Option Investor

Daily Newsletter, Sunday, 01/05/2003

Printer friendly version
The Option Investor Newsletter                   Sunday 01-05-2003
Copyright 2003, All rights reserved.                        1 of 5
Redistribution in any form strictly prohibited.

Entire newsletter best viewed in COURIER 10 font for alignment

In Section One:

Wrap: Let The Trend Begin
Futures Market: Remembering Thursday
Index Trader Wrap: NEW YEAR BANG
Editor’s Plays: War is Hell
Market Sentiment: Hanging On
Ask the Analyst: A no nonsense approach to trend
Coming Events: Earnings, Splits, Economic Events

Updated on the site tonight:
Swing Trade Game Plan: Standing Still

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
       WE 01-03        WE 12-27        WE 12-20        WE 12-15
DOW     8601.69 +297.91 8303.78 -208.22 8512.01 + 78.16 -211.92
Nasdaq  1387.08 + 38.62 1348.46 - 14.59 1363.05 +  0.63 - 60.02
S&P-100  459.20 + 16.14  443.06 - 12.40  455.46 +  3.65 - 12.61
S&P-500  908.59 + 33.17  875.42 - 20.34  895.76 +  6.28 - 22.75
W5000   8593.22 +287.59 8305.63 -169.60 8475.23 + 48.97 -202.90
RUT      390.31 +  6.15  384.16 -  2.72  386.88 -  1.10 -  8.74
TRAN    2364.94 + 73.28 2291.66 - 32.56 2324.22 +  5.75 - 70.34
VIX       27.98 -  6.17   34.15 +  2.68   31.47 -  0.65 -  0.56
VXN       45.71 -  1.00   46.71 -  1.80   48.51 -  2.41 -  1.36
TRIN       1.32            3.60            0.66            1.34
Put/Call   0.76            0.94            0.88            0.87

Let The Trend Begin
by Jim Brown

Fortunately Friday was a disposable day because nothing happened.
Trading was in a very narrow range trapped between bullishness
and profit taking. The eventual draw with the Dow and Nasdaq both
closing within six points of zero was on very low volume. No real
conclusions about market direction should be drawn from the 
lackluster results. Monday, however will be a different story.

Dow Chart – Daily


Nasdaq Chart – Daily


Economically Friday was also slow with Construction Spending the
only material news. November spending rose +0.3%, which was less 
than the +0.4% analysts had expected. This was substantially less 
than the +1.0% from October. It was the third consecutive month
that spending increased but it is increasing very slowly. The
residential construction component rose +0.9% in November and
was the largest component increase. Nonresidential spending is
still very weak. 

Another weak indicator was the ECRI Weekly Leading Index. This
index fell to 117.6 and for the first time since Nov-15th it was
under 118. The index had been flat for five weeks and this down
turn could be an indication that the recovery is weakening. New
mortgage applications fell by -8%. Initial jobless claims grew
with the four week average now well over 400,000. With the six
month growth rate falling again it could be pointing to another
recessionary dip in the 1Q. 

The automakers posted both good and bad news today. GM had its
best December since 1979 with a +36% increase in sales. Ford
posted a +8% increase and DCX +1% overall and +13% for SUVs. 
That was the good news. The bad news was the consumer addiction
to incentives. The incentive war that began after 9/11 has
produced a consumer that is demanding more and stronger reasons
why they should buy another expensive new car. The automakers
are stuck. If they terminate the incentives sales will plummet. 
If they continue the incentives they lose profits and add to 
the current addiction cycle. Despite the positive sales reports
the majors all finished in negative territory as investors 
decided there was more trouble ahead.  

The earnings warning from Home Depot rattled the home products
sector with HD losing -3.50 and LOW dropping -2.43. While that
was traumatic to holders of those stocks it was a dose of reality
that all investors did not want to hear. Slowing home improvement
sales along with slowing mortgage applications means that the
consumer may have completed the cocooning phase and is ready to
sit out the next economic cycle. 

Many of those sitting out the next cycle could be doing so without
jobs. The unemployment rate is rising and mass layoff rates are
increasing but it appears the government does not want you to 
know it. While the flag waving for the economy is in full swing
the reporting of mass layoffs has been stopped. Could it be that
the administration is trying to restrict information that could
be contrary to the party line? I am not going to try and paint
a conspiracy here but the funding for the mass layoff report was
terminated and the November report will be the last one. A 
reader forwarded me this link from the San Francisco Chronicle.  

There was another profit warning on Friday that drew my interest.
Radio Shack (RSH) warned that slower sales and lower margins on
cell phones and other key products would impact results. The 
keyword here is cell phones. This has been a key product in the
minimal chip sector growth and a key growth sector for the last
couple years. Bigger, better, faster phones were literally 
jumping off shelves if we believe the hype. The majority of the
Radio Shack problem came from slowing sales of the Sprint PCS
phones. Those fully featured, Internet capable models hyped on
TV with the stenciled words on phone users foreheads. There are
concerns that inventories of cell phones could be backing up 
in the sales channel and we could be seeing another round of 
warnings from phone makers ahead. 

Want another indication things are tough in retail? McDonalds
scrapped plans for a major networking initiative to network all
its restaurants, headquarters and vendors. The plan called
"Innovate" was scrapped in order to focus on near term benefits
and store operations. Are you ready for this? There was a rumor
after the close that they were going to rent DVDs to customers
through a joint venture similar to NetFlix for 99 cents a day 
to improve customer traffic. No kidding. Evidently the 
Blockbuster profit warning did not make it through the network
to McDonalds management. 

After the close on Friday it was announced that Merrill Lynch
analyst Henry Blodget was about to be charged for bogus calls
on Internet stocks. Blodget was notified by the NASD that they
were going to issue a Wells Notice, which gives him a chance to
contest the charges before they are filed. The complaint was
that he skewed his research to help win investment banking
business for his firm. Get your checkbook out Henry. 

The key question for investors this weekend is what does the
future hold? The debate over direction could take months but
the market tends to pick its own direction regardless of how
many analysts agree. There is almost a unanimous agreement
that there will be an economic recovery in the 2H of 2003 and
the market will gain between 17% and 22% by year end. (9750-
10200) Corporate earnings are expected to increase by +15% to
+17% in 2003. Unfortunately this is exactly what the same
analysts expected last year. In fact the majority of analysts
are almost always WRONG. The amount of bullishness or bearishness
is almost an exact opposite of the actual market results. As
I reported last week only three analysts of the 65 surveyed
by Business week expect the Dow to close below 8500 for 2003. 

The rationale for a rebound is strong. The Fed is in overdrive
and printing money at a blistering pace. The president will 
announce even more fiscal stimulus next week to apply even 
more juice to the economy. There is a pent up tech replacement
cycle just waiting to explode. The economy is about to emerge
from its soft patch. Corporate profits are expected to be +12%
in 4Q-2002 alone. Productivity is soaring. The economy is 
awash in liquidity, war is good for the economy and the third 
year of a presidents term is always bullish. Shucks, let's 
all buy calls. NOT! Does anybody see the problem with this 
scenario? It is predicated on the perfect outcome. In fact 
all this bullishness may already be priced into the market.  

The problems are numerous. The war is not a given. I think
the possibility of a long, messy and globally unpopular 
engagement is strong. When troops start coming home in body
bags the war sentiment could evaporate in an instant. With
no weapons of mass destruction yet found it appears Saddam
has prepared well and the Jan-27th U.N. meeting could be a
challenge for the U.S. If Bush elects to force the issue it
could get ugly. Even dragging the start of the war out by a
couple months will depress the markets farther because of 
the negative ramifications. 

The Fed is printing money 24/7 to "reflate" the economy. They
may reflate the economy but kill the dollar in the world markets. 
That would bring us full circle and back to a weak economy
again. A weak dollar means a strong Euro and problems for
our trading partners around the world. Should the economy 
actually begin to spark the Fed is already poised to raise 
rates again. We are in that precarious point where the Fed 
is holding down the throttle of the economy as it gains 
speed towards the next peak. However, it has to be alert 
for that approaching peak and reduce speed in just the 
right increments to insure we don't lose momentum and slide 
backwards or hit the top too fast and race off the cliff 
on the other side. When that first rate hike occurs the 
housing market will screech to a halt and with it the 
feeder sectors of building materials and home furnishings.

While analysts tell us that the U.S. economy is beginning
to improve they also tell us that Europe and Japan are
beginning to weaken. Along with the consumer we have
depended on Europe and Asia to buy our products and keep
our factories rolling. If those countries are now sagging
then the purchases from the U.S. could slow just as the
U.S. started to move again. This could be another blow to 
the potential recovery.  

Corporate and consumer debt is at an all time high with
foreclosures at a 30 year high and auto repossessions soaring. 
The consumer has been the backbone of the economy but with
rising unemployment we saw the weakness start to appear 
with the holiday shopping. The Home Depot news is just 
another clue that things are not rosy. The oil crisis is
adding a monthly $7 billion tax on the consumer for every
$1 over $25 a barrel. Oil soared to a two year high of
$33.08 on Friday. Venezuela is spiraling downward and is
threatening to destabilize adjoining countries. It could 
be months before oil begins to flow again. 

If the inspectors do not find the weapons in Iraq and the
U.S. decides to attack anyway or force the issue with the
U.N. it is entirely possible that oil shipments will slow
from the OPEC members friendly to Saddam. There is huge
uncertainty brewing with the Iraq situation and the outcome
and timetable is far from clear. 

Bush will announce his stimulus package on Tuesday but the 
details have already been floated. Guess what? The stimulus
is already priced into the market. Once the November election
was decided the markets roared off from the November low of
8300 to the December 2nd high of 9043. That nearly +10% gain
was the accelerated tax cuts, the change in taxes on dividends
and a favorable policy towards business and health care being
priced in. 

Everything hinges on the technology replacement cycle or
so we keep hearing. Unfortunately as long as employers keep
cutting employees they don't need to upgrade. The good
equipment is claimed by the surviving employees and the 
old stuff is retired. There is another problem with the cycle
and that is the selective upgrade process I spoke about earlier
this week. Small purchase orders, minimum quantities and no
rush to get it done. There is also the price problem. There
is so much capacity in the system that prices are minimal. 
I upgraded a 300 MHZ, 256MB Pentium-II this week to a 2.0GHZ, 
1GB P4 for $346 including shipping. I paid nearly $2,000 for 
the original PII. The PC is more of a commodity today than
ever and nobody is going to get rich selling them. Where
are the tech profits going to come from? The Internet has
leveled the playing field so completely that the giants are
stuck competing with the ThreeStoogesPCSales.com's of the 
world. When a P4 is a P4 regardless of who you buy from 
there is no reason to pay double or triple from Dell. 
Productivity is soaring. Yes, it has to because corporations
are laying off more people to cut costs and produce those
all important earnings gains. The problem with this picture
is that the earnings gains are not repeatable. Not unless
you cut more people each quarter. Until companies actually
begin spending more money on goods and services there will
not be any real earnings gains. The Goldman Sachs survey
this week predicted a drop in spending for 2003 not a gain. 
This means the expectations for +15% to +17% gain in 
corporate profits could be just smoke, again. 

Almost everyone agrees that the economy hit a wall in the 
4Q-2002 and the 3Q recovery stalled. The Fed reacted sharply
but earnings estimates for the 4Q are still at the inflated
3Q estimates of +11%. Several (bearish) analysts are predicting
they will actually come in at 7% to 9%. If so this will start
another wave of downgrades for 2003 and stock prices will
fall with them. 

This is a real challenge for investors. 98% of analysts are
predicting a major gain for the markets in 2003. It could 
happen. If the stars line up correctly and all the events
fall into place just right, it could happen. Unfortunately
the markets are already priced for perfection. Unless
perfection happens we could be in for trouble. I have
trouble with this analysis. I want to be bullish for 2003. 
I want to cling to the fact that there have not been four
down years since 1929-1932 in the Dow. I want to cling to 
the fact that since 1939 the 3rd year of a presidential
term has been bullish. I want to believe that Abbey Cohen's
prediction of 10,800 Dow close for 2003 is possible. The 
problem is what do I base it on?

If I base it on fundamentals I lose because there are none. 
Every indicator of corporate profits keeps shrinking. 
Even Abbey is only expecting an 8% growth in profits for
all of 2003. I want to base it on technical analysis but 
the charts do not support it. If I depend on the charts 
completely I could easily see a retest of prior lows with 
a rebound back to 9000 by year end. That would be a +25% 
rebound but only a +8% gain for the year. However, it 
could be the start of an uptrend and a bullish 3rd year 
of the presidents term. Yes, statistics have a strange 
way of asserting themselves. 

Since I have no divine insight into the real fate of the 
markets over the next year I have reached my own conclusion. 
There will be a lot of volatility as bulls and bears do 
battle. I don't know which side will win but I am focused
on being a capitalist and making money regardless of 
direction. Weapons manufacturers don't pick sides in war, 
they just sell weapons. My New Years resolution is to not
choose sides. Trade in the direction of the trend and hope
for big moves. 2003 will be a stock pickers market but if
you only play the upside you could miss half the fun. 

We are kicking off 2003 with our own version of predict
the Dow. We are going to give away a total of $2003 to the
three readers who come closest to the Dow close for 2003. 
Grab a chart and polish up that crystal ball then click below.
The deadline for entries is 9:AM ET on Monday.

If you have not taken advantage of the end of year renewal
special then time is running out. There are only eight days
remaining to take advantage of the special and lock in the
lowest renewal price of the year plus a pile of bonuses. Do
it now! Click here: https://secure.sungrp.com/03renewal/

Enter Very Passively, Exit Very Aggressively!

Jim Brown

"The safest way to double your money is to fold over once 
and put it in your pocket." - Kin Hubbard

Annual Renewal Special

There are only eight days left to take advantage of the 
annual renewal special. Multiple bonus options gives 
everyone something to cheer about. We added the FOMC 
meeting dates to the mouse pads this year. There are also 
two videos with Jim, Jeff and Buzz and seven books by 
leading market professionals like John Murphy and Jim 
Rodgers. We even brought back the Trading Strategies CD 
as an option from last year for all the new subscribers 
who have been asking for it. 

The deadline for taking advantage of this special is Jan-13th.

Click here for the full details:  



Remembering Thursday
By John Seckinger

The range and calculations generated from Thursday’s explosive 
move should take precedent over Friday’s narrow range.  There are 
some things to take from Friday’s trading, though.  

Friday, January 3rd at 3:15 P.M. 

Contract      Last    Net Change     High        Low       Volume    

Dow Jones..  8601.69    -5.83      8635.49     8552.87
YM03H        8604.00   +10.00      8621.00     8535.00     19,570

Nasdaq-100   1031.63    +3.77      1033.37     1018.16     
NQ03H        1036.00   +11.00      1037.50     1020.00    156,629

S&P 500       908.59    -0.44       911.25      903.07
ES03H         910.00    +2.50       910.75      901.75    420,723

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:  The range in the equity markets were relatively tight on 
Friday despite an earnings warning from Home Depot (HD 21.38 
-3.50) and concerns over rising energy prices.  On the economic 
front, a better-than-expected Construction Spending report for 
November accompanied good news regarding December auto sales; 
however, these reports seemed to fall on deaf ears.  Also making 
headlines was President Bush mentioning that he will be proposing 
a new economic stimulus package next week.  Looking elsewhere, 
Walgreens (WAG) reported a better than expected fiscal Q1 
earnings report and rose just over two dollars to 32.16.  Gold 
prices rose $5.10 at $351.60/oz, a new 52-wk high, while heating 
oil, crude oil, and natural gas prices all seemed to be 
positively affected by supply concerns stemming from worries over 
Venezuela, the war with Iraq, and inclement weather.  


The March Mini-sized Dow Contract (YM03H)

The YM contract has now risen for four consecutive days, setting 
a higher high and higher daily low over Thursday’s session.  The 
mild pullback on Friday didn’t even take prices back to any 
significant support.  In fact, Friday’s pivot remained well 
underneath the low.  So, should we be impressed with all of this?  
Well, because the Directional Indicator (ADX) (shown in earlier 
wraps) is below 20, it makes sense to look for a range trade and 
use stochastics and MACD oscillators (as well as Bullish Percent) 
to judge risk in buying moves higher and selling weakness 

Chart of Mini-sized Dow Contract, Daily


Stochastics and MACD shown below are not signaling a compelling 
reason to sell shares short; moreover, Monday’s pivot is below at 
8586.  With that said, traders looking to sell weakness should 
(1) wait at least for the pivot to fail, and (2) watch for a 
cross lower in Stochastics.  On the other hand, taking a quarter 
short position at R2 (8673) should make sense as well.  If 
looking to go long, I personally would wait for a move down to 
8500.  However, aggressive traders can simply use Monday’s pivot 
as a stop and look for a move to first R1 and then R2 (tightening 
stops by using retracement analysis between R2 and S2).  

Chart of YM03H, 60-minute


Bullish Percent of Dow Jones:  50% (Recent High at 72%, last 
Significant Low at 10%).  The recent column of O’s is still at 11 
and still in “Bear Alert” Status.  Note that this number has not 
edged higher, meaning that not one stock gave a buy reading after 
Thursday’s rally.  


Support               Resistance                Pivot    

8552.25               8638.25                   8586.75
8500.75               8672.75

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

The March E-mini Nasdaq 100 Contract (NQ03H)

The NQ contract appears to have broken out to the upside, rising 
and closing above both the top of the regression channel and the 
mid-point of the Bollinger Band.  The 22 DMA (exp) was taken out 
as well.  Shorts should either wait until a move back into the 
regression channel or the 84.1% retracement area at 1044.57.  The 
top of the Bollinger Band is much higher at 1073.  I would be 
surprised if the contract does not come back and test the 
Bollinger Band mid-point area, and this level is a few points 
under Monday’s pivot.  With that said, I would look for weakness 
underneath both before announcing a failure.  A place to add to a 
short position would be under 1014 and Friday’s pivot (shown 
below).  This area lines up nicely with Monday’s S2 reading.  

Chart of NQ03H, Daily


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.  Also note 
that the bullish percent has not risen despite the rise on 


Support              Resistance                 Pivot 

1024.75              1042.50                    1031.25
1013.75              1048.75

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

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

The daily chart of the ES contract below looks very similar to 
the YM contract profiled earlier.  All of the same identifiable 
patterns exist:  Stochastics and MACD are moving higher, mid-
point of Bollinger Band not tested on Friday’s pullback, and the 
contract closed on Friday above Monday’s pivot.  Yes, there does 
appear to be risk at buying the 910 area (resistance dating back 
some time now; however, it always makes sense to wait for 
confirmation).  Maybe 910 becomes the top of a wedge and acts as 
a catalyst for a breakout higher?  That is why I like to use 
levels to increase probabilities.  If 910 is broken, bulls should 
be tired between 913.25 and 916.50 area.  Aggressive traders 
could wait for 910 to be broken, and then look to sell the 
contract back under 910 (say 905) towards Friday’s pivot of 900.  
Not a great reward, but something to look for nonetheless.  

