU
announced that it was hiring SNPS' CFO, and that announcement
was quickly followed by news of SNPS' selection of its new CFO.
Clearly investors did not take kindly to this news of a change to
senior management, as SNPS got whacked in the extended trading
hours down to as low as $43.65.  That takes the stock below
several interim levels of support and just above the December
closing lows near $43.  Extended hours trading can sometimes be
unreliable, so we'll want to see what happens tomorrow.  A sharp
rebound from tonight's lows could provide a great entry into this
play, but if we don't see a solid rebound tomorrow, then SNPS
will make it to the drop list this weekend.  Remember, our stop
is set at $43.


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

SYK - Stryker Corp - 68.02 +0.90 (+2.45 for the week)

Company Description:
Stryker Corporation develops, manufactures and markets specialty 
surgical and medical products, including orthopaedic 
reconstructive, trauma, spinal and craniomaxillofacial implants, 
the bone growth factor osteogenic protein-1, powered surgical 
instruments, endoscopic systems, patient care and handling 
equipment for the global market, and provides outpatient physical 
therapy services in the United States. (source: company press 
release)

Why We Like It:
It was surprisingly difficult to find bullish play candidates 
this evening.  Hundreds of stocks followed the market higher 
today, but in most cases there were no actionable breakouts.  
Stryker, however, has a technical picture that's sure to please 
the bulls.  The stock gained 1.3% today after plowing through 
resistance at $68.00.  This created a triple-top buy signal on 
the point-and-figure chart.  The daily chart is looking quite 
strong as well, with shares trading at new all-time highs.  The 
brisk volume behind this move (the strongest reading since 
November 26th) bodes well for a continued ascent.  As for 
fundamental developments to explain the stock's strength, the 
news front for Stryker has been surprisingly quiet.  The most 
recent noteworthy story was an S&P debt rating upgrade in mid-
December.  In any case, Wall Street seems to agree with S&P's 
opinion that "Stryker's strong competitive positions in the 
orthopedics industry" have created a reliable cash flow.  We 
think SYK will garner more buying attention now that it's trading 
at new highs.  One note of caution, however - Competitor Zimmer 
Holdings (ZMH) sold off by nearly 3% today on no apparent news.  
While there is no indication that this weakness will rub off on 
Stryker, it's of enough concern to warrant placing an action 
point on this play.  Our entry trigger will be at $68.26, six 
cents above today's high.  In terms of upside targets, the p-n-f 
chart is currently showing a bullish vertical count of $81.  
We're going to initially target a move to the $75.00 area.  Our 
stop-loss, if this play is triggered, will be set at $65.00.  

BUY CALL JAN-65*SYK-AM OI=283 at $3.90 SL=2.00
BUY CALL JAN-70 SYK-AN OI=254 at $0.85 SL=0.00
BUY CALL FEB-65 SYK-BM OI= 18 at $5.20 SL=2.60
BUY CALL FEB-70 SYK-BM OI= 55 at $2.20 SL=1.10

Average Daily Volume = 760 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
*******************

CEPH $49.77 +1.10 (+0.75 for the week) There was no post-new 
year's hangover for the bulls.  Enthusiastic buying sent the 
NASDAQ sharply higher on Thursday.  This tech strength helped to 
propel the BTK.X biotech index to a 3.0% gain.  Shares of CEPH 
lagged the index and finished in the green by 2.2%.  
Interestingly, the intraday range was nearly identical to 
Tuesday's, with shares once again finding resistance at $50.00.  
We're pretty impressed with the fact that the bears were able to 
defend this level while the overall market was moving higher.  
Additional resistance looms overhead at the descending 200-dma 
($50.26).  Very conservative traders may want to use a stop 
slightly above that moving average.  Our stop-loss remains set at 
$52.64.  On Friday we'll be looking for CEPH to move back towards 
the relative low of $47.76.  New entries can be evaluated on a 
move below that level.

---

BSC $61.48  +2.08 (+1.70 for the week) Bear Stearns followed 
other financial stocks higher today on the broad market rally 
that made up much of the Dow's losses over the last couple of 
weeks.  Whether this was due to tax-loss sellers getting back 
into the market, or a genuine interest in beaten down stocks, 
there wasn't much red on the screen today.  BSC bounced through 
its 200-dma and 100-dma, as well as getting back through $60 
resistance, which had looked like a breakdown level on Tuesday.   
However, the 50-dma has acted as a more reliable ceiling on a 
closing basis recently and the stock has yet to break that level 
at $62.  Another rollover from this level could provide a short 
entry opportunity and traders can look for a move back under $60 
to initiate positions. If the stock breaks above that 50-dma, 
we'll think about closing the play, so traders should hold off on 
entry unless it breaks down again. The major indices are right up 
against resistance, as well, so the chance of a rollover from 
this level is still high after an oversold bounce.


