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Daily Newsletter, Tuesday, 02/18/2003

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The Option Investor Newsletter                 Tuesday 02-18-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Retail Sales Soar
Futures Markets:
Index Trader Wrap:
Market Sentiment: No Weakness
Weekly Fund Screen: Funds For Investors On A Tight Budget


Updated on the site tonight:
Swing Trader Game Plan: No luck again


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      02-18-2003           High     Low     Volume Advance/Decline
DJIA     8041.15 +132.40  8076.02  7909.30 1.39 bln   2341/ 908
NASDAQ   1346.54 + 36.40  1346.92  1319.52 1.28 bln   2216/1131
S&P 100   431.48 +  8.91   432.71   422.57   Totals   4557/2039
S&P 500   851.17 + 16.28   852.87   834.89
W5000    8051.71 +154.80  8061.00  7896.94
RUS 2000  364.53 +  6.03   364.59   358.50
DJ TRANS 2140.65 + 38.10  2140.65  2100.67
VIX        35.56 -  1.54    37.06    35.25
VXN        48.40 +  0.02    49.63    47.71
Total Volume 2,871M
Total UpVol  2,467M
Total DnVol    378M
52wk Highs  113
52wk Lows   16
TRIN       0.45
PUT/CALL    .81
************************************************************

Retail Sales Soar

At least at Wal-Mart where sales of duct tape, plastic, batteries,
flashlights and other survival necessities helped overcome weak
Valentine sales due to the snowstorm in the north. No kidding.
I mentioned this possibility last week that the terror alert
would revive retail sales and Wal-Mart is the first major chain
to admit it. Don't tell Greenspan or we will have weekly terrorist
alerts to boost the economy.

Dow chart - Daily



Nasdaq Chart - Daily




While Wal-Mart may have seen a benefit from the alert most other
businesses were not seeing anything due to the white out on the
east coast. The traditional mid-winter sale over the President's
Day weekend fell flat with many stores closing for much of the
weekend. The retailers depend on the holiday sale to dump the
rest of their leftover Christmas merchandise and the rest of
winter apparel to make room for spring merchandise. With the
money already spent for the traditional advertising flurry last
weekend there is a shortage of budgets to do it again. This was
a serious blow for retailers in the north.

It was also a blow to the struggling airline industry. Most
airlines had to cancel the majority of flights to the north
east both inbound and outbound. Holiday travelers stayed home
by the millions and equipment shortages hampered routes all
across the nation. Planes snowbound in the north were not
available to complete routes in the south and west. On Monday
alone AMR cancelled 627 flights and UAL cancelled 380. Multiply
this across all the airlines and the multiple days of the
weekend and you can see the problem.

The NY State Manufacturing Survey came in at only 1.1 for
February, which was down from 20.7 last month. This is a huge
drop and showed a huge drop in unfilled orders, -10.6, prices
received -14.4 and inventories -3.8. The switch from robust to
barely positive in only one month is not encouraging. One
analyst said it indicated relatively stable conditions. And
what drug was he smoking?

The Semiconductor book-to-bill numbers came out at 6:PM today
and the number fell to .92 in January from .94 in December.
Remember this is a three month moving average so the real
drop was much steeper. Orders fell -10% and shipments dropped
-9%. The semi sector may be improving on the surface but the
BTB tells the real tale. You can book all the orders you want
but the real number is in the shipments. You can cancel outright
or defer orders for months once placed. When both numbers fall
it is an indication of trouble ahead.

Wednesday we have the Chain Store Sales again, Mortgage
Applications, Residential Housing Starts and the NAHB Housing
numbers. These should not be market movers unless the trend
changed in the housing sector.

The dividend fever is becoming contagious. GDT announced that
they would begin paying a quarterly dividend of 8 cents with
the 2Q. They had suspended the dividend in Nov-1998. Given the
strong cash flow and financial position it is appropriate to
offer a dividend at this time according to the CEO. Last week
QCOM announced a 5 cent dividend and MSFT also announced a
token dividend.

BRL decided to issue a dividend in the form of a 3:2 stock
split. This was the 7th split for BRL. Most investors would
rather see splits than nickels and dimes as that extra share
of stock, even though the three shares are technically the
same value as two, seems to accumulate value faster than the
pocket change from dividends. Ask anybody who held for the
last six BRL splits. MSFT stock gained +.81 cents on its
first day of trading post split at $24.05. I profiled a
play on MSFT in the Editors Plays last Sunday.

ANF announced earnings after the bell and beat the street
but said the outlook for the rest of the year was cloudy.
They said they were being cautious in their planning for
spring merchandise. That means lower inventory levels and
fewer items. This will mean lower sales if retail explodes
again but also lower losses if it fizzles.

Darden Restaurants warned that earnings would be less than
expected because of increased marketing and insurance costs.
They said the economic downturn was causing lower sales as
fewer people ate out. They were spending more in advertising
to attract a smaller audience.

I can't do a market wrap without touching on the Iraq news.
Remember the unconditional approval to allow U2 spy planes
to fly over Iraq? Inspectors finally agreed to Iraq's demands
to notify Iraq at least 48 hours in advance of the exact
route each plane would take. Think about it. I doubt they
will find anything under those conditions. Also, they found
several dozen of the "illegal" missiles and 380 long range
missile engines Iraq had imported illegally in the last four
years in defiance of the current UN restrictions. The
inspectors said they were going to "ASK" Iraq to destroy them
as a show of cooperation. I assume they will actually watch
to see if they are really destroyed and not just take Iraq's
word for it. Is it just me or does it seem like the inspectors
are on the wrong side? In breaking news tonight the Iraq
commission to search out weapons that may have been
overlooked along with important papers that may have been
stored in private residences announced that they have been
unable to find anything. That is reassuring. I am sure the
inspectors are relieved.

The markets rallied for about 30 min today. That was how
long it took for the Dow to race to 8035 and then hover
within 35 points of that level for the rest of the day. There
was an attempt to sell off at 3:PM that took the Dow back down
to 8000 but the attempt failed when short covering and general
buying appeared at the close. The Dow ended back at the 8041
level where it had spent most of the day.

The Nasdaq finally posted back-to-back positive days, a feat
not seen since late January. The Nasdaq closed at 1346 and
well out of the month long trend channel. The nearest resistance
is now 1360 that dates back to Jan-29th. Most tech leaders
showed strong percentage gains with gap open spikes that
indicate short covering rather than pent up buying demand.

The Dow at 8041 is still about 110 points below the top of our
recent trading range. We cannot get excited about the "rally"
until we break that 8150 level to the upside. It will take
more than short covering to make that happen. Using the largest
measure of market strength the Wilshire 5000, the rally stalled
exactly at the top of the down trend channel.

Wilshire 5000 Chart - 60 min




The Iraq problem has not gone away and the rhetoric is continuing.
According to the latest comments it appears the US is still
planning on an attack around March 3rd, maybe as late as March
17th. As this watched pot comes to a boil the markets are not
going to just ignore it. The rally came on indications that the
war might fade away and today is became clear that it was still
on the calendar. Until the Dow breaks 8150 we are still in a
down trend. Ignore either event at your own risk.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Check the Site Later Tonight For John's Futures Markets Article
http://members.OptionInvestor.com/futureswrap/fw_021803_1.asp


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

Check the Site Later Tonight For Jeff’s Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_0218403_1.asp


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


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

No Weakness
by Steven Price

The bulls are back in town!  At least for the moment.  I
highlighted the oversold bullish percents last week, with the
risk shift less in favor of the bears.  However, those indicators
were still falling and could hardly of predicted a rally of more
than 400 points in the Dow off of Thursday's lows.  However,
after testing support levels and ratcheting lower for the past
month, it appears that the bears have taken their profits and
gotten out of the way.  It is still no easier to predict global
events, but the technical indicators still show the end result of
whatever the motivating factors are and give us a good idea of
the likelihood for reversals, at least on an intermediate basis.

The Dow and OEX both slid into oversold territory last week, in
spite of the rallies on Thursday and Friday.  I term Thursday a
rally since we had such a powerful intraday move, although we
actually ended in the red that day.  It is apparent in hindsight
that it was the beginning of a sentiment shift that has continued
through Tuesday, in spite of anti-aircraft weapons being
stationed around national targets of terrorists, and still no
decisive move on Iraq.  The rumor this morning that Saddam
Hussein was looking to flee through Iran into Russian exile
certainly seems to be the logical reason for the continued rally,
as well as the possibility of further delays on Iraq based on
European consensus, but with a market that had sold off
dramatically in the past month, it may have simply been time for
bargain hunting bulls to step back into the ring. While we are
concentrating on technicals here, there are a couple of signals
that suggest Iraq is still the motivating factor.  We saw a
slight pullback in oil and gold futures continue their nosedive,
both of which indicate that the market expects war to be delayed,
or at least the possibility is not growing nearer.  The drop in
gold could also be the result of strength in the dollar today and
a move out of defensive stocks and back into equities on a value
basis.

We saw a powerful enough reversal to register our largest point
and figure reversal since we rolled over in January, but are
right back into resistance zones from the consolidation that took
place before the recent drop. None of the major indices have
registered buy signals, so we are left to determine whether to
short the rally at resistance, or put faith in the big reversal
giving us an indication of a trend change. Note the bullish
percents, although off their lows, have not yet reversed up and
remain in columns of "O." Looking back at the past few trend
reversals, on either an intermediate or longer-term basis,
depending on your trading window, we see a similar pattern to the
last three days.   October 29 shows a big morning drop that
looked like the continuation of a downtrend over the previous few
days, followed by a big afternoon rally and a close near the
opening price (Doji star), then a big rally the following day.
We then continued higher all the way to Dow 8800, from the
October 29 morning low of 8198, for a 600-point rally.  On
November 13, we got another dip that looked like a continuation,
followed by a close near where we opened, another Doji (not
exactly a Doji, but similar) with a low of 8298, followed by a
big rally the next day.  That rally took us all the way to Dow
9000.  On December 31, we got the Doji after a low of 8242,
followed by a big next day rally and ended up at Dow 8069.  It is
getting harder to rely on history repeating itself as we get
closer to a possible war and the timeframe for the threat is
different.  There are now almost daily announcements that change
the potential for an invasion, as opposed to a cloud hanging over
us pointing to a likely war sometime in the future. That means
any move is more subject to a sudden reversal from what appears
to be a trend. However, a look at the intraday chart of the Dow
is still giving a bullish appearance. The average rallied up as
high as 8076, before getting slammed.  It ticked back below 8000
and at the time (late in the day) it appeared as though we had
finally gotten a blow-off rally and the move appeared about to
reverse possibly in favor of the bears.  But the pullback reached
only as low as 7995, before gaining a second wind and heading
back to 8041.  What appeared to be a rollover now looks like a
pullback to a higher level of support at 8000.


While the action certainly looks attractive to bulls, we are back
into a consolidation range that held us at the end of January and
beginning of February, with a solid top at Dow 8150-8160 and SPX
865-870. It is hard to imagine a rally of over 500 points (which
it would be at that level) not taking a break and those levels
would seem the likely resistance now that we have broken previous
resistance at 8000 and found intraday support there. I'll be
targeting possible bearish plays from those levels, since I still
believe the overall trend is down.  However, if we do break
through, then I'll be watching the previous head and shoulders
neckline break at roughly Dow 8200 and 50% retracement of the
Jan-Feb drop at 8250 for signs of a more convincing trend
reversal to jump on long, even if that reversal is only an
intermediate one.


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  8041

Moving Averages:
(Simple)

 10-dma: 7901
 50-dma: 8356
200-dma: 8685



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  851

Moving Averages:
(Simple)

 10-dma:  834
 50-dma:  882
200-dma:  919



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1014

Moving Averages:
(Simple)

 10-dma:  971
 50-dma: 1017
200-dma: 1019



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



The Semiconductor Index (SOX.X):  Just when I had been
considering that the SOX was no longer the same reliable
indicator it has been for the broader markets, the action in the
sector turned me into a believer.  When it bottomed at 260,
refusing to break down beyond that level, I saw the major
indices, COMP included, continuing their downtrends.  However, in
hindsight, the SOX may have been forecasting a short-term bottom,
with its reluctance to sink.  That certainly seems to be the case
after the last three days.  The flat lining in the chip stocks
preceded the reversal higher in the Dow, SPX and COMP, and the
SOX has now gained more than 10% since February 7.  Currently
trading at 291, it is approaching the key 300 level, which has
acted as a magnet in the recent past and coincides closely with
the 50-dma at 299.  A move back through those levels would
suggest a run at the descending 200-dma, currently at 337.

52-week High: 641
52-week Low : 209
Current:      291

Moving Averages:
(Simple)

 21-dma: 277
 50-dma: 299
200-dma: 337

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


The VIX has sunk back to recent support at 35%.  The volatility
measure never managed a break above 40% and the resistance at
that level indicated institutions were selling premium at those
levels, rather than buying it.  That was a bullish sign for
equities and now that we are at support, the action on Wednesday
should give us an indication if the equity run is running out of
steam or has some legs.  A move below 35% could indicate more
bullishness, while a hold above that level may indicate the
premium buyers are back, forecasting a pullback after the recent
run.


CBOE Market Volatility Index (VIX) = 35.56 -1.54
Nasdaq-100 Volatility Index  (VXN) = 48.40 +0.02

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.81        572,696       463,455
Equity Only    0.70        379,517       265,624
OEX            1.58         36,651        47,742
QQQ            1.29         52,584        67,609


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

Bullish Percent Data

           Current   Change   Status
NYSE          40.3    - 0     Bull Correction
NASDAQ-100    33.0    + 1     Bear Confirmed
Dow Indust.   16.7    + 4     Bear Confirmed
S&P 500       34.6    - 0     Bull Correction
S&P 100       29.0    + 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  1.10
10-Day Arms Index  1.32
21-Day Arms Index  1.38
55-Day Arms Index  1.33


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       2125           741
NASDAQ     2127          1048

        New Highs      New Lows
NYSE        45               35
NASDAQ      61               49

        Volume (in millions)
NYSE       1,392
NASDAQ     1,297


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

Commitments Of Traders Report: 02/11/02

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 slightly decreased long positions, while increasing
shorts by a more significant amount.  The net result was an
increase of 8700 on the short side. Small traders increased longs
by 10,000 and shorts by 2,000.

Commercials   Long      Short      Net     % Of OI
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%)
02/11/03      412,333   472,156   (59,823)   (6.8%)

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
01/23/03      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%
02/11/03      161,126    95,618    65,508     25.5%

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 reduced longs by 1,500 and increased shorts by 3,000,
for a 6% increase in overall short position. Small traders
increased the long side by 4,000 contracts, while leaving shorts
close to unchanged.


Commercials   Long      Short      Net     % of OI
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%)
02/11/03       39,412     53,818   (14,406) (15.5%)

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
01/23/03       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%
02/11/03       29,667     8,915    20,752    53.8%

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 2,000 contracts and
shorts by 600.  Small traders took a similar approach with an
increase of 800 to the long side and a small decrease to shorts.

Commercials   Long      Short      Net     % of OI
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%
02/11/03       19,826    11,800    8,026      25.4%

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
01/23/03        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%)
02/11/03        5,390     9,300    (3,910)   (26.6%)

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

Funds For Investors On A Tight Budget

This week we search for funds that may appeal to direct investors
on a tight budget: funds with investment minimums of $50 or less,
expense ratios of 0.50% or less, and imposing no sales charge or
redemption fee.  We will draw our screen universe from a website
run by the Mutual Fund Education Alliance ("MFEA"), a non-profit
trade organization of the mutual fund industry aimed at helping
direct investors make better investment decisions.  In addition
to providing valuable investment education resources, MFEA's web
site (www.mfea.com) has a mutual fund screener, which allows you
to identify funds having low initial investment minimums of just
$50 or less, including funds waiving or reducing initial minimum
requirements.  Some funds reduce or waive the initial investment
requirement when you participate in an automatic investment plan
("AIP").

The MFEA was founded in 1971, and is comprised of the leading no-
load fund families in the U.S.  Collectively, these no-load fund
families serve more than 80 million shareholders and manage more
than $3.0 trillion in assets today, roughly half of industry net
assets, the website states.

We'll begin our search by identifying a small universe of mutual
funds using the MFEA fund selector.  We'll take the fund results
and then put them into Morningstar's system to compare portfolio
characteristics, performance, risk, management, and expense.  In
the end, we hope to have identified the best and most affordable
funds from this group.

Screen Process

The fund selector tool at MFEA.com produced 24 fund results that
matched our criteria.  Below is a summary of the screen criteria
we used to identify mutual funds with low minimums and low costs
of ownership.

 MFEA Screen Criteria:
 Company: All
 Categories: All
 Investment Req. (Type): Waived/Reduced Auto Investment
 Investment Req. (Amount): $50 or Less
 Sales Charge: No
 Redemption Fee: No
 Expense Ratio: 0.50% or Less

Twenty-four funds matched our budget criteria.  We next reviewed
the list to weed out municipal bond funds and money market funds,
leaving 17 equity and fixed income funds to consider.  Below are
the 17 stock and (taxable) bond funds that fit our "tight budget"
criteria.

 ABN AMRO/TAMRO Large Cap Value Fund (ATLVX)
 ABN AMRO/TAMRO Small Cap Fund (ATASX)
 ABN AMRO/Veredus SciTech Fund (AVSTX)
 Berger Large Cap Value Fund (BLCVX)
 Fremont New Era Growth Fund (FNEGX)
 T. Rowe Price Spectrum Growth Fund (PRSGX)
 T. Rowe Price Spectrum Income Fund (RPSIX)
 T. Rowe Price Spectrum International Fund (PSILX)
 TIAA-CREF Bond Plus Fund (TIPBX)
 TIAA-CREF Equity Index Fund (TCEIX)
 TIAA-CREF Growth & Income Fund (TIGIX)
 TIAA-CREF Growth Equity Fund (TIGEX)
 TIAA-CREF High-Yield Bond Fund (TCHYX)
 TIAA-CREF International Equity Fund (TIINX)
 TIAA-CREF Managed Allocation Fund (TIMAX)
 TIAA-CREF Short-Term Bond Fund (TCSTX)
 TIAA-CREF Social Choice Equity Fund (TCSCX)

If you've been to this site before, some of the funds above may
be familiar to you.  Baltimore-based T. Rowe Price offers three
funds-of-funds (the "Spectrum" series) that have produced solid
returns as adjusted for risks and costs versus comparable funds.
T. Rowe Price has built a reputation over the years of providing
superior long-term results while guarding against excessive risk.
ABM AMRO offers mutual funds subadvised by leading institutional
money managers such as TAMRO and Veredus, making such strategies
available to retail investors.  TIAA-CREF offers several low-cost
funds to meet a range of investor needs.

We next entered the 17 ticker symbols into the Fund Compare tool
on the Morningstar.com website to get current information and to
compare performance, risk, portfolio characteristics, costs, and
other fund features.  Berger Large-Cap Value Fund was eliminated
since we couldn't bring it up in the Fund Compare tool using the
ticker symbol BLCVX.  Eight of the remaining 16 funds aren't yet
rated by Morningstar.  Of the eight rated funds, only one sports
a Morningstar highest 5-star rating for risk-adjusted returns in
relation to its respective category peers.  Three receive 4-star
ratings, signifying above average, risk-adjusted performance and
three carry 3-star average ratings.  So, seven of the eight fund
choices left have at least average star ratings from Morningstar.

In the next section, we tell you which funds we like now based on
risk-adjusted performance and taking into account entry costs and
annual operating expenses.

Favorite Funds

Investors with long-term horizons that can accept significant NAV
fluctuations in pursuit of long-term growth objective may want to
think about the T. Rowe Price Spectrum Growth Fund (PRSGX) or the
TIAA-CREF Growth & Income Fund (TIGIX).  T. Rowe Price's Spectrum
Growth Fund makes a compelling case as a "core" equity investment
since it invests in a basket of underlying T. Rowe Price domestic
stock funds, a foreign stock fund, and a money market fund.  Fund
shareholders get exposure not just to U.S. large-cap equities but
also to mid-cap and small-cap stocks located here and abroad, for
maximum total return potential.  The Spectrum Growth Fund is good
for those seeking a professionally managed mutual fund portfolio.

TIAA-CREF Growth & Income Fund is your basic growth & income fund
that seeks favorable long-term returns from a broadly diversified
portfolio of attractively priced, established company stocks that
offer capital growth and/or current income.  TIAA-CREF's fund may
also invest a portion of its assets in steadily growing small-cap
stocks and to a lesser degree in foreign companies.  This product
is conservatively managed so as to appeal to risk-conscious stock
investors or those that want to lower the overall volatility of a
more aggressive stock portfolio.

Both the T. Rowe Price Spectrum Growth Fund and TIAA-CREF Growth
& Income Fund receive 4-star overall ratings from Morningstar in
relation to the large-cap blend category.  Historically, T. Rowe
Price's fund has produced average return with below average risk
relative to other large blends.  Since Ned Notzon's 1999 arrival,
the Spectrum Growth fund has produced above-average returns with
average risk.  Either way, T. Rowe Price has done a nice job for
shareholders of balancing return, risk and expense to generate a
solid return-risk profile for long-term investors seeking growth.

TIAA-CREF has similar risk-return characteristics as the T. Rowe
Price offering.  Relative to its category peers, the product has
produced above-average return over time, with average volatility.
Since a portion of its assets are tied to the S&P 500 index, the
fund typically doesn't stray too far from the return produced by
the S&P 500 index.  Due to its low 0.43% expense ratio, the fund
has historically outpaced the average large-cap blend fund while
guarding against taking undue risk.  Below is a summary of the 2
funds and their Morningstar ratings and trailing 10-year returns.

 Morningstar Overall Ratings:
 4 Stars T. Rowe Price Spectrum Growth (PRSGX)  Average Risk
 4 Stars TIAA-CREF Growth & Income (TIGIX)  Average Risk

 5-Year Annualized Return (February 14, 2003):
 -1.7% T. Rowe Price Spectrum Growth (PRSGX) 23rd Percentile
 -2.1% TIAA-CREF Growth & Income (TIGIX)  28th Percentile

You can see that both funds performed well on a relative basis in
the Morningstar large-cap blend category.  Both funds did a solid
job of minimizing losses over the last five years relative to the
average large-blend fund.  Both funds also beat the broad indices
(S&P 500, Russell 1000).

Investors seeking regular income, who can accept moderate ups and
downs in share price may prefer to look at T. Rowe Price Spectrum
Income Fund (RPSIX) or the TIAA-CREF Bond Plus Fund (TIPBX) which
sports a Morningstar highest 5-star rating.  T. Rowe Price's bond
fund of funds is 4-star rated by Morningstar for relative returns
(risk-adjusted).  While TIAA-CREF's bond plus fund is categorized
as an intermediate-term bond fund by Morningstar, Spectrum Income
fund is put in the multi-sector bond fund category.  The Spectrum
Income Fund invests in a diversified basket of underlying T. Rowe
Price bond funds - both domestic and foreign - as well as a money
market fund and an income-oriented stock fund.  It provides broad
fixed income market exposure including higher-yielding securities
and foreign bonds for greater total return potential.  Hence, its
multi-sector categorization.

TIAA-CREF Bond Plus Fund, like its sibling, doesn't stray too far
from its index benchmark.  As a result, its historical return has
been similar to that of the LB Aggregate Bond Index.  Low expense
and risk are the fund's trademarks, helping to remain competitive
over time relative to the general bond fund universe.  Both funds
can serve the core portion of one's fixed income portfolio.

While the T. Rowe Price Spectrum Income Fund has produced "first"
quartile performance results over the past three to five years in
relation to other multi-sector bond funds, TIAA-CREF has shot the
lights out ranking in the top decile within the intermediate-term
bond fund category.  Below are Morningstar ratings (as of January
2003) and fund performance results through February 17, 2003, per
Morningstar.

 Morningstar Overall Ratings:
 4 Stars T. Rowe Price Spectrum Income (RPSIX) Below Average Risk
 5 Stars TIAA-CREF Bond Plus (TIPBX) Average Risk

 5-Year Annualized Return (February 14, 2003):
 +4.8% T. Rowe Price Spectrum Income (RPSIX) 22rd Percentile
 +7.4% TIAA-CREF Bond Plus (TIPBX) 7th Percentile

In both Spectrum products, T. Rowe Price has historically ranked
in the top quartile of their respective category peer group.  In
the case of TIAA-CREF, experienced management, low expenses, low
risk taking, and prudent high-yield exposure all add up to solid
long-term performance for income-oriented investors.

Conclusion

This week we showed you a stock fund and a bond fund from T. Rowe
Price and a stock fund and a bond fund from TIAA-CREF.  Both fund
families are known for controlling cost and expense and providing
competitive performance results based on prudent risk management.

For more information, visit the mutual fund families' respective
websites.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

No luck again

The bulls are still in the building.  We continued the big
reversal from last Thursday morning and have moved back through
several pivotal levels, suggesting the rally was possibly more
than just a little short covering.  Now that we have what looks
like a decisive rebound, we can start measuring just how powerful
the bounce is by looking at how much of the recent drop has been
made up.  After all, we had dropped more than 1200 Dow points
since the January high of 8869 and even an oversold bounce of 50%
would amount to a 600-point rally off the bottom. So far we have
made up about 400 points and have some significant resistance
above.  If we are truly seeing a trend reversal, the bulls can't
stop now and will need another strong push on volume much higher
than today's paltry 1.1 billion NYSE shares. Volume is less
significant on the way down, but generally strong volume on upside
breakouts is needed for confirmation.


To read the rest of the Swing Trader Game Plan Click here:
http://www.OptionInvestor.com/itrader/indexes/swing.asp


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The Option Investor Newsletter                  Tuesday 02-18-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: EXPE
Daily Results
Call Play Updates: AMGN, NPSP, TRMS, TECD, EMC
New Calls Plays: SLAB
Put Play Updates: CB, HIG
New Put Plays: OSI


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

None


PUTS:
*****

EXPE $63.43 +3.68 (+3.68) That didn't last long!  We were looking
for a slight bounce in shares of EXPE to give us a solid entry,
and we definitely got more than we bargained for.  Continuing
the rebound that began on Friday, the stock rocketed higher on
Tuesday, quickly moving up to and then through the descending
trendline that has been capping rallies in the stock for the past
couple months.  There was never really an opportunity to enter
the play and with the close above both the descending trendline
and our stop, we're dropping EXPE tonight.


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

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

CALLS              Mon    Tue    Wed   Thu  Week

AMGN     53.62    1.07   1.02 Still trending higher
EMC       8.50   -0.08   0.59 New relative high
NPSP     24.07    1.42   0.39 Bounce from 200-dma
SLAB     25.62    0.72   1.02 New, Relative strength
TECD     21.95    0.81   0.44 Strong finish
TRMS     41.80    0.60   0.68 Bouncing again


PUTS

CB       49.39   -0.36   0.70 Failed $50
EXPE     63.43   -0.21   3.68 Drop, Big Bounce
HIG      37.40   -0.20   0.40 Weak rally
OSI      30.83    0.15  -0.62 New, DRI fallout


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

AMGN $53.62 +1.02 (+1.02) Continuing its rebound from the
ascending trendline (now at $51.65) that began with the September
lows, AMGN dragged the Biotechnology index (BTK.X) higher
throughout the day on Tuesday.  If this is a reversal for the
BTK, it looks like AMGN is going to lead the way, and the
critical test will be at the $54 resistance level, which turned
back the bulls last week.  The BTK did manage to close just above
the 10-dma for the first time in over a month and that is
definitely a positive sign.  But there is still some stiff
resistance to contend with in the $327-330 area before we'll
know if it is truly a trend change in progress.  AMGN is looking
much stronger than the BTK, after the gains of the past two
days, and the bulls are likely to challenge that $54 level
tomorrow, market permitting.  Traders that took advantage of
last week's weakness to enter the play are looking good tonight,
while those still waiting on the sidelines can either enter on a
pullback near the $52.50 support level or on a breakout over
$54.  If entering on a breakout, look for confirmation from the
BTK in the form of a push through the $330 level.  Stops should
now be raised to $51, just below last week's low.

---

NPSP $24.07 +0.39 (+0.39) Even with the Biotechnology sector
(BTK.X) in the green all day on Tuesday, NPSP really took its
time deciding if it was going to get moving.  Throughout most of
the day, the $23.80 level kept the bulls in check, until the
final afternoon push got the hob done on increasing volume.  NPSP
eked out a close over the $24 level, ending the day right at the
highs, and it looks like the bulls have the upper hand.  By the
end of the day, the stock was looking a lot better than it did
in the morning, when it was flirting with the $23 support level.
Aggressive traders that took advantage of that dip to enter the
play will now turn their attention to the $24.25 level.  A rally
through that level should open the door for a run at the $25-26
level ahead of earnings on February 27th.  Note that Tuesday's
lows were just above the 200-dma ($22.64), so it does in fact
look like that average is providing support.  Another rebound
from above the 200-dma can be used for new entries into the
play, while those looking for a breakout move will want to wait
for the bulls to clear $24.30 before playing.  Keep in mind that
$25 is the site of the PnF bullish support line and is likely to
provide significant resistance.  Our stop remains at $20.94.

---

TRMS $41.77 +0.65 (+0.65) While slow to join in the bullish party
of the past few days, the Biotechnology index (BTK.X) managed to
post a respectable gain to kick off the week, closing just above
the 10-dma for the first time in over a month.  After rebounding
from the $40 level on Friday, TRMS dipped fractionally at
the open, bounced and then pushed decisively through the $41
level.  There wasn't enough gas in the tank to challenge the $42
level, and TRMS spent most of the day drifting sideways near
$41.50 before pushing back up in the final hour to close very
near the high of the day.  The critical test will come up at the
$43 level, which capped the stock's most recent rally attempt
last week.  That level also lines up with the 50-dma ($42.86),
so momentum traders will need to wait for a volume-backed move
through the $43 level before playing.  TRMS is once again
building a series of higher lows, and traders still in search
of an entry on a pullback will want to see a dip near the $41
level to initiate new positions.  Keep stops set at $39.50.

---

TECD - $ 21.95 +0.44 (+0.44 for the week)
No overhead resistance and a broader market rally proved to be a
potent combination for TECD on Tuesday.  Our play was activated
at the opening trade of $21.75 when shares gapped above our entry
point.  The stock topped out slightly below $22.00 during the
first five minutes of trading before pulling back into negative
territory for several hours.  But as soon as intraday resistance
at $21.60 was broken with two hours left in the session, the
bears decided to call it a day.  Shares closed near the highs of
the day after tagging a high of $22.00.  This created a three-box
reversal on the point-and-figure chart.  On the daily chart we
see that TECD is continuing to fill in its February 7th gap,
accompanied by a nice upward-curling MACD.  In light of this
technical strength, we think odds are good that shares will
eventually reach our upside target at $23.99.  New entries can be
evaluated on either a move above $22.00 or a pullback to $21.60,
which should now provide some measure of support.  The latter
strategy is better left to more aggressive traders.  Our stop for
this play is set at $20.49.  Those looking for a little less
downside risk could use a stop just below $21.00.

---

EMC $8.50 +0.59 (+0.59 for the week) EMC broke out in impressive
fashion today, with a new relative high and another bullish "X"
on the point and figure chart.  While the broader markets are
still making up recent losses, EMC has continued the uptrend that
has been in place since October. More significant, however, is
that not only did EMC break through the recent high of $8.28, but
it pulled back to that level, found support there and moved
higher to its next PnF box at $8.50.   The stock now sits at its
highest level since last July.  In contrast to a low volume day
on the NYSE of only 1.1 billion shares, EMC has supported its
recent gains with a volume surge the last couple days.  The stock
has an average daily volume of 15.8 million shares, but traded an
average of 21.4 million over the last 2 days, coinciding with
today's gain of 7.5%.  With the breakout in the Nasdaq Composite
above recent resistance, along with its H&S neckline, we got some
tech confirmation, as well.  Although EMC is a listed stock, it
still falls firmly in line as a technology stock and sector
confirmation is just another piece of the puzzle.


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

SLAB - Silicon Laboratories - $25.62 +1.02 (+1.02 for the week)

Company Description:
Silicon Laboratories Inc. designs, manufactures, and markets
proprietary high-performance mixed-signal integrated circuits
(ICs) for a broad range of communications markets. Silicon
Laboratories is an ISO9001-certified manufacturer and has applied
for more than 161 patents on its mixed-signal technology.
(source: company press release)

Why We Like It:
In recent months, semiconductors that power wireless devices have
provided one of the few bright spots in the chip industry.  So
far investors haven't been given much evidence of a pickup in
demand for the beleaguered tech sector.  With neither businesses
nor consumers rushing out to upgrade PC's, companies such as
Intel and AMD have yet to see a notable pickup in orders.  But in
sharp contrast to this lack of growth, stronger worldwide demand
in the wireless market has created a favorable climate for
companies such as Silicon Labs.  Taiwan Semiconductor, the
world's largest semiconductor foundry, reported recently that
orders for wireless chips were very brisk.  This may have played
a large role in INTC's decision to roll out its own
communications chip.  SLAB's January 22nd earnings announcement
also reflects the fundamental gains that the sub-sector has
experienced.  Citing growing acceptance of its wireless products,
the company reported fourth-quarter income that was four cents
better than Wall Street expectations.  SLAB also differentiated
itself from many of its chip brethren by not forecasting a
decline in revenue during the first quarter of 2002.

These developments helped SLAB to display incredible relative
strength while the semiconductor index drifted steadily lower
over the following weeks.  From January 22nd to its multi-month
low on February 10th, the SOX.X lost 11.6%.  SLAB actually posted
a small gain over the same time period.  Now that index has
actually found a bid, SLAB is powering ahead to levels not seen
since December.  On Tuesday the stock added 4.1% and moved above
resistance at $25.00 and $25.50.  With both the daily stochastics
(5,3,3 setting) and MACD curling higher, we think SLAB is poised
to retrace its early-December losses and move towards the $30.00
level.  Our trigger to enter this play is set at $25.74, one cent
above today's high.  The daily chart shows that the 21-dma
($23.85) has provided support over the past two weeks.  If the
play is activated we'll use a stop at $23.24.  This is also below
the descending 200-dma.  Traders seeking to minimize downside
risk might want to use a stop a penny or two below the 21-dma.

BUY CALL MAR-20*QFJ-CD OI= 61 at $6.10 SL=3.05
BUY CALL MAR-25 QFJ-CE OI= 503 at $2.10 SL=1.05
BUY CALL APR-22.50 QFJ-DX OI= 236 at $4.80 SL=2.40
BUY CALL APR-25 QFJ-DE OI= 1315 at $3.40 SL=1.70

Average Daily Volume = 1.22 mil



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

CB $49.39 +0.70 (+0.70) In an overall bullish session for the
broad markets, even the beleaguered Insurance index (IUX.X)
managed a 1.7% advance, resulting in its best closing level
since February 5th.  But with declining 20-dma looming just
under $239, this 3-day rebound could be headed for some stiff
resistance.  Our CB play gapped up this morning and ran to
within a few pennies of solid resistance at the $50 level
before retreating throughout the afternoon to close back under
the 10-dma ($49.63).  While aggressive traders could have taken
advantage of the late day fade to initiate new positions, it
isn't yet clear whether this was a pullback, or just a
consolidation before pushing through that resistance.  It is
somewhat disconcerting to see the strength in the IUX index
throughout the day, and more conservative traders will do well
to wait for more weakness before entering.  Note that the $49
level, which acted as resistance last week, served the role of
support this morning and again this afternoon.  At a minimum,
we need to see CB break back under the $48.50 level and
preferably $47.50 before we'll know that the weakness that has
engulfed the stock for the past month is still in force.
Traders looking to trade a breakdown will want to wait for that
lower level to be violated before entering the play.  More
aggressive traders can continue to use rollovers below the
$50.00-50.50 area as an entry point, keeping in mind that our
stop is set at $50.75.

---

HIG $37.40 +0.40 (+0.40) While Insurance stocks, as measured by
the IUX index took a breather from the recent downtrend, our HIG
play actually performed pretty well.  The morning rally attempt
ran out of steam just below the $38 resistance level and then
drifted down throughout the afternoon, closing just above the
low of the day.  The downtrend is still very much intact and
now it remains to be seen whether today's rebound was the
beginning of a trend change or just the latest failed rally.
If the broad markets manage take another run at resistance
tomorrow, we'll want to watch HIG's behavior in the $38.00-38.50
area.  Another rollover there can be used for initiating new
positions, although more conservative traders will want to see
a break back under $37 before jumping aboard.  Watch the IUX
index for confirmation, as another solid up day for the sector
will likely lend a bid even to weaklings like HIG.  Keep stops
set at $39.50.


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

OSI – Outback Steakhouse, Inc. $30.83 -0.62 (-0.62 this week)

Company Summary:
Outback Steakhouse, Inc. operates full-service restaurants under
the Outback Steakhouse, Carrabba's Italian Grill, Fleming's
Prime Steakhouse and Wine Bar, Roy's and Bonefish Grill brand
names.  The majority of the company's restaurants are under the
Outback Steakhouse name, accounting for more than 700 of the
total 870 eating establishments.  Outback Steakhouse's menu
includes seared steaks, as well as prime rib, barbecued ribs,
pork chops, chicken, seafood and pasta.  For the nine months
ended in September 2002, revenues rose 11% to $1.76 billion.

Why We Like It:
Over the past several months, fast food stocks have been under
pressure due to changing tastes.  Consumers have apparently been
redirecting their dining-out dollars towards casual dining
establishments.  Judging by the comments out of Darden
Restaurants (DRI) this morning, it appears that this area of
the marketplace is having troubles of its own.  DRI guided below
consensus for Q3 and the stock was severely punished throughout
the day.  It certainly seems that consumers are just not eating
out as often.  This looks like an emerging trend that could echo
throughout the industry, and after a quick search, we found
another stock that looks to be primed for a breakdown.  Shares
of OSI have been under pressure since failing to crest resistance
at $36 last month, and conditions have been worsening since late
January when the stock broke below the 200-dma (currently
$32.74).  After consolidating below the 200-dma for a little
over a week, the selling pressure picked up and OSI is now
posting lower lows.  Even beating earnings estimates last
Thursday wasn't enough to get the bulls interested, and DRI's
dire forecast this morning drove OSI down to both a new intraday
and closing low.  While the steady deterioration of the On
Balance Volume over the past couple months indicates the stock
is under distribution, we want to wait for a trade under the $30
level to trigger this bearish play.  A drop under that level
should open the door for a drop first to the $28 level and then
$26, which is strong support from both July and October of last
year.  Aggressive traders can enter on the initial breakdown,
while those with a more conservative approach will want to
target a failed rally in the $31.00-31.50 area (just below the
10-dma) after the initial breakdown.  Place stops initially at
$32.75, just above the 200-dma.

BUY PUT MAR-30*OSI-OF OI= 20 at $1.15 SL=0.50
BUY PUT MAY-30 OSI-QF OI=488 at $1.75 SL=0.75

Average Daily Volume = 320 K



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and clicking on the link to the book on its home page.

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

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


**************************************************************
ADVERTISING INFORMATION

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Contact Support
The Option Investor Newsletter                  Tuesday 02-18-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three:

Play of the Day: CALL - SLAB
Traders Corner: A Different Look at Head and Shoulder Tops
Futures Corner: The Dow versus the E-mini


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

SLAB - Silicon Laboratories - $25.62 +1.02 (+1.02 for the week)

Company Description:
Silicon Laboratories Inc. designs, manufactures, and markets
proprietary high-performance mixed-signal integrated circuits
(ICs) for a broad range of communications markets. Silicon
Laboratories is an ISO9001-certified manufacturer and has applied
for more than 161 patents on its mixed-signal technology.
(source: company press release)

Why We Like It:
In recent months, semiconductors that power wireless devices have
provided one of the few bright spots in the chip industry.  So
far investors haven't been given much evidence of a pickup in
demand for the beleaguered tech sector.  With neither businesses
nor consumers rushing out to upgrade PC's, companies such as
Intel and AMD have yet to see a notable pickup in orders.  But in
sharp contrast to this lack of growth, stronger worldwide demand
in the wireless market has created a favorable climate for
companies such as Silicon Labs.  Taiwan Semiconductor, the
world's largest semiconductor foundry, reported recently that
orders for wireless chips were very brisk.  This may have played
a large role in INTC's decision to roll out its own
communications chip.  SLAB's January 22nd earnings announcement
also reflects the fundamental gains that the sub-sector has
experienced.  Citing growing acceptance of its wireless products,
the company reported fourth-quarter income that was four cents
better than Wall Street expectations.  SLAB also differentiated
itself from many of its chip brethren by not forecasting a
decline in revenue during the first quarter of 2002.

These developments helped SLAB to display incredible relative
strength while the semiconductor index drifted steadily lower
over the following weeks.  From January 22nd to its multi-month
low on February 10th, the SOX.X lost 11.6%.  SLAB actually posted
a small gain over the same time period.  Now that index has
actually found a bid, SLAB is powering ahead to levels not seen
since December.  On Tuesday the stock added 4.1% and moved above
resistance at $25.00 and $25.50.  With both the daily stochastics
(5,3,3 setting) and MACD curling higher, we think SLAB is poised
to retrace its early-December losses and move towards the $30.00
level.  Our trigger to enter this play is set at $25.74, one cent
above today's high.  The daily chart shows that the 21-dma
($23.85) has provided support over the past two weeks.  If the
play is activated we'll use a stop at $23.24.  This is also below
the descending 200-dma.  Traders seeking to minimize downside
risk might want to use a stop a penny or two below the 21-dma.

BUY CALL MAR-20*QFJ-CD OI= 61 at $6.10 SL=3.05
BUY CALL MAR-25 QFJ-CE OI= 503 at $2.10 SL=1.05
BUY CALL APR-22.50 QFJ-DX OI= 236 at $4.80 SL=2.40
BUY CALL APR-25 QFJ-DE OI= 1315 at $3.40 SL=1.70

Average Daily Volume = 1.22 mil



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If you trade options online, then you need an online broker that:
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
**************************************************************


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

A Different Look at Head and Shoulder Tops

Any trader who has done any type of technical analysis studies
can usually pick out one of the most recognizable patterns in
chart technical analysis, the head and shoulders pattern. Doesn’t
matter what time frame, you can find this pattern, hourly, daily,
weekly and even monthly. We recently saw a head and shoulders
pattern in the daily charts of the S&P, which has been playing
out quite nicely and if you look (or maybe you don’t want to
look) the monthly S&P is also in a very nice head and shoulders
top pattern.

But some of these patterns work and, of course, some don’t and
that is the discussion I would like to have today. Is there
anything else that we can look at to give us an unfair advantage
(and don’t we all like unfair advantages) when looking at a
classic head and shoulders pattern?

Seems there is. Thomas Bulkowski wrote a wonderful book called
“Trading Classic Chart Patterns” where he includes an easy to use
scoring system supported by statistical research for most of the
classic chart patterns.

Beginning of Trend

The first criteria Bulkowski looked at that made a statistical
increase in head and shoulder’s performance was the length of the
trend leading up to the pattern. This trend can be found by
working backward from the left shoulder and moving downward in
price. Find the lowest low before a ~20% change in price. Most
times you can find the beginning of the trend just by eyeballing
the chart.

Once you have found the beginning of the trend, measure the time
from the beginning of the trend to the top of the left shoulder
and compare it to the following table.
			
Beginning of Trend 0-3 months		+1
Beginning of Trend 3-6 months		-1
Beginning of Trend over 6 months		-1

Horizontal Consolidation

The next thing Bulkowski looked at was what he called Horizontal
Consolidation Regions (HCR). These are areas where the trend
leading up to the Head and Shoulders formation staled and could
be an area where price would stall again on the way down. These
regions can be areas of resistance turned support, wedges,
triangles, any area where price seemed to take a vacation for a
while.

Of the Head and Shoulders pattern looked at, those that had a HCR
to contend with resulted in a 20% drop and those without the HCRs
resulted in a 25% drop which is  enough of a difference to be
statically relevant and to warrant a score.

No HCR		+1
HCR			-1

Neckline

When looking at the neckline only the slope is considered. Does
it matter if it is sloping upward, downward for perfectly
horizontal. Turns out it does matter. Upsloping and horizontal
necklines had a larger drop after breaking the neckline than did
downsloping necklines. So we score it:

Upsloping 		+1
Horizontal		+1
Downsloping		-1

Height of Shoulders

Ok this is getting interesting. Let’s now look at the height of
the left and right shoulders. Turns out this makes enough of a
difference in the performance of the formation to satisfy
statistical relevance. If the left shoulder is higher than the
right then the formation performs better. So we score it:

Higher left shoulder		+1
Even shoulder height		0
Lower left shoulder		-1

Volume

Now you would think that volume would play a very important part
in a head and shoulders pattern but it turns out that it doesn’t.
If the left shoulder volume is above the right shoulder volume
the formation will give an average drop of 21%. While if the left
shoulder volume is below the right shoulder the formation will
give an average drop of 20%. This is not a statistically relevant
difference so no scores are given for volume at the left and
right shoulder.

Tall or Short Pattern

How about the height of the pattern itself? Does the height from
the top of the head to the neckline have anything to do with how
well the formation will perform? Yup! It does. A tall formation
will give an average drop of 24% whereas a short formation will
only give an 18% drop. Now we have to figure out what is tall and
what is short. Get your calculators and take the highest high on
the head and measure to the lowest low between the shoulders.
Subtract these two numbers then divide by the breakout price. The
median percentage found was 17.65% so anything greater than
17.65% is Tall and anything less than 17.65% is considered Short.
We will do a case study later on and I will do this calculation
for you to show how it is done but for now we score it:

Tall Patterns		+1
Short Patterns		-1

Capitalization

The next aspect Bulkowski looked at was capitalization and the
trend was very clear. Small caps performed the worst in a bear
market and large caps performed the best. Keep that in mind while
we are in this extremely bearish market. But enough about our
current state of affairs and on to the scores:


Small Cap		+1
Mid Cap		0
Large Cap		-1

Let’s now put it all together and do a case study. I want to
score the S&P daily then look at the small cap daily to see how
they stand up to this scoring system.

S&P Daily




CRITERIA		VALUE		SCORE
Beginning of Trend 	0-3 months		+1
HCR			No			+1
Neckline Slope	Horizontal		+1
Height of Shoulders	Lower Left		-1
Tall or short Pattern	
(954-869)/869		10%			-1
Capitalization	 	Large			-1
						
Final tally is 0 and probably a pass, although the 6% drop so far
would have been fairly lucrative.

Let’s look at the Small Cap 600 Index SML

SML Daily




CRITERIA		VALUE		SCORE
Beginning of Trend 	0-3 months		+1
HCR			No			+1
Neckline Slope	Upward		+1
Height of Shoulders	Lower Left		-1
Tall or short Pattern	
(207-189)/197		09%			-1
Capitalization	 	Small			+1
						
Final tally is a +2 and the drop so far has been a very nice 8%.	

Let’s look at the Qs




CRITERIA		VALUE		SCORE
Beginning of Trend 	0-3 months		+1
HCR			No			+1
Neckline Slope	Upward		+1
Height of Shoulders	Lower Left		-1
Tall or short Pattern	
(28.79-24.13)/24.34	19%			+1
Capitalization	 	Large			-1
						
Final tally is a +2 and looks to me that this drop is just
beginning.

When looking at a monthly chart, the only thing we would have to
“twig” is the time of the preceding trend. With the daily charts
we used 0-3 months which is 0-90 days so working backward I find
the lowest low before a ~20% price change and give it a +1 if it
occurs within 0-90 months. And indeed on the S&P monthly charts
it does.

S&P Monthly




CRITERIA		VALUE		SCORE
Beginning of Trend 	0-90 months		+1
HCR			No			+1
Neckline Slope	Upward		+1
Height of Shoulders	Higher Left		+1
Tall or short Pattern	
(1552-923)/950	66%			+1
Capitalization	 	Large			-1

This monthly Head and Shoulders Top gave us a whopping +4 and
look how well it has played out. Broke the neckline at 950, then
revisited the neckline and was not able to penetrate it and
started back down again.

Let’s look at an individual stock now. Since a small cap stock
would start us off with a +1, I went looking for some good Head
and Shoulder Top candidates in the Russel 2000 and here is what I
found. CCMP had a very nice Head and Shoulders pattern (or so I
thought). However, notice the red line at 41.31. Here we have a
HCR and notice how price stopped in this area and retraced.

CCMP Daily




CRITERIA		VALUE		SCORE
Beginning of Trend 	0-3 months		+1
HCR			Yes			-1
Neckline Slope	Downward		-1
Height of Shoulders	Lower Left		-1
Tall or short Pattern	
(83.94-47.13)/45.90	80%			+1
Capitalization	 	Small			+1

Final tally is 0 and would be a pass. So what we have is very
nice looking head and shoulders but turns out that it is not that
good after all.

The thing I like about this approach is that it is leaves nothing
to the “art” of charting. For if you are anything like me the
“art” part of charting sometimes leaves a lot to be desired and
anything that puts more of the science into charting is good for
me.

Whether you use this technique or not, breaking down a pattern
like the Head and Shoulders Top makes your pattern picking that
much better.

Until next time

Jane Fox
jfox@OptionInvestor.com


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

The Dow versus the E-mini
By John Seckinger
jseckinger@OptionInvestor.com

What happens if the Dow clears its daily R2 and the ES contract
does not?  Which contract will lead, and which will follow?

The date in question:  Tuesday, February 18, 2003.  Let us look
at the chart I had going into Tuesday's session (done last
Friday).

Chart of ES03H, 90-minute




When I saw the ES contract above the 839.50 intermediate pivot
level heading into Tuesday's 'cash' session, I had to think
higher prices.  It would most likely be an easier session if
prices were falling; however, clearing the top of the drawn range
meant the following, "839.50 is now support, and I have to look
for a move to the 850-853 area."  This was the set-up outlined
last Friday, and it really does make sense to adhere to the set-
up - at least on a partial basis.

But I created a catch, which in hindsight might not have been the
best idea.  Thinking back to last Friday, I vividly that the DOW
traded technically better than the ES, and that the blue chips
CLOSED just above the top of their retracement range (7902 to
8120) heading into the weekend.  This was bullish as well;
therefore, I wanted to spend a lot of attention to the Dow as
Tuesday's trading commenced.  I also distinctly remember the bear
trap last Friday, as the ES traded under pivot at 815 while Dow
did NOT trade down to its daily pivot.  With that said, let us
look at a chart of the Dow up until 1:30 p.m.

Chart of Dow Jones, 5-minutes




During the first-five minutes of trading (which to me is
critical), there was a large candle higher that took place from
above the daily pivot and began near the 7902 retracement level.
Bullish and bullish.  If familiar with my "open to close" article
posted the Traders Corner section, the phrase "open drive" higher
would come to mind.  Only weakness below half of this opening
period range would nullify the possibility of an "open drive"
session (50% of the move from 7909 to 7985, or 7947).  Weakness
did not materialize; therefore, it was therefore not terribly
surprising that the daily R2 was tested at 8031.  Bullish again,
but it is still important to see a five-minute close above R2.
Once that happened, the Dow traded higher in an aggressive
bullish regression channel and then finally weakness started to
develop.  Note:  The ES contract did not trade R2 yet.  Since R2
in the ES was not tested, I felt that the Dow was pulling the ES
higher and that it only made sense to watch for technical
weakness or strength within the Dow.

If following the Futures wrap solely, a trader would be long
above 839.50 (opening at 9:30 was 840.50, with a cash low of 840)
and then look to exit at 850-853.  However, we all know that the
trading situation gets complicated and theories do not always
play out perfectly.  Why?  Well, if long right at the 9:30 open,
a trader would have to sell under 839.50 and then go short
because it is a failure.  Who wants to recognize a loss so early
into the trading session with all the volatility?  In hindsight,
sure it was the right thing to do.  For sake of argument, let us
imagine we are flat at the moment.

At 11:15, the Dow falls underneath its bullish regression channel
and appears to be signaling a failure.  The ES, at 11:15, is
above 839.50 and R1 at 845, while the Dow is still above its R2.
The ES contract is also in its bullish regression channel (see
chart below).  With that kind of strength, it makes sense to
think "buy" first.  Very difficult, but price action says that
money can be made long today.  When the aggressive bullish
regression channel in the Dow is finally broken, a long trader
can exit, but a short trader should only go quarter position
(example:  If used to 4 contracts, only do one) because of the
bullish technicals.  I expected a solid bounce from the Dow R2
level, so a short trader will most likely have to exit soon.  It
was not long afterwards when the Dow bounced from its R2 area,
rallied, and then bounced higher from near 8031 once again.

What does this mean for an ES trader?  Unfortunately, not much.
Short under 850, and then long near 848-848.50 as the Dow bounced
from its R2.  Then exit the long and go short as the ES fails to
clear 853 and trades back under 850.  If long and the ES rallies
above 853 before trading back under 850, then I could see putting
a stop near 852 and maybe even adding to a long position.  If
short just under 850, a stop should be around 854 and a trader
should then go long as well.

When does it make sense to add to a short position?  Fortunately,
we did have a few things line up on Tuesday.  The ES contract was
trading at the bottom of its bullish regression channel when the
Dow fell underneath its R2 level and finally signaled weakness.
The ES contract was also trading at the bottom of its "resistance
zone" of 850-853; moreover, the ES contract tested its R2 level.
The objective?  I looked for the Dow to test 7985, but that never
materialized.  The ES, on the other hand, tested its R1 and found
solid support there.  Yes, I am now realizing that the ES
contract is trading technically better than the Dow.

The moral to this confusing session is the following:  There
really is not a "rule-of-thumb" when trying to correlate movement
in the Dow versus the ES contract.  Boy, I wish there was.  I was
looking for a break in the Dow R2 for weakness; therefore, I was
also looking for the downside objective to be met in the Dow as
well.  However, it was met in the ES contract instead.  The ES
traded its R2 level and R1 level almost perfectly, and never
traded under 839.50 during the session from 9:30 a.m. until the
close.  The Dow, on the other hand, stayed above R2 but couldn't
get many bulls involved above 8031.  Then, once below the daily
R2 in the Dow, the low pullback was at 7995 and missed the 7985
objective.  If a trader missed going long right at the open and
wasn't able to get a sell order off near R2, trading on Tuesday
was much more difficult than it appeared.  I wish I could simply
bury a chart of the Dow and only look at the ES contract;
however, that would, in the long-run, do more harm than good.

Chart of ES03H, 5-minute




Ask Away,

John Seckinger


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