Chart of ES03H, Daily


A 120-minute chart of the ES03H contract shows Friday’s Support 2 
(S2) and Resistance 2 (R2) range.  I do believe these levels will 
be watched more closely than getting retracement levels between 
Monday’s R2 to S2 area.  Monday’s area is simply too tight, and 
“noise” could start to give many false signals.  I will put 
weight in the Pivot, R1, R2, S1, and S2; however, the retracement 
area between them is left out.  Just like with the other two 
contracts, least resistance is higher; however, proceed carefully 
and if we are indeed in a range it makes sense to sell rallies 
and buy dips (the R2 to S2 area).  Trading aggressively from R1 
to R2, or S1 to S2 is a viable day trading strategy.  

Chart of ES03H, 120-minute


Bullish Percent of SPX:  58% (Recent High at 66%, Last 
Significant Low at 20%).  There is still risk in buying the 
contract, and note that the number has not risen and gone into a 
column of X’s after Thursday’s rally.  


Support              Resistance                 Pivot    

904.25               913.25                     907.50
898.50               916.50

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

Good Luck.

Questions are welcomed,

John Seckinger

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:  



By Leigh Stevens

The market rally came from levels somewhat above what I would
 have thought. However, low volume does not suggest more than 
short-covering unless the level of trading activity picks 
considerably this week. While last week’s rebound was a good 
trade in Index calls for nimble folks, it’s not likely to be 
sustained to levels above recent highs. On the plus side, the 
Nasdaq Composite (COMPX) nearly reached my 1320-1300 objective 
(at 1327) and NDX (Nasdaq 100) did fully realize my 980 target, 
so we may be establishing (at least) the low end of a trading 

Stocks took a breather on Friday after Home Depot warned on its 
earnings – it sited lower than expected holiday sales – NOT what 
the market wanted to hear after an overheated but low-volume 
rally on Thursday.  HD was crushed, falling 14% to a 5-year low 
on very heavy volume. Not a bad day overall, but one lacking 
follow through to Thursday’s whooping rally which was the 3rd. 
biggest opening-day percent gain ever in terms of the Dow.  The 
catalyst Thursday was of course the stronger than expected 
December manufacturing activity, which ended 3 months of decline.  
There was a sizable shift by money managers out of their bond 
“safe-haven” and back into stocks – an asset allocation shift NOT 
much followed by individual investors.  

Who said that fund managers are lemmings! – well the nature of 
the (Wall Street) beast is to play follow-the-leader as you can’t 
sit around in cash (or in other assets) while other managers are 
driving up the S&P, YOUR benchmark performance indicator for your 
quarterly report card.  

The march out of bonds late last week made for a sharp sell off 
in that market.  The dollar even rebounded some.  Of course, we 
have to view this all in the context of December’s stock market 
being down 6.2%, which is the biggest December decline since the 
early-thirties – what Santa Claus rally?! 

Speaking of records, the even stronger Nasdaq showing on Thursday 
was its gain of 3.7%, the strongest start to a new year since the 
creation of the index back in the 70’s.  Such is the nature of 
oversold rallies.  It seems like just another bear-market rally – 
fast, sharply up and over quickly on less than stellar volume.  
TIME will tell on this! 

Since I am looking back a bit in this first week of the New Year 
 I could also add that the fall last year was 17% in the 
Industrials and 32% in the Nasdaq Composite (COMPX). Many years 
like that and we will have to start putting houses into our IRA’s 
and 401k’s.  

The gold bulls, along with oil barons are not feeing too bad 
however, as nearby gold futures did manage a weekly close ABOVE 
$350 (at 351.50).  The Philly Gold Index (XAU.X) didn’t quite 
manage a close over its first key technical resistance at 80, but 
came close at 79.51 which put it up 2.2% for the week. The BIG 
test of XAU is to manage a close over 86, the prior 5-year 
closing weekly high – this area is more than that even: in ’89, 
there was one (only one) close above 86 at 89.9; ’99 saw a weekly 
XAU high close at 82.9; then from a low in the low 40’s (late-
2000) there was climb back to 86 in mid-2002.  

The foregoing price history tells us why the gold bugs are saying 
“what bear market?” or “what, ME worry!” as they’ve had a DOUBLE 
in a diversified bunch of shares in this sector during the two 
years when most of those invested in the general market and in 
blue chips were getting hammered. Of course, as we all tend to do 
– they are extrapolating or projecting a future rate of increase 
in the next couple of years perhaps equal or more to what has 
been seen since the new millennium rolled around.  

Time will tell – however, the Gold index or sector as measured by 
XAU did have a 5-year bear market (’96 – 2000), so maybe those 
bullish on the metals/commodities sectors could see a 5-year 
golden trend ahead for the yellow metal.  This even though major 
precious metals bull markets historically have tended to be 
driven by high persistent inflation and the erosion of 
monetary/financial assets.  Of course we have one “hard” asset 
that has seen steady and major inflation – housing.  

Time will tell if gold is simply following the oil price rise 
which will subside after Iraq is taken over, or not (if they 
comply) – this is what I think currently but I’m a believer that 
creation of long-term wealth is from ideas, not from digging in 
the ground. 

On Tuesday we’ll get November factory orders, consumer credit on 
Wednesday and the wholesale inventory report on Thursday – we of 
course are also going to see earnings reports start coming in 
this coming week.  Economic data may take a back seat to any 
bellwether earnings surprises – good or bad.  

On Friday however, the unemployment, hourly earnings and the 
nonfarm payroll number is probably NUMBER ONE on the list of 
possible influences especially if it’s a surprise or well 
above/below consensus estimates. 

As a backdrop, President Bush releases his economic stimulus plan 
this week.  His proposals will involve (guess what?) some tax 
cuts, especially on stock dividends – now this is one tax cut 
that CAN make the market happy on a short-term basis.  


The hourly chart shows it pretty well – SPX has been establishing 
the low end of a trading range in the 870-875 area.  Now, it 
could have broken the low end of that range, but here is where 
the value of the oversold indicators like stochastics and RSI 
come in – when they are showing fully oversold, say on a 14-day 
basis (the daily time frame or “length” setting in common use), 
the odds of this happening is not typically that high.  

S&P 500 Index (SPX) – Hourly chart:


On a risk to reward basis covering (exiting) index puts on an 
approach to where an index has bottomed 2-3 times before is good 
strategy – a good trade (again, on a risk to reward basis) then 
is to go long calls as well for the simple reason that you can 
set a stop not far on under the low end of the suspected trading 
range – if wrong and instead there is further substantial break 
and a new down “leg”, then this fact is established pretty 
quickly without the market traveling very much lower.

Of course, since a trade in calls is a counter-trend play, its 
good to take profits sooner rather than later.  However, I think 
there may be some more upside.  Resistance comes in at 940, then 
950 where I suggest going into puts again on a scale up. Least 
likely in my estimation is that the prior swing high at 960 is 

S&P 100 Index (OEX) – Daily and Hourly charts: 


OEX held at the 50% retracement just under 440, whereas I would 
have thought that the Index would get down to my lower trading 
band closer to 430, which was also a 62% retracement of the last 

From here, resistance is apparent at the trendline around 463, 
but especially at the prior high, assuming this rally really gets 
going – builds up MOmentum.  January does tend to bring some “mo” 
due to reinvestment and this period has a seasonal upward bias.  
However, any rally that takes prices to around or above 480 makes 
for the put play of the week or month in my estimation. 

If the 480 area is reached again its another situation making for 
a favorable risk to reward – if a new up leg develops it will 
“signal” itself by a close above the prior close at 477 AND by 
the ability to the hold this level on subsequent pullback. In our 
dreams maybe - that last run up to 487 was followed by a close at 


There was a bullish stochastic divergence and this was the key 
technical tip off to take the money and RUN – profits in puts I 
mean. This was a good trade for calls as soon as the rally 
started from the 440 area – but given the bullish 
price/oscillator divergence, one of my favorite trading “signals” 
as it so often is a high-potential trade as it tends to so 
reliably signal a good-sized reversal.  

DJ Industrial Index (INDU) Daily:


We saw the same bullish divergence in the daily chart of the Dow 
and this after it came rather close to realizing an 8200 
technical objective for a move to the area of a prior downswing 
low.  Where from here?  I think there’s potential up to the 8800 
at a minimum.  Above 8800 we are living on borrowed time as the 
Dow runs into increasing resistance above there.  

Actually, the Industrial average hits near resistance first at 
8700, THEN at 8800 – above here, another 100 points higher, at 
8900.  Bet you didn’t need me to figure that out.  8900 is the 
high potential short (DJX put purchase area) as it appears highly 
unlikely that its 200-day moving average will be penetrated at 


I was bearish until the Composite got down to near the 1300, 
which was a major downside objective and 980 on the Nasdaq 100 
(NDX) even more so.  What now.  1400 is near resistance, with 
1444 even more key, which is the current intersection of its 200-
day moving average. I would be a seller in this area, with tight 
stop protection – exiting bearish put plays is probably warranted 
on any penetration of the 200-day moving average and looking to 
re-enter on signs of a rally failure at the prior high in the 
1500 area.  The reversal last time in this area occurred right at 
the key 200-day moving average.  


QQQ Daily and Hourly charts:

26 is the key near resistance as is especially apparent by the 
triple top in this area on the hourly chart seen below the daily.  
Notice the low volume nature of last week’s rally – pay close 
attention to this indicator as its key to whether the recent 
rebound can broaden out. Participation is needed and one beauty 
of trading the Q’s is that you have a volume indicator unlike 
trading the NDX.  

If volume revs up, may see a move develop that would take QQQ to 
my upper trading band (envelope) around 28.  Such a move would 
then become a good shorting opportunity as the Q’s have traded 
pretty reliably within the 8-9% envelopes, relative to the 21-day 
moving average.  


And the line chart of the hourly closes ..... 

My best guess is that it will be tough going to get above 25.5-
26.00 without another pullback first, such as to near support at 
24.9-25. A break of last week’s price swing lows by a move to 
below the 24.4 area on an hourly closing basis or to below 24.00 
intraday would likely be the start of a new down leg.  I don’t 
see this just yet in the stocks (especially with good action in 
Cisco and Microsoft, but 24.00 is the key level in the Q’s in 
case this all falls apart this week.  


Best of trading success in the New Year – what we have coming 
will no doubt offer plenty of two-sided trading swings!

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:  


Editor's Plays

War is Hell  

That is unless you are a defense contractor. We added FLIR as 
a long call play this weekend but I also liked the setup on
NOC. Northrop has been butting heads with $100 for two months 
and looks like it is ready for another try. 

I don't normally profile expensive stocks here but with all
the potential war news over the next three months I thought 
this one deserved the extra look. 

Unfortunately the options are expensive. I am not going to 
go into great detail but the Feb-$95 at $7.40 (4.32 ITM) or
the May-$105 at $5.70 would be my choices for calls.

My best choice would be to sell the May-$120 ($22.00) or 
$130 ($31.00) naked put and eliminate the premium decay 
problem. Set a stop loss at $96 and hold on. 

DJX Puts

I hate to keep coming back to this but based on my analysis
I think it is the best bet for an investor on a budget. 
The chance for a dramatic decline over the next 45-60 days
is very strong. There is no guarantee but there is very 
strong resistance above us and no real incentive to provide
the upward momentum. We have war, earnings, oil, earnings,
broker trials, earnings and a potential second economic dip.
Did I mention earnings?
The Feb-$85 put is only $2.85 and the March $84 is only $3.40.
The potential for a retest of the 7700 level is very good. 
For the difference in price I would go with the March option
and leave time for it to happen. 


The key support level is the 100 DMA at 8404. This is why
I would want to hold the 84 or higher put. A dip to 84 could
still be profitable and a drop under the 8300 level could
be very profitable. 

I would use any bounce at the open on Monday (if any) to try
and buy the puts as close to resistance at Dow 8640 as possible.
There is no magic here, just a heavy Dow that could easily be
building the right shoulder of a bearish formation.


Play updates:

Powerball - From 12/29/02

I updated the Powerball picks using the bid prices from the
first 15 min of trading on Jan-2nd. I created an Interquote
portfolio to keep a constant track of the profit and loss 
of this lottery ticket as time passes. It would have taken
$1,135 to buy one contract of each on January-2nd. Any bets
on what this will be worth on 12/13/03?


Goldman Sachs  $70.37 Short

Goldman rallied with the markets on Jan-2nd and put this play
back in a negative position. However, with the Henry Blodget
charges in the news after Friday's close the chances for a
new drop are good. Remember, this was a long term play and
we are betting on bigger judgments from the class action
law suits to take center stage. The stop loss is now $74.00.


We will continue to follow these options until the play is

See the Editors Plays from Sunday 12/22 for the play 


Forrest Labs $106.11 Call 2:1 Split Jan-9th

If you kept the faith on the FRX split play you were well
rewarded on Friday after FRX raised guidance for the current

The stock jumped +6.07 to close at 106.11. The options we
had been following look like this:

FHA-AS now $11.70 profiled at $6.40
FHA-BS now $12.50 profiled at $8.60

I would strongly suggest closing this trade on Monday. 


XRAY Jan-$40 Call

It appears XRAY is not going to break out of its current
slump before our time expires. Close on Monday.  


Remember, these are high risk plays and should only be made
with risk capital.

Good Luck

Jim Brown  


Hanging On
By Steven Price

We finished out a wild week with a whimper. While the intraday 
action had its usual extreme moves, we ended close to unchanged 
in most of the major indices.   In fact, none of the major 
indices closed more than two tenths of a percent away from 
Thursday's finish. After such a big rally to start the year on 
Thursday, it may simply be that those traders looking to get into 
positions to start the year got it out of the way on the first 
trading day of 2003.  In spite of economic data that showed 
construction spending in November slightly higher than expected, 
the Dow and SPX finished slightly in the red.  That was likely 
due to a couple of factors, with a downward revision of the 
October construction spending data offsetting some of the 
November gains, and a warning from Home Depot for both the fourth 
quarter and the full year 2003. 

Much has been made of the holiday retail blues, with many stores 
missing expectations or coming in at the low end of previous 
guidance. Today the retailers got some more bad news that bled 
into the hard line retail sector, which is not as heavily 
dependent on the holiday season as main line retailers. Home 
Depot warned after the bell last night that it would miss 
consensus earnings estimates for 2003.  The company said 
"business trends indicate the likelihood of a challenging 
environment well into the next fiscal year," and also said that a 
poor December sales of power tools and hardware could result in a 
same store sales decline of 10% in the fiscal fourth quarter, 
ending in February.  The news was disappointing on a couple of 
fronts.  First, the obvious effect on the retail sector was 
negative, with the Retail Index (RLX) giving up all of Thursday's 
gain and more, with a loss of 4%.  However, the bigger issue may 
be a lack of spending on home improvement.  Until now, the one 
pocket of strength in the economy has been in the home re-
financing and new mortgage area, since interest rates are so low.  
If consumers aren't shopping at Home Depot, they probably aren't 
improving their homes at the same clip they have been over the 
past couple of years, and therefore the one area that was seeing 
the direct benefits of low rates may not be doing so anymore. On 
the plus side for the markets, investors shook off the scare and 
turned almost half of the Dow stocks green, with a 13 up/17 down 

The other retail warning came from Radio Shack, which guided 
lower partially due to lower sales and gross margins on Sprint 
PCS products. Interestingly, wireless chips have been one of the 
strongest areas of semiconductor sales and the news from Radio 
Shack seemed to have little effect on the Semiconductor Index 
(SOX).  The SOX gained almost 2% and broke through significant 
resistance at the 310 level.  It set an intraday high of 315, 
where it failed on its afternoon rebound attempt, but also found 
support at the 310 level on its afternoon pullback.  If that 
previous level of support/resistance is now acting as support 
again, then we could see another run to 330. 

If a consumer-spending scare from the Home Depot and Radio Shack 
warnings doesn't spook the markets, what will?  Most likely the 
beginning of a war with Iraq would send us lower, but that 
possibility has been factored in for so long that a quick end to 
the conflict might actually give us a boost. I am not necessarily 
predicting a continued breakout to new highs, considering the 
strong downtrend we were in before Thursday's rally, but the 
resilience we saw today after a big profit warning is a red flag 
for shorts. We are entering earnings season once again and given 
the slew of disappointing retail sales numbers during the holiday 
season we may be getting more earnings warnings in the next few 
weeks.  Just how much has already been priced in will be the 

Today's action after Thursday's big rally can be seen with a two-
sided mirror.  Bears will point out the failed rally at previous 
resistance, as well as the 50% retracement of the recent drop 
that the Dow, SPX and OEX all tested unsuccessfully this morning.  
Bulls can point to the afternoon bounce from Dow 8550 and close 
back above 8600 as a higher level of support after the big rally 
Thursday. If the bulls are right, then we'll have to see a 
continued push over the day's high of 911 in the SPX, as well.  
That is the precise point where it ran out of steam on the last 
bounce in mid-December, so it is probably not a coincidence that 
it is the rally failure point again this time. If the bulls can 
overwhelm the bears on the next trip to that level, we may 
finally see a move back to the Dow 8800/SPX 925 levels from the 
beginning of November.  Failure from that point would form a nice 
right shoulder in a bearish head and shoulders pattern, with a 
target between Dow 7700 and 7800.  Of course, that's getting a 
little ahead of ourselves, but planning in advance never hurts.


Market Averages


52-week High: 10673
52-week Low :  7197
Current     :  8601

Moving Averages:

 10-dma: 8442
 50-dma: 8550
200-dma: 8974

S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  908

Moving Averages:

 10-dma:  890
 50-dma:  902
200-dma:  955

Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1031

Moving Averages:

 10-dma: 1012
 50-dma: 1035
200-dma: 1072


Retail Index (RLX):  Home Depot issued a warning for Q4 and 2003, 
following weak December sales of power tools and hardware, while 
Radio Shack warned due to slow sales of Sprint PCS products.  The 
warnings bled through the sector, affecting broad based retailers 
such as Wal-Mart and Target, both of which lost over 3% and 
successfully tested support levels at $50 and $30 respectively. 
The RLX dropped 4%, giving up all of Thursday's gain and then 
some.  It appears headed back to a support test at 260, which 
served as a bounce point the last several days of December.  Wal-
Mart can be used as a gauge for the sector and a close back below 
$50 would put the stock back into its descending channel.  Even 
clothing retailers, such as KSS, FD and ROST felt the blow, as we 
approach the upcoming retail earnings season. Today's news 
reminded investors that the weak December could affect previous 
earnings estimates and we can most likely expect similar warnings 
from other retailers in the next couple of weeks.

52-week High: n/a
52-week Low : 244
Current     : 264

Moving Averages:

 10-dma: 266
 50-dma: 280
200-dma: 307


Market Volatility 

The VIX ended the day on the downside, further extending its drop 
below recent lows.  Those who view this as a contra-indicator to 
the market will see the oversold level as predicting a soon to 
come equity sell-off.  If those traders are right, it could come 
soon as the VIX approaches its next support level of 26.41, which 
is the recent low from late November.  For those traders who see 
a sinking VIX as a sign of institutional premium selling and a 
lack of downside fear, then a break below 26 would indicate a 
continued rally after the big bounce on Thursday. Traders should 
note that Friday's always see some artificial selling, as weekend 
time decay entices premium sellers to take on more risk with 
short positions, or get out of some longs to avoid a loss.