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

IBM - Int'l Business Machines $80.57 +3.07 (+3.21 this week)

Company Summary:
International Business Machines uses advanced information
technology to provide customer solutions.  The company provides
value to its customers through a variety of solutions including
technologies, systems, products, services, software and
financing.  IBM's three hardware product segments are comprised
of Technology, Personal Systems and Enterprise Systems.  Other
major operations consist of a Global Services segment, a
Software segment, a Global Financing segment and an Enterprise
Investments segment.

Why We Like It:
Is it a one-day wonder or the beginning of a trend change?  That
was the question on a lot of traders' minds following the
strongly bullish first trading session of 2003.  Clearly,
Thursday's session was an abrupt departure from the anemic action
of the past two weeks, as breadth was solidly in favor of the
bulls as well.  IBM has been in a solid downtrend for the past
month, so clearly the bears are going to need to see more than a
sharp one-day gain before they stop selling into the rallies.
The stock did break above the month-long descending trendline
and the 200-dma ($77.63) at the open today, before marching
steadily higher to end right at the high of the day.  Not only
did IBM close at the high of the day, but it also closed back
over the 50-dma ($80.27) in the process.  As impressive as that
is, there is still some significant resistance near $82, extending
up to the $82.50 area.  Throw in the fact that the stock is still
on a PnF Sell signal and the DOW is right at major resistance
between 8600-8650, and it is clear that odds favor the bears right
here.  IBM is set to report earnings in about 2 weeks (January
16th) and based on the lack of positive news out of the
Technology sector, this event is going to loom as another obstacle
to any bullish aspirations for IBM over the near-term.  A
continuation of today's rally would set us up for the ideal entry
on a rollover near the $82 resistance level, which has turned
back each rally attempt since December 9th.  Keeping in mind that
each rally attempt has been turned back at a slightly lower level,
and connecting those highs, gives a resistance line at $80.70,
just above today's high.  A rollover near that level could also
provide a solid entry into the play.  Keep in mind that this is a
higher risk play, due to the fact that we are attempting to pick
a top following a powerful one-day rally.  We are placing our
initial stop at $83, the site of failed support from early
December.

BUY PUT JAN-85 IBM-MQ OI=17734 at $5.60 SL=3.50
BUY PUT JAN-80*IBM-MP OI=32798 at $2.75 SL=1.25

Average Daily Volume = 9.62 mln



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

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

Click here for the full details:  

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


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

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http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


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The Option Investor Newsletter                 Thursday 01-02-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: PUT - IBM
Traders Corner: Sit On Your Hands Until You Use Your Head
Traders Corner: Broadening Tops and Bottoms
Futures Corner: End of Day Management
Options 101: Be Your Own Guru

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

IBM - Int'l Business Machines $80.57 +3.07 (+3.21 this week)

Company Summary:
International Business Machines uses advanced information
technology to provide customer solutions.  The company provides
value to its customers through a variety of solutions including
technologies, systems, products, services, software and
financing.  IBM's three hardware product segments are comprised
of Technology, Personal Systems and Enterprise Systems.  Other
major operations consist of a Global Services segment, a
Software segment, a Global Financing segment and an Enterprise
Investments segment.

