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Daily Newsletter, Thursday, 01/23/2003

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The Option Investor Newsletter                Thursday 01-23-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Telecom Bounce, Telecom Drop
Futures Markets: Will the Bounce Continue?
Index Trader Wrap: 
Market Sentiment: Do Over
Weekly Manager Microscope: Jeremy Hosking: Vanguard Global Equity 
(VHGEX)


Updated on the site tonight:
Swing Trader Game Plan: Playing the Bounce


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      01-23-2003           High     Low     Volume   Adv/Dcl
DJIA     8369.47 + 50.70  8386.61  8255.86 2.01 bln 2033/1201
NASDAQ   1388.27 + 28.80  1388.27  1377.50 1.49 bln 1902/1399
S&P 100   450.70 +  5.03   452.34   445.27   Totals 3935/2590
S&P 500   887.34 +  8.98   890.25   876.89 
W5000    8405.68 + 83.60  8429.05  8311.22
RUS 2000  383.71 +  3.18   384.39   380.22 
DJ TRANS 2230.77 + 17.10  2236.56  2211.52   
VIX        30.97 -  1.04    33.22    30.42   
VXN        43.27 -  0.89    45.20    42.56 
Total Volume 3,700B
Total UpVol  2,693B
Total DnVol    953M
52wk Highs  210
52wk Lows   126
TRIN       0.87
PUT/CALL    .68
************************************************************

Telecom Bounce, Telecom Drop

The market was poised to open up this morning on the stronger
than expected earnings news from QCOM, TXN and NOK. Just as
the opening appeared to be a shuttle launch AT&T announced
earnings that missed by a mile and the Telecom bounce turned
into a retest of the Dow's December lows. 

Dow Chart – Daily


 

Nasdaq Chart – Daily


 

Adding to the negative earnings announcements before the open
was news that Jobless Claims rose again last week. There was
only a +18,000 gain to 381,000 but it showed that the holiday
pause in the layoffs was over. Continuing claims also rose to
3,408,000 despite expiring benefits for many workers. Jobless
claims should actually be dropping as employers hire workers
to replace soldiers called up for Gulf duty. The pace of 
layoffs is still increasing with corporations announcing 
426,000 layoffs in the 4Q compared to 269,000 in the 3Q. 
Nearly two million workers have now been out of work from
6 to 12 months. 

Helping hold up the market was the Leading Indicators which
rose +0.1% to 111.3. This was the third consecutive monthly 
gain however slight. The gain today was the total gain for
the last six months which indicates how fragile this recovery
really is. 

The really significant news that shook the market was earnings
related. AT&T shocked investors with a loss of -79 cents a
share compared to a loss of -31 cents a year ago. Revenue 
is dropping fast and they said it would continue in 2003
but at a slower rate. The stock dropped from yesterday's 
close at $25.29 to $19.50 in early trading. This was a
huge deficit for the Dow to overcome and AT&T kept it in
the cellar most of the day. AT&T said it would no longer
provide forward guidance and joined a growing group of 
companies who would rather release no news than bad news. 

Adding to the Dow problems was an earnings miss by another
telecom, BellSouth. BLS missed earnings by a penny. The 
results by BLS and T knocked -$1.40 off Dow component SBC.
Also hurting the Dow was the first ever quarterly loss by
McDonalds. The company pulled out of three foreign markets
and was closing 719 outlets. The loss included an -$810
million charge related to store closures. The current fast
food price war as well as healthier eating habits are 
taking a bite out of the big Mac. They also lowered growth
prospects going forward. 

CAT, another Dow component, beat estimates but lowered 
its outlook for 2003. They expect profits to drop -5%
on flat revenue. 

KRB, a prime credit lender which operates at the opposite 
end of the spectrum from COF and PVN reported its first
loss since 1993 due to higher charge offs and repossessions. 
We have been reporting for months that auto repossessions
were soaring as much as 50% in some areas as unemployment
made it tough to keep up those payments. KRB is feeling 
the heat. KRB said it may be forced to slow loan growth
especially in its consumer division which makes home repair
and college tuition loans. They said the economy and the
market has been bad for so long that even the better credits
are starting to "fray" around the edges. 

After the bell today AMZN reported earnings that beat the
street's estimates by four cents. The stock traded down in
after hours after comments about potential 2003 earnings. 
The company said it was going to keep the free shipping
for orders over $25 as a permanent feature and they were
going to lower prices across the board again. This was
expected to raise revenues by as much as 30% for the year
but reduce profits by -8%. Since this was only the second
quarter ever that they made a profit analysts were 
disappointed and expressed concern that the business model
was never going to work. You can't keep raising costs and
reducing prices forever to capture customers. Eventually
you have to make a profit to keep the doors open. I had 
a lot of email about my editors play on AMZN last Sunday.
Evidently many other investors felt the same way. 

KLAC also reported earnings that beat the street by a penny
and said current orders were "roughly" the same as the last
quarter. Analysts are currently forecasting a -9% drop in the
current quarter. BRCM posted a 4Q loss of about -$2 billion
including charges for prior acquisitions and the CEO resigned. 
Without charges the loss amounted to -2 cents a share and 
inline with analyst's estimates. They said they expected to
post a penny profit in the current quarter. Needless to say
these two earnings reports are not going to energize the chip
sector tomorrow. The SOX has tried unsuccessfully for three
days to break above 300 again. 

Thursday was a big earnings day with 10% of the S&P reporting. 
206 S&P companies have now confessed and the guidance is
shaping up like this. 40% of companies are giving guidance 
inline with estimates, which is not really exciting. 20%
have raised guidance for the current quarter. Here is the
kicker, 40% have warned going forward. That 2:1 warn:raise
guidance is very disturbing. Analyst estimates for 2003
are dropping fast. On Oct 1st analysts were expecting +17.4%
earnings growth for 2003. On January 1st it had dropped to 
only +11.7% for the year. As of today the estimates have
dropped into the single digits at +9.8% for the year. This
means that the end of year rally on +17% earnings growth
expectations is very overdone at +9.8% and dropping. 

The war update for the day came in the form of another
"running out of time" speech by Colin Powell. The emphasis
was on "if we decide to act we will act with or without
the UN or willing partners." Sounds like a warning that
next week the war will be announced regardless of the UN
report. Hans Bliz also got some more face time with news 
of Iraq road blocks to the inspectors including things 
like refusing to let the helicopters take off once the
destination was known. Iraq police dressing up as scientists
and posing for interviews and acknowledgement from several
sources that Saddam has promised to kill any scientist who
talks to inspectors and his family. Whether you believe 
these reports or not the rhetoric is increasing and we all
know what the end result will be. 

Late this afternoon there was news out of Korea that they
would work toward diplomatic resolution of the nuclear
problem. The market spiked up slightly, just enough to 
stop me out of a short signal on the futures monitor, then
it sold off again. The headline caught attention but the
reality was that nothing changed. South Korea is simply
trying to keep North Korea and the U.S. from starting a
fight that would involve the South. 

The Dow gained +50 points! Cheers and backslapping was
could be seen on the trading floor. You would have thought
the new bull market had begun. In reality all we got was
a wimpy bounce after a retest of the December lows. We 
got a +50 point rebound after a five day -600 point drop. 
Am I being too bearish? My thought process after a -600
point drop to major support is a V bottom rocket on heavy
volume, IF it is really the bottom. Instead we stopped 
well below yesterday's resistance on the Dow and the
Nasdaq rolled over right on schedule at 1391 again. 

The Dow dropped to 8255, only +13 points above the 
December lows and the last major line on the chart 
before a potential retest of the October lows at 7197. 
Yes, 7197. Very few traders actually expect it to drop
that far but should 8242 fail it could be a quick trip. 
Do not discount this possibility because it is very 
real. Maybe not 7197 but somewhere below 8242 is a
chart point waiting for us. 

Tomorrow has no major economic reports. The markets will 
be left to react to earnings from a reduced slate of 
35 companies, most of which I have never heard of. 
There will be the required smattering of IRAQ news
and posturing for next weeks events. I don't see it as
being a wildly bullish day. Dow gains, if any are likely
to stop at 8425 and Nasdaq gains at 1400. Many traders
will probably decide to go flat for the weekend with the
UN report on Monday, State of the Union on Tuesday and a
two day FOMC meeting ending on Wednesday. Keep your 
seatbelt fastened. There could be some bumps ahead. 

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Will the Bounce Continue?
By John Seckinger
jseckinger@OptionInvestor.com

Are bears going to start sharpening their claws, or does 
Thursday's rebound portend aggressive behavior from bullish 
traders during Friday's session?  There is definitely a lot of 
levels lining up concerning both camps' viewpoint.

Thursday, January 23rd at 4:15 P.M. 

Contract      Last    Net Change    High        Low       Volume    

Dow Jones    8369.47   +50.74     8386.61     8255.86      
YM03H        8325.00   +25.00     8375.00     8239.00     29,332 
Nasdaq-100   1032.67   +26.16     1038.49     1011.12      
NQ03H        1026.50   +22.00     1041.00     1011.50    271,118
S&P 500       887.34    +8.98      890.25      876.89      
ES03H         883.00    +5.50      889.75      875.50    689,943

Contract         S2         S1       Pivot        R1         R2    

Dow Jones      8206.56    8288.01   8337.31    8418.76    8468.06
YM03H          8177.00    8251.00   8313.00    8387.00    8449.00
Nasdaq-100     1000.06    1016.37   1027.43    1043.74    1054.80
NQ03H           996.75    1011.75   1026.25    1041.25    1055.75
S&P 500         871.47     879.41    884.83     892.77     898.19
ES03H           868.50     875.75    882.75     890.00     897.00

Weekly Levels

Contract         S2         S1        Pivot        R1         R2    

YM03H         8336.00    8459.00    8662.00    8785.00    8988.00
NQ03H          958.25     989.25    1048.75    1079.50    1139.25
ES03H          873.25     888.25     912.50     927.50     951.75

Monthly Levels (December's High, Low, and Close)

Contract        S2         S1        Pivot       R1         R2    

YM03H         7726.00    8028.00    8524.00    8826.00    9322.00
NQ03H          861.75     924.25    1041.75    1104.25    1221.75
ES03H          814.75     846.75     900.25     932.50     985.75

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

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

Before we begin, let us take a look at Jim Brown's day in the 
Futures Monitor.  Recapping his signals:    

Short 885.00, exit 883.00, gain +2.00
Short 882.00, exit 878.00, gain +4.00
Short 879.00, exit 880.50, loss -1.50
Short 878.50, exit 880.50, loss -2.00
Short 884.00, exit 886.50, loss -2.50
Short 888.00, exit 889.50, loss -1.50

Total for the Day = -1.50 points
Total for the Week = +13.25 points (Every point equals $50)

For more information on Jim's posts for Tuesday, please go to the 
following link and download the current market monitor.  If you 
already have the most recent version, simply go to the Futures 
Monitor Post on the upper left hand portion of the applet.  

http://www.OptionInvestor.com/itrader/marketbuzz/download.asp

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

The ES contract opened above the 881.75 pivot, but it wasn't long 
before weakness took the contract towards Wednesday's low of 876.  
I would have liked Wednesday's S1 level of 871.75 to be tested; 
however, that was not to be.  At 13:10, the ES contract closed 
back above the 881.75 pivot (five-minute chart) and then never 
closed back underneath during this timeframe.  R1 at 887.50 was 
tested, but, as Jim pointed out, the Korean news managed to move 
the contract a little too much before falling back towards the 
pivot as the session ended.  

Going forward, I don't want to scare anyone with all the retracement 
levels listed below; however, there is a pretty solid band from 881.25 
to 884.50 I wanted to note.  Moreover, Friday's pivot comes in at 
882.75 and within that range.  Therefore, weakness on Friday below the 
pivot and underneath this range could really start to force longs to 
liquidate.  If the ES contract does happen to find a bid, the areas 
above that should pose a problem is from 888.25 to 890 (Weekly S1 to 
Daily R1), and then from 899 to 903.25 (a variety of moving averages 
converging, as well as the monthly pivot at 900.25).  Moreover, as 
noted in the chart below, a few retracement areas cover the range from 
900 to 902.50; further strengthening this area.  

Chart of ES03H, Daily 


 

We did not get a settlement above 888.25; therefore, sentiment, 
in my opinion, is still slightly bearish.  'Slightly bearish' 
only because Thursday's settlement is above Friday's pivot.  
Looking at the 15-minute chart below, notice how the range is 
very similar to Thursday's levels.  The contract did move outside 
its Regression Channel, and that also might be getting a bear
slightly nervous.  Since the ES contract is just above the solid
area of 881.25 to 884.50, I will look for either a move to R2 and
then possibly towards 900 (with R1 acting as support), or, on the
other hand, weakness under the pivot and 881.25, with an
objective of near 870.

Chart of ES Contract, 15-minute


 

Bullish Percent of SPX: 56.11% and still in column of O’s (Recent 
High at 66%, Low of current column at 58%).  On Thursday, the 
Bullish Percent fell 1.0% and 56% was not reached.  Therefore, we 
were not allowed to add an "O" to the chart.  Nevertheless, at 
56.11%, I think shorts can be aggressive on weakness and trade a 
larger size than normal.  Risk still remains on the buy side.  

The March E-mini Nasdaq 100 Contract (NQ03H)

Amazingly, the low was 1011.50 and came 0.50 from hitting the 
daily pivot.  Therefore, bears really didn't have a reason to get 
aggressive.  Concerning the move upwards, there was a bid from 
1024 to the 1040-48 area, testing noted solid resistance.  We now 
have the monthly pivot, weekly pivot, Friday R1, and mid-point of 
the shown Regression Channel all in that area of 1040 to 1048.  
Therefore, this area should continue to be protected by bears on 
Friday.  If weakness does take hold, look once again for an 
extended move lower if the pivot (1026.25) is taken out.  More 
conservative traders can certainly use the 1023.50 area.  The 
objective will be for a move back to 1011 (which is now S1 for 
Friday).   

Chart of NQ03H, Daily


 

Looking at a 60-minute chart of the NQ contract, I am sure 
traders are wondering above a move back to 1060 - which would 
close the gap.  However, that is going to take a lot of energy 
from bullish traders.  Even R2 on Friday only comes in at 
1055.75, and I would be surprised if this area is reached.  If 
the NQ contract CLOSES above the 1048 area on Friday, then I am 
sure 1060 will become a more practical area to look at.  On the 
other hand, a close underneath the 1011 level should have bears 
sharpening their claws.  If the session ends up being relatively 
quiet, please use the retracement area between R2 and S2.  

Chart of NQ03H, 60-minute


 

Bullish Percent for NDX:  This indicator fell 2% to 57% and added 
another "0" on Thursday.  Therefore, the last column of O's (from 
80 to 60%) is now history.  This further indicates that bears will 
most likely sell rallies going forward. 

The March Mini-sized Dow Contract (YM03H)

The YM contract on Thursday did rise to the 8357-8373 area 
(intra-day high was 8375), and selling pressure due to the 19.1% 
retracement area (shown below) capped bulls' hopes.  The 
settlement at 8325 is above Friday's pivot of 8313, but below the 
S2 of 8336 for the week.  I will wait until the pivot is cleared 
before getting bearish, and then we might (hopefully) get a test 
of the elusive December 31st low of 8221.  I was surprised it was 
not hit on Thursday.  

The upside is a little harder to read, but I do expect strong 
resistance from R2 (8449) to 8459 (weekly S1 reading).  Note that 
the monthly pivot is at 8524 and basically at the 38.2% 
retracement of the decline in December.  Aggressive bulls could 
look for a move from 8459 to 8525, but that might require holding 
over the weekend.  A close under the 8220 area should have 
intermediate bearish implications.  

Chart of YM03H, 60-minute


 

Bullish Percent of Dow Jones: 43.33% and in column of O’s.  The 
Bullish Percent indicator lost another 10% on Thursday, and 
clearly still has intermediate bearish implications.  It does 
indicate that bears will look to sell rallies and be aggressive 
on weakness as well.  

Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com 


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

Check the Site Later Tonight For Jeff’s Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/012303_1.asp


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


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

Do Over
by Steven Price

We got yet another look at the support level between Dow 8200 and 
8300 that we tested as we closed out 2002.  One of the big 
reasons for that support test was the earnings release from AT&T, 
which almost doubled the expected losses for the fourth quarter.  
The company recorded a loss of $0.79, versus expected and 
expected loss of $0.40.  Those results were followed by a 
downgrade from JP Morgan, which cited the company's poor outlook 
for 2003.  On the flip side, Goldman Sachs upgraded the stock.  
That upgrade, however, did little to soothe investors that 
hammered the stock, which lost $4.83 on the day.  The other big 
loser in the Dow, albeit to a smaller extent, was SBC 
Communications, which fell in sympathy with AT&T.

This morning's economic data was slightly better than expected, 
with a rise in weekly jobless claims to 381,000 coming in just 
below expectations of 383,000.  The index of leading economic 
indicators rose a slightly better than expected 0.1%, versus 
expectations for a flat reading.  There were also gains in eight 
of the ten components, although the two negatives were big ones 
for the markets: unemployment claims and stock prices. 

The techs actually saw green, with the COMP adding 28.79 points 
and the NDX adding 26.16.  The COMP has fallen into the 
congestion point that held it through much of December between 
1350 and 1400, prior to the sell-off of the last two days of 
2002. There were several large tech stock upgrades, including 
EMC, Symantec (SYMC), Siebel Systems (SEBL) and PeopleSoft 
(PSFT), which contributed to the rally. 

After a drop of over 500 points in the Dow over the last five 
days, some bounce could be expected.  However, as we continue to 
set lower intraday lows, the head and shoulders pattern that has 
appeared over the last several months gets closer to its neckline 
down at Dow 8200.  The question will likely be just how high the 
bounce can take us.  If we continue to find support in the 8200-
8300 range, with a top at around 8800, maybe we are simply seeing 
a range bound market, rather than a bearish head and shoulders 
pattern. However, if we do crack the neckline, which is really 
more of an approximation depending on how it's drawn, the 
measuring objective of the pattern will be somewhere around Dow 
7500, where it can find support at the July sell-off low of 7532.   
Most of the Dow stocks finished in the green, and the index shook 
off the AT&T results to finish up 50 points on the day.   Part of 
the reason for a late day surge came from an announcement that 
North and South Korea had agreed to hold cabinet level talks to 
resolve the issue of North Korea's nuclear weapons program.   

Any rally has several factors working against it, which can be 
seen on the point and figure charts.  First of all, the Dow and 
SPX have both sunk far enough below their sell signals, which 
came at 8550 and 905, to break through their bullish support 
lines at 885 and 8,400.  The OEX has not yet broken through its 
bullish support, but sits right on top of it at 447.50. Today's 
rebound was certainly a positive sign, but not so strong as to 
reverse these charts into bullish columns of "X."  After flipping 
into columns of "O" at 8800 and 930, a bounce that cannot 
establish at least a minor reversal is most likely insignificant. 
Another factor on the point and figure charts is the bullish 
percent. The bullish percent in the Dow has reversed down after 
the rebound to 8800 failed and now sits in a column of "O" at 
54%.  The SPX bullish percent looks similar, with a reversal down 
to 58%. With plenty of room to fall until the bullish percents 
reach oversold territory below 30%, there is little to stop the 
fall, given most of the recent bearish responses to even positive 
earnings results.  Most comments accompanying recent earnings 
have been cautious for 2003 and are holding far more weight than 
upside surprises for the final quarter of 2002. 

If we get a sustained rally, which looks doubtful, traders can 
look to see where it runs out of gas.  A failed rally below 
recent resistance at Dow 8600/SPX 910/COMP 1400 may simply be 
another shorting opportunity.  Until we get a breakout above or 
below the Dow 8200-8900 range that has held us for most of the 
past three months, we may simply be restricted to picking our 
entry and exit points within that range.  It can still make for 
some nice swings within that range, but entering at midpoints 
should be done carefully with position sizes that reflect the 
possibility of whipsaws.  For now the overall trend is down. 

With no economic data due out on Friday, the market will be left 
to digest earnings reports from Amazon, which beat estimates, but 
gave mixed guidance going forward. Other companies that beat 
forecasts include KLA-Tencor (KLAC), Microchip (MCHP) and Nortel 
(NT).  NT also warned that first quarter 2003 revenues would be 
lower than fourth quarter 2002.  There are several earnings 
reports coming out tomorrow as well, but tonight's releases are 
likely to set the tone.  


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  8369

Moving Averages:
(Simple)

 10-dma: 8648
 50-dma: 8593
200-dma: 8876



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  887

Moving Averages:
(Simple)

 10-dma:  910
 50-dma:  906
200-dma:  942



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1033

Moving Averages:
(Simple)

 10-dma: 1054
 50-dma: 1048
200-dma: 1049




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

The Semiconductor Index (SOX): The chip stocks rallied along with 
the rest of the techs today, but fell short of resistance in the 
SOX at 300.  After the bell, MCHP beat earnings forecasts and 
provided guidance for this quarter roughly in-line with 
expectations.  AMCC also matched expectations. VSEA predicted a 
much more profitable quarter than expected, saying it would earn 
$0.10-$0.20 per share, versus expectations of a loss of $0.01.  
KLAC, however, gave mixed guidance, saying net orders this 
quarter would be flat, but overall 2003 spending on chip 
equipment should be up by about 10%.  That's an awful lot of data 
for traders top sort through and they can watch the 300 
resistance level for an indication of just how well the market 
reacts.  The SOX has failed at 301 on 2 of the last 3 days and 
tomorrow should give us a better overall picture of whether 300 
is our new ceiling in the sector.

52-week High: 397
52-week Low : 260
Current     : 328

Moving Averages:
(Simple)

 21-dma: 318
 50-dma: 308
200-dma: 331

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


Market Volatility

The VIX finally settled down with today's overall market bounce.  
It did, however, find support above 30, indicating that downside 
fear is still alive and well. It traded as high as 33.22, 
eventually failing the converging 200-dma and exp 100-dma, which 
come in just below 33.  The exp 100-dma has capped the last three 
VIX rallies, as well, although at the time it was closer to 35.  
Look for a move under 30 to confirm renewed bullishness, but 
given a one-day rally, following a five-day sell-off, that may 
not happen.



CBOE Market Volatility Index (VIX) = 30.97 –1.04
Nasdaq-100 Volatility Index  (VXN) = 43.27 –0.89

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.68        581,729       398,007
Equity Only    0.58        459,019       265,191
OEX            0.63         17,692        11,119
QQQ            1.86         21,872        40,698


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

Bullish Percent Data

           Current   Change   Status
NYSE          50.4    - 2     Bull Confirmed
NASDAQ-100    57.0    - 4     Bull Confirmed
Dow Indust.   43.3    -17     Bear Confirmed
S&P 500       56.4    - 5     Bull Correction
S&P 100       54.0    - 7     Bull Correction

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  1.56
10-Day Arms Index  1.25
21-Day Arms Index  1.32
55-Day Arms Index  1.27


Extreme readings above 1.5 are bullish, and readings below .85 
are bearish.  These signals don't occur often and tend be early, 
but when they do, they can signal significant market turning 
points.

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

Market Internals

        Advancers     Decliners
NYSE       1800          1068
NASDAQ     1829          2390

        New Highs      New Lows
NYSE         89              51
NASDAQ       76              44

        Volume (in millions)
NYSE       2,033
NASDAQ     1,537


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

Commitments Of Traders Report: 01/14/02

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

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

S&P 500

Commercials left positions mostly unchanged with a small 
reduction to the short side.  Small traders reduced the long side 
by 1,000 contracts, while adding 9,000 contracts to the short 
side.

Commercials   Long      Short      Net     % Of OI 
12/23/02      408,592   467,259   (58,667)   (6.7%)
12/31/02      410,968   462,782   (51,814)   (5.9%)
01/07/03      411,542   455,538   (43,996)   (5.1%)
01/14/03      411,052   453,164   (42,112)   (4.9%)

Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year: ( 16,472) - 10/01/02

Small Traders Long      Short      Net     % of OI
12/23/02      138,756    58,236    80,520     40.9%
12/31/02      139,383    75,640    63,743     30.0%
01/07/03      143,169    83,895    59,274     26.1%
01/14/03      144,182    92,358    51,824     21.9%

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

Commercials added slightly to the long side, while reducing short 
positions by 3,000 contracts.  Small traders added 1,000 to the
 long side and left shorts virtually unchanged.


Commercials   Long      Short      Net     % of OI 
12/23/02       32,067     44,451   (12,384) (16.2%)
12/31/02       31,399     44,387   (12,988) (17.1%)
01/07/03       37,966     48,156   (10,190) (11.8%)
01/14/03       38,057     45,060   ( 7,003) ( 8.4%)

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
12/23/02       17,009     5,865    11,144    49.0%
12/31/02       19,841     5,009    14,832    60.1%
01/07/03       19,708     8,453    11,255    40.1%
01/14/03       20,757     8,320    12,437    42.8%

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:  14,832  - 12/31/02

DOW JONES INDUSTRIAL

Commercials added slightly to both sides, with a net 500 contract 
ncrease on the long side. Small traders reduced long and short 
positions slightly.

Commercials   Long      Short      Net     % of OI
12/23/02       14,991    11,103    3,888      14.9%
12/31/02       15,940    11,253    4,687      17.2%
01/07/03       16,210    11,333    4,877      17.7%
01/14/03       17,804    12,427    5,377      17.8%

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
12/23/02        4,584     6,296    (1,712)   (15.7%)
12/31/02        4,997     6,553    (1,556)   (13.5%)
01/07/03        4,963     8,334    (3,371)   (25.4%)
01/14/03        4,552     7,697    (3,145)   (25.7%)

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

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


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

Jeremy Hosking: Vanguard Global Equity (VHGEX)

Investors seeking maximum long-term growth of capital plus broad 
diversification across global markets have a fine choice here in 
the Vanguard Global Equity Fund (VHGEX) subadvised by Mr. Jeremy 
Hosking of Marathon Asset Management Ltd. of London.  Hosking is 
a seasoned investment professional, getting his investment start 
in 1981.  Hosking holds an M.A. Degree from Cambridge University. 

In 1986, Mr. Hosking joined Marathon Asset Management in London, 
and today serves as Director of Investments in the Americas and 
Southeast Asia at Marathon.  Between 1979 and 1986, Mr. Hosking 
was a director and portfolio manager with GT Capital Management, 
where he specialized in Southeast Asian investments.

Hosking/Marathon Asset Management has served as the sub-advisor 
to the Vanguard Global Equity Fund since its inception in 1995.  
Marathon receives a fee for its services.  At 1.08%, the fund's 
total expense ratio is significantly below the Morningstar fund 
average of 1.86% for all world stock funds.  Even when Vanguard 
uses investment sub-advisors, fund management fees and expenses 
are generally lower than similar funds, adding to their appeal.

The Vanguard website (www.vanguard.com) states that the Global 
Equity fund may not be suitable for investors who are unwilling 
to accept significant fluctuations in share price or that seek 
significant dividend income.  This fund seeks long-term capital 
growth as its prime objective; income is a secondary objective.

Investment Style/Strategy

The London office of Marathon Asset Management where Hosking is 
situated uses a blend of qualitative, non-consensus disciplines 
to construct diversified portfolios which exhibit a core market, 
dynamic value bias.  The firm applies its approach to different 
international, global and regional mandates, including the fund 
management of the Vanguard Global Equity Fund.  

In pursuit of the fund's long-term growth of capital objective, 
Hosking will invest in stocks from the U.S. and other countries, 
selecting those that appear to be undervalued based on analyses 
of industry sectors and individual companies.  Hosking may look 
at such things as management's strategies are for new investment 
or for dealing with competition when evaluating companies.  The 
fund is widely diversified across nations, industry sectors and 
individual companies.

According to Morningstar, the Vanguard Global Equity Fund had 95% 
of assets invested in stocks at September 30, 2002, with 61.5% of 
assets invested in foreign stocks.  True to its mandate, the fund 
is well diversified across regions, with 41.2% of assets invested 
in North America, 28.6% in the U.K. and Western Europe, and 26.5% 
in Japan and Asia, per Morningstar.  At September 30, 2002, there 
were 317 stock holdings, with only 10% of fund assets represented 
by its top 10 holdings.  Hosking's broad diversification helps to 
preserve capital.

In terms of style, Hosking holds growth stocks, characterized by 
relatively high price valuations and value stocks, characterized 
by relatively low price valuations.  Accordingly, the fund falls 
into the blend style box per Morningstar.  Overall, the fund had 
a mid-cap bias at September 30, 2002, with 46% of assets held in 
the mid-cap sector.  Almost one third was invested in large-caps.

In addition to investing in the cash markets, Hosking can invest 
in stock futures and options contracts, and swap agreements.  He 
may also use forward currency exchange contracts to protect fund 
investments from price declines caused by changes in FX exchange 
rates.  The website notes the fund doesn't expect to commit more 
than 20% of its assets to such contracts.

Investment Performance

In comparison to his world stock category peers, Mr. Hosking has 
produced high total returns over the past three years, with just 
average relative risk, per Morningstar, earning it a Morningstar 
highest 5-star rating for risk-adjusted performance.  The fund's 
also Morningstar 5-star rated for trailing 5-year performance on 
the basis of above average return and average risk when compared 
to other global stock funds.  Below is a performance summary for 
the Vanguard Global Equity Fund (VHGEX) using Morningstar's data 
through Wednesday, January 22, 2003.

 Trailing 1-Year Total Return:
 - 3.0% Vanguard Global Equity Fund (VHGEX) 2nd Percentile
 -18.1% Morningstar World Stock Fund Average
 
 Trailing 3-Year Annualized Total Return:
 - 3.3% Vanguard Global Equity Fund (VHGEX) 7th Percentile
 -15.7% Morningstar World Stock Fund Average
 
 Trailing 5-Year Annualized Total Return:
 + 4.4% Vanguard Global Equity Fund (VHGEX) 8th Percentile
 - 1.5% Morningstar World Stock Fund Average
 
You can see the superior performance that Hosking and Marathon 
Asset Management have delivered for investors on an annualized 
basis during the trailing 3- and 5-year periods, with the fund 
ranking in the top decile of the Morningstar global stock fund 
category.  It sports a positive annualized total return of 4.4 
percent in the last five years versus an annualized loss of 1.5 
percent for the Morningstar world stock fund average, so credit 
is due here. 




 


Lipper Analytical Services also recognizes the job that Hosking 
has done in good and bad times too, giving the fund its highest 
ratings for Total Return, Preservation and Expense and an above 
average rating for Consistent Return.

At 16%, the fund's average standard deviation (volatility) over 
the past three years, per Morningstar, is comparable to the 17% 
category average.  So Hosking has outpaced his world stock fund 
peers by a wide margin while not exceeding the category average 
for risk (volatility), producing a superior reward/risk tradeoff 
for investors.

Conclusion

Hosking's buy-and-hold approach results in low turnover and low  
expense, which in turn helps to boost fund performance relative 
to other world stock funds.  Low turnover funds also have lower 
capital gains distributions in general, adding to their overall 
appeal in regular accounts.    

Maintaining a diversified portfolio, combining value and growth, 
and investing across capital sectors are a few of the ways that 
Hosking and Marathon Asset Management go about controlling risk.  
Futures, options and swaps are other tools that are used in the 
management of portfolio risk.  The result is a well-disciplined 
approach that has succeeded in producing maximum capital growth 
over longer periods of time relative to similar funds.

For more information or to D/L a prospectus, go to the Vanguard 
website at www.vanguard.com.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

Playing the Bounce

After a day on the sidelines, I came back to see the Dow right 
back above the support line between 8200 and 8300 that we last 
tested in late December.


To read the rest of the Swing Trader Game Plan Click here:
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The Option Investor Newsletter                 Thursday 01-23-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: RJR
Dropped Puts: ERTS
Daily Results
Call Play Updates: CI, OCR
New Calls Plays: FRX, SYMC
Put Play Updates: CTAS, ASD, CTSH, KSS
New Put Plays: None


****************
PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

RJR $44.37 (-2.56 for the week) RJR bucked the sinking market 
trend for a while.  In fact, after breaking resistance at $45, it 
soared to new relative highs as the Dow continued to add red 
candles.  The overall selling of the last three days eventually 
caught up to it, however, and today it broke that $45 level, in 
spite of the Dow rally.  Fellow tobacco companies Phillip Morris 
and also suffered big drop-offs and the industry slide has us 
worried.  With $45 failing to act as support, after acting as 
previous resistance, we are going to let this one go. However, if 
the stock manages to break back above $45, more aggressive 
traders can give it another shot.  Our current stop was $42.50, 
but given the sector weakness, an alternative would be $43.50, 
just below the 21-dma, for those traders hanging onto the calls.


PUTS:
*****

ERTS  $50.90 +1.37  (+2.94 for the week) There wasn't much 
conviction behind ERTS' latest rebound from multi-year lows.  
Tuesday's bullish brokerage comments propelled shares back to 
$50.00.  However, the stock was unable to close above this level 
of psychological resistance.  This continued to be the case on 
Wednesday as shares moved above $50.00 on an intraday basis 
before finishing with a loss.  ERTS looked like it was going to 
duplicate that feat today when without warning shares suddenly 
went vertical about a half-hour before the closing bell.  We 
didn't see any news to explain this rapid ascent.  In any case, 
Electronic Arts has confirmed their January 29th earnings release 
date.  This gives us a maximum of four trading days to play the 
stock before the company announces.  Since we were never 
triggered, we're simply going to remove our action point and 
close the play.  And while wouldn't be surprised to see shares 
roll over from the 21-dma ($50.81), the powerful late-day rally 
should definitely have bears concerned.


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

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

CALLS              Mon    Tue    Wed   Thu  Week

CI       44.86    0.00  -1.06  -1.03  0.62  Holding
CTAS     42.71    0.00  -0.63  -0.07  0.14  weak bounce
FRX      52.87    0.00  -1.39   0.08  1.01  New, better entry
OCR      26.01    0.00  -0.34   0.00  0.11  holding over $26
RJR      44.37    0.00  -0.38  -1.35 –0.84  Drop, weak sector
SYMC     45.99    0.00  -0.86   0.05  0.44  New, bounce from $45

PUTS

ASD      66.32    0.00  -0.80  -1.20  1.42  under resistance
CTSH     58.70    0.00  -0.97  -0.83  0.48  mild bounce
ERTS     50.89    0.00   1.72  -0.16  1.37  Drop, Over $50
GS       71.92    0.00  -1.58  -0.76  1.67  Drop, sector strong
KSS      55.25    0.00  -2.30  -0.75  1.74  need $55 failure


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

CI  $44.86 +0.62  (-1.37 for the week) On Wednesday the weakening 
broader market dragged CI below $45.00.  We'd been looking for 
shares to find support at this level (which formerly acted as 
resistance), but the bulls were simply unable to counteract a 
steady downtrend in the Dow Jones and $IUX.X insurance index.  
The inverse was true on Thursday.  Cigna managed a solid 1.4% 
gain and easily outpaced both aforementioned indices.  Shares 
spiked above $45.00 during the final hour of trading and closed 
slightly under that level.  Overall this action is somewhat 
encouraging for the bulls.  On Friday we'll be watching for CI to 
break out of today's Inside Day pattern and rise above 
yesterday's high of $45.18.  Such a move would clear the way for 
a possible test of the relative highs near $46.75.  On the other 
hand, a breakdown out of today's Inside Day formation would be a 
clearly bearish technical development.  With this in mind, very 
conservative traders may want to place their stops slightly under 
yesterday's low of $44.15.

---

OCR $26.01 +0.11 (-0.29) While it certainly hasn't provided much
excitement this week, our OCR play has one distinct advantage, in
that it has refused to participate in the broad market weakness.
A brief dip down to the 10-dma (then at $25.30) provided the
only decent entry point we've seen this week, but it is
encouraging to see how resilient the stock has been at holding
support.  The $26 level has served as a price magnet over the
past couple days, as the stock continues to consolidate it's
recent gains on declining volume.  Recall that the 10-dma (now
at $25.57) has provided support throughout the month of January
and should continue to do so, making another successful test of
that support level a solid entry point ahead of the expected
breakout over the recent highs.  Traders that would prefer to
wait for that breakout before playing will want to see a
volume-backed move through $26.75 to trigger new entries.
Until OCR breaks out, we're keeping our stop set at $25.


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

FRX - Forest Labs $52.87 +1.01 (+0.68 for the week)

Company Description:
Forest Laboratories develops, manufactures, and sells ethical 
pharmaceutical products that are used for the treatment of a wide 
range of illnesses. Forest Laboratories' growing line of products 
includes: Lexapro(TM), indicated as initial as well as 
maintenance treatment of major depressive disorder; Celexa(TM), 
an antidepressant; Tiazac®, a once-daily diltiazem, indicated for 
the treatment of angina and hypertension; Benicar(TM)*, an 
angiotensin receptor blocker indicated for the treatment of 
hypertension; and Aerobid®, an inhaled steroid indicated for the 
treatment of asthma. (source: company press release)

Why We Like It:
It seems like forever since we listed FRX back at $98 for a nice 
gain.  The stock has been all over the board since then, 
eventually splitting. Now that the post-split decline has taken 
place, we think FRX will resume its winning ways.  

On Thursday FRX spiked lower and moved below its 21-day and 50-
day moving averages.  Shares also violated a trend of higher lows 
dating back to December.  The powerful rebound from these various 
support levels is a very encouraging technical development.  
Bulls can also be pleased with the daily stochastics (5,3,3), 
which are just beginning to rise from oversold levels.  Similar 
stochastic reversals have offered reliable buy signals in recent 
months.  Investors might also be buying the stock in anticipation 
of good news related to one of Forest Labs' experimental drugs.  
On December 20th Forest Labs submitted to the FDA an application 
for Memantine, an investigational Alzheimer's treatment.  The 
government agency has 60 days from that date to decide whether it 
will accept the filing for review.  Memantine holds a lot of 
promise for FRX because it's the only drug that's shown positive 
Phase III results in the treatment of moderate-to-severe 
Alzheimer's disease.  With thousands of people suffering from the 
disease, it's possible that the FDA could grant "fast-track" 
status to Memantine in order to get the drug to market as quickly 
as possible.  Actual approval of Memantine might not occur for 
several months, but we suspect that investors would react 
positively to news that the drug is up for review.  Our strategy 
for playing FRX is as follows: We'll activate this play if shares 
move above today's high of $53.00.  If the play is triggered 
we'll use a stop at $49.74, slightly under the bottom of the 
January 3rd gap.  Our initial upside target will be the $60.00 
area.  Shorter-term traders may want to aim for the all-time 
highs near $56.00.  Given enough time, we think shares will 
eventually move above this level.  

BUY CALL FEB-50*FHA-BJ OI= 1044 at $4.30 SL=2.15
BUY CALL FEB-52.50 FHA-BX OI= 1526 at $2.40 SL=1.20
BUY CALL MAR-50 FHA-CJ OI= N/A  at $4.90 SL=2.45
BUY CALL MAR-55 FHA-CK OI= 258  at $2.00 SL=1.00

Average Daily Volume = 3.51 MIL


---

SYMC – Symantec Corp. $45.99 +0.44 (+0.94 this week)

Company Summary:
A world leader in Internet security technology, SYMC provides
a broad range of content and network security solutions to
individuals and enterprises.  The company is a leading provider
of virus protection, risk management, Internet content and
e-mail filtering, remote management and mobile code detection
technologies.  The desktop battleground is where SYMC derives
nearly 60% of its sales.  Duking it out with Network Associates
in this arena, the company is best known for its security
software (Norton AntiVirus), desktop efficiency (Norton
CleanSweep), and PC utility (Norton Ghost) products.

Why We Like It:
While most areas of Technology spending have been cut back
drastically over the past couple years, there's one area that
continues to find strong demand: Security.  Not only is physical
security important, but in this increasingly-wired world,
computer and Internet security is increasingly critical.  SYMC
is continuing to establish its leadership position in this
arena, as demonstrated by both their recent stock price
performance, as well as last week's impressive earnings report.
Topping EPS estimates by 8 cents on better than expected revenues
was a good start, but then the company guided above consensus
for the next quarter and the full year.  While the initial
response in the market was to sell the news, there wasn't much
downside, as the stock found solid footing at the $45 level, a
level that has continued to provide support all week.  Adding
more fuel for the bulls today, Janney upgraded the firm to Buy,
along with an increased price target of $56.  The market has
been rewarding SYMC for its outperformance for awhile now, with
the stock showing a gain for 2002 and currently up 13% for 2003
already.  As long as computer and Internet security remains a
top priority, SYMC ought to see demand for its products and the
subsequent profits continue to rise.  The PnF chart certainly
bears that out with another Buy signal generated on the
post-earnings surge to the $48 level, and a bullish price target
of $67.  If the market is going to put together a rally from
current levels, it seems a safe bet that SYMC will lead that rise.
With the post-earnings selling out of the way, the stock ought
to continue to find support near the $45 level, with further
support found at the 20-dma ($44.47), and a rebound in that area
should make for a favorable entry point.  Due to the congestion
between the current price and the post-earnings high at $48.30,
aggressive momentum traders will need to wait for a volume-backed
move through the $48.50 level before playing.  Our stop is
initially set at $43, just below the 50-dma.

BUY CALL FEB-45*SYQ-BI OI=3217 at $2.70 SL=1.25
BUY CALL FEB-50 SYQ-BJ OI=3055 at $0.65 SL=0.25
BUY CALL APR-45 SYQ-DI OI=3938 at $4.70 SL=2.75
BUY CALL APR-50 SYQ-DJ OI=2632 at $2.30 SL=1.25

Average Daily Volume = 3.19 mln



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

CTAS $42.71 +0.14 (-0.55 for the week)  Cintas managed to halt 
its recent slide, after giving a triple-bottom point and figure 
sell signal when it traded $44 last Friday.  The stock gave two 
consecutive triple bottoms, actually, with the first turning out 
to be a bear trap (a one box violation followed by a reversal 
up).  The second one, however, achieved a second box down, 
getting us past the trap on a technical basis.  The bearish 
vertical count for CTAS is $38, however the bounce off $42 comes 
at a level of previous resistance and could continue to provide 
support.  So far on Monday and Tuesday, the stock has also found 
resistance at $44 on intraday rebound attempts, which was the 
next level of resistance after $42 throughout September and 
October. The gain of $0.14 today actually looks weak, considering 
the broad market bounce and the fact that coverage was initiated 
on the stock with a "BUY" rating by DBS.  Traders holding the 
position can look for a bearish breakdown of $42 to indicate the 
stock is not "trapped" between $42 and $44.  We wouldn't 
necessarily recommend new entries on that breakdown, however, 
since our target on the play is $40.

---

ASD $66.32 +1.42 (-0.70) In what was a hard-fought session on
Thursday, the bulls finally managed to defend support, both in
the broad market and in our ASD play.  Yesterday's drop below
the $66 level was almost perfectly reversed today, as the stock
say pretty solid buying interest right after the opening dip to
just above the $64 level, resulting in a rise back over $66, to
end just a dime below Tuesday's closing level.  Recall that the
bearish price target from the PnF chart is $64, so it is a safe
bet that there were some eager bulls looking to buy the stock
this morning when that level was tested at the open.  Despite
the fact that today's rise came on rather strong volume, we need
to remember that one day is not enough to change the 3-week
bearish trend.  In fact, today's bounce could be setting up
another attractive entry point if this fledgling rally runs
into trouble.  Those looking to take a new position will want
to look for a rollover near the $67 resistance level.  Another
dip and rebound above the $64 level will likely signal an end
to the current decline and that rebound would be a signal for
conservative traders to harvest gains accrued since entering up
near the $70 level.  Given the likelihood that ASD will fail on
this initial rally attempt, we're keeping our stop set at
$67.50.  That's the first significant resistance level and a
close above that point would signal that it is time to move to
the sidelines.

---

CTSH $58.70 +0.48 (-1.44) Hopefully nobody was surprised to see
our CTSH play find support at the 200-dma ($58.08) on Thursday,
as we've pointing out the possibility of a bounce from that
level.  There's a big difference between finding support and
reversing a bearish trend though.  The stock has now shed almost
$17 in a nearly straight line since the end of December, and
given the magnitude of that slide, it's rather encouraging how
small today's rebound was.  Now we need to see if there's any
conviction behind the bounce or if it is just a one-day wonder.
The $60-61 area should now prove to be formidable resistance,
now that this prior support level has been violated.  A failed
rally at that level will confirm the stock's continued weakness
and provide for new bearish entries as well.  Keep in mind the
huge PnF Sell signal has given us a bearish price target of $39,
meaning that there is still some significant downside potential
in the play.  Traders that would prefer to see continued weakness
before playing will need to wait for a solid violation of the
200-dma support with a breakdown under $57.50.  Below the
200-dma, next support is found near $55, the site of the
ascending support line, which began with the October 2001 lows.
Keep stops tight at $61, as a close over that level likely
indicates further upside ahead.

---

KSS $55.25 +1.74 (-1.35) With broad market weakness taking
center stage right from the opening bell this morning, the
Retail index (RLX.X) looked like it was on its way to a breakdown
under the $255 level.  But then a funny thing happened: buyers
appeared right at the critical point and boosted the index
higher throughout the day, ending with a 1.55% gain on the day.
This action was duplicated in our KSS play, with the stock
rebounding from just above $52.50 (the site of the lows earlier
this month) on its way to gaining 3.25% by the close.  With
volume coming in a bit stronger than average, and such a strong
intraday reversal, traders might question the wisdom of keeping
the play active, and rightly so.  As pointed out in the Market
Monitor this morning, the rebound from the lows presented a
good opportunity for conservative traders to harvest gains in
the play.  But there isn't anything on the chart to suggest the
downtrend has been reversed, and with solid resistance
$55.50-56.00 area (backed up by the 20-dma at $55.97), we're
looking for another rally failure to present a fresh entry
opportunity into the play.  Another drop and rebound near the
$52.50 level would indicate stronger-than-expected support and
would have us leaning towards closing the play.  Of course, a
close over our $56 stop will have the same result, as it would
indicate KSS is likely headed back towards its recent relative
highs near $59.


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

None


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The Option Investor Newsletter                 Thursday 01-23-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: CALL - SYMC
Traders Corner: The Best Laid Plans Of Mice And Men
Traders Corner: Ins, outs and best use of Stochastics
Futures Corner: Lining Up Levels
Options 101: To Inflate or Die - That is the Second Question

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

SYMC – Symantec Corp. $45.99 +0.44 (+0.94 this week)

Company Summary:
A world leader in Internet security technology, SYMC provides
a broad range of content and network security solutions to
individuals and enterprises.  The company is a leading provider
of virus protection, risk management, Internet content and
e-mail filtering, remote management and mobile code detection
technologies.  The desktop battleground is where SYMC derives
nearly 60% of its sales.  Duking it out with Network Associates
in this arena, the company is best known for its security
software (Norton AntiVirus), desktop efficiency (Norton
CleanSweep), and PC utility (Norton Ghost) products.

Why We Like It:
While most areas of Technology spending have been cut back
drastically over the past couple years, there's one area that
continues to find strong demand: Security.  Not only is physical
security important, but in this increasingly-wired world,
computer and Internet security is increasingly critical.  SYMC
is continuing to establish its leadership position in this
arena, as demonstrated by both their recent stock price
performance, as well as last week's impressive earnings report.
Topping EPS estimates by 8 cents on better than expected revenues
was a good start, but then the company guided above consensus
for the next quarter and the full year.  While the initial
response in the market was to sell the news, there wasn't much
downside, as the stock found solid footing at the $45 level, a
level that has continued to provide support all week.  Adding
more fuel for the bulls today, Janney upgraded the firm to Buy,
along with an increased price target of $56.  The market has
been rewarding SYMC for its outperformance for awhile now, with
the stock showing a gain for 2002 and currently up 13% for 2003
already.  As long as computer and Internet security remains a
top priority, SYMC ought to see demand for its products and the
subsequent profits continue to rise.  The PnF chart certainly
bears that out with another Buy signal generated on the
post-earnings surge to the $48 level, and a bullish price target
of $67.  If the market is going to put together a rally from
current levels, it seems a safe bet that SYMC will lead that rise.
With the post-earnings selling out of the way, the stock ought
to continue to find support near the $45 level, with further
support found at the 20-dma ($44.47), and a rebound in that area
should make for a favorable entry point.  Due to the congestion
between the current price and the post-earnings high at $48.30,
aggressive momentum traders will need to wait for a volume-backed
move through the $48.50 level before playing.  Our stop is
initially set at $43, just below the 50-dma.

BUY CALL FEB-45*SYQ-BI OI=3217 at $2.70 SL=1.25
BUY CALL FEB-50 SYQ-BJ OI=3055 at $0.65 SL=0.25
BUY CALL APR-45 SYQ-DI OI=3938 at $4.70 SL=2.75
BUY CALL APR-50 SYQ-DJ OI=2632 at $2.30 SL=1.25

Average Daily Volume = 3.19 mln



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

The Best Laid Plans Of Mice And Men
By Mike Parnos, Investing With Attitude

Well, based on the performance of last Sunday’s new positions, 
neither the mice nor the men are getting any (profit?).  So we 
have to come up with a plan B.  The only things that performed 
worse than our positions were the Tampa Bay Buccaneers, Joe the 
Millionaire, and almost every contestant on American Idol.

Let’s see what we can salvage from this mess.  (Hint: It ain’t so 
bad.  I just love the melodrama). :-)   
_____________________________________________________________

Position #1: SMH Straddle
First:  Let me say “OOPS!”  I made an error in Sunday’s column – 
writing "August" options on the new SMH Straddle position when I 
should have written "May" options.  However, the symbols and 
prices are correct.  The vast majority of CPTI students figured 
it out and successfully entered the $22.50 may Straddle.
_____________________________________________________________

Position #2: BBH Iron Condor – Oh well!
We had hoped to establish another Iron Condor with an $80-$100 
range on our favorite Biotech index for a credit of $.95.  
However, after the three-day weekend, the marketmakers had sucked 
the blood out of the premiums to the point where it was no longer 
a realistic position.
______________________________________________________________

Position #3:  XAU Calendar Spread – It’s déjà vu all over again!
We put on the June $80/February $80 calendar spread at a debit of 
$4.85.  And just like last month, wouldn’t you know, the damn 
thing has moved up too quick again.  This time, it looks like 
perhaps we should get out while the getting is good.  

XAU closed today at $80.33, but traded as high as $81.18. As of 
yesterday’s (Wednesday) close, the deltas were in our favor 52 to 
43.  After today’s $2.64 gain, the gap on the deltas has narrowed 
to 56 to 54.  That’s a bit too close for comfort.  

Based on today’s closing prices, you can buy back the Feb. $80 
call for $3.80 and sell the June $80 for $8.70.  That’s a credit 
of $4.90 – which is pretty much a break-even deal.  No harm, no 
foul.   So, unless XAU gaps down significantly in the morning, 
it’s time to bail and put the money back into our pocket.
______________________________________________________________

Replacement Plays In This Sunday’s Column
I’m going to try and come up with a few plays for our CPTI 
Portfolio to take the place of the BBH Iron Condor and the XAU 
______________________________________________________________

Mike,
Read your Traders Corner piece on calendars. I've been doing 
calendars for a while, love’em. Your article, however, left out 
implied volatility and its impact on an option’s price. I'm 
always looking for skews before I place a trade. Do you?

Response:
Excellent question!  Some traders might avoid putting on a spread 
when the options are overpriced, but remember that we're only 
dealing with a difference figure (between the long-term and 
short-term option).  When volatility is high, it’s usually the 
near term option that reflects a higher premium than the longer-
term option.  In that respect, it may be more desirable to put on 
the trade when volatility is high.  
 
During the life of a calendar spread -- which could be as little 
as a few months, or as long as two years -- there are going to be 
times of high, low and average volatility.  Since we're selling 
premium, especially after the spread is initiated, the highest 
volatility will yield the highest premium.  However, high 
volatility translates into larger movements in the underlying.  
That means we have to pay closer attention to the position.
____________________________________________________________

Mike,
Would you please explain some issues, which came to my mind 
during analyzing different scenarios, regarding your last SMH 
Straddle?

1) What if SMH will move, but only, let say, 2 points? Value of 
the call is growing, but, on the other hand, the value of put is 
falling (according to - Delta of OTM option). Doesn't it cause 
our risk to be higher than only time value erosion (15%) in case 
when SMH won't move? How do you assess the potential value of an 
option that decreases in value?

For example, with the stock at 22.50, if it begins to move up, 
the call will increase in value faster than the put will lose 
value.  That's how we make money in a straddle.  The delta of the 
call increases more quickly the further the stock moves up.  At 
the same time, the delta of the put will not go down as quickly.

2) Are the prices that you indicated for SMHEX and SMHQX the 
highest acceptable for that trade, or, as I understand, is the 
total cost of the Straddle more important, no matter what is the 
price of call or put?

The total cost of the straddle is only significant in that the 
total cost is how much money that will be tied up for the initial 
option cycle.  That's how long we're going to be in the trade.  
15% of the total outlay is approximately the figure the total 
amount will erode during that first cycle.  That will be our risk 
in the position.

3) What is our exit strategy? How about trailing stop?

There are a few ways to exit the position. 
1.  For example, if SMH moves dramatically up, we can sell the 
call that has appreciated in value.  Then, we could wait for SMH 
to reverse and sell the put after it has gone back down 
significantly.  This is not recommended because all this 
volatility rarely takes place in one option cycle -- and that's 
how long we're going to be in the trade -- no exceptions!  That's 
how we keep our risk minimized and that's a priority that's 
etched in stone.
 
2.  This is the simpler, and preferred, method.  You can estimate 
approximately how far SMH might go up until it hits resistance.  
Then you can estimate what the call will be worth at that point 
along with the value of the put.  The total of those two figures 
should be significantly higher than what was paid to open the 
trade -- hence, your profit.  If you're not near your computer 
often to monitor the trade, you can put in a spread order to sell 
both options together at a specified credit.  The only problem 
with spread orders is that both the put and call are sent to the 
same exchange -- and it's rare that a single exchange will offer 
the best prices for both options.
 
Once SMH reaches a certain level, some brokerages have software 
that is sophisticated enough to enable you to create a spread 
order that is contingent on where the stock is trading.  But, 
again, both options will go to one exchange.
_____________________________________________________________

Hi Mike, 
I wanted to pass along the great job you are going. I have been 
following your selections since the beginning and I have, 
unfortunately, only have done the QQQ play so far. But plan on 
trying the your selections this month (which means things might 
not go as planned, so if things don't work out just pass the 
blame on to me :). Regardless, I have learned a lot and I have a 
few questions:

Like you, I'm getting very tried of trying to pick a direction in 
stocks, so I'm trying to learn some new techniques which would 
limit or eliminate me trying to do so. My questions are:

Response,
Thanks for the kind words.  I'm glad you enjoy the column and 
hopefully things will continue to go well and you'll refine your 
trading skills and profit from what you're learning.  If not, 
we’ll simply repossess your couch and your TV and you can start 
filling out job apps at Burger King.  It’s a lot better to be 
eating the 99-cent Whoppers than being the mayo-and-pickle-guy on
the assembly line.
 
1. Why did you pick strikes so far out?
a)  The strikes I picked for SMH were picked far out so that the 
month we will be in the trade (Feb. option cycle) will erode 
premium very slowly.  We're only risking the erosion for that 
first month -- then we close out of the trade.

2. Is this type of play most effective when you buy ATM or near 
the money options near support? 
b) It's best to buy at-the-money puts and calls because the 
sooner SMH starts its move, the sooner the option (in that 
direction) will begin to increase in value.  It's often a good 
idea to find a stock that is at, or near, support because it is 
likely to either break support and head down to the next support 
level -- or it will bounce up and head toward the nearest 
resistance level.


3. How does a person manage this position if either A. the SMH 
goes north or B. It heads south, like you have suggested or would 
like?
c) You have to estimate what the options would be worth if SMH 
were to go to $29 or if SMH were to go to $17.50.  That will give 
you an approximate target.  Then, just keep an eye on SMH and 
when it approaches either level, determine what you can get if 
you sold both the put and the call.  If SMH moves that much, the 
profit should be a nice return on the risk.
_____________________________________________________________

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


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

Ins, outs and best use of Stochastics 
By Leigh Stevens
lstevens@OptionInvestor.com

One of the things that I wrote about in my weekly Index Trader 
Wrap last weekend (1/19/03) was a price/stochastic "divergence" 
that had developed on the hourly charts BEFORE the last 
significant top - for example in OEX.  This divergence looked 
like this - 



 

The divergence refers to where prices and a technical indicator, 
especially the "oscillator" type formulas of Stochastics, the 
Relative Strength Index (RSI) and MACD (Moving Average 
Convergence Divergence) diverge in direction in terms of one 
making higher (closing) highs and the other making LOWER 
(closing) highs on upswing. This is a bearish divergence. (A 
bullish divergence is price falling to new lows where a 
stochastic or RSI makes a HIGHER high.)  

I have made the chart above a close-only "line" chart to better 
compare prices to what the stochastics model was doing as  
stochastics makes its final computation based on the CLOSE of any 
period being looked at; e.g., hourly, daily, weekly, etc.  Of 
course, during the hour or within the day, the stochastic may 
reflect an update to the formula based on THAT price - most 
stochastic models that work off from a real-time price "feed" or 
stream of quotes will do this - what's called "update every 
tick". However, only the closing price becomes the level that 
becomes finalized for that hour, day or week.  

E-MAIL QUESTION: "Please provide the settings you used for the 
stochastics on your OEX charts (especially the hourly).  I get a 
very different pattern using 5/3/3 and 21/3/3.  What am i doing 
wrong?"

It turned out. nothing, as we'll see in a moment from this 
thoughtful OIN subscriber who went back and looked at his charts 
again (on Q-Charts - I use TradeStation). However, if YOUR 
stochastic doesn't look like "MY" stochastic shown in my OIN 
article, there may be a question of whether I use "3" and "3" for 
the so-called smoothing part of the formula.  ANSWER: yes I do, I 
just don't show "5,3,3" or "21,3,3" on my TradeStation charts, 
whereas Q-charts does show those other numbers.  Most users don't 
care and (for the most part) rightly so.  The "3" is the standard 
stochastics formula and I leave it ALONE, but what I do find 
important is the "LENGTH" setting - do you work with a 5, 10 or 
some other setting for the number of hours, days, etc that will 
be used in the equation or some other choice(s). 

I find it most useful to line up a relatively short stochastic 
such as one that looks at only the last 5 "periods" and a longer 
one - especially 21 on hourly charts - that looks at a longer 
time frame.  When BOTH are oversold registering low extremes, or 
both are "overbought" at the high end of the scale, there is 
often a bigger move that is about to develop.  And, if the daily 
stochastic, set at length 14 measuring a 14-day period (others 
find other length settings to be most useful; e.g., 10) is also 
at an extreme, even better.   

More on the stochastic model is found in one of my past Trader's 
Corner articles - 
http://www.OptionInvestor.com/traderscorner/072502_1.asp 

The follow up e-mail I mentioned, from the same OIN subscriber, 
writing earlier included the following: 

"Thanks for responding to my question about appearance of stochs 
on OEX hourly from QCharts. To save my chart i had to play with 
it a bit but found using Chart Tab, Export, Image i was able to 
get the job done. Looking at the chart again this morning, it 
looks pretty darn close to what you showed in the Wrap.  
 
This shows me that its my perception and lack of experience that 
caused me to not see the divergence you focused on.  It was NOT a 
technical problem with Qcharts or chart settings.....your 
approach and insights seem to fit Jim's "trade what you see" 
mantra at OI."

HIS QCHART - OEX HOURLY:


 

Make sure that you don't happen to have "Semi-Log" checked at the 
type of price scaling to use and not "Linear", which is usually 
the "default" setting in all charting applications that I know 
of.  However, I've sometimes had the logarithmic scaling switched 
on while looking at weekly or monthly stock or Index chart that 
has made a huge percentage move and want to see equal percent 
moves as the same distance on the vertical price scale, which is 
what "Semi-Log" does.  



 

If I am using the Semi-Log scaling on long-term chart (most 
common use) and I then switch to a daily or hourly chart I might 
forget to check "Linear" again.  I may not notice an obvious and 
major difference in the price scale but it could be different 
enough to cause some confusion if someone else's hourly chart 
looks different than mine. 

The central idea or concept of stochastics - what it is 
attempting to measure - is that in an up or down market trend for 
any number of trading periods (e.g., 10 hours or 14 days), prices 
will often move away from the lowest low made during that 10 
hours or 14-days, or the highest high, at an increasing rate – 
this "rate" or speed of price changes is what the (slow) 
stochastic oscillator is showing visually.  

There is one more possible variation that I know of in how 
intraday hourly charts can be calculated - and this is by the use 
of so-called "natural hour" bars. In fact, hourly charts became 
very popular by the folks charting the Dow, who took a reading at 
the top of the hour - this is the "natural" hour so to speak.  
However, look at what we have today - the market opens at 9:30 
Eastern.  In most charting applications, the first hour measures 
the hour from 9:30 to 10:30.  With stocks closing then at 4:00 pm 
EST, the last "hour" is not an hour at all - rather, it is the 
OHLC (Open, High, Low, Close) from 3:30-4:00.  In Indices, the 
last hour is 45 minutes - from 3:30-4:15.  The last hour is a 
truncated or a shortened period.  

In very sophisticated charting applications, especially popular 
with Foreign Exchange and Bond traders who trade "natural" hours, 
not Exchange hours, there is another charting option - 



   

See the lower left choice of "Use Natural Hour Bars" - this is 
the choice that this technical analysis application 
(TradeStation) will END every hour at the end of the hour.  Now, 
here is where a stochastic could look significantly different in 
stocks: the 1st "hour" is from 9:30-10:00 - thereafter, it's 10-
11, 11-12, etc. 

But the last hour is an even hour, from 3-4 pm in stocks, but not 
in Index options like OEX - here the next to last hour, using the 
"Natural Hour" option, will also be 3-4, but the LAST "hour" will 
be 4-4:15 - a really truncated bar! But a bar or period is the 
same to the stochastics formula and goes according to how the 
application measure what an hour is.  

Fortunately, as a stock or stock options trader you do not have 
to consider such charting choices as a normal rule.   

What we do have to consider with using the so-called 
overbought/oversold type indicators like Slow Stochastics is that 
"overbought" or "oversold" relate to a POTENTIAL vulnerability 
for a trend reversal only – a market can stay oversold or 
overbought for a relatively long period.  It is also true that 
rapid and steep advance or a steep and rapid decline is not 
usually going to go on for an unlimited period.  A market WILL 
correct at some point after a steep rise or fall, but WHEN is an 
open question in a strong trend. Hence the great value of when a 
DIVERGENCE sets up.    

There is another thing to remember - a "correction" may 
just turn out to be a sideways consolidation period, before there 
is yet another push in the same direction as before.  A sideways 
trend will cause the stochastics to FALL, just as a downward 
trend does, just not as quickly such as in this chart from a past 
period - 



 

Oscillators "work" well in terms of timing trend trades contrary 
to the most recent trend – buying dips in a downswing and selling 
rallies in an upswing -- in markets that are experiencing two-
sided price swings rather than trending strongly in one 
direction -  



 

The above example is not a "perfect" back and forth trading range 
- e.g., from 10 to 20, back to 10, then back to 20 - unlike 
commodities (think of gold), stocks often have approximate 
ranges. 

IF YOU REALLY WANT TO KNOW THE FORMULA - 
The Stochastic study looks at the current price in relation to 
the highest high or lowest low in the period being measured.  
Stochastics plots the current close in relation to the price 
range over the length set for this indicator and gives this a 
percentage value.  

The initial calculations for a stochastic of say 14-days is 
twofold -  
Establishing a "fast" and "slow" line.  The fast line or "%K" 
formula is 100 – (the close minus the 14-day low) divided by (the 
14-day high – the 14-day low; i.e., the price range).  The slow 
line or "%D" (here called “FastD”) is equal to a 3-day (this is 
where the "3" comes from) average of "%K".  This first formula is 
referred to as the "fast" stochastic model.  Fast stochastic 
lines react so quickly to price changes that the use of it is 
mostly appropriate for very short-term traders. 

The "slow stochastics" variation of the basic stochastics formula 
is simply to take the "FastD" figure and apply a "smoothing" 
calculation yet again, which results in another line which we can 
call “SlowD”, to differentiate the two versions of "%D".  The 
important thing to remember is not this alphabet soup, but the 
fact that the slow version of the stochastics oscillator (slow 
stochastics) is the version that is in most common use and is 
most likely what you will be using if you choose the stochastics 
indicator to apply to a price chart.  Use of slow stochastics is 
the most appropriate for all around trading purposes.  

Buy and sell crossover "signals" are considered to be optimal if 
they occur in or near the overbought and oversold zones, 
respectively.  There will be instances of crossovers that occur 
in the middle of these ranges and these should not be utilized 
UNLESS there is some compelling other technical factors guiding 
you – for example, a break out above or below an important 
trendline – here's a chart from my book and its one for the 
"books" hey, as when do you think we'll see YHOO at 200 again!



 

I make use of Stochastics, RSI and MACD indicators among others, 
but mostly ALSO in tandem with price patterns, sentiment readings 
from Put/Call or TRIN, daily trading volume trendlines, trendlines 
and fundamentals, especially earnings trends. Use em all and you 
will make fewer mistakes over time.   


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

Lining Up Levels 
By John Seckinger
jseckinger@OptionInvestor.com

It all comes down to conviction.  While at the CBOT, there was one
error that many traders continued to make.  A travesty, to say the 
least.  

I could probably wrap this article up in one sentence:  "When a number 
of levels line up in one's favor, INCREASE trade size."  It really is 
this simple.  Nine out of ten pit traders (either bonds or the YM 
contract) would put on exactly the same size order regardless of where 
the market was.  They were 'just trading levels,' they told me.  I 
would always reply, "Well, what if a few levels line up?  Doesn't that 
increase its significance and shouldn't you INCREASE trade size?".  
Never a response.

To me, trading the same size on every trade is like "trading without a 
plan."  I like the football analogy, "Would you increase your bet if a 
Professional team was playing a High School program?"  In the futures 
pits, we don't have to 'cover a spread' like the one that the Pro Team 
might have to give in the above example.  Liquidity will be there in 
the ES contract, and I am a believer that usually a bad fill (example:  
fill worse than the bid when going short, due to a fast market) will 
result in a better trade anyhow.  Maybe it is this slippage that 
'covers the spread.' 

Let us assume that your account can handle up to 10 ES contracts at one 
time.  I have to imagine that the ES opening up at 880 with a daily 
pivot at 885, a weekly pivot at 875, and a 38.2% daily retracement at 
882 would tell a trader to NOT trade all 10 contracts.  On the other 
hand, if every timeframe pivot is at 880 and the ES opens underneath, I 
do think trading MORE than one contract would make sense.  

When getting ready for a trading session, I encourage all traders to 
get comfortable "lining up levels" on both a daily, weekly, and monthly 
time frame.  Let us do that now:  

Closing Levels 

Contract      Last    Net Change    High        Low       Volume    

ES03H         883.00    +5.50      889.75      875.50    689,943

Daily Levels 

Contract         S2         S1       Pivot        R1         R2    

ES03H           868.50     875.75    882.75     890.00     897.00

Weekly Levels (High, Low, and Close from week prior)

Contract         S2         S1        Pivot        R1         R2    

ES03H          873.25     888.25     912.50     927.50     951.75

Monthly Levels (December's High, Low, and Close)

Contract        S2         S1        Pivot       R1         R2    

ES03H          814.75     846.75     900.25     932.50     985.75

Chart of ES03H, Daily


 

Chart of the ES03H, Daily 


 

I didn't put in moving averages, but the 200 DMA (exp) is below at 
871.00, while the 50 and 22 DMA's (exponential and simple) reside from 
899 to 903.25.  The monthly pivot is also at 900.25.  The middle of the 
Bollinger Band is at 904.90, and I would have liked it to be in this 
899 to 903.25 range.  Now let us line up some areas to pay close 
attention to:

The range from 881.25 to 884.50 (based on daily retracement chart)
873.25 to 875.75 (Weekly S2 and Daily S1)
865 to 868 (Bollinger Band low and December 31st low)

For the upside, the ranges that seem key are as follows:

888.25 to 890 (Weekly S1 to Daily R1)
899 to 903.25 (Moving Averages Convergence)

The "wildcard" areas seem to 894.50 (retracement on daily chart) and 
904.50 (mid-point in Bollinger Band)

Now we are making progress.  I don't have to do a retracement between 
R2 and S2, because this is not about "hitting singles."  We are trying 
to line up more like a double today.  Possibly a triple.  A home run 
would most likely require being at a significant relative low or high.  
With these five different areas, traders see that the ES contract is 
currently at 885 and just above the first area listed from 881.25 to 
884.50.  So, go long and then put a stop at 881, right?  Well, that 
certainly is a good strategy; however, I would prefer something a 
little different.  Since the high today was 889.75, and within the 
second defined area, I still would rather sell short than go long.  Not 
blindly, but how about selling the contract either within the range or 
underneath the range at 881, and then putting stop back up at 885 and 
on the outside of the defined area?  Note:  The pivot is at 882.75, so 
just underneath the pivot would be inside the range AND would be better 
execution than 881.  

Now this is what I call "setting up a trade."  If bullish, then you can 
use 885 with a stop at 881 (or underneath the pivot).  But notice how 
we are defining risk?  With a number of levels lining up, I think it 
means that trade size can be increased.  What if it doesn't work?  I 
still highly recommend trading the levels again; however, scaling back 
would then make sense.  What if we got a bid back all the way to the 
900 area?  Same theory.  We have our 899 to 903.25 area, and ideally we 
would like a roll from 903.25 and short the contact back under 900 with 
a stop at say 905 (back above the wildcard mid-Bollinger Band area - 
which I am sure will move by then).  Regardless, can you see how this 
makes more sense to do more than one contract than say if the ES was at 
893.25?  What is 893.25?  I don't know, and I bet a lot of other 
traders don't either.  Therefore, if you must, only do one contract.  

In conclusion, try spending time "lining up levels," and I can almost 
guarantee that this will increase confidence when trading.  It 
certainly does for me.  What if these areas are not hit in a particular 
session?  Exactly, only do one contract or not trade at all.  

There are a few other things that I like to use when increasing both 
conviction and position size.  Number One, the "Open to Close" theory.  
Hopefully, the first five-minutes on Friday will encompass the pivot; 
therefore, if the first candle is red, we can look for a move to and/or 
S1 and S2.  As you probably already have been thinking about, when we 
group these levels we usually grab either S1 or S2; therefore, we don't 
have to talk in S1, S2.  Instead, we could just say "look for a move 
down to the next 'significant area' of support.'  This would be a range 
of a few points, instead of one exact level.  Note:  When exiting, it 
is perfectly fine to exit "near" the next area, and not trying to 
capture the area in its entirety.  Example:  Short at 882.50 (under the 
pivot) and then exit at 876, since the next level below is at 873.25 to 
875.75.  Ideally, we would want 873.25, but it is ok to not get too 
greedy.  

Ask Away,

John Seckinger
jseckinger@OptionInvestor.com 


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

To Inflate or Die - That is the Second Question
Buzz Lynn
buzz@OptionInvestor.com

Last week in the deflation/inflation argument, we only had time 
and space for the deflation case.  In honor of the notion of equal 
time, we are going to strictly focus on the case for inflation 
this week.

In case you missed last week's Options 101 morph into Economics 
101 on exported deflation born of production overcapacity (and the 
economic rise of China, I might add), you can get up to speed 
here:

http://members.OptionInvestor.com/options101/opt_011603_1.asp

The good news is that the case for inflation practically writes 
itself.  What I should really say is that the Federal Reserve has 
practically written it for us.  Even if you are not into economics 
(and who among us actually likes to take this stuff to bed?), 
follow along, as the implications of inflation help us determine 
the direction of our investment future.

Here's how things are setting up.  Deflation is dangerous and the 
Federal Reserve will do anything to fight it.  Why is it dangerous 
and why fight it?  Two reasons.  First, if consumers are to 
consume their brains out (not far from reality), the prospect of 
buying goods and services cheaper next month will keep their 
collective wallets closed in anticipation that they can buy it 
cheaper later.  Keeping the wallet closed is bad for business 
investment spending and corporate profits, both things that the 
Fed counts on to keep the economy humming.  That "buy it cheaper 
later" notion feeds on itself.  

Second, once deflation takes hold, the Fed is POWERLESS to stop 
it, and the Fed is loath to lose its power over the economy.  0% 
is the lowest achievable interest rate for the Fed to implement.  
The Fed can do nothing once rates hit that level.  Even 0% 
borrowing cost is not cost effective to the borrower when prices 
are falling.  Again, it comes back to overpaying now - even at 0% 
interest - when we can buy cheaper later.

Need evidence?  See Japan.  Though the Bank of Japan would love to 
see the Yen fall against the Dollar from the current roughly 115 
to 150 by the end of 2003, it isn't working for them.  The Yen is 
going the wrong way and gaining strength against the Dollar.  You 
pretty much have to consider yourself a failure as a Japanese 
Central Banker if you cannot succeed at intentionally destroying 
your own currency.  Such would be the plight of the Fed should the 
U.S move into all out deflation.

So given the preponderance of evidence of deflation, what are the 
Fed-meisters to do?  The answer is very telling and was given for 
all the world to see by Ben Bernanke, a recently appointed Federal 
Reserve Governor, on November 21, 2002 to the Economists Club in 
Washington D.C.  It isn't just hopefulness by the Fed to keep 
deflation at bay.  It's a mission.  Evidence is contained in the 
title of the speech: "Deflation: Making Sure "It" Doesn't Happen 
Here."  OK, guns loaded; fire!

I'll skip most of the speech, as it sounds like most Fed speeches 
full of verbose qualifiers and caveats.  But here are the actual 
words spoken that night that ought to be etched in every 
investor's brain if they are to prosper in the coming years.  Get 
this if nothing else:

"U.S. dollars have value only to the extent that they are strictly 
limited in supply.  But the U.S. government has a technology, 
called a printing press (or, today, its electronic equivalent), 
that allows it to produce as many U.S. dollars as it wishes at 
essentially no cost.  By increasing the number of U.S. dollars in 
circulation, or even by credibly threatening to do so, the U.S. 
government can also reduce the value of a dollar in terms of goods 
and services, which is equivalent to raising the prices in dollars 
of those goods and services.  We conclude that, under a paper-
money system, a determined government can always generate higher 
spending and hence positive inflation.  ......If we do fall into 
deflation, however, we can take comfort that the logic of the 
printing press example must assert itself, and sufficient 
injections of money will ultimately always reverse a deflation."

"The basic prescription for preventing deflation is therefore 
straightforward, at least in principle: Use monetary and fiscal 
policy as needed to support aggregate spending..."

Did everyone get that?  Barnanke admits the Fed has a printing 
press and is intent on using it to thwart deflation.  It can't be 
any clearer than that.  It has thus become the Fed's mission to 
"Inflate or Die".  You can bet it is going to do its darndest to 
inflate and has done a pretty good job, so far (though it is 
interesting to note that M3 money supply has actually DECREASED in 
the last few weeks).  [Note: "money supply" is loosely defined as 
cash, checking, and savings deposits - there is more to it than 
that, but after 20 years, my memory of economics classes has 
become a bit fuzzy.]

Just a paragraph or two on money supply.  A declining money supply 
right now has to be scary, even to the Fed.  I don't make any 
guarantees on this and I am not an economist by trade.  I don't 
even play one on TV.  Yes, it's just a number to most, which 
doesn't affect the outcome of anyone's life.  But my take on this 
isn't good.  To me, it means that while the Fed is flooding the 
banking system with money, that money isn't getting lent out and 
ending up in consumers wallets and checking accounts, which may be 
an early sign that consumers are raising the white flag of 
consumption in surrender.  As one financial author recently put 
it, it's like pushing on a string.  More like, "You can lead a 
horse to water, but you can't make him drink."  Perhaps the 
consumer horses in this economy have had all they can take.  

Listen to Dan Denning of Strategic Investments: "An awful 
convergence of macroeconomic trends was revealed last week.  
Spending for the indebted consumer went up.  But business spending 
did not.  What demand there is in America is directed towards 
foreign goods, with the profits going overseas, further putting 
pressure on U.S. firms; the very same firms who have no incentive 
to invest in new jobs because they are already operating well 
below capacity.  The only real question left for the economy is 
when the consumer will surrender."  Oh boy - not music to the 
Fed's ears.  Again, the necessity to "Inflate of Die".

Anyway, just a thought on my part.  If any of you have further 
insight on this, I'd love to hear it and welcome to knowledge that 
sets me straight on the subject.

But back to the subject at hand.  Any other reason that the Fed 
would inflate?  It all goes back to deflation fears and other 
exporting nations wanting to weaken their currencies as a way to 
stimulate exports.  Central bankers worldwide are competing to 
make their currency cheaper than the next guy's.  Remember, weaker 
currency makes goods cheaper to buy with the relatively stronger 
currency.  To stimulate export growth, Central Bankers need only 
cheapen the currency to that other find it attractive to buy the 
goods.  That's what I meant last week by competitive devaluations.

Adds James Grant, Forbes contributor and research analyst, also 
one of the clearest minds in finance for thinking outside the box 
(He probably doesn't even know where the box is), "The world wants 
to reflate.  Bloomberg News reminds us that, by August, the Bank 
of Japan, the European Central Bank and the Bank of England will 
all be under new management. 'With the 1970s inflation rates of 
10% or more a distant memory,' the news service notes, 'the new 
central bankers will probably keep a lid on interest rates.'  "We 
suspect that the new generation of central bankers will also see 
to it that their national mints do not lack for either parchment 
or pigment."

There you have it - the case for monetary inflation - which is 
squarely pitted against the forces of deflation.  It should come 
then as no surprise that gold has gone from roughly $315 to $360 
since Bernanke's speech and that the Dollar has caved against the 
Euro rising from $0.99 to $1.07 in the same period.

Good bye Dollars; hello Euros (for now); welcome gold!  More on 
the latter after tackling real estate in this column next week.  

Questions always welcome!  Stay tuned and make a great week for 
yourselves!

Buzz


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