CBOE Market Volatility Index (VIX) = 27.98 –0.54
Nasdaq-100 Volatility Index  (VXN) = 45.71 –1.34


          Put/Call Ratio  Call Volume   Put Volume

Total          0.76        377,633       288,864
Equity Only    0.62        287,153       200,274
OEX            0.94         14,655        13,829
QQQ            4.22          6,061        25,596


Bullish Percent Data

           Current   Change   Status
NYSE          50      + 0     Bull Confirmed
NASDAQ-100    59      + 0     Bear Alert
Dow Indust.   50      + 0     Bear Alert
S&P 500       59      + 0     Bull Correction
S&P 100       54      - 1     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  1.40
10-Day Arms Index  1.42
21-Day Arms Index  1.39
55-Day Arms Index  1.23

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 


Market Internals

        Advancers     Decliners
NYSE       1456          1360
NASDAQ     1481          1627

        New Highs      New Lows
NYSE         68              19
NASDAQ       77              15

        Volume (in millions)
NYSE       1,346
NASDAQ     1,127


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 

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 

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


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


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:  



A no nonsense approach to trend

What are the rules for adding support and resistance lines to a 
PnF chart.  For instance on a traditional chart for IBM why is a 
resistance line run from the August high of 82 and none is shown 
from the Dec high of 89 or even the more recent high at 82?

The question above is easily answered.  While on the surface, the 
explanation will seem too simplistic to have any technical 
significance, it is often found that the bullish support trend or 
the bearish resistance trend is the "only" technical indicator 
the truly "explained" why a stock traded like it did.  Remember, 
the point and figure charts are used by institutions as they 
remove much of the day-to-day noise.  The stock that has been an 
"institutional" favorite and treated the fund manager and his/her 
investors well over time (given good guidance, come through with 
the numbers, honest and up front with both good and bad news) 
will find the fundamental-based fund manager willing to buy the 
stock on a pullback, but if he/she can buy it $5 cheaper at an 
upward trend while still bullish the fundamental, then so be it.

The "rules" of how a trend is established on a point and figure 
chart is rather simple.  Once a trend is established, that trend 
becomes both the short-term and longer-term trend as long as the 
trend is not violated/broken.  The length of the trend should carry 
"weight" with the trader and be understood and respected.

Let's take a look at International Business Machines (NYSE:IBM) 
$81.65 trend and look at the point and figure chart and see how 
the trend the "point-and-figuretologist" monitors is constructed.

The two major trends are knows as the bullish support trend 
(upward/bullish trend) and bearish resistance trend 
(downward/bearish trend).  

IBM Chart (Bullish Trend Construction) - $1 box


The above chart of IBM hopes to explain how BULLISH SUPPORT 
trends are developed (blue plus).  Only when a downward trend is 
broken, can a bullish trend be established.  

Once a stock has formed a base of accumulation below the bearish 
resistance trend and gives the first buy signal, go to the LOWEST 
column of O's and begin diagonally (45-degrees) charting the 
bullish support trend.

In the lower left of the chart, the placement of the bullish 
support trend is somewhat confusing as the "rules" of placing 
trend were not shown on the stockcharts.com p/f chart, but a 
"cleaner look" is achieved as it would be displayed at 
www.stockcharts.com.  If, the column of "O" in October (after the 
red 8) had not come down to $67, then the bullish trend I pointed 
to would have extended up at a 45-degree angle.  However, IBM 
needed to test support at its triple-bottom of $66 one more time 
before the stock turned higher and eventually broke above bullish 
support trend.  Note the rather "short" length of the bullish 
support tend (6 blue plus signs).  That's a relatively "short" 
trend and may not hold much "power" as institutions may not have 
been very committed to the stock at that time.

Once the bullish support trend was broken at $70, a new trend was 
developed.  That trend was a downward trend.  The "rules" for 
downward trend are similar and I'll walk through this in a 

I've also shown a break of another bearish trend, Trend (BB).  
Using the same "rule" of finding the lowest column of O, to the 
left of the first buy signal off the bottom, a new bullish trend 
is established.  Currently, we would say that IBM is in a bullish 
trend and that trend should be assumed to hold support at $66.  
Note the length of this bullish trend is 12 blue plus signs long 
and perhaps carries "twice" as much respect as the previous 
bullish trend that had been broken.

To chart bearish trend, the same set of "rules" are applied, only 
this time the traders identifies the break of bullish support 
trend, then looks for the highest "X" column to the left of the 
first sell signal off the top.

IBM Chart (Bearish Trend Construction) - $1-box


The bearish resistance trends are developed very similar to the 
bullish support.  The bearish resistance trend is put in place 
AFTER the bullish support trend is broken.  The point and figure 
chartist then finds the highest column of X prior to the break of 
bullish trend and begins charting trend downward at a 45-degree 

I've also shown a POTENTIAL bearish resistance trend.  However, 
in the point and figure charting world, this trend would only be 
considered a channel trend at this point.  To be labeled a true 
"bearish resistance trend" the bears must prove that they can 
break the bullish support trend and turn the trend from bullish 
to bearish.

Unlike bar charts, where the drawing of trends can be somewhat 
"arbitrary," the point and figure charting system uses a set of 
rules to establish trend and help the trader/investor understand 
what type of trend a stock or index is in.

Some "general" rules that I've learned to incorporate into my 
trading over the years with respect to bullish support and 
bearish resistance trend is this.

Regardless of what type of market environment I'm trading in (as 
depicted by the bullish %), stocks that are trading in BULLISH 
trend that look to be weakening, I will only trade partial 
positions bearish in.  The reason for this is should I find 
myself trading bearish in a more technically longer-term bullish 
stock when the market suddenly decides to turn bullish, I may 
find myself in trouble.  By reducing trade size to 1/4 or 1/2 
position, a sudden and unpredictable change in market environment 
has lesser capital exposed.  

If looking to trade bullish in stocks that are trading below 
bearish resistance trend, but look to be breaking higher from a 
base, I also like to begin trading bullish with 1/4 or 1/2 
positions.  Here too, should market conditions turn from bullish 
to bearish, a stock that has been in a longer-term bearish trend 
is usually in the bearish trend for a reason.  That reason is 
that the stock has fallen out of favor.  As such, bulls prefer to 
trade bullish in bullish trending stocks.

Conclusion:  So, to answer the subscriber's question "... IBM why 
is a resistance line run from the August high of 82 and none is 
shown from the Dec high of 89 or even the more recent high at 

The answer is that a bearish trend could be established from the 
August high of $82 because supply exceeded demand and was able to 
break the bullish trend.

While I (Jeff Bailey) started a little channel trend from the 
December high of 89, I can't place a true bearish resistance 
trend on the chart at this point until supply (O's) exceeds 
demand (X's) to the extent that the bullish support trend is 

Even if you're a bar chartist, try to take a quick look at the 
point and figure chart of the stock/index your trading and find 
the bullish or bearish resistance trends.

Some of the worst trades I made in my life were buying "breaks of 
trend" in bar charts, only to find out later that I was actually 
trying to buy stocks at their bearish resistance trends.  I also 
shorted a few "breaks of trend" on bar charts, only to find out 
later what had happened.

At the time, when these horrific trades were initiated, I had no 
clue that point and figure charts even existed.  I'm one of those 
people that you can't sell me anything without me trying it out 

So.... I knew what my terrible trades were (long and short) and 
went back to find out what went wrong.  I going long a stock by 
the name of Leasing Solutions at around $32, getting stopped out 
at $28 two days later after the stock had made a "powerful" move 
above a 200-day moving average.  I had no clue until several 
months later when first learning about point and figure charting 
that the bearish resistance trend was at $33.  Boy, that one 
would have made a beauty of a short.  I think they went bankrupt 
about 8-months later when it was "discovered" that all the 
equipment they had been leasing (computers) would suddenly 
depreciate at a much faster rate than leases had accounted for.  
I'm thinking that day I "bought the breakout" on the bar chart, 
there was an institution on the other side of the trade looking 
to get the heck out on strength and trading the trend.  

Point and figure trend I should say.

Jeff Bailey


Market Watch for the week of January   6th

Major Earnings This Week

Symbol  Company               Date           Comment      EPS Est

------------------------- MONDAY -------------------------------

STZ   Constellation Brands   Mon, Jan 06  After the Bell      0.68

------------------------- TUESDAY ------------------------------

HB    Hillenbrand Industries Tue, Jan 07  Before the Bell     0.75

-----------------------  WEDNESDAY -----------------------------

AA    ALCOA                  Wed, Jan 08  Before the Bell     0.25
EMMS  Emmis Communications   Wed, Jan 08  -----N/A-----       0.08
LEN   Lennar Corporation     Wed, Jan 08  Before the Bell      N/A
SDX   Sodexho Alliance S.A.  Wed, Jan 08  Before the Bell      N/A
STI   SunTrust               Wed, Jan 08  Before the Bell     1.18

------------------------- THURSDAY -----------------------------

ACN   Accenture              Thu, Jan 09  Before the Bell     0.25
CMH   CLAYTON HOMES INC      Thu, Jan 09  Before the Bell     0.22
MDC   M.D.C Holdings         Thu, Jan 09  -----N/A-----       1.94
MSM   MSC Industrial Direct  Thu, Jan 09  -----N/A-----       0.16
RPM   RPM, Inc.              Thu, Jan 09  After the Bell      0.25
RI    Ruby Tuesday           Thu, Jan 09  -----N/A-----       0.27
STX   Seagate Technology Inc Thu, Jan 09  After the Bell       N/A
SIGY  Signet Group           Thu, Jan 09  Before the Bell     0.06

------------------------- FRIDAY -------------------------------

INFY  Infosys Technologies   Fri, Jan 10  -----N/A-----       0.39
STT  State Street Corp       Fri, Jan 10  -----N/A-----       0.56

Upcoming Stock Splits In The Next Two Weeks...

Symbol  Company Name              Ratio    Payable     Executable

FRX     Forest Labs               2:1      Jan.  8th   Jan.  9th
RAVN    Raven Industries          2:1      Jan. 15th   Jan. 16th

Economic Reports This Week

After Thursday's big ISM Manufacturing number the markets will
be watching Monday's ISM Services report.  Factory orders and
Wholesale Inventories also come out this week.  Q4 earnings 
reports are starting to trickle in.  Watch out - earnings season
is almost here!


Monday, 01/06/02
ISM Services (DM)       Dec  Forecast:   55.8  Previous:     57.4

Tuesday, 01/07/02
Factory Orders (DM)     Nov  Forecast:  -0.6%  Previous:     1.2%

Wednesday, 01/08/02
Consumer Credit (AB)    Nov  Forecast:  $3.8B  Previous:    $1.5B

Thursday, 01/09/02
Initial Claims (BB)   01/04  Forecast:    N/A  Previous:     403K
Wholesale Inventores(DM)Nov  Forecast:   0.2%  Previous:    -0.3%

Friday, 01/10/02
Nonfarm Payrolls (BB)   Dec  Forecast:    21K  Previous:     -40K
Unemployment Rate (BB)  Dec  Forecast:   6.0%  Previous:     6.0%
Hourly Earnings (BB)    Dec  Forecast:   0.3%  Previous:     0.3%
Average Workweek (BB)   Dev  Forecast:   34.2  Previous:     34.2

DM=  During the Market
BB=  Before the Bell
AB=  After the Bell
NA=  Not Available

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:  



Standing Still

We did a whole lot of running to stand still on Friday, with none
of the major averages finishing more than two tenths of a percent 
away from Thursday's closing levels.

To read the rest of the Swing Trader Game Plan click here:


If you like the results you have been receiving we
would welcome you as a permanent subscriber.

The monthly subscription price is 39.95. The quarterly
price is 99.95 which is $20 off the monthly rate.

We would like to have you as a subscriber. You may
subscribe at any time but your subscription will not
start until your free trial is over.

To subscribe you may go to our website at


and click on "subscribe" to use our secure credit
card server or you may simply send an email to

Contact Support

with your credit card information,(number, exp date, name)
or you may call us at 303-797-0200 and give us the
information over the phone.

You may also fax the information to: 303-797-1333


Please read our disclaimer at:


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

Contact Support
The Option Investor Newsletter                   Sunday 01-05-2003
Sunday                                                      2 of 5

In Section Two:

Daily Results
Call Play of the Day: AU
Put Play of the Day: QCOM
Dropped Calls: SNPS
Dropped Puts: None

Annual Renewal Special

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

Click here for the full details:  



For Best Alignment view in Courier Ten Font

CALLS              Mon    Tue    Wed   Thu  Week

ACS      54.81    0.26   0.15   0.00  1.33  2.61 Above resistance
AU       35.81    0.03  -0.58   0.00  1.06  1.00 New, Gold Rush 
BEAS     12.03   -0.38  -0.02   0.00  0.48  0.20  Finding support
SNPS     42.25   -0.12   0.15   0.00  0.82 –4.02  Drop, CFO Gone 
SYK      68.68    1.22   0.33   0.00  0.90  3.11  New highs


ASD      69.48   -0.03   0.07   0.00  0.82 –1.62  New, no support 
BSC      61.72    0.05  -0.61   0.00  2.08  1.77  Entry point?
CEPH     49.57   -0.26  -0.58   0.00  1.10  0.51  Failed rally
IBM      81.65   -0.75   0.40   0.00  3.07  4.65  Into resistance
QCOM     35.70   -0.42  -0.21   0.00  0.52 –1.52  New, downtrend

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:  



Call Play of the Day:

AU - AngloGold Limited $35.81 (+1.00 last week)

See details in play list

Put Play of the Day:

QCOM - QUALCOMM Inc - 35.70 -1.44 (-1.57 for the week)

See details in play list


Remember that historically, when we drop a pick it will go up
10 to 15% the very next week. It is part of Murphy's Law.
Just because we drop a stock as a pick does not mean we are
advocating a "sell" on any position you have. We are simply
dropping our recommendation as a new play. Existing plays
can and do continue on and are usually profitable.


SNPS $42.25 (-3.99) While the broad market held up fairly well
following Thursday's strong rally, the same couldn't be said
about our SNPS play.  The news of the CFO replacement didn't
sit well with investors, and they knocked the stock back for
nearly a 10% loss on the day, decisively breaking the $43 support
level, trading down to below $41 before a slight recovery in
the afternoon.  That recovery wasn't nearly enough to have us
consider keeping the play alive.  We covered this in the update
Thursday night, and any open positions should have been exited
early in the day.




SL  = Suggested stop loss. Sell if bid breaks this price.
OI  = Open Interest - the number of open contracts outstanding.
ITM = In the money
ATM = At the money
OTM = Out of the money
ADV = Average Daily Volume

The options with a "*" by the strike price are our choices from the
group. If the stock moves as expected we feel they have the best
chance to substantially increase or double in price with the best
risk/reward ratio compared to the other options for the same stock.
You must determine if they fit your risk profile for time and price.

Analysts ratings: 1-2-3-4-5
Analysts who follow each stock rate it and these rating are
accumulated and displayed as follows;

Position 1 = number of analysts recommending "strong buy"
Position 2 = number of analysts recommending "moderate buy"
Position 3 = number of analysts recommending "hold" or "neutral"
Position 4 = number of analysts recommending "moderate sell"
Position 5 = number of analysts recommending "strong sell"

Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys",
1 "hold" recommendation.

The risk of selling naked puts is always the possibility
of a catastrophic event that drops the stock below the
strike price and could result in the stock being PUT to you.
Always protect yourself with a "buy to cover" limit order
to take you out before this can happen.

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:  



Please read our disclaimer at:


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

Contact Support
The Option Investor Newsletter                   Sunday 01-05-2003
Sunday                                                      3 of 5

In Section Three:

New Calls: AU
Current Calls: SYK, ACS, BEAS
New Puts: QCOM, ASD

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:  



AU - AngloGold Limited $35.81 (+1.00 last week)

Company Summary:
AngloGold Limited conducts gold mining operations in Africa,
North America, South America and Australia.  The company owns
or has interests in 21 operations around the world.  In 2001,
AU produced approximately six million ounces of gold.  The
company's production base spans four continents, with a mixture
of undergound and open pit operations along with interests in
Argentina, Australia, Brazil, Mali, South Africa, Tanzania and
the United States.

Why We Like It:
All that glitters is not gold.  But sometimes it is.  With the
continuing weakness in the dollar and escalating geopolitical
tensions, gold has seen a tremendous rise over the past month,
breaking out over numerous levels of resistance.  After breaking
through the $330 level, the February gold futures contract
(GC03G) rose quickly to the vicinity of $350, where it has been
consolidating for the past 2 weeks.  Friday's weakness in the
dollar saw contract closing at $352.60, a new 6-year high, and
it looks like there is plenty of room to run.  Gold mining stocks
have been on fire lately as well, best measured by the Gold and
Silver index (XAU.X), which traded the $80 level on Friday,
generating a powerful triple-top breakout on the PnF chart.  That
just serves to underscore the bullishness in the sector, with
the current vertical count pointing to an upside target of $114.
Of the stocks in the gold mining sector, shares of AU have been
one of the strongest performers, and this action continued on
Friday, with the stock breaking out over the $35 resistance level,
which had held since first being tested in June of last year.
The PnF chart of AU is impressive as well, as the stock is in a
long column of X's that produces a bullish price target of $63.
We aren't likely to see that over the near-term, but it does
quantify the current strength.  A continuation of this rally is
certainly a possibility as the metal, sector and stock all seem
to have some significant momentum working in their favor.  So
momentum traders can certainly enter on a push through $36.50
(just above Friday's intraday high).  But given the strong rally
over the past month, more conservative traders may prefer to
enter on a pullback to support.  Right now, the $34 level
(supported by the 10-dma) looks to be solid support, and a dip
and bounce from that level would make for a good entry.  We
could even see an intraday dip near the $33 level, which acted
as resistance in mid-December and then support during the
Christmas week.  Any weakness below that level would indicate
a more substantial pullback, so that is where we are setting our
stop on the play.  Confirm new entries with strength in the XAU
and the gold futures.

*** January contracts expire in two weeks ***

BUY CALL JAN-35 AU-AG OI=1419 at $1.95 SL=1.00
BUY CALL FEB-35 AU-BG OI= 190 at $3.30 SL=1.75
BUY CALL FEB-40 AU-BH OI= 139 at $1.30 SL=0.75

Average Daily Volume = 762 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:  



SYK - Stryker Corp - 68.68 +0.66 (+3.11 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 

Why We Like It:
It took a mere two minutes for this long play to be activated.  
SYK gapped slightly higher this morning and quickly reached our 
entry trigger at $68.26.  Shares set an all-time high of $69.00 
before trading in a narrow 50-cent range for the remainder of 
the trading session.  Stryker also showed relative strength by 
outperforming the flat Dow Jones.  Looking at the daily chart, 
it's hard not to be bullish on this stock.  SYK is trading in 
blue-sky territory and seems to be headed for a test of 
psychological resistance at $70.00.  It's also interesting to 
note how the stock behaved today, following the previous 
session's breakout to all-time highs.  The past two all-time 
highs (set on November 7th and November 21st) were quickly 
met with selling.  That does not appear to be the case with 
the current breakout.  With volume remaining relatively 
strong (compared to the past month's volume), we think the 
odds of a sustainable rally are high.  New entries can be 
gauged on a move above $69.00 or on a pullback to $68.00.  
Our stop is set at $65.00.  