Why We Like It:
Is it a one-day wonder or the beginning of a trend change?  That
was the question on a lot of traders' minds following the
strongly bullish first trading session of 2003.  Clearly,
Thursday's session was an abrupt departure from the anemic action
of the past two weeks, as breadth was solidly in favor of the
bulls as well.  IBM has been in a solid downtrend for the past
month, so clearly the bears are going to need to see more than a
sharp one-day gain before they stop selling into the rallies.
The stock did break above the month-long descending trendline
and the 200-dma ($77.63) at the open today, before marching
steadily higher to end right at the high of the day.  Not only
did IBM close at the high of the day, but it also closed back
over the 50-dma ($80.27) in the process.  As impressive as that
is, there is still some significant resistance near $82, extending
up to the $82.50 area.  Throw in the fact that the stock is still
on a PnF Sell signal and the DOW is right at major resistance
between 8600-8650, and it is clear that odds favor the bears right
here.  IBM is set to report earnings in about 2 weeks (January
16th) and based on the lack of positive news out of the
Technology sector, this event is going to loom as another obstacle
to any bullish aspirations for IBM over the near-term.  A
continuation of today's rally would set us up for the ideal entry
on a rollover near the $82 resistance level, which has turned
back each rally attempt since December 9th.  Keeping in mind that
each rally attempt has been turned back at a slightly lower level,
and connecting those highs, gives a resistance line at $80.70,
just above today's high.  A rollover near that level could also
provide a solid entry into the play.  Keep in mind that this is a
higher risk play, due to the fact that we are attempting to pick
a top following a powerful one-day rally.  We are placing our
initial stop at $83, the site of failed support from early
December.

BUY PUT JAN-85 IBM-MQ OI=17734 at $5.60 SL=3.50
BUY PUT JAN-80*IBM-MP OI=32798 at $2.75 SL=1.25

Average Daily Volume = 9.62 mln



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

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

Click here for the full details:  

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


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

Sit On Your Hands Until You Use Your Head
By Mike Parnos, Investing With Attitude

I want to thank all the CPTI students who sent holiday wishes.  
It was, indeed, heartwarming to hear how you’ve benefited from 
our approach to trading.  Keep the faith and damn the torpedoes. 
. . 2003, we’re ready for you!

The rest of the world is making New Years resolutions.  I 
couldn’t help myself.  Here are a few of mine:
1.  I resolve to lose 30 pounds.
2.  I resolve to lose those 30 pounds again.  
Actually, I lost 120 pounds four years ago.  I got a divorce.  
She said she weighed 110, but I know differently.
3.  I resolve to maintain my trading discipline and not 
compromise – no matter how tempting it is to “throw the dice.”  
4.  I resolve to do the research and diversify my positions.  If 
I diversified my positions earlier, I might still be married . . 
.
5.  I resolve to trade within my financial limitations and to 
avoid picking a direction whenever possible (trading, not 
driving). 
6.  I resolve to never take a sleeping pill and Ex-lax at the 
same time.
7.  I resolve to trade indexes instead of stocks and never sell 
unhedged options.
8.  I resolve to never say, “Yes, dear” without hearing the 
question.
9.  I resolve to keep an open mind, listen to new ideas, and 
strive to learn something new every day.
10.  I resolve to never order anchovies on my pizza. (that’s an 
easy one)
11.  I resolve to be kind to my fellow man (and women) unless 
they give me good reason not to.
12.  I resolve not to get homesick for New York City whenever I 
see garbage.
13.  I resolve to not spend money until I make it and to live 
within my means.
14.  I resolve to share knowledge.  There is no greater gift to 
give.
15.  And last, but not least, I resolve not to let my OI 
subscription expire.

I’d love to hear some of your resolutions.  Don’t worry, I won’t 
hold you accountable – and I promise they won’t end up in next 
week’s column.  Send them along.
____________________________________________________________

Now, let’s check out some questions that traveled through 
cyberspace and somehow ended up in my computer.  I don’t care 
what anyone says, I still think it’s magic.
____________________________________________________________

Mike,
I got into the BBH $95/$100 bear call last week for $1.00.  The 
other half of the condor didn't execute last week so, this 
morning, I entered an $.80 spread order for the $75/$80 bull put 
portion, but I ended up legging into it for$.60 thinking I 
cancelled the spread order.  The spread order executed and now I 
have double the size of the $75/$80 bull put spread.

My question is should I get out at a loss, or should I put on a 
$90/$95 bear call spread to make another condor?  Please advise 
as I have been doing well with these strategies and I'm trying to 
avoid the dumb mistakes I used to make with daytrading, but I'm 
feeling some of those impulses come back.

Response:
Sounds like you’re in desperate need of a 12-step program.  When 
you start feeling the urge to trade, take those 12 steps to the 
refrigerator and back to the couch until it passes
 
So you have two $80/$75 bull put spreads instead of one?  You 
have a few choices:
1.  If you're comfortable with the straight bull put spread 
position, you could just hold it.
2.  You could put on an additional bear call spread -- giving you 
two complete condors.  However, I wouldn’t recommend the $90/$95 
bear call spread.  That’s a little too close to the trading price 
for comfort.  The $95/$100 is offering only $.10-$.15 and is not 
worth the exposure.
3.  You could close out the second bull put spread and accept the 
small loss on it -- and learn the relatively inexpensive lesson 
to -- keep track of your outstanding orders and take nothing for 
granted.
Today (Thursday), the BBH has bounced up.  You may be able to 
close out that extra bull put spread for no loss at all.  Even if 
you do escape without a loss, take heed of the lesson.  

