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Daily Newsletter, Tuesday, 02/11/2003

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The Option Investor Newsletter                 Tuesday 02-11-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: It Is All About Iraq
Futures Markets: (See Note)
Index Trader Wrap: (See Note)
Market Sentiment: Don't Look Down
Weekly Fund Screen: Blue-Chip Value Funds


Updated on the site tonight:
Swing Trader Game Plan: All About Iraq


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      02-11-2003           High     Low     Volume Advance/Decline
DJIA     7843.11 - 77.00  7985.52  7806.50 1.52 bln   1315/1899
NASDAQ   1295.51 -  1.17  1315.04  1385.77 1.27 bln   1503/1771
S&P 100   418.58 -  3.45   425.96   416.26   Totals   2818/3670
S&P 500   829.91 -  6.76   843.02   825.09
W5000    7873.29 - 55.83  7992.37  7835.73
RUS 2000  359.95 -  2.14   363.58   357.96
DJ TRANS 2128.07 - 16.67  2160.45  2121.59
VIX        37.35 -  0.35    38.05    35.53
VXN        46.90 -  0.41    47.58    46.07
Total Volume 2,998M
Total UpVol  1,226M
Total DnVol  1,668M
52wk Highs  129
52wk Lows   266
TRIN       1.61
PUT/CALL    .87
************************************************************

It Is All About Iraq

That was the main message from Alan Greenspan today when he
testified before congress in his regular semiannual meeting.
At the same time Collin Powell was testifying that Bin Laden
was alive and well and calling for renewed attacks on the US.
Traders unsure which way to jump were more concerned with
getting a desk near the fire escape than pushing the Dow back
over 8000.

Dow Chart - 240 min



Nasdaq Chart - 60 min




The morning started off well despite some negative news.
Goldman Sachs warned that IT spending for 2003 could fall
as much as -10% compared with previous estimates of minor
gains. Merrill Lynch warned that inadequate capital funding
will persist and push the technology sector recovery into
2004 or even 2005. Both companies said sales and profit
outlooks for 2003 were dismal. Despite the dismal forecasts
Abbey Cohen, Goldmans chief investment officer, is still
forecasting Dow 10800 for 2003. That would be a +36% gain.
Despite these two independent studies the Nasdaq held the
market up all day and finished down only -1.17 for the day.

QCOM shocked traders this morning with news that they would
be paying a quarterly dividend of five cents and buy back
$1 billion in stock. The tech company bounced on the news
but investors are fickle and after gaining +1.25 at the open
it sold off to flat by the close.

Instinet, INET, warned that lower trading volume was hurting
them and other electronic exchanges. INET posted a loss of
-$735 million for all of 2002. Even ESPD warned that the
outlook for bond trading for 2003 was lower than expected.
The ESPD warning was especially meaningful since bonds have
been such a favorite investment vehicle recently. Times are
tough all over and that should come as no surprise.

Of course the publisher of the worlds most successful books
should not be in trouble, right? Not so it appears. Scholastic,
SCHL, publisher of the Harry Potter series, warned that sales
of its other products were slowing due to budget cutbacks and
the weak economy. The last Potter book sold out in 48 hours
and they plan on printing 6.8 million of the fifth book this
year.

The Greenspan testimony drew traders attention for a couple
hours and he did try to paint a balanced picture. His main
message was that it is all about Iraq and once Iraq was over
the economy was primed to recovery quickly. Imagine that!
Even Alan was able to use the Iraq ate my economy excuse.
In another comment that we will likely hear over and over
he said "deficits do matter" and every democrat in the room
was writing furiously I bet. Greenspan was attacked outright
by one member and told he was the cause of the current
economic slump due to his mismanagement of the rate cut
policy and should quit.

Later in the day Collin Powell testified that Osama had
released a new tape and quoted from a transcript. Arabic TV
denied there was a tape and it appeared the US had intercepted
it on the transmission to them. Later at 3:PM the tape was
played on TV after the earlier denial was retracted. Don't
you think it was nice of the local networks to play the tape
for all those terrorists in the US waiting for the signal
to attack? It has been proven in the past that major attacks
have come within days/weeks of a tape release. Why give him
a free communications outlet? At least make the bad guys
struggle a little bit please! There was a lot of support
Iraq appeals and suggested that suicide bombers attack the
US if Iraq was attacked.

As if Greenspan and Bin Laden was not enough to confuse the
issue, Russian prime minister Putin warned the US that a
unilateral attack on Iraq would be a "grave error" and he
also threatened to veto any UN resolution calling for force.
Now that is a real problem. We have France and Germany already
lined up against us but now Russia is "threatening" us. This
does not look good for the offensive team. The market was
poised to rebound from the day's lows when the Putin remarks
were aired and that pushed it down once again.

After the bell AMAT announced earnings and missed the street
estimates by two cents. They warned that new orders had fallen
-35% and they were facing tough times ahead until capital
spending returned. They said orders in the current quarter
would be only slightly better than last and declined to give
any estimates. AMAT had warned two weeks ago so the outcome
was not a surprise. They still traded down in after hours.

Thursday Dell reports earnings and is widely expected to
warn about the rest of the year. The Dell COO said they were
seeing softer corporate spending and that would match the
CSCO warning from last week. The Dell conference call will
be well attended but unless they raise guidance I doubt it
will be anything we have not already heard.

Don't look now but yesterday's bullishness evaporated and
the outlook is not bright. Oil rose to $35.44 today as the
Iraq problem becomes more complicated. Rising oil and political
tension along with falling earnings and expectations is not
a prime environment for stock market gains. I had been planning
on leaving a futures buy order about +10 points above the daily
trading range just in case Saddam decided to retire or had an
accident. Instead I think we need to leave a sell order about
ten points below the current range to protect against the
coming attack. If the tape today was the "go" signal for
whatever is in the works then our countdown clock is running.

There was considerable talk in the press about the real threats
that prompted the increased threat level last week. Evidently
there were multiple intercepts about a radiation bomb along
with chemical/biological threats. Police in New York have been
told to look for household items like fire extinguishers that
could contain gas or chemicals. A suspicious man in a wetsuit
and rubber boat was seen near the bay bridge in San Francisco
this morning but got away clean after being spotted. The main
thread through all the government press conferences was the
potential for multiple concentrated attacks. This means that
any event will likely be followed by other events and the
market is not going to react well. Anyone that doubts we will
have an attack at some point in the future is kidding themselves.