***** January Contracts expire in two weeks *****

BUY CALL JAN-65*SYK-AM OI=283 at $4.40 SL=2.20
BUY CALL JAN-70 SYK-AN OI=254 at $1.00 SL=0.00
BUY CALL FEB-65 SYK-BM OI= 18 at $5.70 SL=2.85
BUY CALL FEB-70 SYK-BM OI= 55 at $2.40 SL=1.20

Average Daily Volume = 760 K


ACS – Affiliated Computer Services, Inc. $54.81 (+3.08 last week)

Company Summary:
ACS is a global Fortune 1000 company that delivers comprehensive
business process outsourcing and information technology
outsourcing solutions, as well as system integration services,
to both commercial and federal government clients.  

Why We Like It:
After huffing and puffing for over a week, our ACS play broke out
decisively on Friday, once again showing its relative strength
over the broad market.  The bullish victory wasn't readily
apparent at the open, as the stock spent most of the morning
vacillating around the $54 level.  But with a surge just before
lunchtime, the bulls pushed through $54.50 and never looked back.
In addition to the strong price action, ACS looks good based on
the action of the oscillators, all of which are in positive
territory and pointed north.  Particularly encouraging is the On
Balance Volume indicator, which is moving up out of a 6-week
base.  While volume over the past few days has been increasing
(an encouraging sign), it is still well below the ADV, likely
due to the continued effect of the holidays.  Next week will
tell the true story, as volume returns.  ACS is quickly
eliminating levels of overhead resistance, with the $56-57
resistance zone (all time highs from March through June of last
year) now looming as the most likely obstacle.  If the PnF chart
is any indication, with its long column of X's and price target
of $88, ACS has some significant room yet to run.  We don't
really want to chase the stock higher due to the looming
resistance, but the behavior on the next pullback will be key.
If ACS drops back to the $54 level and finds support, that would
be a real sign of strength.  But even a drop and rebound from
the vicinity of $52.00-52.50 would make for a very nice entry.
This is the site of both the 10-dma ($52.39) and the ascending
trendline that has been in place since the July lows.  We're
ratcheting our stop up again this weekend, this time to $51.75.

*** January contracts expire in two weeks ***

BUY CALL JAN-50*ACS-AJ OI=2508 at $5.60 SL=1.75
BUY CALL JAN-55 ACS-AK OI=2018 at $1.85 SL=0.40
BUY CALL FEB-55 ACS-BK OI= 291 at $3.80 SL=2.50
BUY CALL FEB-60 ACS-BL OI=1010 at $1.65 SL=0.75

Average Daily Volume = 1.66 mln


BEAS - BEA Systems $12.03 (+0.18 last week)

Company Summary:
As a provider of e-commerce infrastructure software, BEAS
helps companies of all sizes extend investments in existing
computer systems and provide the foundation for running a
successful integrated e-business.  The company's products have
been adopted in a wide variety of industries, including
commercial and investment banking, securities trading,
telecommunications, airlines, retail, manufacturing and
government.  BEAS' products serve as a platform or integration
tool for applications such as billing, customer service,
electronic funds transfers, ATM networks, Internet sales,
supply chain management, and hotel, airline and rental car

Why We Like It:
After a push up to new recent highs on December 23rd, shares
of BEAS have spent the past couple weeks consolidating in the
$11-12 area, awaiting the catalyst for the next directional
move.  Clearly that isn't enough movement to generate profits
on short-term trades, but the stock appears to be readying
itself for another breakout move.  While it is frustrating to
sit and wait for that move to take place, bullish traders can
take comfort in the fact that the recent pullback was rather
shallow, finding support near the $11.40 level, which just
happens to be the site of prior resistance, both in late
November and the middle of December.  The recent pullback came
on very light volume (roughly half the ADV), which we can
attribute to the light holiday trading.  Even with the light
volume, it is really encouraging to see that the stock got
nowhere near challenging the rising trendline from the October
lows, currently at $10.80.  In the past, we've seen stocks
trade sideways after a strong move, we've lost patience due
to the inaction, and dropped the play just before continuing
with the trend that first got our attention.  Not this time.
All signs, from oscillators to price action, to the PnF chart
(with a bullish price target of $20) suggest BEAS has more
upside to go.  A return of volume next week ought to be just
what we need to get this party started again.  Look for intraday
dips in the $11.00-11.50 area as solid entry points so long as
those dips are followed by buyers taking advantage of the dip.
Momentum traders will need to wait for a breakout over $12.75
(with the conviction of stronger volume, of course) before
considering new positions.  We'll maintain our stop at $10.50,
just in case the stock actually reverses lower.  That level is
below both the ascending trendline and important support from
the past several weeks.

*** January contracts expire in two weeks ***

BUY CALL JAN-10*BUC-AB OI=19214 at $2.20 SL=1.00
BUY CALL JAN-12 BUC-AV OI= 9172 at $0.55 SL=0.25
BUY CALL FEB-10 BUC-BB OI=   70 at $2.80 SL=1.50
BUY CALL FEB-12 BUC-BV OI=  773 at $1.40 SL=0.75

Average Daily Volume = 10.1 mln


QCOM - QUALCOMM Inc - 35.70 -1.44 (-1.57 for the week)

Company Description:
QUALCOMM Incorporated is a leader in developing and delivering 
innovative digital wireless communications products and services 
based on the Company's CDMA digital technology. (source: company 
press release)

Why We Like It:
In our heavily integrated economy, one company's misfortune can 
set off a chain reaction that sends several other stocks lower.  
Case in point - Niche retailer RadioShack (RSH) announced an 
earnings warning today.  The company lowered its fourth-quarter 
EPS forecast from $0.63-$0.68 to $0.58-$0.60, citing weak sales 
of Sprint PCS cell phones and service contracts as one of the 
primary reasons for the revision.  RSH took the news in stride; 
the stock actually finished in the green.  Such was not the case 
with PCS.  The wireless carrier derives a significant chunk of 
its business from sales at Radioshack, and its stock was hammered 
for an 8.7% loss.  The evidence of weakening demand for cell 
phones also pressured shares of QCOM.  Qualcomm, who makes the 
chips that power most Sprint PCS devices, stands to see a very 
real impact on its bottom line as a result of the poor Radioshack 
sales.  This news couldn't have come at a worse time.  The stock 
has already been pressured by news that China may adopt its own 
cell phone technology by 2004.  The country is developing a 
wireless standard that will directly compete with Qualcomm's CDMA 
technology.  To make matters worse, the highly intrusive and 
quasi-Communist government in Beijing could actually mandate that 
its own standard be adopted, thereby eliminating a tantalizing 
growth market for QCOM.  

So perhaps it's not all that surprising to see that the company's 
stock is in a severe rut.  QCOM has been moving south ever since 
it topped out near $43 at the beginning of December.  Shares 
pegged a new relative low today and finished with a 3.8% loss.  
Signs of weakness were already appearing on Thursday.  Two of the 
leading sectors during the explosive tech rally were the 
semiconductor and wireless groups (represented by the SOX.X and 
YLS.X, respectively).  QCOM makes semiconductors for wireless 
devices.  Sounds like a combination for some robust gains, 
doesn't it?!  The stock instead managed a paltry gain of only 
2.0%.  With QCOM trading well above any underlying support 
levels, it looks like the current downtrend could remain intact 
for weeks to come.  For the purposes of this play we will target 
a decline to the $30.00 region.  Traders who watch QCOM will 
recall that this area provided solid resistance throughout the 
summer.  Our path to profits is blocked by two potential 
obstacles - The November lows near $33.00 and the 200-dma at 
$32.22.  Shorter-term or conservative traders may want to target 
a move to the latter level, which is more likely to offer 
support.  We believe that the recent bearish news stories, 
combined with a deteriorating technical picture (a trade at 
$35.00 would trigger a double-bottom breakdown) will be enough to 
send QCOM below moving average support.  But in order to ensure 
that the stock is trading at new lows before we enter this paper 
trade, we're placing an action trigger at $35.38.  If the play is 
triggered our stop will be set at $38.25, slightly over the 50-
dma.  Those not willing to take as much heat could use a stop 
just above Thursday's high of $37.17.

***** January Contracts expire in two weeks *****

BUY PUT FEB 37.50 AAW-NU OI=  130 at $4.00 SL=2.00
BUY PUT FEB 40*   AAW-NH OI=  113 at $5.60 SL=2.80

Average Daily Volume = 15.3 mil


ASD - American Standard Companies $69.48 (-1.59 last week)

Company Summary:
American Standard Companies is a global, diversified manufacturer
of high-quality, brand name products in three major product
groups: air conditioning systems and services, bathroom and
kitchen fixtures and fittings and vehicle control systems for
heavy and medium-sized trucks, buses, trailers, luxury cars and
sport utility vehicles.  The company's brand names include
Trane and American Standard for air conditioning systems,
American Standard, Ideal Standard, Porcher, Jado, Armitage,
Shanks, Dolomite, Meloh, Venlo and Borma for plumbing products
and Wabco for vehicle control systems.

Why We Like It:
With the consumer showing signs of faltering, and business not
yet showing any signs of increased spending, those companies
that serve both markets are caught in the middle.  The negative
comments from Home Depot on Thursday showed that the home
improvement spending cycle is weakening and despite positive
sales growth from the automotive companies on Friday, it is clear
that the recent gains have been driven by incentives which can't
be expected to continue indefinitely.  Investors in ASD seem to
be getting that picture, as the stock has continued to languish
in recent weeks.  After topping out in mid-November, the stock
began to show some relative weakness with its failure to post a
new recent high in early December with the rest of the market.
Since then it has been a series of lower highs and lower lows.
It looked like buyers might offer some relief last week when the
stock rebounded from the converged 50-dma ($71.13) and 200-dma
($71.40), but the warning from HD removed that illusion.  ASD
responded to that news by plummeting through support and closing
below $70 for the first time since the middle of November.  The
PnF is currently on a Sell signal, with a price target of $64,
but we need to be cautious about chasing the stock lower here
with the bullish support line just below at $68.  That makes
entry on the next failed rally the more prudent strategy for now.
With last week's breakdown, the $71-72 level should now provide
solid resistance, backed up by the month-long descending
trendline at $72.75.  Look to enter the play on a rally failure
below that level, ideally accompanied by a resumption of the
broad market weakness we've seen over the past month.  Place
stops initially at $73.

*** January contracts expire in two weeks ***

BUY PUT JAN-70*ASD-MN OI=635 at $2.10 SL=1.00
BUY PUT JAN-70 ASD-NN OI= 40 at $3.60 SL=1.75
BUY PUT JAN-65 ASD-NM OI=  0 at $2.75 SL=1.50

Average Daily Volume = 445 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:  



Please read our disclaimer at:


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

Contact Support
The Option Investor Newsletter                   Sunday 01-05-2003
Sunday                                                      4 of 5

In Section Four:

Current Put Plays: BSC, CEPH, IBM
Leaps: New Year Cheer
Traders Corner: If Variety Is The Spice Of Life, Gimme Some Garlic

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:  



BSC - Bear Stearns - $61.72 +0.24 (+1.94 for the week)

Company Summary:
Founded in 1923, The Bear Stearns Companies Inc. is the parent 
company of Bear, Stearns & Co. Inc., a leading investment banking 
and securities trading and brokerage firm. With approximately 
$30.6 billion in total capital, Bear Stearns serves governments, 
corporations, institutions and individuals worldwide. The 
company's business includes corporate finance and mergers and 
acquisitions, institutional equities and fixed income sales, 
trading and research, private client services, derivatives, 
foreign exchange and futures sales and trading, asset management 
and custody services. Through Bear, Stearns Securities Corp., it 
offers financing, securities lending, clearing and technology 
solutions to hedge funds, broker-dealers and investment advisors. 
Headquartered in New York City, the company has approximately 
10,500 employees worldwide.

Why We Like It:
BSC finally broke down low enough to give the PnF sell signal we 
referred to in our original write-up.  The trade of $59 on 
December 31 set the current bearish vertical count at $51, 
however, if the stock heads lower without a reversal into a 
column of "X," then the count could continue to sink.  BSC did 
get a big boost on Thursday, following the Dow rally that took 
most financial stocks with it.  BSC also added just under a 
quarter in today's action.  The stock has failed to break its 50-
dma at $61.98, which would coincide closely with a PnF reversal 
up at $62. BSC is now facing heavy resistance in the $62-$63 
range.  Aggressive traders may view this level as an entry point, 
with the current stop set at $63 for a favorable risk/reward 
scenario. Conservative traders may want to wait for another break 
below $60 as proof of a failed rally. In either case, we will 
hang onto the bearish play and rely on our stop to tell us if it 
is time to let go. BSC's chart looks very much like that of the 
Dow and S&P 500, so traders can watch the broad market action for 
signs of a support break to confirm new entries in the short 

***** January Contracts expire in two weeks *****

BUY PUT JAN-60 BSC-ML OI= 4469 at $1.00 SL=0.00
BUY PUT FEB-60*BSC-NL OI=   71 at $2.20 SL=1.10

Average Daily Volume = 1.12 mil


Cephalon Inc - CEPH - 49.57 -0.20 (+0.58 for the week) 

Company Description:
Founded in 1987, Cephalon, Inc. is an international biopharmaceutical 
company dedicated to the discovery, development 
and marketing of innovative products to treat sleep and 
neurological disorders, cancer and pain. (source: company press 

Why We Like It:
Last night we discussed Cephalon's two overhead resistance 
levels: $50.00 and the 200-dma at $50.26.  The bears were 
seemingly on the defensive today when CEPH made two separate 
jaunts above these obstacles.  Both rallies came in tandem with 
intraday bounces in the broader market.  But just as it looked as 
though the bulls might run away with the ball during the second 
rally, an afternoon sell-off dragged the stock back into negative 
territory.  Shares faded the NASDAQ during the final hour of 
trading and finished with a 20-cent loss.  So basically, we're 
looking at a bearish intraday reversal on the daily chart.  The 
inability of CEPH to hold above resistance is a positive sign for 
this play.  However, we're going to need to see some heavier 
selling if CEPH is ever going to move back towards its relative 
lows.  Weakness in the biotech sector would certainly help our 
cause.  The BTK.X biotech index is currently struggling with its 
100-dma at 348.53.  More substantial resistance looms overhead at 
352, near the descending trend of lower highs.  We'd expected 
CEPH to follow suit if the BTK retraces its recent gains and 
retests the short-term lows.

***** January Contracts expire in two weeks *****

BUY PUT JAN 50 CQE-MJ OI= 2486 at $2.40 SL=1.20
BUY PUT FEB 50*CQE-NJ OI=  920 at $4.30 SL=2.15

Average Daily Volume = 2.25 mil


IBM - Int'l Business Machines $81.65 (+4.29 last 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:
In the wake of Thursday's stellar rally in the broad market, IBM
looked like a strong candidate to give back its quick-won gains,
and it still does.  Despite the solid 2-day rally, shares of Big
Blue are still resting just below strong resistance near the $82
level.  This is a significant level on the PnF chart as well, as
it will require a trade at $83 to negate the current Sell signal
and bearish price target of $69.  So what we have is a very
attractive risk/reward trade, with just over $1 of upside risk
and more than $12 of potential reward if the current bloom fades
with the holiday good cheer.  That said, there is no question
that this play is higher risk, as we are attempting to pick a
top in a stock that is attempting to rally through resistance.
All of the oscillators are in various stages of bullish reversal,
and that's why we need to adhere strictly to our stop at $83.
While aggressive traders can look to enter on a failed rally
near the $82 level, those that want to take a more cautious
approach, will want to wait until IBM drops back under the
$80,50 level.  This prior resistance level is the site of the
broken descending trendline connecting the highs of each of the
failed rallies throughout December, and a move back under that
level would have significant bearish implications.  Given its
prominence in the various broad market indices, look for
confirmation of weakness in IBM to be exhibited in the broad

*** January contracts expire in two weeks ***

BUY PUT JAN-85 IBM-MQ OI=18378 at $4.70 SL=2.75
BUY PUT JAN-80*IBM-MP OI=34345 at $2.10 SL=1.00
BUY PUT FEB-80 IBM-NP OI=  765 at $3.90 SL=2.50

Average Daily Volume = 9.36 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:  



New Year Cheer
By Mark Phillips

At last we're beyond all the holidays, and we should all welcome
that development because now we should be able to get back to
normal markets...whatever that means.  I hope you had an
enjoyable break from the markets over the past couple weeks,
because I believe there is going to be plenty of excitement to
keep us busy in the weeks and months ahead.

Exhibit 1 is the fact that investors couldn't wait to get the
bullish party started on the first trading day of the New Year,
sending all the major indices sharply higher on volume that was
heavily lopsided to the Buy side.  Whether it was driven by an
early installment of retirement funds, the ISM report (not
likely, considering that the European markets had a great day
too, without the benefit of that report), belief that we can't
possibly have a fourth consecutive down year, or just a
continuation of the holiday good cheer, it was a nice way to
start 2003.  The problem is that it came on rather light volume
in a holiday week.  So we're left scratching our heads as to
what it all means.  That seems to be what everyone else was
doing on Friday, as can be seen with all the major indices
essentially closing flat on the day.  We need to see volume
come back into the market, and hopefully that will be
forthcoming next week.

If the earnings warnings from HD and RSH on Thursday and Friday
are any indication though, the buying frenzy on Thursday may
have been overdone and premature.  Oh sure, we have all the
clowns (analysts and economists) being paraded on CNBC and
various financial publications, entertaining us with rosy
pictures of how much the market will advance in 2003.  There are
hardly any that are predicting a decline, and that lines up
perfectly with what they've been telling us for the past 3
years.  In fact, the larger the gain projected by Wall Street's
seers, the larger the percentage loss suffered by the market
in recent years.

Let's take a look at the annual BusinessWeek Market Survey for
our data, shall we?  In 2000, the predicted rise for the DOW
was 5.7%, while the actual result was a loss of -6.2%.  In 2001,
those bold prognosticators came in with a consensus forecast of
an 11.4% rise, only to be disappointed when the DOW lost -7.1%.
Now that the book is closed on 2002, we can compare results
again -- the prediction of a 10.6% gain resulted in a loss
of -16.8%.  Well, ever the optimists, the Wall Street
"professionals" are telling us to expect a 17% gain for the
year.  I sure hope the pattern of the past 3 years doesn't
repeat, or else I fear we could be looking at a loss of more
than 20% for 2003.  Not pretty!