It's your call.  BBH looks good, but you never know.  That extra 
bull put spread is using up margin $$$.  Do you need them for 
something else?  An additional bear call spread would use up even 
more.

Put the daytrader out of his misery.  Before you trade, first: 
sit on your hands!  You can't get into trouble that way.  Do all 
the thinking BEFORE you do the clicking!  And think with your big 
head, NOT your little one.  That applies to life as well as 
trading.  You’ll avoid countless problems, not the least of which 
is 18 years of child support!  
____________________________________________________________

Mike,
Enjoy your column.  I have been a long-time believer in selling 
short-term calls against leap call positions in the QQQ, so I was 
intrigued by adding the put portion to it.  I have two questions.

1.  With the QQQ hanging around $25, why not sell the $23 puts 
and the $27 calls in order to generate a higher return, or at 
least the $22s and $28s. You could obtain .75 to a $1.00 on each 
side by doing this.  I realize it is possible one of them may end 
up in the money but the other is certainly going to expire 
worthless.  If one of them ends in the money you could always buy 
it back or roll it out to the next month.

2.  Why not sell Januarys and every other month instead of 
skipping a month and selling Februarys?

I like the strategy, just trying to find a way to milk it for a 
little more without screwing it up.  Thanks.

Response:
Glad you enjoy the column.  I appreciate any and all suggestions 
on how to improve our strategies.  I love to learn and it shows 
just how creative CPTI students are becoming.

1.  What I try to create are very safe plays for CPTI students 
that require very little attention.  If we sold near term puts 
and calls closer to where the QQQs are trading, we would 
certainly generate additional premium.  However, if the QQQs make 
their somewhat-predictable 3+ point move, it would require more 
adjustments than many readers are comfortable with.   

I recently realized just how many readers actually trade our 
supposedly hypothetical CPTI portfolio.  Although they are 
represented as being ideas or starting points for people to look 
for their own trades, hundreds of CPTI students are apparently 
trading them with real money.  Although we've been very 
successful over the last 3-4 months, since I started this 
portfolio, I'd feel terrible if people lost any significant 
amount of money based on these trades.  That's why I try to make 
them as safe as possible.

2.  At the time, February puts and calls had decent premiums.  
January did not.  After all, we're selling the puts and calls 
about eight points out of the money.  

More sophisticated investors could conceivably leg into the near 
term sales of the puts and calls.  When the QQQs dip, then they 
could sell the $21 puts.  When the QQQs bounce back, they can 
sell the $29 calls.  It’s possible to improve the returns using 
this “tweak.”  However, if you sell one side and don’t get the 
bounce back for quite a while, you’re likely not accomplishing 
anything and possibly even hurting yourself.  The object is to 
get a respectable return and to K.I.S.S.
______________________________________________________________

CPTI PORTFOLIO UPDATE – As Of Thursday’s Close

BBH Iron Condor – Currently trading at $87.19.
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 $77.82
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.  

A few days ago we were concerned that gold might be moving up too 
quickly and that we would have to make an adjustment to our 
spread.  However, we got the retracement I thought might happen, 
and we’re in a comfortable place once again.  All the planets are 
aligned and so are our deltas.  Remember, the time to close out 
the spread is when the June $80 call no longer has a delta 
advantage.  We’ll still keep a close eye on it.

QQQ ITM Strangle  – Currently trading at $25.40.
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 and 
collecting a chunk of money every few months.
____________________________________________________________

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

Broadening Tops and Bottoms
By Leigh Stevens

I’ve mentioned in prior Trader’s Corner articles on technical 
analysis the work of Dr. Andrew Lo, an MIT professor and 
researcher in the area of the financial markets.  He and a group 
of MIT folks working under him, made a comprehensive study of 
whether technical price “patterns” had future predictive value – 
assuming you could define the characteristics of a chart pattern 
well enough to set up the conditions for a computer search of 
historical stock market data (for individual stocks), the 
resulting outcomes could be studied as to whether the trend 
subsequently went in the direction predicted by that pattern 
according to mainstream or “conventional” technical analysis.  