Airlines are struggling with rapidly rising oil prices. It
appears jet fuel is in very short supply with the US burning
huge amounts in preparation for the war. Not only are they
storing it for war planes they are burning it with hundreds
of commercial aircraft they have commandeered to shuttle
troops from the US to the gulf. Those long flights are
depleting the reserves which are planned to handle current
airline schedules only. There are estimates of $40 oil by
next week. Every $1 rise in oil is a $7 billion drain on the
US consumer each month. Oil rose +.96 cents today alone. A
prolonged war will consume even more and we could see Iraq's
three million barrels dry up.

The Nasdaq somehow managed to close over 1295 yet again. This
level has proven to be critical to the market's health. This
is the sixth day the index has traded in this range. After
the Dow's decent bounce yesterday and the intraday gains
today it still managed to trade within 5 points of the lows
for the year at 7806. The close at 7838 was the lowest close
for the year. There is just a lot of uncertainty and fear
hanging on the market and there are fewer buyers every
day. Volume today was very anemic again and was the third
consecutive day under three billion total shares traded.
Some analysts claim low volume moves are not important but
ships can still sink in a calm sea. This sea is far from
calm and the current low volume may actually be the eye of
the storm.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Check the Site Later Tonight For John’s Futures Market Article
http://www.OptionInvestor.com/futurescorner/fc_021103_1.asp


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

Check the Site Later Tonight For Jeff’s Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_021103_1.asp



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


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

Don't Look Down
by Steven Price

It was hard to take much from today's early action, which saw
drifting around through much of the morning as Fed Chairman Alan
Greenspan testified before Congress.   However, one of the things
we did see is that the Dow found resistance once again at 8000
and left us squarely in sub-8000 territory, despite the political
developments of the past couple of days. We got a big move on
Monday following news that Iraq would allow U2 surveillance
flights over the country and that bullish move carried over into
this morning. The high of the day in the Dow, however, was 7985,
for its third failure at that level in the last four days.
However, by the end of the day, we got a better feel for overall
sentiment and that hasn't changed much in spite of Monday's
bounce.  We also got a reminder of just how sensitive the markets
remain to terrorism and war fears.

The Nasdaq Composite also crossed back over the 1300 level.  That
level had served as support during the past week, before finally
giving in on Friday.  Monday's bounce stopped short of that
level, topping out at 1298, giving the impression that previous
support would act as resistance.  That was not the case early on,
as the COMP traded all the way up to 1314 intraday.  It did stop
short of the 1319 level that had been previous resistance,
however, and bears can think about using a move over 1320 for a
stop to close current positions.   By the end of the day,
however, the COMP was sold down to 1295 and the close beneath
1300 still looks bearish.

That brings us back to those indices.   We did get reversals back
into columns of "X" in the OEX and SPX, but failed to get the 3-
box reversal in the Dow.   How important are those reversals?
The past four reversals up were actually great shorting
opportunities and so far these reversals come at lower levels
than the last and once again faded after the move higher. The SPX
reversed up to the breakdown level at 840, before falling and the
OEX made it just below that level, up to 425, before fading.
This may have been an excellent entry point for bears once again,
but chances are we won't be sure until we see how the market
reacts to the next Iraq weapons inspectors' report on Friday.
Traders looking to get short should keep that event in mind and
stick to smaller positions. They can be encouraged, however, that
the Dow was unable to muster enough strength to establish a
reversal at a round number as significant as 8000.   The
reversals certainly looked like great short entries by the end of
the day, as a major reversal lower followed news that Osama Bin
Laden was alive and once again sending messages through Arab
network Al-Jazeera.  Bin Laden pledged to fight with you
(assuming he meant Iraq) and U.S. officials said the tape does
appear to be from Bin Laden.  The SPX actually came within 0.09
of what would be a reversal back down again if it traded that low
on a day when it had not already reversed higher (For PnF
enthusiasts, a trade down to 820 would have simply added another
"O" to the current column, since it began the day in a column of
"O").  That's how strong the sell-off was from the high of the
day.  The oil markets also reflected the renewed war/terrorism
fear following the tape release, as March Oil Futures closing at
new relative highs and back over $35 per barrel. It may also
indicate the strength of the U.S. case against Iraq for harboring
terrorists just got stronger, thus speeding up the timetable for
an invasion. Of course, this once again leaves us in familiar
territory, wondering just how much of a sell-off we'd be seeing
without the Bin Laden tapes and Iraq hanging over the markets.
That brings us to the Fed Chairman's comments about the economy.

Alan Greenspan's testimony was his semi-annual report to Congress
and contained some nuggets that the Bush administration will not
likely be terribly happy about. He said he didn't necessarily
believe the economy needed an economic stimulus package and that
the geo-political concerns were weighing on an otherwise
improving picture.  He also said that he supported the
elimination of double taxation of corporate profits (read: get
rid of taxes on dividends), but not if it costs us anything.  The
Bush plan would cost plenty and democratic Senators made sure to
highlight that caveat to the recommendation. The support of the
elimination of dividend taxes will likely be used by the Bush
administration in pushing its plan, but it remains to be seen how
they will handle the part about funding such a move.

Until the Iraq situation is behind us, we will most likely be
asking ourselves that question on a regular basis.  Until then we
can only trade what we see, and for that purpose we can rely on
the technical indicators to help us make sense of it all.  It is
generally impossible to judge what we will be hearing next and
with so many international players having a hand in the
possibility (probability) of war, we need to be prepared for
whipsaws on a regular basis.  So far, however, the trend remains
down and it is hard to see how taking long positions for anything
more than a very short-term bounce makes any sense.


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  7843

Moving Averages:
(Simple)

 10-dma: 7977
 50-dma: 8430
200-dma: 8725



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  829

Moving Averages:
(Simple)

 10-dma:  844
 50-dma:  890
200-dma:  924



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     :  971

Moving Averages:
(Simple)

 10-dma:  978
 50-dma: 1026
200-dma: 1024



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

The Semiconductor Index (SOX.X):  What started as a bullish day
first faded and eventually bled red across many sectors. The SOX,
though, held up fairly well, gaining a point to finish at 266, in
the center of its recent range.  This group has been a barometer
for action in the broader tech indices and has actually held up
well, comparatively speaking, over the past week.  The support at
260 has turned out to be solid on a closing basis, although that
level did not appear as a significant one before this recent
test.    That could change tomorrow.  While AMAT came out and
warned that its 1st quarter orders would be down 35% on January
31, the SOX dipped to 261, before recovering and then held above
that level up until now.  Tonight, AMAT released earnings that
added to the negative tone for the sector. The company missed
estimates by two cents per share, reporting a breakeven net
quarter. Revenues rose to $1.05 billon, versus expectations for
$1.15 billion and it gave guidance for second quarter earnings
below consensus, as well.   Traders can watch for a decisive
breakdown below 260 to signal another leg lower, but keep in mind
we bounced after the last announcement and the intraday relative
low is 258.56 from Monday morning.  It will likely take a close
beneath 260 to cement the support break, but a move back below
the relative low may signal the opportunity to start stepping
into a position a little bit at a time.

52-week High: 657
52-week Low : 214
Current     : 266

Moving Averages:
(Simple)

 21-dma: 287
 50-dma: 306
200-dma: 342

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

Market Volatility

The VIX once again forecast a bounce on Monday as it touched 40%.
Interestingly enough, on Tuesday's rollover back toward Monday's
lows, it remained closer to 37 and may be telling us that we have
more room to the downside on this drop before we get another
bounce at 40.  It may also be forecasting a lack of fear as we
simply dropped on the Bin Laden news and are in for a bounce.  If
we do take out Monday's lows and continue to fall, watch for the
VIX to approach 40 again and as it does shorts can tighten stops
in anticipation of an intraday bounce.  If instead, it continues
through 42, where there is congestion (between 40 and 42), then
look out below, as we may be headed into the 50s for the VIX and
much lower for the equities.

CBOE Market Volatility Index (VIX) = 37.35 –0.35
Nasdaq-100 Volatility Index  (VXN) = 46.90 –0.41

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.87        433,864       377,304
Equity Only    0.67        313,259       210,113
OEX            1.72         22,654        39,072
QQQ            0.77         45,628        35,130


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

Bullish Percent Data

           Current   Change   Status
NYSE          42.7    - 1     Bull Correction
NASDAQ-100    37.0    - 1     Bear Confirmed
Dow Indust.   20.0    - 0     Bear Confirmed
S&P 500       41.0    - 1     Bull Correction
S&P 100       37.0    - 1     Bear Confirmed

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  1.38
10-Day Arms Index  1.40
21-Day Arms Index  1.43
55-Day Arms Index  1.34


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       1106          1751
NASDAQ     1436          1683

        New Highs      New Lows
NYSE        54              138
NASDAQ      41              120

        Volume (in millions)
NYSE       1,521
NASDAQ     1,282


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

Commitments Of Traders Report: 02/04/02

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

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

S&P 500

Commercials reduced long positions by 8,000 contracts and shorts
by 3,000, for a net increase of 5,000 shorts.  Small traders
increased long and short positions by about 8,000 contracts,
keeping the net relatively unchanged.

Commercials   Long      Short      Net     % Of OI
01/14/03      411,052   453,164   (42,112)   (4.9%)
01/21/03      415,028   456,885   (41,857)   (4.8%)
01/28/03      422,232   468,586   (46,354)   (5.2%)
02/04/03      414,543   465,678   (51,135)   (5.8%)

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
01/14/03      144,182    92,358    51,824     21.9%
01/23/03      148,227    95,356    52,871     21.7%
01/28/03      142,734    85,567    57,167     25.0%
02/04/03      151,174    93,439    57,735     23.5%

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 increased long positions by approximately 2,000
contracts and shorts by 1,600.  Small traders increased short
positions by 1,000 contracts, leaving the long side close to
unchanged.


Commercials   Long      Short      Net     % of OI
01/14/03       38,057     45,060   ( 7,003) ( 8.4%)
01/23/03       37,174     49,789   (12,615) (14.5%)
01/28/03       37,955     49,321   (11,366) (13.0%)
02/04/03       40,934     50,992   (10,058) (10.9%)

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
01/14/03       20,757     8,320    12,437    42.8%
01/23/03       25,852     6,764    19,088    58.5%
01/28/03       25,814     7,576    18,238    54.6%
02/04/03       25,573     8,648    16,925    49.5)

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:  19,088  - 01/21/02

DOW JONES INDUSTRIAL

Commercials increased long positions by 1,500 contracts, while
reducing shorts slightly.  Small traders increased shorts by
1,600, while seeing a slight reduction to the long side.

Commercials   Long      Short      Net     % of OI
01/14/03       17,804    12,427    5,377      17.8%
01/23/03       16,901    11,031    5,870      21.0%
01/28/03       16,013    11,574    4,439      16.1%
02/04/03       17,596    11,232    6,364      22.1%

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
01/14/03        4,552     7,697    (3,145)   (25.7%)
01/23/03        5,120     8,282    (3,162)   (23.6%)
01/28/03        4,838     7,836    (2,998)   (23.7%)
02/04/03        4,583     9,424    (4,841)   (34.6%)

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 FUND SCREEN
******************

Blue-Chip Value Funds

In this week’s fund screen, we compare six U.S. equity funds that
are similar to the TD Waterhouse Dow 30 Index Fund, a mutual fund
which seeks to track the total return of the Dow Jones Industrial
Average (Dow 30 Index).  It invests in the stocks of the 30 blue-
chip companies comprising the popular Dow 30 index.

We wanted to focus again on this small group of funds because the
Dow 30 index is the oldest and most widely quoted of all the U.S.
market indicators and can be a cost effective way to hold stocks.
This week’s search includes funds that are similar to the Dow 30
index as determined by Morningstar’s "Similar Funds" tool online.
This tool tells you which funds are similar to a particular fund,
such as VFINX (Vanguard 500 Index Fund) and WDOWX (TD Waterhouse
Dow 30 Index Fund).

To do this Morningstar’s system determines a portfolio similarity
score and a performance similarity score for each fund, combining
the two scores to determine each fund's overall similarity score.
The "portfolio similarity" score compares each fund's most recent
portfolio, while the "performance similarity" score compares fund
returns over the last three years.  Morningstar recognizes as you
should too that portfolios change over time.  Accordingly, a fund
may have high portfolio similarity to another fund, but that does
not mean the two funds are managed in the same way.  In addition,
just because returns may been similar doesn't mean that two funds
share similar portfolio characteristics.

Since neither score is perfect, Morningstar combines the two fund
similarity scores into one overall similarity score, ranging from
0 to 10, with 10 being the highest.  In our case, we're searching
for funds that are similar in portfolio characteristics and total
return performance as the TD Waterhouse Dow 30 Index Fund.  Below
is a summary of the fund's main features using information on the
TD Waterhouse website (www.tdwaterhouse.com):

- The fund replicates the Dow 30, providing shareholders with a
portfolio of well known, U.S. blue-chip companies as represented
by the Dow 30 index.

- Buying an index fund can be a more cost-effective way to hold
U.S. stocks.

- The fund can complement other actively-managed funds in one's
portfolio by offering a contrasting management style ("passive"
versus "active" management).

According to Morningstar, the TD Waterhouse Dow 30 Index Fund had
an average market capitalization of $66.5 billion at December 31,
2002, with 66.1% of assets invested in what they call "giant-cap"
stocks and 33.9% of assets invested in the large-cap sector.  So,
this fund is more conservative than the average equity fund from
a market capitalization viewpoint, sticking with the largest U.S.
blue-chip stocks, primarily industrials.  The low relative price
valuations of many of the Dow 30 index components makes the fund
value oriented overall.  Value funds typically are less volatile
than growth funds and offer greater yields, which can contribute
significantly to a fund's long-term total return.

Screening Process

In the Morningstar Similar Funds tool, we asked for funds similar
to ticker symbol WDOWX (TD Waterhouse Dow 30 Index Fund) that are
open to new investors and require a minimum initial investment of
$5,000 or less.  That process yielded seven results including one
institutional fund, which was ruled out.  That left six potential
candidates as follows:

 TD Waterhouse Dow 30 Index Fund (WDOWX)
 Strong Dow 30 Value Fund (SDOWX)
 Vanguard Value Index Fund (VIVAX)
 Industry Leaders D (ILFDX)
 Maxim Value Index (N/a)
 ProFunds Ultra Basic Materials Inv (BMPIX)

At this juncture, we decided to rule out the ProFunds Ultra Basic
Materials Fund due to its substantially lower overall similarity
score of 1.40.  The four funds above it on the list had overall
similarity scores ranging from 6.55 to 8.69, considerably better.

We also eliminated Maxim Value Index Fund (no symbol), since the
fund is available primarily through workplace savings plans such
as 401k's.  Morningstar's system doesn't even present the fund's
ticker symbol.  Further, the Industry Leaders Fund D (ILFDX) was
removed from contention since it holds just $3 million in assets
and has limited retail brokerage availability.

That leaves TD Waterhouse Dow 30 Index Fund, Strong Dow 30 Value
Fund and Vanguard Value Index Fund as the three remaining equity
fund candidates.  We then looked at these funds' risk and return
ratings from Morningstar, noting the 2-star rating currently for
the TD Waterhouse Dow 30 Index Fund.  Compared with other large-
cap value funds, the TD Waterhouse fund has earned below average
returns over the past three years, while producing above average
risk compared with the average large-value fund in Morningstar's
system.

The TD Waterhouse Dow 30 Index Fund's overall Morningstar rating
leaves something to be desired, leaving us to consider the other
two funds, both of which are 3-star rated overall by Morningstar
for risk-adjusted performance.

Vanguard Value Index Fund

One index alternative to the 2-star rated TD Waterhouse Dow 30
Index Fund may be the Vanguard Value Index Fund (VIVAX) run by
George Sauter since fund inception (November 1992).  Sauter is
head of Vanguard's quantitative equity group and runs this and
other passively managed (indexed) funds for the Vanguard Funds
Group.







The Vanguard Value Index Fund seeks to generate returns that are
equal to the S&P 500/BARRA Value Index.  The S&P value index has
a lower price/book ratio and has historically had a higher yield
than the S&P 500 index.  Morningstar's shows the fund's trailing
yield at 2.21 percent, a half percentage-point more than the S&P
500 index.  Accordingly, the Vanguard Value Index Fund may be an
appropriate "core" choice for people seeking long-term growth of
capital and dividend income from a portfolio of undervalued blue
chip companies.

At 0.22% of assets, the fund's expense ratio is among the lowest
in the business.  Because of Vanguard's cost advantage, the fund
has produced returns over the past 10 years that rank in the 2nd
quartile of the Morningstar large-cap value category.  Below is a
performance summary for the Vanguard Value Index Fund, using data
from Morningstar.com.

 5-Year Annualized Return (February 10, 2003):
 -2.7% Vanguard Value Index Fund (VIVAX) 60th Percentile
 -2.2% Morningstar Large-Cap Value Fund Average

 10-Year Annualized Return (January 31, 2003):
 +8.7% Vanguard Value Index Fund (VIVAX) 38th Percentile
 +8.1% Morningstar Large-Cap Value Fund Average

You can see that the value index fund's trailing 5-year returns
slightly lagged the average large-value fund, but over the long-
term (says 10 years) its low expenses help it to outperform the
category peer group.  Nothing fancy here, just the value stocks
comprising the S&P 500 index.  If you want a value approach and
higher dividend yield then the Vanguard Value Index Fund may be
suitable for you.

For more information, go to www.vanguard.com.

Strong Dow 30 Value Fund (SDOWX)

Strong Dow 30 Value Fund (SDOWX), managed by Karen McGrath since
December 2000, seeks long-term capital growth.  The fund intends
to invest at least 50% of assets in a price-weighted position of
the 30 stocks comprising the Dow Jones Industrial Average (DJIA).
That part is similar to the TD Waterhouse Dow 30 Index Fund.  It
also invests between 30%-50% of assets in other DJIA securities,
employing the Dow Dividend Strategy and other valuation measures.
Up to 20% of assets in cash and short-term investment-grade debt.





At 1.30% of assets, the fund's current expense ratio is slightly
below that of the average large-cap value fund using Morningstar
numbers, so no significant cost advantage here as with Vanguard.
Since McGrath took the reins in December 2000 return performance
has been up and down within the large-cap value category; still,
the fund sports a solid 5-year track record.  Below is a return
summary for the Strong Dow 30 Value Fund, using Morningstar data.

 5-Year Annualized Return (February 10, 2003):
 -0.6% Strong Dow Value Fund (SDOWX) 28th Percentile
 -2.2% Morningstar Large-Cap Value Fund Average

Whereas the Vanguard Value Index Fund slightly lagged the large-
cap value category average over the last five years, the Strong
Dow Value Fund did considerably better than its large-cap value
fund peers and the S&P 500/BARRA Value Index.  By better I mean
that the fund preserved capital better than similar funds in the
market downturn.

For more information on the Strong Dow Value Fund, log on to the
Strong website at www.strong.com.

Conclusion

Investors seeking long-term growth of capital and income have a
couple large-cap value funds here that may be suitable for their
long-term financial plan.  Strong Dow Value Fund has done better
than the average large-cap value fund over its 5-year life while
the Vanguard Value Index Fund has outpaced the average large-cap
value fund over its 10-year history.

Because the two funds have large-cap value biases, total returns
may exceed or lag other asset classes and investment styles from
time to time depending on what's in favor with the market at the
time.  Just as value and growth outperform at different times so
do large-cap and small-cap stocks.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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


In Section Two:

Dropped Calls: EBAY
Dropped Puts: None
Daily Results
Call Play Updates: TRMS
New Calls Plays: AMGN
Put Play Updates: CCMP, GWW, TSCO, AT, AZO, PII
New Put Plays: CB


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

EBAY - 73.49 -0.16 (+1.03 for the week)

Well, we tried.  When EBAY wasn't able to move back towards its
relative highs, it seemed that a pullback to the rising 50-dma
might offer an alternate entry point.  Late last week it looked
as if shares might pull back to that level.  A bounce from the
moving average would've activated this long play.  But instead,
the stock failed to set a lower low on Monday.  Today's action,
which saw EBAY trade in narrow range while remaining well above
$72.00, was the last straw.  Bulls can be encouraged that the
long-term uptrend has not been broken.  And while the 50-dma
wasn't actually tested, it's worth noting that the previous
pullback in December came to a halt without actually touching the
moving average.  But with the stock showing no clear direction
and plenty of congestion looming overhead, we're going to part
ways with this un-triggered play.  We'll keep an eye on EBAY for
an eventual breakout to new highs.


PUTS:
*****

None


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

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

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

CALLS              Mon    Tue

AMGN     53.45    0.85   0.47  New, uptrend in tact
EBAY     73.40    1.26  -0.16  Drop, No trigger
TRMS     42.71   -0.28   0.78  Building gains


PUTS

AT       43.87   -0.35  -0.28  Inching down
AZO      64.30   -1.11   1.31  Entry point
CB       48.85    0.80  -1.25  New, Failed at $50
CCMP     41.78    0.28  -0.78  Still dropping
GWW      45.52   -0.10   1.22  Failed at $46
PII      49.57    0.95  -0.03  Late-day sell
TSCO     31.82   -1.26  -0.16  New relative low


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

TRMS $42.71 +0.78 (+1.08) The broad market may still be pinned
in its declining trend, but there are still some pockets of
strength to be found.  TRMS is one of those pockets adding
another day with a higher high and higher low on Tuesday.
Following the rebound off of the $40 support level late last
week, the stock has been working its way back up the chart,
managing to clear the 10-dma ($42.16) early in the day, then
pulling back to confirm support just above that level and
bouncing at the close to end near the highs of the day.
Entering on strength doesn't appear to be the winning strategy,
as the stock's stair-step pattern is providing ample opportunity
to enter on each intraday dip to support.  Going forward, the
$42 level seems to be shaping up as decent support and a dip and
rebound from that level can be used for new entries.  We're
likely to see some resistance provided by the 50-dma (currently
$43.15) and then again at the 20-dma ($43.69), but so long as
the pullbacks don't break the pattern of higher lows, we can use
them as solid entry points along the way to our eventual target
in the $45-46 area.  Once solidly above the $43 level on a
closing basis, we'll raise our stop, but for now we're leaving
it at $39.50.


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

AMGN – Amgen, Inc. $53.45 +0.47 (+1.36 this week)

Company Summary:
The biggest of the Biotech big guns, AMGN makes and markets
therapeutic products for hematology, oncology, bone and
inflammatory disorders, as well as neuroendocrine and
neurodegenerative diseases.  Anti-anemia drug Epogen and immune
system stimulator Neupogen account for about 95% of sales.  Its
Infergen has been commercialized as a treatment for hepatitis C,
and Stemgen is approved for stem cell therapy in Australia,
Canada, and New Zealand.  The company has a strong pipeline of
new drugs in various stages of development as well as research
and marketing alliances with Hoffman-La-Roche and
Johnson & Johnson.

Why We Like It:
Finding a solid bullish trend that has existed for more than a
week in the current market environment is tough enough, but how
about a stock that has steadily posted higher highs and higher
lows since late September?  Further narrowing the field, how
many stocks in that narrow field are above their 50-dma, with
the 50-dma above the 200-dma?  Not many.  Believe it or not,
we're talking about Biotechnology giant, AMGN, which has been
steadily marching up the charts in defiance of the both the
broad market weakness and even the lackluster action in the
Biotechnology index (BTK.X), which is a lot closer to its October
lows, than its December highs.  One factor that may be
influencing the recent bullish action could be the company's
analyst meeting, currently scheduled for February 25th, and we
could see a strong move leading up to that event.  Not only is
the price action in AMGN impressive (trading a new 9-month
intraday high of $53.96 today), but so is the volume.  Buying
volume has been increasing over the past few days, and this is
most clearly demonstrated by the On Balance Volume indicator,
which has been moving steadily higher recently and is right on
the cusp of a breakout over the late-August high.  Combine that
with the picture on the PnF chart, and AMGN looks like it is
ready to stage a solid breakout with a trade at $54.  In fact,
a trade above $54 looks like a good catalyst for momentum
entries.  The only downside to trading a breakout move is that
there is some formidable resistance (old support) at the $55
level to contend with.  But we'll give the nod to the PnF chart,
with a current bullish price target of $69.  That won't likely
be achieved in the near future, but that trade of $54 would
certainly confirm the stock's bullishness with another
double-top breakout on the PnF chart.  Those looking for a
pullback to support before stepping into the play will want to
see a successful test of the $52 support level (also the site
of the 4-month ascending trendline) before playing.  The most
recent consolidation took place in the $51-52 area before the
solid bullish move of the past 2 days, so we're initially
setting our stop at $50.50.

*** February contracts expire in less than two weeks ***

BUY CALL FEB-50*AMQ-BJ OI=11618 at $3.80 SL=2.00
BUY CALL FEB-55 YAA-BK OI=21724 at $0.60 SL=0.25
BUY CALL MAR-50 AMQ-CJ OI= 2136 at $4.90 SL=3.00
BUY CALL MAR-55 YAA-CK OI=18452 at $1.70 SL=0.75

Average Daily Volume = 12.7 mln



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

CCMP - 41.78 -0.78 (-0.19 for the week) Lately it seems as if the
chip group has been devoid of any remotely positive news.  On
Tuesday morning, Texas Instruments reiterated its earnings
expectations for the first quarter of 2003.  Sector bulls,
perhaps relieved that TXN wasn't suddenly expecting business to
deteriorate in Q1, bid the semiconductor index above 270.  These
gains evaporated during the afternoon as the SOX.X moved lower
with the broader market.  CCMP suffered a similar intraday sell-
off after topping out at $43.78.  The stock finished with a 1.8%
loss, following rangebound trading in the $41.50-$42.00 area
during the final two hours.  That indecision suggests many
investors were unwilling to take positions ahead of tonight's
earnings report from Applied Materials.  Shares of the leading
chip manufacturer were ticking lower by roughly 3% in the
extended session after the company reported a break-even quarter.
Analysts had been expecting a profit of 2 cents/share.  AMAT also
said its second-quarter earnings would come in slightly lower
than expectations.  The implicit lack of demand does not bode
well for Cabot, who makes the polishing slurries that are used in
the circuit manufacturing process.  This news will make it that
much harder for the stock to hold above its relative low of
$41.36.  Aggressive traders could think about opening new short
positions on a move below that level; just bear in mind that
shares may stabilize at psychological support ($40.00).  For the
time being we'll keep our stop-loss set at $44.51.  Those looking
for less upside risk could use a stop slightly above $44.00.

---

GWW - 45.51 +1.21 (+0.51 for the week) GWW bulls got some much-
needed positive news on Tuesday morning when BB&T Capital Markets
upgraded the stock from "Hold" to "Strong Buy."  While BB&T isn't
one of the larger players in the brokerage industry, it
nonetheless gave some bearish traders a good excuse to cover
their short positions.  GWW marched higher on strong volume
before the rally lost momentum below short-term resistance at
$46.00, which happens to coincide with the top of the loosely-
defined descending channel that has dictated trading over the
past month.  This level also happens to coincide with the 19.1%
retracement from the January highs to yesterday's lows.  Given
the steady downtrend, we're not overly concerned by the fact that
a rebound has taken GWW up to resistance.  A move over $46.50,
however, might spell trouble for the bears.  Conservative traders
may want to use a stop slightly above that level.  We're going to
lower our stop by 50 cents, to $47.56.  Speculative traders could
think about shorting a rollover from current levels, using a
fairly tight stop above resistance.

---

TSCO - 31.82 -0.16 (-1.60 for the week) So far, so good.  Our
short play in TSCO was activated yesterday at $32.76 when shares
fell to new relative lows.  Early-morning selling gave way to a
mid-day rebound that had absolutely no staying power.  Shares
traded the remainder of the session below $32.50.  This level
continued to provide intraday resistance on Tuesday.  TSCO
finished the session with a small loss after tracing both a lower
high and a lower low. This extension of the recent downtrend and
the continued strong volume are promising signs for this play.
Bears can also be encouraged by TSCO's pattern of relative
weakness versus the RLX.X retail index.  Any intraday rallies
will be challenged by overhead resistance at $32.50 and $33.00.
Our stop is located above the 200-dma at $35.25.  Those with a
more conservative strategy could use a stop slightly above
$34.00.  Traders still looking to open short positions can watch
for either a move under today's low ($31.65) or another rollover
from the $32.50 region.

---

AT $43.87 -0.28 (-0.63) Amazingly, our AT play just continues
along its trend of lower highs and lower highs, with rally
attempts looking feeble at best.  Since the failure at the
200-dma on February 3rd, AT has hit a posted a lower low every
day and is looking pretty oversold right here.  But it looked
oversold a week ago too.  Proof that oversold can always become
more oversold.  At this point, gaming new entries is a tough
proposition, as there hasn't been enough of a bounce in the past
week to provide a solid risk/reward proposition, especially with
the PnF bullish support line at $44.  It looks like that support
is about to break, and AT came close on Tuesday with a low print
of $43.30.  Looking at the hourly chart shows that the stock
has repeatedly been turned back each time it has tested the
descending trendline that began in early January, so that's
where we'll define a possible new entry point.  A failed rally
attempt below this trendline (currently $44.50) can be used for
new entries, but keep in mind that we're now starting to get
aggressive with our stop, lowering it to $45.10 tonight.

---

AZO $64.30 +1.31 (+0.15) Early in Monday's session, shares of
AZO were taking a beating along with the rest of the market,
falling to an intraday low of $61.75, before beginning a steady
afternoon recovery that took the stock back up to the $63 level.
That looked like the beginning of the end, as once into the gap,
the stock seemed destined to trade down to the bottom of that
gap near $61.20.  But a funny thing happened after the close,
with the company updating its Q2 guidance.  Apparently investors
liked what they heard, as the stock gapped back over the $64
level and then pushed up to just below the $65 level before
giving up most of those intraday gains by the end of the day.
Recall from last night's Play of the Day writeup, that we were
looking for a failed rally near $65 as a new aggressive entry
point.  That's exactly what we got and now we'll see if today's
bounce was a one-day wonder or the beginning of a reversal.  It
is somewhat disconcerting to the bears that AZO was able to hold
above the $64 level at the close, despite the negative tone in
the broad market.  While another failed rebound below $65 can
be used for new entries, more conservative traders may now want
to wait for a drop back under the $63.75 level (just below
today's intraday low) before jumping aboard.  Our stop remains
at $65.50, just above the descending trendline.

--

PII $49.57 -0.03 (+0.80) Over the past few days, PII hasn't been
behaving like we normally want to see in a put play.  After
cracking the $49 support level last week, the stock found some
decent buying interest and over the past few days has been
posting a series of higher lows and higher highs.  But that
pattern seems to have really run into a roadblock this afternoon,
when the stock failed to break through the month-long descending
trendline, currently at $50.80.  After posting a slightly lower
intraday high in the early afternoon, the rally really fell apart
in the final hour, with a $1.35 intraday gain turning into a
3-cent loss by the close.  As noted in the Market Monitor during
the day, a rollover near that trendline looked good for
aggressive entries, with confirmation coming with a drop through
the 10-dma ($50.16) at the end of the day.  We actually
considered dropping the play this afternoon, but after the sharp
end-of-day drop, we're going to give it one more day to get
moving further south.  Accordingly, we're tightening our stop
to $51, just above today's intraday high.


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

CB - Chubb Corporation $48.85 -1.25 (-0.59 this week)

Company Summary:
Chubb Corporation, incorporated in June 1967, is a holding
company with subsidiaries principally engaged in the property and
casualty insurance business. The Company presently underwrites
most forms of property and casualty insurance. The Company's
Property and Casualty Insurance Group writes non-participating
policies. Several members of the Property and Casualty Insurance
Group also write participating policies, particularly in the
workers' compensation class of business, under which dividends
are paid to the policyholders.

Why We Like It:
The latest slide in the market hasn't been kind to shares of the
major insurance companies, with the Insurance index (IUX.X)
getting slammed lower over the past couple weeks.  Now resting
right at the site of the October lows, and just barely above the
intraday lows in January, this group is clearly a pocket of
relative weakness.  As one of the larger insurance companies,
AIG led the way lower over the past 3 weeks with a 25% loss,
following Morgan Stanley's bearish comments on the Property and
Casualty group in late January.  But AIG doesn't make sense to
the downside right here, as it just achieved its bearish vertical
count of $46.  So we went looking for another major insurer in
the group that still looks to have room to fall.  That search
turned up CB, which not only looks bearish, but has room to fall
to its PnF target.  The stock generated another  PnF Sell signal
last week when it traded below $51, and it hasn't been able to
generate much of a bounce this week, as it continues to fall,
now under the $49 level.  The current vertical count projects
down to the $44 level, and based on the action with AIG, that
target seems eminently achievable.  Another bearish observation
is that CB is now trading below both its July and October lows
and hasn't been below the $50 level since early 2000.
Translation: relative weakness.  It's interesting to note that
those lows in early 2000 came right at the $43-44 area, adding
credence to that level as a downside target.  Ideally, we'll get
a bit of an oversold rebound to provide entry near the $50.50
level, which acted as intraday resistance both last Thursday
and then again this morning.  Traders looking to enter on
further weakness can target a breakdown under $48.70 (just
below today's intraday low).  Place stops initially at $51.75,
just above the declining 10-dma.

*** February contracts expire in less than two weeks ***

BUY PUT FEB-50 CB-NJ OI=613 at $1.90 SL=1.00
BUY PUT MAR-50*CB-OJ OI= 49 at $3.20 SL=1.50
BUY PUT MAR-45 CB-OI OI= 54 at $1.20 SL=0.75

Average Daily Volume = 1.40 mln



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

Please read our disclaimer at:
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The Option Investor Newsletter                  Tuesday 02-11-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: PUT - CB
Futures Corner: Whipped Into Shape


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

CB - Chubb Corporation $48.85 -1.25 (-0.59 this week)

Company Summary:
Chubb Corporation, incorporated in June 1967, is a holding
company with subsidiaries principally engaged in the property and
casualty insurance business. The Company presently underwrites
most forms of property and casualty insurance. The Company's
Property and Casualty Insurance Group writes non-participating
policies. Several members of the Property and Casualty Insurance
Group also write participating policies, particularly in the
workers' compensation class of business, under which dividends
are paid to the policyholders.

Why We Like It:
The latest slide in the market hasn't been kind to shares of the
major insurance companies, with the Insurance index (IUX.X)
getting slammed lower over the past couple weeks.  Now resting
right at the site of the October lows, and just barely above the
intraday lows in January, this group is clearly a pocket of
relative weakness.  As one of the larger insurance companies,
AIG led the way lower over the past 3 weeks with a 25% loss,
following Morgan Stanley's bearish comments on the Property and
Casualty group in late January.  But AIG doesn't make sense to
the downside right here, as it just achieved its bearish vertical
count of $46.  So we went looking for another major insurer in
the group that still looks to have room to fall.  That search
turned up CB, which not only looks bearish, but has room to fall
to its PnF target.  The stock generated another  PnF Sell signal
last week when it traded below $51, and it hasn't been able to
generate much of a bounce this week, as it continues to fall,
now under the $49 level.  The current vertical count projects
down to the $44 level, and based on the action with AIG, that
target seems eminently achievable.  Another bearish observation
is that CB is now trading below both its July and October lows
and hasn't been below the $50 level since early 2000.
Translation: relative weakness.  It's interesting to note that
those lows in early 2000 came right at the $43-44 area, adding
credence to that level as a downside target.  Ideally, we'll get
a bit of an oversold rebound to provide entry near the $50.50
level, which acted as intraday resistance both last Thursday
and then again this morning.  Traders looking to enter on
further weakness can target a breakdown under $48.70 (just
below today's intraday low).  Place stops initially at $51.75,
just above the declining 10-dma.

*** February contracts expire in less than two weeks ***

BUY PUT FEB-50 CB-NJ OI=613 at $1.90 SL=1.00
BUY PUT MAR-50*CB-OJ OI= 49 at $3.20 SL=1.50
BUY PUT MAR-45 CB-OI OI= 54 at $1.20 SL=0.75

Average Daily Volume = 1.40 mln



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offers true direct access to each option exchange
offers stop and stop loss online option orders
offers contingent option orders based on the price of the option or
stock
offers online spread order entry for net debit or credit
offers fast option executions

PreferredTrade offers these online option trading features and more;
call 1-888-889-9178 or click for more information.

http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN
**************************************************************


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

Whipped Into Shape
By John Seckinger
jseckinger@OptionInvestor.com

There are many occasions when the futures markets will whip
around an important area, only to seemingly give a number of
false signals.  Can trading this area actually be profitable?

If a trader's nomenclature includes the word 'whipped,' it simply
means that the market is chopping around and not giving a clear
direction of trend.  Most of the time this results in a losing
trade.  Heading into the significant psychological area, a trader
generally has no idea that the markets reaction will be opposite
of the expected result, and this makes the 'whipping' action that
much more frustrating.  Nevertheless, even if a trading account
is contracted as false signals are given, it definitely does not
mean to turn the computer off and go home.

Before a trading session starts, hopefully a number of support
and resistance zones will be carefully mapped out (see nightly
Futures Wrap).  Using February 11th, 2003 as the date in
question, I vividly remembered before the market opened that
there was a sizable significant range given in the E-mini Nasdaq
contract (NQ03H).  6.75-points to be exact.  I felt heading into
the session that this level was important and should be monitored
closely.  I expected a move to 1000-1003 if 986.50 was taken out,
and that a DAILY close above 986.50 would be important for
intermediate sentiment reading (read bullish).

It was only a few minutes into the daily session when R1 at
979.75 was hit, testing the bottom of this zone of resistance and
triggering an alert on my computer.  R2 was much higher at
990.25, and I put an alert for this level as well.  As soon as
prices closed on a five-minute basis above 979.50, I was then
ready to trade.  As the chart below shows, the NQ traded above
986.50 but never closed above this 'critical zone' on a five-
minute basis.  No confirmation; still watching.  Then, fifteen
minutes later, we got a close under 979.79 and I knew it was time
to go short.  Fortunately, I put in a regression channel around
10:15 a.m. and decided not to pull the trigger.  If you read my
material, you know I like to use regression channels on a daily
basis.  A lot of nervousness, but no action yet.  It was only
minutes later when I am sure a lot of traders were getting
whipped around this level.  I easily could have been one of them.

Chart of E-mini Nasdaq 100, 5-minute




It was about 40 minutes later when prices got above 986.50 and I
was actually confident that the 986.50 level would become solid
support, giving us a move to 1000-1003.  I was ready to go long.
R2 was at 990.25, so a five-minute close above here would give me
a close outside the regression channel as well as an objective to
1000.  Stop at 986.  Good risk/return, so I was ready.  That
trade never happened as well.  Once again, the whipsaw
environment was taking over.  A few years ago, I would have
turned the computer off at this time.

It was then 30-minutes later when the NQ contract fell back into
the "Resistance Zone", getting me to contemplate if it make sense
to sell the NQ as 986.50 was cleared?  Well, the aggressive
bullish channel wasn't broken in my mind until 984, and 50% of
the daily range came in at 982.50.  So, how about 982 with a stop
at 987?  Absolutely a viable trading strategy, win or lose;
however, I wanted the period close under 979.75.  I tried fitting
a bearish regression channel during the move lower from the daily
R2 area, but it was too narrow and didn't seem practical.  Note:
It was at 982 when I saw the bearish divergence, but that is
never a single reason to act.

Finally, we get a move under 979.75.  I am of course wondering if
this is indeed a trap; however, from a bearish point of view, it
was very nice to see R2 tested, the entire "resistance zone"
rejected to the downside (prices unable to stay above this area),
and there has to be some traders forced to exit as this zone
failed to provide a move back to the 1000-1003 area.  Finally a
reason to get involved.  Where is a stop placed?  Well, I like
the 987 area as risk, with reward to daily pivot, or roughly 14-
points.  So, better than 1:1 risk/reward (which is the minimum).
Why not use the noted 50% retracement of the day's range at the
moment it makes sense to go short?  For aggressive traders, I
could see using a five-minute close above this level; however, I
was concerned that the market might whip up towards 986.50 and
force me to re-evaluate market conditions.

Chart of NQ03H, 5-minute




At 2 p.m., we finally had our breakdown towards a new low,
signaling to me that it was time to draw in a new regression
channel.  Up until 2 p.m., it was really only price action that
signaled a move lower.  If I would have traded what I 'felt,' I
would most likely be on the sidelines wondering how the market
whipped around the 979.75 to 986.50 area like it was nothing.

I starting thinking, even if the daily pivot at 965.25 is hit, I
don't have to exit here.  However, that is a level where both
bulls and bears will be very nervous about a possible bounce or
breakdown.  Fortunately, the NQ hit the daily pivot from OUTSIDE
the regression channel.  Therefore, I began expecting lower
prices.  The regression channel was acting like resistance, and
the contract fell underneath the pivot.  I actually contemplated
getting even more bearish, and would not have blamed a trader for
adding to a short there.  It was just after the bond market
closed, so volatility usually picks up and I wanted to see if
that meant much lower prices.

The trading day effectively ended as the NQ contract rose above
the pivot, closed back inside the regression channel, and MACD on
a five-minute chart crossed higher.  Well, not bad for a session
that really seemed hard to figure out.

What is the lesson?  Do NOT get frustrated with the market(s)
whipsawing around an area that SHOULD be psychologically
significant.  Trust your homework the night before, and remember
to constantly look for reasons to either enter or stay on the
sidelines patiently waiting (regression analysis, five-minute
closes, MACD), since institutional traders will try to trap all
traders at both the top and bottom.  Trading is a business, and
sticking with a methodology no matter what can make all the
difference between a professional and amateur trader.
Moreover, if a trader did get trapped on one end of the
'resistance zone,' odds are that he/she would have missed the
real move lower.  That would be a far greater travesty.

Ask away,

John Seckinger


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