But this is a perfect example of Ken Fisher's "Great Humiliator",
where the market strives to embarrass as many people as possible.
What I find interesting in all the predictions, is that these
analysts don't seem at all dismayed or dissuaded by their recent
abysmal records.  No, they just trot out the same old bullish
forecast, supported by the same tired justifications without
taking the time to review that perhaps things have changed.
Here are the catch-all phrases that pop up with alarming
regularity -- Accommodative monetary policy, compelling
valuations (oh, come on!), unlikelihood of a fourth consecutive
down year, easy earnings comparisons, and on and on.  The
problem is that they really don't provide any factual basis for
their position.  They're just broken clocks, hoping that this is
the year that they'll be right for a change.  Remember, even a
busted clock is right twice a day.  But that doesn't change the
fact that the clock is worthless.

I wrote about my perception of analysts and economists in my
Trader's Corner article on Monday, and Buzz did a nice piece of
work on Thursday, advocating that we each become our own guru.
The bottom line is that there are three aspects to successful
investing -- fundamentals, technicals and sentiment.  There is
nothing in the fundamentals to indicate a rebound this year,
except maybe for the Bush administration's economic stimulus
plan, which is probably already factored into the market.  In
fact, quite the opposite as earnings quality continues to
deteriorate across much of Corporate America, and stock
valuations still absurdly high relative to every other major
bottom in the last century.  Technicals certainly don't provide
much hope either, with the series of lower highs and lower lows
across the major averages still very much intact.  And there is
still far too much bullish sentiment out there to reasonably
expect that a new bull market is going to emerge any time soon.

Before you label me as a perma-bear and click over to a
different, less dour article, let me tempt you with this
statement.  I actually expect 2003 to be an up year!  That's the
tease.  The way in which we get there is not necessarily the
prettiest picture though.  We started the year with the DOW near
8350 and the SPX near 880.  I believe when we reconvene this
time next year, we'll see both of those averages above where
they started this year.  And believe it or not, I think the
NASDAQ will actually look better on a percentage basis.  While
I'd love to spend the next few hours detailing the reasons
behind that belief, there just isn't time to cover it today.
But unlike the analysts that I berated up above, I will deliver
the goods.  How about we reconvene on Monday to slice and dice
the data and some charts to see if there's any validity to my

In the meantime, let's just say that I expect to get another
rally failure below the early December highs, and see the
selloff following that failure taking us below the lows of
late December.  We'll cover the rest on Monday.  Now let's get
to the nitty-gritty of what this section is all about -- the


LEN - Over the past few weeks, the housing stocks have been on a
bit of a roller-coaster ride, and LEN has been right there with
them.  The bottom line for me is the fact that the stock has
continued to find resistance at the 200-dma (currently $54.05)
and the 50-dma is cruising along below the 200-dma.  All we need
to see to get LEN solidly back on its bearish footing is for the
stock to fall back under the 50-dma (currently $52.76) and take
another run at the $50 support level.  Supporting my still-bearish
position on the stock is the fact that weekly Stochastics are
once again poking into overbought territory, while price is
stalling out at a lower level than the last time we were
overbought.  That's right, bearish divergence in the making.
All we need now is for our $54 stop to hold until the stock
rolls over again.

NEM - Gold stocks are looking better by the day, especially
with the gold futures closing once again over the $350 level.
It wasn't so long ago that we would have been branded lunatics
for suggesting $350 gold, but here we are.  Shares of NEM are
looking pretty strong as well, managing their first weekly
close over the $30 level since last May.  The long-term bullish
trend in the yellow metal is really starting to reveal itself,
and I'm looking for much higher levels in the months ahead,
primarily driven by continued weakness in the dollar and
continued geo-political uncertainty.  With that said, I'm going
to stick to my guns and not advocate buying into the strength.
In the LEAPS world, we're looking to take a long-term position,
and that means entering on the dips, not the breakouts.  But the
higher the stock pushes, the shallower the dips have become.
At this point, I think a pullback into the $28-29 area would
make for a solid entry into the play.  Per my comments in the
Market Monitor on Friday, I'm raising the stop on the play to
$27, just below the still-rising 200-dma.

MO - Sigh...While we were expecting some weakness in MO due to
the topped out daily and weekly oscillators, the action in the
stock last week is not encouraging.  On Tuesday, Morgan
Stanley cut their 2003 earnings estimates from $4.75 to $4.65,
saying that the modest increase in market share is coming at
the significant cost of much higher marketing costs.  Despite
the rebound on Thursday, weakness prevailed again on Friday,
pushing the stock back under $40 on heavy selling volume.  Like
we've been saying all along, we're not looking for an overnight
recovery in the stock.  But the pattern of higher lows since
mid-November is still in place and I'm looking for investors to
continue in their search for large and sustainable dividends in
the new year.  MO shines in that regard.  Ascending trendline
support, along with horizontal support comes in at $38.  Traders
still looking to initiate a position, can use a rebound from
that level as an entry trigger, keeping in mind that our stop
is currently at $37.

GM - Along with the rest of the market, GM exploded upwards on
Thursday, finally clearing the $37.50 resistance level that has
been holding it back for the past few weeks.  But there just
wasn't enough buying interest to get the stock through the $39
level, even on Friday after the company announced strong auto
sales results for the month of December.  Hmmm, seems like the
'good' news may have already been factored into the stock and
investors are starting to look out towards what happens when
the incentives (largely responsible for the strong sales over
the past year) have to be reduced.  And if they aren't reduced,
it's going to continue to cut into profits.  I don't know about
you, but it seems like a lose-lose proposition for GM.  Just
keep in mind that we're still bucking the trend a bit on this
play, as GM's PnF chart has yet to turn bearish following the
Buy signal that was generated in late November.  We need to see
a trade at $35 to get the chart back in favor of the bears.  In
the meantime, I still like new entries on rally failures in the
$39-40 area, keeping in mind that our stop is rather tight at
$40, so a close above that level will have us dropping the play.

BBH - Just when it looked like a breakdown was imminent, the
BBH was rescued by an excess of holiday cheer.  At least that's
the way it seemed to me, with the bulls dragging it back from
the brink on Thursday.  That was the 3rd consecutive day that
it had traded below $85, but rather than break down, the BBH
rebounded strongly with the rest of the market, closing back
over $87.  Friday was a throwaway day, with the stock trading
in a rather narrow range, and ending right on the ascending
trendline that has been in place since the July lows.  The
descending trendline is falling in line with the 200-dma (both
of which are now just below the $89 level, compounding the
50-dma resistance just below $88.  While BBH could still go
either way, it looks like the bears are gaining the upper hand
with the weekly Stochastics now in bearish decline and the
weekly MACD appearing to roll over below the zero line.  At
this point, failed rallies below the $89 level still look
attractive for new entries, while we wait for confirmation of
weakness with a breakdown under $84.  Adding confirmation to
the bearish picture is the PnF chart, which generated a fresh
Sell signal last week, confirming that the prior week's trade
at $91 was a Bull Trap.  Given last week's breakdown, it seems
safe to lower our stop to $92, just above the highs of the
past four months.

DELL - That 200-dma is actually turning out to be an important
inflection point, don't you think?  DELL has now rebounded
from that level 3 times in as many weeks, as there are
apparently some strong hands willing to defend that level.
Whether there is enough buying interest to allow a resumption
of the rally in the stock over the near term is another matter
altogether.  We know there is a PC replacement cycle coming,
but businesses really have no need to do it in one big push
until there are some signs of a recovery in business or the
economy.  That puts the emphasis back on the technicals of
DELL's chart, with the bullish ascending triangle (resistance
at $30, and rising support at $25.40) defining the current
trading range.  Traders still looking to enter the play can
use a rebound from the 200-dma or even the ascending
trendline to establish new positions.

Watch List:

GD - I put GD on HOLD because of the Sell signal generated on
the PnF chart, and despite the gradual rise over the past couple
weeks, I think it was the right move.  With the stock still
trading in the neutral wedge that has been building for over
four months, I still like the bullish prospects if the stock
can break out to the upside.  The stock needs to trade $83 to
generate a fresh PnF Buy signal and invalidate the current Sell
signal.  That's what I'm going to wait for before putting the
play back on active status.  A breakdown under $76 will have
us jettisoning the play from the list of Watch List candidates.

DJX - It was starting to look like the DOW was going to break
down without us onboard, so it was with a sense of relief that
we welcome the broad-based New Year's rally.  I have no
illusions about a sustained rally challenging the early December
highs anytime soon.  On the contrary, I'm hoping the bulls can
cobble together enough buying interest to get the DJX up into
our $87-88 target zone before the earnings warnings start to
fly.  Once the parade before the corporate confessional begins
in earnest next week (earnings warning season), I think any
rally is going to be very difficult to sustain.  That combined
with the still elevated, but weakening Bullish Percent readings
has me looking for one more push up to resistance, followed by
a breakdown below the late December lows.

BEAS - In contrast to my bearish expectations for the broad
market, our BEAS play is looking better to me all the time.
See how well it held up over the past couple weeks, without
even seriously challenging the ascending trendline?  In
retrospect, I probably should have initiated the position on
the weakness early last week, but was expecting we'd actually
test that trendline.  At this point, I think any rebound from
above the $11 level is looking like a solid entry point ahead
of the expected push through near resistance and an assault on
the $15 resistance level.

GS - Alright, we missed out on getting into the GS play with
a rally up to my ideal $74-75 area, but Thursday's euphoric
rally seems to be giving us another chance at it.  I don't
have any illusions about this rally attempt having much
staying power, but there's no sense jumping in front of the
stampeding bulls until they tire a bit first.  The daily
oscillators have all turned up, so let's let them run their
course.  Price could stall out near current levels, in which
case we'll want to enter on a reversal and close back under
the $70 level.  But ideally, we'll get one last push up the
charts, which ought to give us a rally failure in the $73-74
area.  This lines up nicely with the 50-dma ($73.96) and the
200-dma ($74.94) both of which are declining by the day.  Note
the rebound from the $67 level made perfect sense, as it was
the site of the bullish support line on the PnF chart.  Remember,
the first test of support is normally painful for the bears.
Now that we have that out of the way, we can focus on entry on
the next failed rally and target the bearish price target of
$53.  That might be a bit aggressive of a target, but I'd be
happy with a decline down into the $58-60 area, wouldn't you?

With the exception of the sharp upward move on Thursday, there
still wasn't a lot of meaningful action in the market last week,
and I'm eagerly awaiting the resumption of full-volume action
as we enter earnings warning season.  The one clue that tells
me that we aren't going straight down from here is the action
of the VIX.  We've talked about the pattern of this indicator
frequently in recent weeks, as it seems to be trying to work
its way back into that historically normal range.  Since
breaking down in mid-November, the VIX has found consistent
resistance near the 35-36 area, each time at a slightly lower
level.  And Thursday's impressive rally in the broad market has
once again sent the VIX plunging, with a close on Friday at
27.98, it's lowest level since late November.  Based on the VIX,
I would say an imminent market collapse is unlikely, but we all
know how quickly things can change.

I must apologize for the brevity of content this weekend (no new
plays), as the events of life have conspired to keep me
off-balance since midday on Friday.  As a result, I've run out
of time to add plays to the Watch List, so we'll have to defer
them until next week.  I do have a couple of candidates we can
start to watch together, and I'll point out what I find
interesting in the Market Monitor during the week.  In the
meantime, get set to put your business plan to work, as it's a
brand new year just begging to give us the just rewards of our
hard work.

Have a great week!


LEAPS Portfolio

Current Open Plays


NEM    10/30/02  '04 $ 30  LIE-AF  $ 3.90  $ 6.00  +53.85%  $27
                 '05 $ 30  ZIE-AF  $ 6.10  $ 8.80  +44.26%  $27
MO     11/13/02  '04 $ 40  LMO-AH  $ 3.90  $ 4.30  +10.26%  $37
                 '05 $ 40  ZMO-AH  $ 4.80  $ 5.60  +16.67%  $37
DELL   12/19/02  '04 $ 30  LDE-AF  $ 3.70  $ 4.20  +13.51%  $23
                 '05 $ 30  ZDE-AF  $ 6.10  $ 6.70  + 9.84%  $23

LEN    10/02/02  '04 $ 50  KJM-MJ  $ 8.60  $ 9.00  + 4.65%  $54
                 '05 $ 50  XFF-MJ  $11.20  $11.90  + 6.25%  $54
BBH    12/02/02  '04 $ 85  KBB-MQ  $12.10  $13.60  +12.40%  $92
                 '05 $ 80  XBB-MP  $14.40  $15.80  + 9.72%  $92
GM     12/02/02  '04 $ 35  LGM-MG  $ 5.20  $ 5.60  + 7.69%  $40
                 '05 $ 30  ZGM-MF  $ 5.50  $ 5.80  + 5.45%  $40

LEAPS Watchlist

Current Possibles


GD     11/24/02  HOLD          JAN-2004 $ 80  KJD-AP
                            CC JAN-2004 $ 70  KJD-AN
                               JAN-2005 $ 80  ZZJ-AP
                            CC JAN-2005 $ 75  ZZJ-AO
BEAS   12/22/02  $11           JAN-2004 $ 12  LZP-AV
                            CC JAN-2004 $ 10  LZP-AB
                               JAN-2005 $ 12  ZWP-AV
                            CC JAN-2005 $ 10  ZWP-AB

DJX    12/08/02  $87-88        DEC-2003 $ 84  ZDJ-XF
                               DEC-2004 $ 84  YDJ-XF
GS     12/22/02  $70-71, 74    JAN-2004 $ 70  KGS-MN
                               JAN-2005 $ 70  ZSD-MN

New Portfolio Plays


New Watchlist Plays





If Variety Is The Spice Of Life, Gimme Some Garlic
By Mike Parnos, Investing With Attitude

It’s great to have choices in life.  Blond, brunette or redhead.  
Fruit Loops or Wheaties.   ESPN or CNBC.  Bud or Bud Lite.  
Jockey or briefs.  Probation or jailtime.  Decisions, decisions.

This week I received a lot of letters asking how to “juice” the 
Long Term Strangle we discussed last week.  Not only will I give 
you “juice,” but I’ll give you a three-egg omelet, bacon, and a 
side of hash browns.  If the cholesterol doesn’t kill you, you’ll 
be bored to death counting your money.  

Here’s another choice for you on a long term ITM strangle play.  
Now, prepare yourself.  Turn off the TV, put on clean underwear, 
and vacuum the couch.  You’re going to need a clear head for 
this, because it’s complicated.  You’re really going to have to 
focus.  But it’s worth it.

The Original Position
Last Sunday I discussed a long term In-The-Money (ITM) Strangle 
strategy.  Basically, it consisted of buying ITM long term LEAPS 
puts and calls and selling near term out-of-the-money puts and 
calls against them.  The objective of this strategy is to 
generate a nice cash flow without exposing ourselves to 
substantial risk.

The position was constructed as follows:  We are long –
a) QQQ 2005 January $21 calls
b) QQQ 2005 January $29 puts

Against these long positions, we have sold short –
a) QQQ 2003 February $29 calls
b) QQQ 2003 February $21 puts
We took in a total of $950 of premium when we sold the near term 
options.  Our cash outlay was $15.20.  However, because of the 
$8.00 of intrinsic value in the long LEAPS, the risk is only 

Although the LEAPS go out 24 months, it’s highly unlikely that 
the QQQs will stay within the $21 - $29 trading range.  We will 
either have to adjust or close all or part of the position at 
some point in time.

For a more in-depth discussion of the initial Long Term ITM 
Strangle, see last Sunday’s column (“Manufacturing Wealth – Among 
Other Things” 12/29/02)

Now, Let’s Get Kinky
No, this isn’t like the chandelier trick.  It’s a little easier 
and not quite as physically taxing.  Mentally, it will be a 
challenge.  Once again, we’re going to initiate the position 
using LEAPS.   But, instead of using the 2005 LEAPS, we’re going 
to use 2004 LEAPS.  For our example, we will use the prices as of 
Friday’s close.   The QQQs closed at $25.68

Buy QQQ 2004 January 21 calls @ $6.90
Buy QQQ 2004 January 29 puts @ $5.80
Total of $12.70
Again, because of the $8.00 of intrinsic value of these two 
positions, the risk is only $4.70.

Now, instead of selling near term options against these 2004 
LEAPS, we will sell out-of-the-money January 2004 LEAPS.

Sell QQQ 2004 January 28 calls @ $3.10
Sell QQQ 2004 January 22 puts @ $2.15
Total credit of $5.25.
Notice that the credit of $5.25 is higher than the risk of $4.70.  
Therefore, in this strategy there is NO RISK.   Actually, if we 
did nothing at all, and the QQQs remained in the $21-$29 range, 
we would make $.55.

What we actually have here is a $21-$28 bull call spread that 
cost $3.80 ($6.90-$3.10).  We also have a bear put spread that 
cost $3.65 ($5.80-$2.15).  Remember these numbers.  They will 
come into play later.

How We’re Going To Make Money
Obviously, we’re going to set our sights higher than $.55.  We’re 
not here for the fun of it.  So, how are we going to make money 
out of this mess.  Well, here’s the plan.

We know that the QQQs have a tendency to move 3+ points every 4-6 
weeks.  For example, if the QQQs fall to $22.00, the $29/$22 bear 
put spread would be worth about $4.35.  The cost of the bear put 
spread was only $3.65.  So, we’re going to liquidate the bear put 
spread and put the $.70 in our pocket.

Now we have to replace the bear put spread.  We need to replace 
it with another bear put spread that costs the same as the first 
one ($3.65) or less.  We will then move down our strikes and:
Buy the QQQ January 04 $27 put and sell the QQQ January 04 $19 
put.  If we keep the same 8-point difference, the cost should be 
very close to, or less than, the $3.65 price objective.  

We’re not done yet.  We also have to adjust the bull call spread.  
Why?  Because we need to maintain the integrity of the 8-points 
of intrinsic value of our two long LEAPS.   First, we have to 
unwind our call spread.  When we sell the $21 LEAPS and buy back 
the $28 LEAPS, we will take in about $2.90.  That’s $.90 less 
than what we spent ($3.80) when we put it on originally.  We’ll 
have to make that up when we select the call to sell.

The new put spread’s long put is $27.  So, to maintain the 8 
points of intrinsic value, our long call will need to be at the 
$19 strike.  To make up the $.90 deficit, we would sell the $24 

So, we are left with the following:
Long January 2004 $19 call, Short January 2004 $24 call
Long January 2004 $26 put, Short January 2004 19 put
Now we wait for the next 3+ point move and keep making 
adjustments along the way.  

If a 3+ point moves happens every six weeks, you could have 8-9 
adjustments during the life of the LEAP option.  If you take in 
$.70 of profit each time, you could realize about $6.00 over the 
year – with NO RISK.  And don’t forget the $.55 you took in when 
you put on the trade originally.