Of the chart patterns Dr. Lo studied, he found that there were 5 
such technical patterns that yielded “statistically significant 
test results”; i.e., they had a level of predictive value that 
was greater than any random chance occurrence.  

I have written about 4 of the 5 such patterns with his “proven” 
predictive outcomes in prior Trader’s Corner articles. They are:

1. The Head & Shoulders top or bottom pattern (6/16/02) – see
http://www.OptionInvestor.com/traderscorner/061602_1.asp

2. Double tops (10/17/02) - see
http://www.OptionInvestor.com/traderscorner/101702_2.asp

3. The Rectangle Tops AND 4. Rectangle Bottoms (11/10/02) – see 
http://www.OptionInvestor.com/traderscorner/111002_2.asp

The 5th. pattern on Dr. Lo’s list is described here - the 
Broadening BOTTOM formation. Now, there are broadening bottoms 
AND broadening tops but the bottom formation is the one that this 
MIT group found to have a good predictive outcome – the bottom 
pattern has a sufficient rate of success in predicting an 
eventual reversal of the trend from down/sideways to UP.

The broadening formation is often a reversal pattern because, 
unlike the compression of the triangle occurring when buyers and 
sellers get more and more finely matched, the broadening 
formation is “decompression” in a way. When price volatility 
increases as is the case when you have a series of higher highs 
and lower lows, it is because buyers and sellers of a stock get 
less certain what the correct valuation (price) of a stock or 
index should be. This dynamic more often accompanies a reversal 
in the direction of the trend.   

One peculiarity about a “broadening” formation – it is the SAME 
pattern in either instance. It can be labeled an expected 
broadening BOTTOM when the trend that preceded the pattern is 
DOWN and the and a possible broadening TOP when the preceding 
trend was UP.  The MIT study found the pattern where the prior 
trend was down to be the one that you could trade off from. Here 
of course a picture is worth a 1000 more words – 



 

The broadening bottom is where the price trend that preceded the 
pattern is downward and a sideways series of price swings develop 
that form a series of higher (minor) upswing highs and lower 
downswing lows – meaning that there is one upward and one 
downward sloping trendline.  There should be at least 2-3 prices 
swings that result in the 2-3 lows and highs that allow drawing 
of the trendlines.  The subsequent outline to this pattern is 
also triangular in shape but that shape takes the form of a 
MEGAPHONE.  The subsequent breakout is upward as can be seen 
above in the chart of KLAC in 1998. 

A breakout from the broadening bottom exists when prices advance 
about the highest high in the formation or “within” the 
megaphone. The measuring implication for the height of the next 
leg is the same regardless of whether the breakout direction is 
up or down.  The measuring implication for a broadening bottom is 
for a “minimum” objective equal to the height of the formation at 
its widest point added to the “breakout price” – the breakout 
price is the price point at which prices advance above through 
the upper trendline after it’s formed by 2-3 points; 3 offering 
better definition.  

The price objective rule of thumb for broadening formations in 
general is not as reliable as for the head and shoulders or 
regular triangle patterns.  If the breakout is to the upside, 
when any subsequent gain after the breakout, is into the 20-30 
percent range, exit on a move to just below the closest 
appropriate previous downswing low.  The first goal becomes one 
of trying to “lock in” any such gain – I mention 20% as some 
studies suggest this is an “average” gain after such a “breakout.  

While the lower line of the broadening bottom is usually formed 
by LOWER relative lows, I am struck by the similarity of the 
pattern being traced out by the XAU or the Philly Gold & Silver 
Index as seen below – 



   

While there is a need to clear its weekly down trendline around 
80 and to exceed the prior weekly closing high at 86, it appears 
to me that XAU is going to do this – 86 is the “breakout” point.  
The pattern outlined above is properly called a triangle (reverse 
symmetrical) and which also has bullish implications. Time will 
tell on a next up leg in Gold stocks in general although there a 
couple (e.g., GOLD) in runaway bull moves already. 

I was unable find any recent bullish broadening bottoms in 
general except in some individual gold and oil stocks. Broadening 
tops are another story as I will show shortly as, of course, at 
the bull market there were many. 

As I said there is little to differentiate the actual broadening 
formation in the top or bottom varieties from one another EXCEPT 
for the direction of the preceding trend – the preceding trend, 
before this series of higher highs and lows, is down in the case 
of the broadening bottom and up in the case of the broadening 
top.  Even this categorization is not so easy to determine as 
what defines whether the item being charted is in an uptrend or 
downtrend?  