The important thing is to maintain the integrity of the eight 
points of intrinsic value and to maintain, as close as possible, 
the total initial debit of the two spreads ($7.45).  You may have 
to use judgment to make the spreads slightly narrower to achieve 

This is a commission intensive strategy, but it’s also a trade 
that you don’t have to hover over.  It’s only realistic if you 
use online brokers that charge about $2 per contract.   The 
numbers that I used in the example above are projections and 
could only be approximate, but they’re not too far off.

I told you it was going to be complicated.  I always keep my 
promises.  Now go watch a movie, have a taco or two, and maybe 
take your weekly shower. Then, come back and go over this column 
again.  Stir gently and repeat the process until you have a 
migraine or understand the concept.

Don’t hesitate to write if you have questions.


BBH Iron Condor – Currently trading at $86.80.
We want BBH to finish the January option cycle anywhere between 
$80 and $95.  We’re still looking good – still in mid-range.

XAU Calendar Spread  – Currently trading at $79.51.
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.  

Gold has become the “safe haven” for investors recently.  As a 
result, XAU has moved up, and broke through, our $80 level a 
little faster than we wanted.  When it was trading at $80.77 on 
Friday, the June $80 call was selling for $9.60 and we could buy 
back the January $80 call for $3.30.  That’s a difference of 
$6.30.  Our cost was only $5.00.  That’s a profit of $1.30 on a 
$5.00 risk.  If XAU trades back up to that level, we will close 
the spread and take our profits.  Even CPTI students who paid 
above $5 for the initial spread should be happy to take the money 
and run.

Another choice would be to buy back the January $80 call and sell 
the February $85 call.  You would take in a little additional 
premium and give XAU an additional five weeks to roam.

QQQ ITM Strangle  – Currently trading at $25.68.
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.

Mike Parnos

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:  



Please read our disclaimer at:


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

Contact Support
The Option Investor Newsletter                   Sunday 01-05-2003
Sunday                                                      5 of 5

In Section Five:

Covered Calls: Covered-Calls On The QQQ?
Naked Puts: Pricing Fundamentals For New Traders
Spreads/Straddles/Combos: A Great Way To Start The Year!

Updated In The Site Tonight:
Market Watch
Market Posture

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:  



Trading Basics: Covered-Calls On The QQQ?
By Mark Wnetrzak

This week's discussion concerns the use of LEAPS as a substitute
for owning the NASDAQ-100 Index (QQQ) in a technology sector

Attn: Covered-Calls Editor
Subject: Trading the QQQ with LEAPS

Thanks for your excellent site!

My question is basically one I should ask my broker, but before
I do, I would like your take on it...

As I read your 12/15/02 article about selling calls covered by
LEAPS, I was wondering if my broker would let me do this.  I
understand that selling calls, when they are backed by "real"
shares, can give me returns of 1.5 to 3% per month.  I have good
experience with the QQQ's selling the one or two month ATM or
ITM calls.  Especially with a sideways moving market, the chances
are good that I do not have to buy back these calls.  However, if
I bought LEAPS instead, my returns would jumps significantly as
I understand it.  Right now a 2005 January 25 call is $6, and a
2003 January 25 call sells for $1.35.  If I bought five of the 05
LEAPS (as underlying "stock") and sold five of the 03 Jan 25 call,
my cost would be $3k and my writing would generate $675.  If not
called my return would be 22.5% (before commissions).  This is
almost too good to be true.  

If I there is chance I will get called, do the LEAPS "cover" the
write?  Or do I have to buy back the calls, no matter what?  Is
my reasoning right and would my broker (TDWaterhouse) let me do
the above?



Hello HK,

Indeed, NASDAQ-100 (QQQ) LEAPS are a viable alternative to owning
the underlying in the combination position you described and in
reality, the strategy you are using is simply a calendar spread.

A calendar spread (also known as a horizontal spread), involves
the purchase of an option with one expiration date and the sale
of another option with the same strike price but a different
expiration date.  The philosophy for using calendar spreads is
that time will erode the value of the short term option at a
faster rate than it will the long term option.  A spread which
is established when the underlying stock is at or near the strike
price of the options used is a neutral spread.  If the underlying
issue remains relatively unchanged until the near-term option
expires, the neutral spread will make a profit.

A less neutral and more bullish type of calendar or time spread
is initiated when the current value of the underlying issue is
below the strike price of the options.  This type of position is
speculative with low initial cost and large potential profits.
Two favorable outcomes can occur: the underlying stock rallies in
the short-term and the position is closed for a profit as time-
value erosion in the short option produces a net gain or; the
underlying stock consolidates, allowing the sold option to expire
and then eventually rallies above the long option's strike price.

It is important to understand how a calendar spread profits from
the passage of time.  When opening a horizontal spread, we buy a
long term option and sell a short term option.  Both options have
the same exercise price, thus they have the same intrinsic value.
Regardless of the movement of the stock, time value will always
be less in the near term option.  As long as the underlying stock
price remains relatively close to the exercise price, the value
of the spread will be determined by the time premium of each
option.  When we close the position at expiration, the remaining
time value in the short term option will be very low relative to
that of the long term option.

A horizontal spread is completely dependent upon the relative
behavior of time-value decay in each of the option positions.
Since the profitability of this strategy is determined solely
by the difference in time values of the options, it is important
for the underlying issue to remain near the strike price; where
time premium is theoretically the highest.  If the stock price is
at the high or low extreme, the time values of both options will
be low and the position will likely incur a loss; the remaining
credit will be less than the opening debit.

To the average trader, it would appear that this technique can't
lose.  One would simply buy the longer-term option and sell the
shorter-term option.  As both time values decayed, the spread
would gain value.  In reality, it's rarely that easy because the
underlying stock does not remain constant.  One way to reduce
the negative effects of a volatile stock is to establish the
spread at least two to three months before the near-term option
expires, capitalizing on the ability to sell a second position
against the longer-term option.  Ideally, the stock price would
be just below the sold strike when the near-term option expires
but if the options are in-the-money, they must be repurchased
to preserve the long-term position.

Another method that is commonly used to increase the probability
of profit in this strategy requires an understanding of implied
volatility in option pricing.  When opening any type of spread,
it's important to take advantage of any premium disparities to
create the best possible position.  At the OIN, we generally try
to open "time-selling" plays when there is excess value in the
sold option or a discount in the long option.  This allows us to
enter the position with a theoretical edge.  At the same time,
positions can be based more on technical indications than option
pricing, as long as the recent trend suggests a high probability
of a profitable outcome.

There is always the risk of early exercise in a calendar spread
(unless you are trading cash-settled index options such as the
S&P 500 index).  The degree of risk depends on which options are
bought and sold and the distance to the price of the underlying.
The greater the time value in the sold option, the lower the
probability of it being exercised.  If it does occur, a trader
can fulfill the obligation by simply purchasing the underlying
stock (or stock-index) or offsetting the sold options with the
purchase of another series of options.  The important thing is
to be notified in a timely manner so the appropriate action can
be taken before the price of the underlying changes appreciably.

Trade Wisely!


The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of actual traders, due to the variety of ways
in which each play can be opened, closed and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The play commentary (when provided) is simply a service to help
new traders understand when positions might be opened and closed.
In most cases, actions taken based on the commentary would be far
too late to be effective, thus it is not intended as a substitute
for personal trade management nor does it replace your duty to
diligently monitor and manage the positions in your portfolio.

Note:  Margin not used in calculations.

Stock   Price   Last    Option    Price   Gain  Potential
Symbol  Picked  Price   Series    Sold   /Loss  Mon. Yield

XMSR     3.00    2.79  JAN  2.50  0.80    0.30*  14.8%
RAD      2.46    2.73  JAN  2.50  0.15    0.19*  11.9%
AES      3.25    3.45  JAN  2.50  1.05    0.30*  11.9%
IDNX     5.40    5.17  JAN  5.00  0.70    0.30*   9.2%
FEIC    15.88   16.17  JAN 15.00  1.75    0.87*   8.9%
DNDN     5.43    5.50  JAN  5.00  0.70    0.27*   8.3%
AGIL     8.10    8.13  JAN  7.50  1.00    0.40*   8.2%
ELN      2.90    2.79  JAN  2.50  0.65    0.25*   8.0%
MMR      5.20    5.31  JAN  5.00  0.60    0.40*   7.6%
TKLC    10.33   11.00  JAN 10.00  0.80    0.47*   7.1%
LWSN     5.26    5.56  JAN  5.00  0.55    0.29*   6.7%
ADVS    13.51   14.39  JAN 12.50  1.50    0.49*   5.9%
SEPR     9.48   10.25  JAN  7.50  2.35    0.37*   5.6%
MEE     10.65   10.25  JAN 10.00  1.25    0.60*   5.5%
BEAS    12.15   12.03  JAN 10.00  2.60    0.45*   5.1%
EYE     10.27   10.35  JAN 10.00  0.70    0.43*   4.9%
IMCL    13.50   10.91  JAN 10.00  4.10    0.60*   4.6%
ALXN    15.30   14.55  JAN 12.50  3.40    0.60*   4.4%
MOGN     8.30    7.65  JAN  7.50  1.15    0.35*   4.3%
AVID    22.03   23.72  JAN 20.00  2.75    0.72*   4.1%
LVLT     5.13    4.70  JAN  5.00  0.50    0.07    1.6%
VISG     5.72    4.71  JAN  5.00  1.05    0.04    0.6%
ZIXI     5.51    4.29  JAN  5.00  0.90   -0.32    0.0%

* = Stock price is above the sold striking price.


The "old" year drags to a close and then the "new" year jumps to
conclusions.  Bullish conclusions!  I'm not convinced, but the
rise in the "tide" did allow for a "painless" exit/adjustment in
BioMarin Pharmaceuticals (NASDAQ:BMRN), as noted in the Market
Monitor on Thursday.  Our current early exit/adjustment watch-list
includes:  Imclone (NASDAQ:IMCL), MGI Pharmaceuticals (NASDAQ:
MOGN), Level 3 (NASDAQ:LVLT), Viisage Technology (NASDAQ:VISG),
Massey Energy (NYSE:MEE), and Zix Corp. (NASDAQ:ZIX).  The move
above the December high bodes well for VISX (NYSE:EYE), though
the volume was rather light.  Hopefully, the rally will continue
next week with some volume support, but don't count on it.

Positions Closed:

BioMarin Pharmaceuticals (NASDAQ:BMRN)


Sequenced by Company
Stock  Last  Call Strike  Option  Last Open  Cost   Days  Target 
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

ASML    9.20  JAN  7.50   MFQ AU  1.85 1283   7.35   14    4.4%
BSTE   35.82  JAN 35.00   BQS AG  2.10 852   33.72   14    8.2%
CAL     8.32  JAN  7.50   CAL AU  1.05 2618   7.27   14    6.9%
DCTM   16.97  JAN 15.00   QDC AC  2.25 81    14.72   14    4.1%
EP      7.74  JAN  7.50    EP AU  0.40 29041  7.34   14    4.7%
MATK   24.20  JAN 22.50   KQT AX  2.30 5     21.90   14    6.0%
MCDTA   8.40  JAN  7.50   MQG AU  1.10 309    7.30   14    6.0%

Sequenced by Target Yield (monthly basis)
Stock  Last  Call Strike  Option  Last Open  Cost   Days  Target 
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

BSTE   35.82  JAN 35.00   BQS AG  2.10 852   33.72   14    8.2%
CAL     8.32  JAN  7.50   CAL AU  1.05 2618   7.27   14    6.9%
MATK   24.20  JAN 22.50   KQT AX  2.30 5     21.90   14    6.0%
MCDTA   8.40  JAN  7.50   MQG AU  1.10 309    7.30   14    6.0%
EP      7.74  JAN  7.50    EP AU  0.40 29041  7.34   14    4.7%
ASML    9.20  JAN  7.50   MFQ AU  1.85 1283   7.35   14    4.4%
DCTM   16.97  JAN 15.00   QDC AC  2.25 81    14.72   14    4.1%

Company Descriptions

LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even 
point, DE-Days to Expiry, TY-Target Yield (monthly basis).

ASML - ASML Holding  $9.20  *** Bottom-Fishing: Chips ***

ASML Holding (NASDAQ:ASML) is a provider of advanced technology
systems for the semiconductor industry.  The Company offers an
integrated portfolio of lithography, track and thermal systems,
mainly for manufacturing complex integrated circuits.  ASML has
research and development and manufacturing facilities in the US
and the Netherlands, as well as applications facilities, technology
development centers and training sites in the Netherlands, the US,
Korea, Japan and Taiwan.  ASML has locations in 16 countries.
ASML has moved back above its 30-dma on increasing volume and 
appears to have made a successful test of support.  Short-term
speculation that offers a fair reward at the risk of owning 
this issue at a reasonable cost basis.

JAN 7.50 MFQ AU LB=1.85 OI=1283 CB=7.35 DE=14 TY=4.4%

BSTE - Biosite  $35.82  *** Will The Rally Continue? ***

A leader in the drive to advance diagnosis, Biosite (NASDAQ:BSTE)
is a unique research-based company dedicated to the discovery and
development of novel protein-based diagnostic tests that improve
a doctor's ability to diagnose debilitating and life-threatening
diseases.  The firm combines integrated discovery and diagnostics
businesses to access proteomics research, identify proteins with
high diagnostic utility, develop and commercialize products and
educate the medical community on new diagnostic approaches that
improve health care outcomes.  Biosite's "Triage" rapid diagnostic
tests are used in approximately 50 percent of U.S. hospitals and
in approximately 40 international markets.  In October, Biosite
reported strong growth for the third quarter of 2002 and projected
continuing growth in fiscal year 2003.  The company said that it
expects revenues in 2003 to be 35 to 40 percent higher than in
2002, with the possibility for upside from new products and new
markets that are currently under development.  Biosite's chart
shows only strength and traders looking for an entry point closer
to support can speculate on the company's future with this position.

JAN 35.00 BQS AG LB=2.10 OI=852 CB=33.72 DE=14 TY=8.2%

CAL - Continental  $8.32  *** Bottom-Fishing: Airlines ***

Continental Airlines (NYSE:CAL) is a major US air carrier engaged
in the business of transporting passengers, cargo and mail.  The 
company has wholly owned airline subsidiaries, including ExpressJet
Airlines and Continental Micronesia, which served 216 airports 
worldwide at January 31, 2002.  As of January 31, 2002, Continental
flew to 123 domestic and 93 international destinations and offered
additional connecting services through alliances with domestic and 
foreign carriers.  The company directly served 15 European cities
and seven South American cities, as well as Tel Aviv, Hong Kong and 
Tokyo as of January 31, 2002.  Continental also provides service to
Mexico and Central America.  Through the company's Guam hub, CMI
provides extensive service in the western Pacific, including service
to Japanese cities.  Shares of Continental Airlines rose on Friday
after the carrier reported better-than-expected revenue for December.
The rally on heavy volume is encouraging and investors can use this
position to speculate on the company's near-term share value.

JAN 7.50 CAL AU LB=1.05 OI=2618 CB=7.27 DE=14 TY=6.9%

DCTM - Documentum   $16.97  *** Long-Term Stage I Base ***

Documentum (NASDAQ:DCTM) provides enterprise content management
software solutions that bring intelligence and automation to the 
creation, management, personalization and distribution of vast 
quantities and types of content, including documents, Web pages,
XML files and rich media, in one common content platform and
repository.  Documentum's platform makes it possible for companies
to distribute content globally across all internal and external 
systems, applications and user communities.  The company's products
include site delivery services, content personalization services
and document control managers, among others.  Documentum continues
to forge a stage I base and this position offers investors who
believe an upside resolution is forthcoming a favorable cost
basis in the issue.  Earnings are due January 28.

JAN 15.00 QDC AC LB=2.25 OI=81 CB=14.72 DE=14 TY=4.1%

EP - El Paso  $7.74  *** Bottom-Fishing: Natural Gas ***

El Paso Corporation (NYSE:EP) is a North American provider of
natural gas services.  El Paso has core businesses in natural
gas production, gathering and processing, and transmission, as 
well as liquefied natural gas transport and receiving, petroleum
logistics, power generation and merchant energy services.  The
company, which is rich in assets and fully integrated across the
natural gas value chain, is committed to developing new supplies
and technologies to deliver energy to communities around the world.
El Paso, which is in the midst of shutting down its energy trading
operations, has been forming a stage I base for several months.
The technicals suggest the selling has abated and this short-term
position offers a reasonable reward for speculators who favor
"bottom-fishing" in the Utilities sector.

JAN 7.50 EP AU LB=0.40 OI=29041 CB=7.34 DE=14 TY=4.7%

MATK - Martek Biosciences $24.20 *** Pull-Back = Entry Point? ***

Martek Biosciences (NASDAQ:MATK) develops and sells products
made from microalgae.  Microalgae are microplants.  The firm
is engaged in the commercial development of microalgae into a
portfolio of high value products and new product candidates
consisting of Nutritional Products, Advanced Detection Systems
and Other Products, primarily Algal Genomics.  Their nutritional
products include nutritional oils for infant formula, dietary
supplementation and other products. Advanced Detection Systems
products include fluorescent dyes from various algae for use
in scientific applications for detection of certain biological
processes.  Martek has been in the news since announcing that
Abbot Labs would produce an infant formula supplemented with
Martek's DHA and ARA oils.  In mid-December, MATK shares rallied
after a favorable Q4 report and the near-term outlook is bullish.
Investors who are interested in adding this unique biotechnology
company to their portfolio should consider using this position
to establish a conservative cost basis in the issue.

JAN 22.50 KQT AX LB=2.30 OI=5 CB=21.90 DE=14 TY=6.0%

MCDTA - McDATA Class A  $8.40  *** Bottom-Fishing: Telecom ***

McDATA Corporation (NASDAQ:MCDTA) is a provider of open-storage
networking solutions and provides highly available, scalable and
centrally managed storage area networks (SANs) that address 
enterprise-wide storage problems.  The company's core-to-edge 
enterprise solutions consist of hardware products, software 
products and professional services.  Its SAN solutions improve
the reliability and availability of data, simplify the management
of SANs and reduce the total cost of ownership.  The strong rally
on Friday suggests that investors are expecting to hear good news
at McDATA's investor conference next week.  We simply favor the
move above the 30- and 50-dmas on heavy volume, which suggests
further upside potential.  Reasonable short-term speculation in
a stage I stock.

JAN 7.50 MQG AU LB=1.10 OI=309 CB=7.30 DE=14 TY=6.0%



The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary. 

Sequenced by Target Yield (monthly basis)
Stock  Last  Call Strike  Option  Last Open  Cost   Days  Target 
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

FDRY    7.76  JAN  7.50   OUJ AU  0.60 1145   7.16   14   10.3%
RFMD    8.10  JAN  7.50   RFZ AU  0.90 8722   7.20   14    9.1%
IDE    15.26  JAN 15.00   IDE AC  0.85 84    14.41   14    8.9%
FCX    17.61  JAN 17.50   FCX AW  0.70 267   16.91   14    7.6%
FEIC   16.17  JAN 15.00   FQE AC  1.65 16    14.52   14    7.2%
AU     35.81  JAN 35.00    AU AG  1.70 1419  34.11   14    5.7%
ACF     7.98  JAN  7.50   ACF AU  0.65 3362   7.33   14    5.0%
ISSX   20.13  JAN 17.50   ISU AW  3.00 2150  17.13   14    4.7%
GRMN   30.82  JAN 30.00   GQR AF  1.40 451   29.42   14    4.3%
FTE    19.57  JAN 17.50   FTE AW  2.40 57    17.17   14    4.2%


Options 101: Pricing Fundamentals For New Traders
By Ray Cummins

Our year-end subscription offer has been well received and with
the influx of new readers, it's a great time to review the basics
of option pricing.

In order to identify the most favorable options for a specific
strategy or position, it is necessary for a trader to understand
the principles related to option valuation.   The first step in
this process is to become familiar with the individual components
that determine an option's price and the mathematical equations
used to establish its theoretical value.  Each aspect of option
pricing is a separate element and they have Greek titles; Delta,
Gamma, Theta, Vega, and Rho.  As most traders know, the primary
influence on an option's price is the movement of the underlying
security.  This concept relates directly to the first and most
important member of the Greeks: Delta.  Delta measures the rate
of change in an option's price compared to a one point movement
in the underlying security.  It can be thought of as a percentage
of the movement of the stock price.  If the stock price moves up
$2 while the option on that stock gains $1, it has a Delta of 50
(or 50%).  An at-the-money (ATM) call option will typically have
a delta of 50.  In-the-money (ITM) calls have a higher delta; a
greater percentage move, based on the change in the underlying
issue.  As you might expect, the opposite condition is true for
out-of-the-money (OTM) call options; their Deltas are lower.

Gamma is listed next in most contexts and it is equivalent to the
change in the Delta of an option with respect to the change in
price of its underlying security.  In short, Gamma is the "Delta
of the Delta" and it is used primarily by professional traders in
portfolio hedging calculations.  While Gamma is a key factor in
managing institutional positions, it is not used regularly by
retail option traders thus it warrants no further discussion in
this forum.

Theta is the next component and it is most commonly defined as the
change in the price of an option with respect to a change in its
time to expiration.  In laymen's terms, it is a measure of premium
decay (or erosion) and thankfully, time value and decay are two of
the easiest aspects of option pricing to understand.  The time
value of any option can be simply expressed as everything but the
intrinsic value.  More importantly, the "extrinsic" value in an
option's price decays each day the option is in existence and the
closer the option gets to expiration, the faster it decays.  In a
strictly mathematical sense, time value decays at its square root
and this rate of decay can cost an option trader lots of money.
Since more time equals more money, long-term options have more
extrinsic value at equivalent strike prices.  Another important
concept option writers should be aware of is that time value is
highest in at-the-money (ATM) options.  Time value decreases as
options move in- or out-of-the-money (ITM-OTM) and strike prices
that are deep in- or out-of-the-money have the lowest time value of
all options.

Finally, the two lesser-used components of option pricing theory:
Vega and Rho.  Vega, which is the change in option price given a
one percentage point change in volatility, is used by professional
traders in hedging calculations.  Rho is a measure of an option's
sensitivity to changes in the risk-free interest rate and it is
used to help compare the holding costs and risk-reward outlook for
various trading strategies.

The Black-Scholes model and the Cox, Ross and Rubinstein binomial
model are the primary pricing models used by most professionals to
evaluate equity and equity-index options.  For retail traders, it
is adequate to know that both of these models are based on similar
theoretical foundations and assumptions.  However, there are also
some important differences between the two, the most important of
which is the fact that the Black-Scholes model cannot be used to
accurately price options with an American-style exercise (because
it only calculates the option price at expiration).  Even so, it
offers an expeditious means to calculate a large number of option
prices in a short time which, in contrast, is the main disadvantage
of the binomial model.

Option traders need to have a firm grasp of pricing theory because
the primary attraction of derivatives is the leverage they offer.
A trader can achieve an exponential percentage profit with only a
moderate change in the price of the underlying issue but to attain
this goal, he (or she) has to know which option provides the best
results in a given situation.  Choosing the correct time frame for
a specific play is also vital to long-term success, consequently
traders should have a fundamental understanding of time decay and
how it affects the value of an option.  Next week, we will discuss
probability and the statistical (volatility-based) components of
option pricing.

Good Luck!

The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of actual traders, due to the variety of ways
in which each play can be opened, closed and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The play commentary (when provided) is simply a service to help
new traders understand when positions might be opened and closed.
In most cases, actions taken based on the commentary would be far
too late to be effective, thus it is not intended as a substitute
for personal trade management nor does it replace your duty to
diligently monitor and manage the positions in your portfolio.

Stock   Price   Last    Option    Price   Gain    Max   Simple
Symbol  Picked  Price   Series    Sold   /Loss   Yield  Yield

MATK    25.55   24.20  JAN 22.50  0.60    0.60*  11.2%   4.0%
MATK    24.94   24.20  JAN 20.00  0.50    0.50*   9.8%   2.8%
BSTE    34.48   35.82  JAN 30.00  0.60    0.60*   8.8%   3.0%
AVID    22.80   23.72  JAN 20.00  0.40    0.40*   8.6%   3.0%
ACAS    22.69   22.39  JAN 20.00  0.40    0.40*   8.5%   3.0%
GG      12.62   13.07  JAN 11.25  0.40    0.40*   8.5%   3.2%
ESPD    16.90   18.08  JAN 15.00  0.30    0.30*   8.4%   3.0%
GFI     14.68   14.40  JAN 12.50  0.35    0.35*   7.5%   2.5%
RGLD    26.08   26.08  JAN 22.50  0.35    0.35*   7.0%   2.3%
PLMD    32.77   27.62  JAN 25.00  0.45    0.45*   7.0%   2.0%
COF     31.54   31.75  JAN 20.00  0.40    0.40*   6.5%   2.2%
IMPH    19.48   20.19  JAN 17.50  0.35    0.35*   6.2%   2.2%
WERN    22.21   21.50  JAN 20.00  0.40    0.40*   6.1%   2.2%
DISH    22.20   23.90  JAN 20.00  0.40    0.40*   6.1%   2.2%
MATK    23.37   24.20  JAN 17.50  0.35    0.35*   6.1%   1.8%
BSTE    31.41   35.82  JAN 22.50  0.45    0.45*   5.8%   1.8%
OVER    28.99   28.57  JAN 22.50  0.40    0.40*   5.6%   1.6%
AU      33.99   35.81  JAN 30.00  0.65    0.65*   5.5%   1.9%
IGEN    43.56   42.20  JAN 35.00  0.35    0.35*   5.5%   1.5%
IGEN    41.10   42.20  JAN 30.00  0.55    0.55*   5.5%   1.6%
GRMN    28.95   30.82  JAN 25.00  0.40    0.40*   5.4%   1.8%
GRMN    29.78   30.82  JAN 25.00  0.25    0.25*   4.9%   1.5%

* = Stock price is above the sold striking price.


The New Year's rally was a blessing to investors but it remains
to be seen if the move can generate any lasting support.  From
a technical viewpoint, the market resides in a intermediate-term
trading range and until one of the boundaries of the pattern are
breached, the major equity averages will have difficulty making
much headway in either direction.  Despite the (overall) lateral
activity, one of our portfolio issues endured some heavy selling
pressure this week.  Polymedica (NASDAQ:PLMD), the popular maker
of Liberty diabetes products, plunged on Friday after its chief
executive warned staff that the Federal Bureau of Investigation
will begin questioning employees in a health-care fraud probe of
the medical products maker.  Our bullish position at $25 will be
in jeopardy if the issue continues to move lower, thus it may be
prudent to exit the position and look for more profitable plays.
The Martek Biosciences (NASDAQ:MATK) position at $22.50 is also
on the watch-list as profit-taking has pulled the issue lower in
recent sessions.


The sale of uncovered puts entails considerable financial risk,
far more than the initial margin or collateral required to open
a position.  The maximum financial obligation for the sale of a
naked put is the strike price (of the underlying stock) that is
sold.  Although this obligation is reduced by the premium from
the sale of the option, a writer of puts should have the cash or
collateral equivalent of the sold strike price in reserve at all
times.  In addition, there is one very important rule when using
this strategy: Don't sell puts on stocks that you don't want to
own!  Why?  Because stocks occasionally experience catastrophic
declines, exponentially increasing the margin maintenance and
possibly causing a devastating shortfall in your portfolio.  It
is also important that you consider using trading STOPS on naked
option positions to help limit losses when a stock's price falls.
Many professional traders suggest closing the position when the
underlying share value moves below the sold strike, or using a
"buy-to-close" STOP at a price that is no more than twice the
original premium received from the sold option.


The Initial Margin is the amount of collateral you must have in
your account to initiate the position.  In specific terms, margin
refers to cash or securities required of an option writer by his
brokerage firm as collateral for the writer's obligation to buy
or sell the underlying interest if assigned through an exercise.
The Maintenance Margin is the amount of cash (or securities)
required to offset the changing collateral requirements of the
written options in your portfolio.  As the price of the option
and the underlying stock changes, so does the maintenance margin.
With (short) put options, the margin requirements can increase
when the underlying stock price declines and also when it rises
significantly.  The reason is the manner in which the collateral
amount is determined (with the formula listed above) and traders
should always consider not only the initial margin requirement,
but also the maximum margin needed for the life of the position.
Option writers occasionally have to meet calls for additional
margin during adverse market movements and even when there is
enough equity in the account to avoid a margin call, the need
for increased collateral will make that equity unavailable for
other purposes.  Please consider these facts carefully before
you initiate any "naked" option positions.

For more information on margin requirements, please refer to:



The Maximum Monthly Yield (listed in the summary and with each
new candidate) is the greatest possible profit available in the
position.  This amount, expressed as a percentage, is based on
the initial margin requirement as determined by the Board of
Governors of the Federal Reserve, the U.S. options markets and
other self-regulatory organizations.  Although increased margin
requirements may be imposed either generally or in individual
cases by various brokerage firms, our calculations use the widely
accepted margin formulas from the Chicago Board Options Exchange.
The Simple Monthly Yield is based on the cost of the underlying
issue (in the event of assignment), including the premium from
the sold option, thus it reflects the maximum potential loss in
the position.


Sequenced by Company
Stock  Last   Option   Option Last Open  Cost  Days   Max   Simple
Symbol Price  Series   Symbol Bid  Int   Basis Exp.  Yield  Yield

BVF   29.00  JAN 25.00 BVF ME 0.25 2611  24.75  14    6.9%   2.2%
CTAC  27.34  JAN 22.50 QCJ MX 0.30 19    22.20  14   10.2%   2.9%
DISH  23.90  JAN 22.50 UAB MX 0.30 339   22.20  14    7.7%   2.9%
LEA   37.09  JAN 35.00 LEA MG 0.40 44    34.60  14    6.6%   2.5%
OVTI  17.35  JAN 15.00 UCM MC 0.35 368   14.65  14   15.4%   5.2%
VXGN  18.99  JAN 15.00 UWG MC 0.35 555   14.65  14   18.3%   5.2%
XLNX  22.94  JAN 20.00 XLQ MD 0.25 8908  19.75  14    8.4%   2.8%
YHOO  18.10  JAN 15.00 YHZ MC 0.25 27215 14.75  14   12.4%   3.7%

Sequenced by Maximum Yield (monthly basis - margin)
Stock  Last   Option   Option Last Open  Cost  Days   Max   Simple
Symbol Price  Series   Symbol Bid  Int   Basis Exp.  Yield  Yield

VXGN  18.99  JAN 15.00 UWG MC 0.35 555   14.65  14   18.3%   5.2%
OVTI  17.35  JAN 15.00 UCM MC 0.35 368   14.65  14   15.4%   5.2%
YHOO  18.10  JAN 15.00 YHZ MC 0.25 27215 14.75  14   12.4%   3.7%
CTAC  27.34  JAN 22.50 QCJ MX 0.30 19    22.20  14   10.2%   2.9%
XLNX  22.94  JAN 20.00 XLQ MD 0.25 8908  19.75  14    8.4%   2.8%
DISH  23.90  JAN 22.50 UAB MX 0.30 339   22.20  14    7.7%   2.9%
BVF   29.00  JAN 25.00 BVF ME 0.25 2611  24.75  14    6.9%   2.2%
LEA   37.09  JAN 35.00 LEA MG 0.40 44    34.60  14    6.6%   2.5%

Company Descriptions

LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, MY-Maximum Yield (monthly basis - using
margin), SY-Simple Yield (monthly basis - without margin).

BVF - Biovail  $29.00  *** New FDA Approval! ***

Biovail (NYSE:BVF) is a full-service pharmaceutical company that
applies its proprietary drug delivery technologies in developing
"oral controlled-release" products throughout North America.  The
company applies its proprietary drug delivery technologies to
successful drug compounds that are free of patent protection to
develop both branded and generic oral controlled-release products.
The branded oral controlled-release products improve on existing
formulations, providing better therapeutic and economic benefits.
The company also engages in the formulation, clinical testing,
registration, manufacturing and sales of oral controlled-release
products throughout North America.  Biovail said Friday it had
won approval from the U.S. Food and Drug Administration for its
Zovirax cream, which is used to treat cold sores.  The firm also
said the FDA approval would put it in a good position to launch
the product in the first half of this year.  Investors were very
pleased with the news and this position offers a conservative way
to profit from continued upside activity in the issue.

JAN 25.00 BVF ME LB=0.25 OI=2611 CB=24.75 DE=14 MY=6.9% SY=2.0%?

CTAC - 1-800 CONTACTS  $27.34  *** New Acquisitions! ***

1-800 CONTACTS (NASDAQ:CTAC) is a direct marketer of replacement
contact lenses.  Through its toll-free telephone number, 1-800
CONTACTS, and through its Internet addresses, which include
www.1800contacts.com, www.contacts.com and www.contactlenses.com,
the company offers substantially all of the soft and hard contact
lenses produced by major contact lens manufacturers, including
Johnson & Johnson, CIBA Vision, Bausch & Lomb, Ocular Sciences
and CooperVision.  The company stocks a large inventory of lenses
from which it can ship approximately 95% of its orders within one
business day of receipt.  A recent deal to purchase rivals Lens
Express and Lens 1st has brought new buying interest to CTAC and
analysts say the deal is key to the company's future.  Investors
who believe the new acquisitions will yield favorable results can
establish a conservative cost basis (near $25) in CTAC with this

JAN 22.50 QCJ MX LB=0.30 OI=19 CB=22.20 DE=14 MY=10.2% SY=2.9%

DISH - EchoStar Communications  $23.90  *** More Deals! ***

EchoStar Communications (NASDAQ:DISH) operates through two major
business units, the DISH Network and EchoStar Technologies.  The
DISH Network offers a direct broadcast satellite subscription TV
service in the United States with almost 7 million DISH Network
subscribers.  EchoStar Technologies Corporation is engaged in the
design, development, distribution and sale of DBS set-top boxes,
antennae and other digital equipment for the DISH Network and the
design, development and distribution of similar equipment for a
range of international satellite service providers.  Dish recently
announced a deal to buy back 57 million shares of its stock from
Vivendi Universal at a discount to the current value and below the
original purchase price.  The news came on the heels of another
favorable agreement which voids an obligation to purchase Hughes
Electronics' stake in PanAmSat.  Both of the events were positive
for DISH and last week its subsidiary, EchoStar DBS Corporation,
elected to retire all of its outstanding 9 1/4% Senior Notes due
2006, three years early.  The near-term outlook for the company's
stock is bullish and investors who want to own DISH shares should
consider this position.

JAN 22.50 UAB MX LB=0.30 OI=339 CB=22.20 DE=14 MY=7.7% SY=2.9%

LEA - Lear Corporation  $37.09  *** On The Rebound? ***

Lear Corporation (NYSE:LEA) is an automotive supplier to major
manufacturers around the world, including General Motors, Ford,
DaimlerChrysler, BMW, Fiat, Volkswagen, Peugeot, Renault, Toyota
and Subaru.  The company has established in-house capabilities in
all five primary segments of the automotive interior market: seat
systems, flooring and acoustic systems, door panels, instrument
panels and headliners.  The company is also a global supplier of
automotive electronic and electrical distribution systems.  Shares
of LEA rebounded this week after Robert Hinchliffe, an analyst at
UBS Warburg, said Lear shares may offer some upside, based on his
recently lowered earnings estimates.  Merrill Lynch auto analyst
John Casesa also said he continues to favor parts supplier stocks
over automakers, given they are more profitable and sell at lower
valuations.  He noted that Lear is one of three companies in the
group that offer straightforward business models, improving balance
sheets, strong track records, management stability, and good growth
prospect.  Investors looking for these assets in an automotive
sector stock should consider this position.

JAN 35.00 LEA MG LB=0.40 OI=44 CB=34.60 DE=14 MY=6.6% SY=2.5%

OVTI - OmniVision Technologies  $17.35  *** New Technology! ***

OmniVision Technologies (NASDAQ:OVTI) designs, develops and sells
high performance, high quality and cost efficient semiconductor
imaging devices for computing, telecommunications, industrial,
automotive and consumer electronics applications.  The company's
main product, an image sensing device called a CameraChip, is used
to capture an image in cameras and camera-related products in a
range of imaging applications such as personal computer cameras,
digital still cameras, security and surveillance cameras, personal
digital assistant cameras, mobile phone cameras, and cameras for
automobiles and toys that incorporate both still picture and live
video applications.  OmniVision is set to demonstrate its newest
CameraChip technology advancements at CES in the coming week and
investors are hoping the activity will generate additional buying
interest in the company's shares.  Traders who believe the event
will result in future upside movement for OVTI can profit from
that outcome with this position.

JAN 15.00 UCM MC LB=0.35 OI=368 CB=14.65 DE=14 MY=15.4% SY=5.2%

VXGN - VaxGen  $18.99  *** Drug Speculation! ***

VaxGen (NASDAQ:VXGN) is engaged in the commercialization and
development of AIDSVAX, a vaccine designed to prevent infection
or disease caused by HIV (Human Immunodeficiency Virus), the
virus that causes AIDS.  The original AIDSVAX technology was
developed by Genentech, and then licensed exclusively to the
company.  AIDSVAX consists of two primary, biologically active
ingredients: an antigen and an adjuvant.  An antigen is the
ingredient in vaccines that activates the human immune system
response.  The antigen in AIDSVAX is synthetic gp120 protein.
An adjuvant is an active ingredient in vaccines that improves
the human immune system response by attracting immune cells to
the region where the vaccine is injected.  The adjuvant is alum,
or aluminum hydroxide.  Vaxgen is under contract with the U.S.
government to develop a new and better anthrax vaccine in case of
a biological attack.  The company also recently entered into an
agreement with Chemo-Sero-Therapeutic Research Institute to begin
clinical development and pursue regulatory (FDA) approval for an
attenuated smallpox vaccine.  Traders who want to establish a
relatively conservative position in a speculative issue should
consider this play.