If not readily apparent from the shape chart’s price pattern or 
analysis of any relevant trendlines and other such visual marking 
clues, we can define the trend direction by whether prices are 
trading below or above the average of the last 200 days closing 
price; i.e., a 200-day “moving average as it will be described 
later.   

The broadening TOP is composed of exactly the same upward sloping 
trendline composed of higher upswing highs, coupled with a down 
sloping trendline connecting lower downswing lows, resulting in 
the same “megaphone” shape outline – when the trend that precedes 
this formation is up, assume that the resolution of the pattern 
will be a breakout through the lower line as in the charts below 
– the first (JNPR) is one from my book (Essential Technical 
Analysis) and the other (INTC) is just one that I went looking 
for among some of the bigger bellwether tech stocks –



  

The breakout direction is the most important thing.  We have to 
be prepared for a pattern “failure” of the broadening top as 
indicative of an upcoming downside reversal. A “pattern failure” 
is when the outcome reverses from the expected or usual - in this 
case (the chart above) it would have been if the pattern turned 
out to have led to the same result as a continuation formation 
and the breakout was to the upside in the direction of the prior 
trend. 

The “breakdown” point in the broadening top is a move to below 
the lowest low of the megaphone shaped pattern of higher highs 
and lower lows such as in Intel (in 2000) shown below – 



  

There is more price volatility than usual being shown in a 
broadening formation as its not common for big price swings in 
both directions – higher highs and lower lows.  The direction of 
a next price leg after such increased volatility is never going 
to be completely predictable.  

The need is to watch carefully for a breakout at either trendline 
– the price objective on a breakout either way is the same and is 
as suggested by a measurement of the height of the formation 
added to or subtracted from the breakout depending on the 
direction.  

The broadening pattern is not as common as other types of 
reversal patterns such as double tops. And, as the work done by 
Dr. Lo would suggest – if the trend preceding the broadening 
formation is up, it’s more likely to signal a significant top, as 
is evidenced by INTC above.  The stock has dipped into the $13 
area so the broadening top 2 years back was a major one. Now 
maybe we’ll see some 2003 bring some broadening bottoms. Stay 
tuned!


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

End of Day Management
By John Seckinger
jseckinger@OptionInvestor.com

When should a futures trader take a position home?  

I wish, as always, that there was just one indicator that 
answered this sometimes-puzzling question.  If you are a day 
trader by profession, then you already have your answer.  I like 
to simply call myself a trader; one that just tries to take out 
what the market gives me.  If it is only 2 ES points, fine.  I 
know I cannot force the market to give me anymore than it wants 
to.  However, if I expect 10 points and only see 5 right before 
the close, do I let the trade ride? It all depends.

The date in question:  January 2, 2003.  Heading into this 
session, we have the following levels to look at:  

ES03H

Support        Resistance        Pivot    

871.00         884.00            876.00
863.00         889.00

Plus, we had some other levels to contend with as outlined in the 
last futures wrap:  

Chart of E-mini S&P 500, 10-minute


 

Now let us take a look to see how these levels worked during 
trading on Thursday.  For one, the market opened above the pivot 
and during the first five-minutes eclipsed both R1 and R2.  The 
pullback then only brought prices back to R1 (884) before the ISM 
number at 10:00 a.m.  Also notice how the 78.6% level was broken 
but that the 70.7% area was never hit.  Bear trap?  Evidently it 
was, but remember to look at a bullish percent chart before 
clearly coming to that conclusion.  Go to www.stockcharts.com and 
use the ticker BPSPX.  

Bullish Percent of SPX comes in at 58% (Recent High at 66%, Last 
Significant Low at 20%).  With that said, I would worry more 
above bull traps than bear traps going forward.  Note:  On a P&F 
chart, the contact did give a buy signal with a price objective 
of 980.  A sell signal would be given on a move to 865.  

It was also interesting how the 127.2% retracement was cleared 
and the ES contract did hit the 161.8% retracement at 905 (since
ES03H doesn’t trade at 905.05, I always round towards the nearest 
quarter point).  

Chart of ES03H, 5-minute


 

At the close, the ES contract finished above the R2 designated 
area for Thursday (889).  Does this mean take the position home?  
Not so fast.  First I get last week’s range in ES (903.25 to 
871.25) and calculate my pivot and R1, R2, S1, S2 levels.  I get 
R1 of 892.91 (cleared) and R2 of 914.08.  So, current prices are 
above R1 but not R2 and there is some risk back down to R1.  

I then look at a daily chart.  The mid-point of Bollinger Band is at 
895 and the ADX is currently at 16.28.  Still some risk to the 
downside, and the ADX is signaling odds of a range trade more than 
anything else.  I like to use the Average Directional Movement Index 
(ADX) oscillator.  It measures the degree of trend or direction in the 
market. A rising ADX line suggests the presence of a strong trend. A 
falling ADX line suggests the presence of a trading market and 
the absence of a trend.  A rising ADX line favors moving 
averages; a falling ADX favors oscillators.  The key levels are 
40 and 20.  If the ADX on a daily moves from below 20 to close 
above 20, expect downward momentum to continue.  

Chart of E-mini S&P 500, Daily 


 

Let us look at what the levels for tomorrow are:

ES03H

Support              Resistance                 Pivot    

890.00               917.34                     900.00
872.75               927.17

Ok, now let us try to assess risk to holding a position:

The contract closes at 907.50 and could fall to 900 or even back 
to 892 (weekly level which matches up well with S1 for Friday).  
So, if I do keep it overnight, risk is to lose 7.50 points.  If I 
was long from 900 or above, I would then close the position on 
the close and forget about it.  This is one of my rules.  

What is the upside objective:  The 914 (weekly) to 917 level 
(daily).  This gives me about 7 more points of upside potential.  
Hmmm, only a 1:1 risk/reward scenario.  No, definitely not worth 
risking profits and going home either long or short.  

For tomorrow (as noted in futures wrap), look for bids to develop 
from the 900 level.  If 900 is cleared and prices fall back into 
the regression channel, it might make sense to sell short with a 
stop back above 900.  I would also look for selling from 915 to 
918.  

Chart of ES03H, 60-minute


 

Where could the ES contract close tomorrow for me to think about 
holding a position over the weekend?  First look at this week’s 
potential range (using M-H levels) and then calculate R2, R1, S2, 
and S1 based on a theoretical settlement.  If the range was 
909.75 to 868 and the ES closed at 900, then risk downside is to 
892 and upside objective 917 and then 934.  I like those odds.  
So, a close at 900 could make sense to go home long.  A close 890 
or below could make sense to go home short.  During the day 
towards the close, calculate the levels and evaluate risk.  

Ask away,

John Seckinger
jseckinger@OptionInvestor.com


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

Be Your Own Guru
Buzz Lynn
buzz@OptionInvestor.com

Well, in case nobody noticed, U.S. equity markets "finally" 
suffered their third straight declining year since the Great 
Depression.  Statistically, that wasn't supposed to happen.  
Everybody knows markets "never" decline for three years in a row.  

Surprise!  We just made history!  That is if we judge history 
since the end of World War II.  I am always fascinated by peoples' 
egocentricity manifested in historical shortsightedness.  

(Mark Phillips wrote an excellent article on the "since WWII" 
blathering of analysts and the financial media that talks about 
the fallacy of statistical history.  You can find it here: 
http://www.OptionInvestor.com/traderscorner/tc_123002_1.asp)

I hate to keep harping on this, but for the sake of the new 
readers I'll repeat it again.  We are in a bear market - a bear 
market fostered by the greatest inflationist bull market the world 
has ever seen.  U.S markets have witnessed the most speculative 
bubble in history; greater than the South Seas Bubble; greater 
than the Tulip Bubble.  We're not just talking about since WWI, 
the Great Depression, or "turn of the last century".  We're 
talking over the last nearly 400 years of economic history.

But one thing is for sure.  EVERY bubble pops.  And what typically 
accompanies the popping is a correction of equal magnitude to that 
of the bubble in the first place.  In other words, with the 
spectacular bull will likely result a spectacular bear.  

I personally believe that the bear has yet to run its course.  
Running its course would include the return of significant 
dividend and earnings yields.  Bear market bottoms have happened 
in the past when average dividend yields hit 6-7% and P/E ratios 
are single digits of value.  With the Dow's dividend yielding less 
2% and real P/E ratios well over 30, we aint there yet.  That is 
why it is so incredible to me that all the gurus are predominantly 
bullish.  Abbey Joseph Cohen sees a Dow at 10,800 by year-end and 
Ed Yardeni sees a Dow of 10,500.

Based on what?  Don't get me wrong, I'm no guru either and don't 
ever want to referred to as such.  They don't exist because 
eventually, they are wrong.  Such is the case, I believe with 
"Gurus de jour" trotted out on the covers of Barron's, or paraded 
on the guest interviews during financial media circus hour.  I 
shake my head in amazement as Rukeyser and his elves predict an 
upturn in the market this year after being dead wrong over the 
last three years.  

Again, based on what?  Mostly, the answer is based on the theory 
that lightning never strikes twice in the same place.  Never is a 
pretty strong word.  While it isn't probable that lightning will 
strike the same place twice, it is possible.  It is also possible 
that the markets could be down in 2003 for the fourth year in a 
row.

The trouble with analysts and gurus is that most believe we will 
not suffer a fourth declining year because, statistically we 
haven't done it since the 1929-1932 crash.  With thousands of 
years of economic history and a score of bubbles to review that 
always ended in correction to boot, isn't looking back to just 
'29-'32 a bit short sighted?  "History" for most people is that 
which happened in their lifetimes.  Thus if we haven't seen it in 
our lifetimes, we tend to think of it as "improbable".  But 
"improbable" still happens.  

Thus, when I hear most analysts predicting a recovery in equities 
for 2003 based on recent (since The Great Depression) history that 
says markets never suffer three down years let alone a fourth, I 
feel pretty certain in a contrarian way that they will be wrong, 
surprised and humiliated for, well, their lack of humility

I always hearken back to the quotes of great financial minds and 
timeless principles that never go out of style.  As Scott McNeely 
of Sun Micro noted back in 2000, "If they didn't see the cliff 
coming, how do they know when they've hit the bottom?"  The short 
and simple answer is that they don't know.  

Let me offer my also simple thoughts on when they will know.  
They'll know when CNBC is off the air for lack of viewers; when 
headlines reading, "Investors stayed the course" are replaced by, 
"Equities dead, never to return again"; when investors pull the 
plug and wouldn't want to touch stocks with a 10-foot pole, much 
the same way in which nobody would touch gold with that same pole 
last year; when cash on cash returns (dividends) are compelling 
compared to anything else available.

Until then, the hopeful will suffer at the hands of "The Great 
Humiliator".  What is TGH?  It's a description of the market's job 
as coined by Ken Fisher, money manager and regular Forbes 
columnist - to humiliate as many people as possible in the 
shortest amount of time.  Simply stated, the majority is often 
wrong and the markets will see to that since not everyone can be 
right at the same time.  

Summarized:  Place your bets on the contrarian.  Expect the herd 
to be wrong.  Be your own guru by doing what nobody else is doing.

There was no Santa Claus Rally, there was no late 2002 recovery, 
nor was there recovery in 2001 or 2000.  I wonder how those who 
dogmatically made those predictions can keep making them in a 
confirmed secular bear market.  I marvel at their consistent 
wrongness.  What the analysts really lack is the ability to do 
good analysis.  They evade the reality of an inflationist Fed, the 
popping of the equity bubble, the rising of the housing bubble, 
the heavily debt-burdened consumer, the fiat dollar, worldwide 
production overcapacity, the Chinese production powerhouse, and 
the shrinking dollar.  Instead, they rely on a statistic to 
replace the analysis.

Maybe they mean well (or maybe they are just interested in 
management fees and commissions earned from asset gathering), but 
how can we trust the judgment of consistently wrong people?  
Whether on purpose or accidental, we must conclude their judgment 
is wrong and seek to avoid making the same mistakes that they do.  

Folks, if we are seeking expert advice to help us buy fine 
gemstones, we don't give our money to a brick maker!

OK, I'll get off the soapbox, which is a good thing because I go 
on about this for a novels worth of reading.  But it also means 
I'm our of writing space for today, and I had originally intended 
to offer my silly forecasts for 2003.  They are so absurd, nobody 
would believe them anyway!

Alright, well, if we want to hear the absurd, I'll start that 
series in this column on Thursday of next week.  We'll get to what 
Fundamentals Guy thinks of stocks, bonds, commodities, inflation, 
the dollar, and how to profit from a huge wave of change born of 
financial to hard asset conversion.

Happy New Year and best wishes for a prosperous 2003 to each and 
every one of you.  Think independently and be your own guru!

Buzz


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Annual Renewal Special
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Click here for the full details:  

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