JAN 15.00 UWG MC LB=0.35 OI=555 CB=14.65 DE=14 MY=18.3% SY=5.2%

XLNX - Xilinx  $22.94  *** Semiconductor Sector ***

Xilinx (NASDAQ:XLNX) is the world's leading supplier of complete
programmable logic solutions.  Xilinx develops, manufactures, and
markets a broad line of advanced integrated circuits, software
design tools and intellectual property.  Their customers use the
automated tools and intellectual property, which are predefined
system-level functions delivered as software cores, from Xilinx
and its partners to program the chips to perform custom logic
operations.  The beleaguered semiconductor sector has very few
bullish stocks to choose from, however one issue that has a solid
near-term base and reasonable upside potential is XLNX.  Traders
who agree with that outlook can speculate on the company's future
share value with this position.

JAN 20.00 XLQ MD LB=0.25 OI=8908 CB=19.75 DE=14 MY=8.4% SY=2.8%

YHOO - Yahoo!  $18.10  *** Pure Internet Play! ***

Yahoo! (NASDAQ:YHOO) is a global Internet business and consumer
services company that offers a comprehensive branded network of
properties and services to millions of individuals worldwide.  The
company offers an online navigational guide to the Internet via
its www.yahoo.com web-site, which is a guide in terms of traffic,
advertising and household and business user reach.  Through Yahoo!
Enterprise Solutions, the company also provides business services
designed to enhance the productivity and Web presence of its many
clients.  Yahoo! has offices in the United States, Europe, Asia,
Latin America, Australia and Canada.  YHOO is this week's pick for
an Internet-related stock and investors who wouldn't mind owning
the issue at a cost basis near $15 should consider this position.
The company's earnings are due 1/15/03.

JAN 15.00 YHZ MC LB=0.25 OI=27215 CB=14.75 DE=14 MY=12.4% SY=3.7%



The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary. 

Sequenced by Maximum Yield (monthly basis - margin)
Stock  Last   Option   Option Last Open  Cost  Days   Max   Simple
Symbol Price  Series   Symbol Bid  Int   Basis Exp.  Yield  Yield

IDE   15.26  JAN 15.00 IDE MC 0.65 0     14.35  14   21.7%   9.8%
ADTN  36.28  JAN 35.00 RQA MG 0.80 18    34.20  14   12.4%   5.1%
LLTC  28.18  JAN 25.00 LLQ ME 0.40 2818  24.60  14   10.2%   3.5%
COF   31.75  JAN 25.00 COF ME 0.30 15428 24.70  14    9.8%   2.6%
QLGC  37.77  JAN 32.50 QLC MZ 0.45 1837  32.05  14    9.5%   3.1%
NTAI  26.25  JAN 25.00 QNA ME 0.30 6     24.70  14    6.8%   2.6%
STJ   41.55  JAN 40.00 STJ MH 0.45 451   39.55  14    6.3%   2.5%



A Great Way To Start The Year!
By Ray Cummins

The market enjoyed its biggest one-day gain in three months this
week after bullish data from the manufacturing sector boosted
investor optimism of a recovery in the U.S. economy.

While analysts were hopeful the rally would continue, the major
equity averages ended Friday's session relatively unchanged as
traders sold for profits in the wake of the unexpected activity.
Blue-chip shares slipped after a mediocre earnings forecast from
home-improvement retailer Home Depot (NYSE:HD), which led the Dow
Jones Industrials 5 points lower to 8,601.  The NASDAQ Composite
Index finished up 2 points at 1,387 as investors shopped for new
positions in Internet and chip stocks.  The S&P 500 index closed
unchanged at 908 as gains in drug-delivery, airline and precious
metals stocks offset losses in retail, automotive and industrial
equipment issues.  Trading was tentative and somewhat lackluster
with advancing stocks pacing decliners by roughly a 6 to 5 ratio
on both the New York Stock Exchange and the NASDAQ.  Almost 1.13
billion shares changed hands on the Big Board, while only 1.14
billion shares traded on the technology exchange.  The U.S dollar
fell while oil prices jumped on fears that a strike in Venezuela
would trigger a supply crisis.  The bond market held steady with
the benchmark 10-year note climbing 3/32 to 99-27/32, while its
yield slipped to 4.02%.  The 30-year bond rose 2/32 at 106-12/32
with its yield closing at 4.95%.


The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of actual traders, due to the variety of ways
in which each play can be opened, closed and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The play commentary (when provided) is simply a service to help
new traders understand when positions might be opened and closed.
In most cases, actions taken based on the commentary would be far
too late to be effective, thus it is not intended as a substitute
for personal trade management nor does it replace your duty to
diligently monitor and manage the positions in your portfolio.


Symbol  Pick   Last  Month  LP  SP Credit   CB    G/L   Status

APC     49.59  48.43  JAN   40  45  0.55  44.45  $0.55   Open
VLO     36.39  37.57  JAN   30  32  0.30  32.20  $0.30   Open
ASA     39.30  42.19  JAN   33  35  0.35  34.65  $0.35   Open
FNM     66.61  67.83  JAN   55  60  0.40  59.60  $0.40   Open
NBR     37.75  36.55  JAN   30  32  0.30  32.20  $0.30   Open
DHR     65.10  67.39  JAN   55  60  0.40  59.60  $0.40   Open
IGEN    41.96  42.20  JAN   30  35  0.55  34.45  $0.55   Open
RD      43.21  44.78  JAN   37  40  0.15  39.85  $0.15   Open
LMT     57.70  58.71  JAN   50  55  0.50  54.50  $0.50   Open
STJ     39.17  41.55  JAN   35  37  0.25  37.25  $0.25   Open

LP = Long Put  SP = Short Put  CB = Cost Basis  G/L = Gain/Loss


Symbol  Pick   Last  Month  LC  SC Credit   CB     G/L   Status

JCI     81.79  81.35  JAN   90  85  0.20   85.20  $0.20   Open
LEH     56.72  55.80  JAN   65  60  0.25   60.25  $0.25   Open
GS      73.10  70.38  JAN   85  80  0.60   80.60  $0.60   Open
LXK     61.93  63.61  JAN   75  70  0.55   70.55  $0.55   Open
MMM    121.77 126.27  JAN  135 130  0.70  130.70  $0.70   Open
GD      78.87  81.20  JAN   90  85  0.40   85.40  $0.40   Open
CDWC    44.06  44.34  JAN   55  50  0.45   50.45  $0.45   Open
CEPH    49.02  49.60  JAN   60  55  0.40   55.40  $0.40   Open
GILD    34.57  35.51  JAN   40  37  0.25   37.75  $0.25   Open
UBS     47.56  50.83  JAN   53  50  0.35   50.35 ($0.48)  Open

LC = Long Call  SC = Short Call  CB = Cost Basis  G/L = Gain/Loss

UBS AG (NYSE:UBS) gapped higher (at the open) on Friday and the
heavy trading volume suggests the move has buying support in the
near-term.  Conservative traders can close the spread for a small
loss while more aggressive players might wait for further upside
activity before exiting the position.


Symbol  Pick   Last  Month  LP  SP   Debit   B/E   G/L   Status
WMT     50.54  50.00  JAN   60  55   4.45   54.45  0.55   Open

LP = Long Put  SP = Short Put  B/E = Break-Even  G/L = Gain/Loss


Symbol  Pick   Last  Month  LC  SC   Debit   B/E   G/L   Status

GDW     72.33  73.65  JAN   65  70   4.25   69.25  0.75   Open

LC = Long Call  SC = Short Call  B/E = Break-Even  G/L = Gain/Loss


Stock   Pick   Last   Expir.  Long  Short  Initial  Max.    Play
Symbol  Price  Price  Month   Call   Put   Credit   Value  Status

SCIO    32.84  33.43   JAN     40    25     0.00    0.25    Open
PXD     26.11  25.94   MAR     30    23     0.10    0.20    Open?
VAR     50.38  50.43   FEB     55    45     0.10    0.00    Open

Varian Medical Systems (NYSE:VAR) ended at an all-time high Friday
but the issue will need to rally in the coming sessions to generate
profits in the bullish position.  Pioneer National Resources has
retreated to a recent trading range near $24-$25 and it is unlikely
the stock will move much higher in the near future.


Stock   Pick   Last   Expir.  Long  Short  Initial   Max    Play
Symbol  Price  Price  Month   Put   Call    Credit  Value  Status

IMN     35.00  37.52   APR     30    40      0.15    0.00   Open?
AMZN    18.86  20.52   FEB     15    22      0.10    0.00   Open?

The New Year rally quickly ended the bearish trends in both Imation
(NYSE:IMN) and Amazon.com (NASDAQ:AMZN) and it may be prudent to
close the positions on any further upside activity.


Stock   Pick   Last     Long     Short    Current   Max     Play
Symbol  Price  Price   Option    Option    Debit   Value   Status

HNT     25.75  27.24   JAN-30C   DEC-30C   0.60    0.60     Open
GISX    20.21  18.06   FEB-22C   DEC-22C   0.95    0.75     Open?
COF     29.65  31.75   FEB-25P   JAN-25P   1.00    0.90     Open
HSY     67.76  67.50   FEB-65C   JAN-70C   3.25    3.10     Open
RTN     30.47  31.60   FEB-30C   JAN-32C   1.65    2.20     Open

The new "volatility" play in Capital One (NYSE:COF) did not benefit
from the bullish activity in equities.  However, the disparity in
premiums allowed the spread to be initiated for a favorable debit
and the long option is holding its value despite the sharp rebound.
The new diagonal spread in Raytheon (NYSE:RTN) has already yielded
a small profit.  The bullish position in Williams Sonoma (NYSE:WSM)
was closed early, after the expiration of the December option, for
a favorable gain.


Stock   Pick   Last    Short      Long    Initial   Max     Play
Symbol  Price  Price   Option    Option   Credit   Profit  Status

AES     2.92   3.45    J04-7.5P  J03-2.5P  4.50    0.25     Open
EDS    19.64  19.50    J04-25P   M03-17P   6.50    0.00     Open

ImClone (NASDAQ:IMCL), which was previously closed, offered a gain
of up to $2.25 in the speculative play.

No Positions

Stock   Pick   Last   Exp.   Long  Long  Initial   Max     Play
Symbol  Price  Price  Month  Call  Put    Debit   Value   Status

GENZ    34.43  30.35   JAN    35    35    6.15    6.30     Open
L        9.95   9.15   JAN    10    10    1.35    1.55     Open

The speculative position in Liberty Media offered a small profit
as the issue slumped to a recent low of $8.45.  Genzyme has also
been on the move with the straddle reaching profitability as the
issue approached the break-even point in the bearish portion of
the play.

Questions & comments on spreads/combos to Contact Support


This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your skill level, risk-reward tolerance and
portfolio outlook.  In addition, we recommend that you avoid any
strategy or technique in which you are not completely comfortable
with the potential loss, the necessary adjustments and the common
entry-exit strategies.


These candidates are based on the underlying issue's technical
history or trend.  The probability of profit in these positions
may be higher than other plays in the same strategy, due to
small disparities in option pricing.  Current news and market
sentiment will have an effect on these issues, so review each
play individually and make your own decision about its outcome.

FRX - Forest Labs  $106.07  *** Bullish Earnings Forecast! ***

Forest Laboratories (NYSE:FRX) develops, manufactures and sells
both branded and generic forms of ethical drug products that
require a physician's prescription, as well as non-prescription
pharmaceutical products sold over-the-counter.  The company's
most important U.S. products consist of branded ethical drug
specialties marketed directly, or "detailed," to physicians by
its Forest Pharmaceuticals, Therapeutics and Specialty sales
forces.  The company's many products include those developed by
Forest and those acquired from other pharmaceutical companies
and integrated into Forest's marketing and distribution systems.
Principal products include Celexa, an SSRI for the treatment of
depression; the respiratory products Aerobid and Aerochamber;
Tiazac, a once-daily diltiazem for the treatment of hypertension
and angina; and Infasurf, a lung surfactant for the treatment and
prevention of respiratory distress syndrome in premature infants.

PLAY (less conservative - bullish/credit spread):

BUY  PUT  JAN-95.00   FRX-MS  OI=1040  A=$0.30
SELL PUT  JAN-100.00  FRX-MT  OI=2153  B=$0.70
POTENTIAL PROFIT(max)=9% B/E=$99.55

MYL - Mylan Laboratories  $36.74  *** Upcoming FDA Approval? ***

Mylan Laboratories (NYSE:MYL) is a leading pharmaceutical company
that develops, manufactures and markets generic and proprietary
prescription products.  Mylan has two major operating segments
that market an extensive line of generic and branded products
through four primary business units: Mylan Pharmaceuticals, Mylan
Technologies, UDL Laboratories, and Bertek Pharmaceuticals.

PLAY (less conservative - bullish/credit spread):

BUY  PUT  FEB-30.00  MYL-NF  OI=13  A=$0.20
SELL PUT  FEB-35.00  MYL-NG  OI=53  B=$0.95
POTENTIAL PROFIT(max)=17% B/E=$34.25

XAU - PHLX Gold & Silver Sector  $79.51  *** Market Hedge ***

The PHLX Gold & Silver Sector (XAU) is a capitalization-weighted
index composed of the common stocks of 9 companies involved in
the gold and silver mining industry.  The XAU was set to an
initial value of 100 in January 1979; options commenced trading
on December 19, 1983.  For more information on the XAU, go to

PLAY (less conservative - bullish/credit spread):

BUY  PUT  FEB-65.00  XAU-MM  OI=1772  A=$0.95
SELL PUT  FEB-70.00  XAU-MN  OI=353   B=$1.70
POTENTIAL PROFIT(max)=17% B/E=$69.25

ABK - Ambac Financial Group  $57.56  *** Premium Selling! ***

Ambac Financial Group (NYSE:ABK) is a holding company that,
through its subsidiaries provides financial guarantee products
and other financial services to clients in both the public and
private sectors around the world.  The firm provides financial
guarantees for municipal and structured finance obligations
through its principal operating subsidiary, Ambac Assurance
Corporation.  Through its financial services subsidiaries, the
company provides financial and investment products, including
investment agreements, interest rate swaps, funding conduits,
investment advisory and cash management services, principally
to its financial guarantee clients, which include municipalities
and their authorities, school districts, healthcare organizations
and asset-backed issuers.

PLAY (conservative - bearish/credit spread):

BUY  CALL  FEB-70.00  ABK-BN  OI=221   A=$0.30
SELL CALL  FEB-65.00  ABK-BM  OI=2268  B=$0.80
POTENTIAL PROFIT(max)=12% B/E=$65.55

KBH - KB Home  $44.01  *** Trading Range? ***

KB Home (NYSE:KBH) is a homebuilder that has domestic operations
in Arizona, California, Colorado, Florida, Nevada, New Mexico and
Texas, and, through a majority owned subsidiary, international
operations in France.  KB Home builds homes that cater primarily to
first-time and first move-up homebuyers, generally in medium-sized
developments close to major metropolitan areas.  Kaufman & Broad
S.A., KB Home's majority-owned subsidiary, builds single-family
homes, high-density residential properties such as condominium
complexes and commercial projects in France.  KB Home also provides
mortgage-banking services to domestic homebuyers through its wholly
owned subsidiary, KB Home Mortgage Company.

PLAY (conservative - bearish/credit spread):

BUY  CALL  FEB-55.00  KBH-BK  OI=0    A=$0.30
SELL CALL  FEB-50.00  KBH-BJ  OI=131  B=$0.85
POTENTIAL PROFIT(max)=14% B/E=$50.60


These candidates offer a risk/reward outlook similar to credit
spreads, however there is no margin requirement as the initial
debit for the position is also the maximum loss.  Since these
positions are based primarily on technical indications, traders
should review the current news and market sentiment surrounding
each issue and make their own decision about the outcome of the

OCR - Omnicare  $25.03  *** Reader's Request! ***

Omnicare (NYSE:OCR) is a unique provider of pharmacy services to
long-term care institutions, such as skilled nursing facilities,
assisted living facilities and other institutional healthcare
facilities.   The company also provides comprehensive clinical
research for the pharmaceutical and biotechnology industries.
Omnicare operates in five business segments: Pharmacy Services,
which provides distribution of pharmaceuticals, related pharmacy
consulting, data management services and medical supplies to many
long-term care facilities; Consultant Pharmacist Services, which
provides consultant pharmacist services; Pharmaceutical Case
Management Services, which are provided to seniors living who are
independently who receive drug benefits under employer-sponsored
retirement programs; Ancillary Services, which provides infusion
therapy support services for hospice and home care patients, and
Contract Research Organization Services, which provides product
development services.

PLAY (very speculative - bullish/debit spread):

BUY  CALL  FEB-25.00  OCR-BE  OI=16  A=$1.40
SELL CALL  FEB-27.50  OCR-BY  OI=31  B=$0.35
POTENTIAL PROFIT(max)=150% B/E=$26.00

UOPX - University of Phoenix Online  $38.08  ** All-Time High! **

University of Phoenix Online (NASDAQ:UOPX) is a provider of unique,
accessible, and accredited educational programs for working adults.
The firm began operations in 1989 by modifying courses developed by
University of Phoenix's physical campuses for delivery via modem to
students worldwide.  University of Phoenix Online now offers 11
accredited degree programs in business, education, information
technology and nursing.  Students can participate in their online
classes anytime via the Internet by using basic technology such as
a Pentium-class personal computer, a 28.8K modem and an Internet
service provider, thereby enhancing the accessibility of and the
potential market for its programs.

PLAY (conservative - bullish/debit spread):

BUY  CALL  FEB-30.00  UBY-BF  OI=0   A=$8.70
SELL CALL  FEB-35.00  UBY-BG  OI=16  B=$4.30
POTENTIAL PROFIT(max)=15% B/E=$34.35


These stocks have established trends and favorable option premiums.
Traders with a directional outlook on the underlying issues may
find the risk-reward outlook in these momentum plays attractive.

WPI - Watson Pharmaceuticals  $29.22  *** Speculation Only! ***

Watson Pharmaceuticals (NYSE:WPI) is primarily engaged in the
development, manufacture, marketing and distribution of branded
and off-patent (generic) pharmaceutical products.  Through its
internal product development and synergistic acquisitions of
products and businesses, the firm has grown into a diversified
specialty pharmaceutical company.  Watson currently markets more
than 30 branded pharmaceutical products and over 140 off-patent
pharmaceutical products.  Watson also develops advanced unique
drug delivery systems that enhance the therapeutic benefits of
existing drug forms.

PLAY (very speculative - bullish/synthetic position):

BUY  CALL  MAY-35.00  WPI-EG  OI=208  A=$1.00
SELL PUT   MAY-22.50  WPI-QX  OI=171  B=$0.70

Note:  Using options, the position is similar to being long the
stock.  The minimum initial margin/collateral requirement for the
sold put is approximately $675 per contract.  However, do not open
this position if you can not afford to purchase the stock at the
sold strike price!


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:  



Ready to Enter

To Read The Rest of The OptionInvestor.com Market Watch Click Here


Testing Resistance

To Read The Rest of The OptionInvestor.com Market Posture Click Here


Please read our disclaimer at:


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

Contact Support


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

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

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives