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Daily Newsletter, Tuesday, 02/25/2003

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The Option Investor Newsletter                 Tuesday 02-25-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Long For Peace, Short For War
Futures Markets: (See Note)
Index Trader Wrap: (See Note)
Market Sentiment: Bulls Win!  Bulls Win!
Weekly Fund Screen: Schwab Select List: Large-Cap Funds


Updated on the site tonight:
Swing Trader Game Plan: Quite a Show


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      02-25-2003           High     Low     Volume Advance/Decline
DJIA     7909.50 + 51.30  7920.49  7719.64 1.74 bln   1853/1372
NASDAQ   1328.98 +  6.60  1331.35  1291.96 1.37 bln   1687/1537
S&P 100   424.88 +  3.41   425.52   413.69   Totals   3540/2909
S&P 500   838.57 +  5.99   839.55   818.54 
W5000    7949.38 + 54.30  7956.53  7771.79
RUS 2000  361.53 +  2.98   361.20   354.09 
DJ TRANS 2041.83 + 24.10  2041.91  1973.63   
VIX        36.12 -  0.65    38.13    35.92   
VXN        44.33 -  0.55    47.27    44.04 
Total Volume 3,331M
Total UpVol  1,935M
Total DnVol  1,334M
52wk Highs  146
52wk Lows   335
TRIN       1.40
PUT/CALL    .75
************************************************************

Long For Peace, Short For War

And I on the opposite side will be. I modified that phrase from
Paul Revere's midnight ride text only slightly to reflect investor
sentiment this week. It seems everyone is going in opposite 
directions as conflicting signals are seen. Iraq news is driving
traders to drink when faced with dozens of news conferences per
day and differing opinions expressed in each. This is Yo-Yo
trading at extremes!

Dow Chart - Daily


 

Nasdaq Chart - Daily


 


The day started out very ugly with news overnight that North 
Korea had fired another missile into the Sea of Japan. The saber
rattling is moving to a fever pitch and the Asian markets did
not react well. This set up the US markets for a fall and fall
they did. We gapped down and came very close to 7700 once again 
before the buyers appeared. 

It is amazing they appeared at all once the Consumer Confidence
numbers were announced. The headline number came in at 64.0 and
well below consensus estimates at 76.50. Everyone expected a 
lower number but nobody was even close to the disaster that was
announced. The present situation component fell from 75.3 to 
61.6 and the expectations component fell to 65.6 from 81.1. 
Consumers planning on buying autos and major appliances were 
dropping but there was a small gain in home buyers. This
was the lowest headline number since October 1993 and indicated
the rate of decay was accelerating. It was the largest drop
since Sept-2001. War, high energy prices, rising unemployment
and weak markets all weighed on consumers. Orange terror alerts
did not help either. 

Offsetting the Consumer Confidence was the existing home sales
numbers which came in at 6.09 million compared to estimates
of 5.80 million. The gains surprised everybody again and set
a new record. House prices are beginning to fall and many
thought that could be the incentive dragging the last round
of buyers off the couch. Prices in the Midwest have dropped
-5.5% in the last two months. The west and northeast prices
are still rising slightly. The south dropped -1.4% for the 
month. The comments by Fed members last week that they will 
not raise interest rates anytime soon gave the housing sector
one more reprieve for the spring selling season. 

Chain Store sales declined for the third consecutive week
despite the rush to buy duct tape, batteries and plastic. 
Wal-mart said it helped them but evidently the other dept
stores lost sales. Sales have dropped due to the big storm
as well. The estimates for monthly sales growth have now
been lowered from flat to -0.5% overall. With the President's
Day sale a bust in the northeast the earnings for retail
stores could be tough for the quarter. 

Oil prices continue to rise and are showing no signs of easing. 
There are strong fears that Iraq may blow up its wells and 
take that three million barrels of daily supply out of the 
market for 6-12 months. That would be a serious problem with
Venezuela still not at 100%. With gas prices well over
$2 a gallon in many places the consumer is feeling the pain. 
Every dollar increase per barrel amounts to a $7 billion 
undeclared monthly tax on consumers. With oil reaching $37.20
today that is $12.20 over the base rate that OPEC strived
to maintain. That is $85 billion in excess costs being 
passed to consumers each month with no end in sight. 

This tax is being passed on to manufactures as well and 
earnings revisions are being made on a daily basis due 
to higher oil. 8% of the S&P set a new 52-week low today
and the new lows at 335 beat new the new highs of 146 better
than 2:1 in the broader market. This was the 15th consecutive
day that the lows beat highs. 40% of the S&P have already
warned for the 1Q. 

The floor traders on the NYSE said the big dip at the open 
and after the confidence numbers was due to heavy institutional
selling. There were a couple comments that the strength of 
the selling was encouraging. It appeared that institutions
wanted out at any price. While this was limited to only a
few of the thousands of institutions, traders thought maybe
we were nearing a capitulation event and something we could
build a real bottom upon. With the rebound this afternoon
that thought evaporated. The dip buyers are alive and well
and they did overcome some decent selling resistance to 
power the Dow back to a +187 point rebound from the days 
lows. There was also some asset allocation taking place
again with selling in bonds and buying of stocks. This has
happened each time the Dow traded around the 7700 level. It
would appear that other institutional investors are deciding
that bonds are not going higher with heavy supply coming to
market in the near future and the risk of stocks going much
lower is slim. Hope they are right. 

After the bell today HPQ announced earnings that beat the
street by a penny and affirmed earnings for the current
quarter. Unfortunately they missed revenue targets by an
analyst mile and gave a cautious outlook. Revenue was only
$17.88 billion vs analysts estimates of $18.47. Close enough
for me but the stock traded down in after hours. Carly
Fiorina followed the pattern of those early announcers and
said the environment is uncertain and predictions of 
performance were very difficult. The HPQ CFO declined to 
comment on tech spending trends in general claiming limited
visibility. 

This cautious HPQ stance weighed on the futures after the
close and it would appear the open may not contain a 
continuation of today's rebound. We closed just barely over
the 7900 level and below strong resistance at 7950. There
are no major economic reports on Wednesday and that means
we are stuck depending on stock news and war news for
direction. 

Depending on how you draw the lines the Dow has serious 
resistance at every 50 point increment between 7900 and 8150. 
There have been 12 major gap down days since Jan-23rd and 
nine miraculous recoveries. While there have been some
spectacular rebounds we are trading in a range -500 to -700
points below those Jan-23rd levels. Don't get me wrong. The
rebound from 7700 today was amazing. Especially considering
the confidence numbers were at 13 year lows. Still the 
pattern is clear. The rebounds eventually fail and we start
the process over again from a lower high. According to the
charts that lower high on this bounce could come anywhere
between 7900-8000 but probably not over 8000. This sets up 
the next dip as early as tomorrow. Considering most funds 
and institutions are not reactionary and they plan tomorrows 
moves only after fully evaluating today's reports and market 
reaction, that immediate direction is probably not up.

The NDX closed at 999.24 and could not break that 1000 barrier
but the Nasdaq Compx managed to edge just slightly over 1325.
The tech stocks are the wild card tonight. If they react
positively to the HPQ news the Nasdaq could throw just 
enough confusion to the bears to keep them off balance. 
The only sure bet is that volatility will be strong and
we will continue to see big moves in both directions. 

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Check the Site Later Tonight For John's Futures Market Article
http://members.OptionInvestor.com/futureswrap/fw_022503_1.asp


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

Check the Site Later Tonight For Jeff’s Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_022503_1.asp


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


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

Bulls Win!  Bulls Win!
by Steven Price

A day without geo-political news would be like a day without, 
without....   I'm having a hard time remembering just what that 
would be like.  In the last 48 hours, we have seen the U.S. and 
Britain submit a new U.N. resolution, France and Germany counter 
with one of their own, Saddam Hussein defy the weapons 
inspectors' request to destroy missiles and North Korea launch a 
missile test of their own.  It was enough to send the markets 
reeling early today and that was before we got the release of the 
lowest Consumer Confidence number in ten years.  That release 
pushed us a little further downhill and got the markets back into 
an area we last saw in mid-February.  It seems like just a couple 
of days ago that we were breaking through Dow 8000 and it 
appeared that investors had shaken off the geo-political concerns 
that have weighed heavily on the broader markets.  Oh wait - it 
was just a couple of days ago.   In any case, the sell-off looked 
decisive until mid afternoon, when the bulls came back with a 
fury. Not only did we make up the entire loss, we made it all the 
way into the green on the day and blasted through 7900 to boot.  
It now appears that another run at Dow 8050, where the rallies 
over the past few days have failed, could be in the cards.  If 
the recent news wasn't enough to inspire a true sell-off, then it 
may be hard to imagine what will.  The U.S. comments that North 
Korea's missile was not a concern may have soothed some traders, 
who figure Saddam's reluctance is old news, but whatever the 
reason for the big turnaround, it underscored the 
unpredictability of the current environment. 

While we had been seeing quite a reversal over the last couple of 
days, we were bombarded with plenty of news to scare investors 
away and still got a bounce above the February lows in the 
Dow/SPX/OEX.  The Dow transports are a different story, however.  
The transports have received a good deal of attention lately, as 
they have not only taken out February lows, but also tested those 
of October, when it last seemed the sky was falling.  Dow 
theorists, going back to the existence of the Rails Index 
(replaced by the TRAN for purposes of Dow theory), look to this 
index for confirmation of activity in the Dow Industrials - the 
TRAN's more heavily watched sister.  As the price of fuel has 
risen, the transportation stocks continued to struggle and gave 
us overall bearish signals. Today's drop took us to levels not 
seen since the week following the September 11 attacks, when 
airline stocks to an enormous tumble. This time war fears have 
driven up the cost of fuel and created jitters about a lack of 
travel that have also weighed on the sector. However, we got a 
huge bounce after taking out those lows and left us wondering 
whether the move is signaling at least a short-term bottom as the 
October low brought back the buyers. 

In contrast to Saddam's refusal to destroy his missiles, as 
requested, chief weapons inspector Hans Blix said that the 
country has begun to show signs of increased cooperation the past 
few days.  Whether that is simply window dressing and should be 
ignored on a national front is really irrelevant to investors who 
should be aware that another extension of the inspection deadline 
could lead to at least a short-term rally.  As time moves further 
along, so does the possibility that the invasion could be put off 
through another hot season in the Middle East.   While that seems 
unlikely given the latest U.S. resolution, there is still enough 
international resistance to the U.S. plans to make us aware that 
the direction of the market can continue to whipsaw with each new 
development.  It seems the U.S. is pushing the envelope and has 
decided that a direct resolution authorizing force would only 
hinder its invasion plans. By wording the new resolution, as they 
did, so that U.N. simply reinforces the idea that Iraq has failed 
to comply with resolution 1441, which directed it to disarm, the 
U.S. can rely on 1441 for its authority to invade.  An explicit 
resolution for military force may be defeated, and it would put 
the U.S. in a much hairier position.  This way it can simply 
invade and say the parameters were previously set and have been 
violated.  President Bush said today that the U.S. does not need 
another resolution to launch an attack and that it would consider 
a French vote against its resolution very unfriendly.  The other 
factor we need to consider is just how a war will affect the 
markets.  While the uncertainty surrounding the possibility has 
helped keep a lid on any rallies, the theory advanced most often 
seems to be that once the missiles start dropping, it is time to 
buy.  While that pattern may have been the way it happened last 
time, it is now 12 years later and there is no guarantee it will 
happen again.  However, if enough traders believe it to be the 
case, it may become a self-fulfilling prophecy.

Of course, even if it does happen that way, we still have a host 
of economic problems that underlie the market.  Businesses still 
aren't spending and Consumer Confidence is sinking, indicating a 
consumer less willing to spend, as well.   Certainly from these 
levels, that looks bearish, but once the war uncertainty is 
behind us, we may have a better idea what fair market value 
really is.  Right now, the geo-political uncertainty is being 
blamed for companies' reluctance to spend, but I think there is 
certainly more to it that the current environment is simply 
masking.  For now the trend remains down and looking at a weekly 
chart of the Dow, which filters out the day-to-day moves, it 
simply looks like we bounced to another lower high just above 
8000. It would be the third in a series since last December and 
gives us little reason to expect a rebound.  Today's big 
turnaround may signal another couple days of heading higher, but 
until we break the Dow 8150-8160 resistance, these intermediate 
rallies are like putting perfume on a pig. However, when a big 
uncertainty is lifted, we may see institutions do another round 
of buying, expecting some pickup in spending, consumer confidence 
and lower fuel costs.  It's not that fuel costs will dive when 
the bullets fly, but rather the war will have started and most 
are expecting it to be a short one.  We can't really start the 
clock ticking for lower fuel costs until the war starts and there 
is some end in sight.  If we don't get a rally after war jitters 
are behind us, then it could be a very steep drop from whatever 
level we happen to be trading at that time, since we will be out 
of excuses. 

The one index that has been giving me fits is the Semiconductor 
Index (SOX).  It has been a good correlative tool in the past 
year to predict market direction, but it managed to hold gains 
through much of the recent action, contrary to the past couple of 
days in the broader markets. Today, that finally ended as the SOX 
dropped 11 points intraday before catching a boost late with the 
broader markets.  However, with the Nasdaq Composite bouncing 
back above 1300, this morning's breakdown must be called into 
question.  If we are unable to get back under that mark, then it 
may be time for another test of 1350.  While I do think we could 
test the October lows around 1100, 1300 is the next support level 
to break on a closing basis.  We did make it down to 1261 a 
couple of weeks ago and at that time it looked like 1100 would be 
only a matter of days.  However, we bounced almost 100 points and 
1300 is close to the 50% retracement of that low and the recent 
high (actually 1302).  A failure back below the 50% mark might 
indicate another test of the bottom and as close as it is to the 
previous support at 1300, that should be our gauge.  We did trade 
below that level intraday and that's a start, but without a 
close, it is far less decisive, as we say it was successfully 
defended by the bulls.   

The big reversal today can certainly be considered bullish, since 
in spite of all the bad news, we still managed to find dip 
buyers.  Stayed tuned for a run at Dow 8050 and then stronger 
resistance at 8150. Above that is the H&S neckline around 8200 
and previously strong support (which could now act as resistance) 
at 8300. The bulls may have won today's battle, but there are 
still plenty of resistance levels above to contend with.  

(Title Disclaimer: This former Chicagoan has been waiting to hear 
those words since Michael Jordan left town and today's trading 
session seemed to be the best and possibly last opportunity to 
use them, which says as much about the stock market as it does 
about the team)

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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  7910

Moving Averages:
(Simple)

 10-dma: 7900
 50-dma: 8292
200-dma: 8634



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  839

Moving Averages:
(Simple)

 10-dma:  835
 50-dma:  876
200-dma:  914



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     :  999

Moving Averages:
(Simple)

 10-dma:  989
 50-dma: 1013
200-dma: 1014




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

The Semiconductor Index (SOX.X):  The SOX almost gave us the 
breakdown I have been looking for to confirm broader market 
weakness.  Alas, it recovered on the afternoon market-wide rally 
to finish off on 2.21 point son the day.  However, it did finish 
down on the day, after trading as low as 281.40 and appears out 
of steam with the 300 resistance level sitting just above. The 
other possibility that I am beginning to consider, however, is 
that this index may not be as correlative to the broader markets 
as it has been in the recent past. It seems unlikely since it is 
a good barometer of spending and demand in the tech sector, but 
if it doesn't work for those purposes I'm not going to hang on 
forever. The current environment is obviously tough to predict 
with just about any sector index, considering the geo-political 
factors now in play, but for the time being, a more politically 
sensitive sector may reflect the broader markets better.

52-week High: 641
52-week Low : 209
Current:      289

Moving Averages:
(Simple)

 21-dma: 277
 50-dma: 296
 200-dma: 332
-----------------------------------------------------------------


The VIX remains back in its recent pattern between 35% and 40%.  
We have now seen it test the bottom twice, closing as low as 34%, 
but no closes above 40%.  This morning's drop looked to have 
plenty of room, as the VIX never made it much above 38%, but the 
intraday bounce put it in reverse, finishing down on the day.  
Right now the schizophrenic market action is being reflected in 
option premium levels that vary just as quickly as equity values.  
I will continue to rely on 40% as an indicator of a possible 
bounce in equities after a drop and rely on 34-35% as a warning 
that a pullback in equities may be upon us following a rally.


CBOE Market Volatility Index (VIX) = 36.12 -0.65
Nasdaq-100 Volatility Index  (VXN) = 44.33 -0.55

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.75        569,482       427,474
Equity Only    0.56        424,521       237,173
OEX            1.89         23,486        44,493
QQQ            1.27         44,692        56,707


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

Bullish Percent Data

           Current   Change   Status
NYSE          39.5    - 1     Bull Correction
NASDAQ-100    33.0    - 2     Bear Confirmed
Dow Indust.   13.3    - 3     Bear Confirmed
S&P 500       33.0    - 2     Bull Correction
S&P 100       28.0    - 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  1.41
10-Day Arms Index  1.26
21-Day Arms Index  1.34
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       1667          1174
NASDAQ     1633          1457

        New Highs      New Lows
NYSE        60               89
NASDAQ      85               98

        Volume (in millions)
NYSE       1,759
NASDAQ     1,370


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

Commitments Of Traders Report: 02/18/02

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 added 11,000 contracts to the long side and 9,000 to 
the short side, for a net reduction to the overall short 
position. Small traders took 5,600 contracts off the long side 
and 4,000 off the short position.

Commercials   Long      Short      Net     % Of OI 
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%)
02/18/03      423,871   481,871   (58,000)   (6.4%)

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
01/28/03      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%
02/18/03      155,475    91,102    64,373     26.1%

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 the long side by 1,000 contracts and the 
short side by 3,000.  Small traders reduced long positions by
 4,000 contracts and added 500 contracts to the short side. 


Commercials   Long      Short      Net     % of OI 
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%)
02/18/03       38,486     50,501   (12,015) (13.5%)

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
01/28/03       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%
02/18/03       25,482     9,425    16,057    46.0%

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 reduced long positions by 1,000 contracts and left 
the short side close to unchanged.  Small traders reduced the net 
short position by 500 contracts. 

Commercials   Long      Short      Net     % of OI
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%
02/18/03       18,812    11,939    6,873      22.4%

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
01/28/03        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%)
02/18/03        5,561     8,973    (3,412)   (23.5%)

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

Schwab Select List: Large-Cap Funds 

Over the next few weeks, we will be using Charles Schwab's Select 
List to help identify no-load, NTF funds in various asset classes 
starting with large-cap stock funds.  Mutual funds that appear on 
the Schwab Select List have been carefully screened by the Schwab 
Center for Investment Research to meet strict selection criteria, 
making for a great starting point in your search for the suitable 
fund(s).  All of the funds on the list are available on a no-load 
basis I believe, with several funds available on a no transaction 
fee (NTF) basis through Schwab.  They may be available on a "NTF" 
basis through other leading mutual fund networks as well.  

In week one, we'll focus on large-cap U.S. stock funds.  In week 
two, we'll concentrate on mid-cap and small-cap U.S. stock funds.  
Then, in week three, we'll look at international stock funds and 
in week four, we'll explore partial equity (balanced) funds.  In 
week five, the last week of our 5-part series, we'll concentrate 
on taxable bond funds.  Hopefully, in the next five weeks, we'll 
cover an investment class that is of particular interest to you.

Each week our process will put Schwab's Select List funds to the 
test, comparing them primarily based on return, risk and expense 
relative to their broad peer group, but also considering factors 
such as manager tenure and investment style/strategy.  The final 
result each week will be one, two or three funds within the peer 
group that we like now.  In other words, if we had to select one 
or two funds from each peer group, which would they be?  We will 
find out together, as we go through the screening and evaluation 
process.

Screening/Evaluation Process

Conveniently for us, there are 21 Select List funds in the large 
cap U.S. stock fund group, a reasonable number of funds to start 
with.  Some of the names may be familiar to you if you have come 
to this website before.  For example, just last week we spoke of 
the Mosaic Investors Fund (MINVX), an excellent large-blend fund 
managed by Jay Sekelsky, Madison Investment Advisors, since 1990 
in our weekly Fund Family series.  Just about all of these funds 
have been mentioned at one time or another on this website, so I 
trust you can find one or more funds to use as part of your long-
term financial plan.

Below is a summary of the 21 Schwab Select List funds in the U.S. 
large-cap stock fund group.  

 Schwab Select List Funds: Large-Cap U.S. Stock Funds
 -Parnassus Equity Income (PRBLX) Large Value
 -Thompson Plumb Growth (THPGX) Large Blend
 -Dodge & Cox Stock (DODGX) Large Value
 -Jensen (JENSX) Large Growth
 -PBHG Large Cap Value (PLCVX) Large Value
 -Ameristock (AMSTX) Large Value
 -Excelsior Value & Restructuring (UMBIX) Large Blend
 -Fidelity Independence (FDFFX) Large Growth
 -Janus Growth & Income (JAGIX) Large Growth
 -Federated Capital Appreciation (FEDEX) Large Blend
 -ABN AMRO/Chicago Capital Growth (CHTIX) Large Growth
 -PBHG Large Cap Growth (PBHLX) Large Growth
 -Whitehall Growth (WHGFX) Large Growth
 -Mosaic Investors (MINVX) Large Blend
 -Buffalo USA Global (BUFGX) Large Blend
 -Sound Shore (SSHFX) Large Value
 -Oakmark I (OAKMX) Large Value
 -Vanguard 500 Index (VFINX) Large Blend
 -Neuberger Berman Focus (NBSSX) Large Blend
 -Papp Stock (LRPSX) Large Growth 
 -Clipper Focus (PBFOX) Large Value
  
Since most mutual fund investors have long-term goals, we first 
compared fund performance over the trailing 10-year period thru 
January 31, 2003 per Schwab.com (powered by Morningstar).  Here, 
we found that three funds really stood out in terms of their 10-
year average annual total return performance, as follows:

 Highest 10-Year Average Annual Returns:
 +14.6% Excelsior Value & Restructuring (UMBIX) 
 +13.6% Dodge & Cox Stock (DODGX)
 +13.3% Thompson Plumb Growth (THPGX)

Five other funds on the Select List had annualized total returns 
of at least 10% over the trailing 10-year period: Oakmark, Janus 
Growth and Income, Parnassus Equity Income, Sound Shore, and the 
Federated Capital Appreciation Fund.  The S&P 500 index returned 
an average of 9% a year over that period, so each of these funds 
has outpaced the S&P large-cap index benchmark and similar funds 
over the past decade.

The Parnassus Equity Income Fund (PRBLX) sported the best 5-year 
average return thru January 31 of 9.45%, beating the rest of the 
funds by a wide margin.  The next best 5-year annualized returns 
were 7.6% by Thompson Plumb Growth Fund, and 7.1% by Dodge & Cox 
Stock Fund.  For comparison purposes, the S&P 500 index produced 
an average annual loss of 1.3% during the trailing 5-year period.

PBHG Clipper Focus (PBFOX) wasn't around the full five years but 
sports the highest average annual return for the trailing 3-year 
period through January 31, 2003 per Schwab.com.  It gained 13.8% 
on an annualized basis the last three years, while the S&P large 
capitalization index lost 13.8% per year on average for the same 
period.  Seven other funds on the list have generated a positive 
net return (annualized) for investors over the past three years.

We next turned to Morningstar.com to score the funds on the list 
based on our specific selection criteria.  Rather than customize 
the default scoring criteria, we simply added one more criterion 
for long manager tenure.  Below is a summary of the Score screen 
criteria and importance we assigned to each criterion (with a 10 
being most important, 1 being least important).

 Morningstar Score Tool Criteria:
 3-Year Return (5 Importance)
 5-Year Return (5 Importance)
 Low Expense Ratio (5 Importance)
 High Star Rating (10 Importance)
 High Earnings Growth Rate (5 Importance)
 Low P/E Ratio (5 Importance)
 High YTD Return (5 Importance)
 Long Manager Tenure (5 Importance)

We weighted the high star rating a "10" to give more importance 
to a fund's performance (adjusted for risk).  Five funds topped 
the list with scores between 40 and 41, as follows:

 Morningstar Score Tool Results:
 41 Dodge & Cox Stock (DODGX)
 41 Mosaic Investors (MINVX) 
 40 Ameristock (AMSTX)
 40 Parnassus Equity Income (PRBLX)
 40 Janus Growth & Income (JAGIX)

So, on the basis of performance over the past 3-year and 5-year 
periods, and taking into account these other factors, the above 
funds scored the best.  While it omits the top 3-year performer, 
PBHG Clipper Focus, that fund has struggled of late, falling by 
11% since December 31.  That has me a little concerned since it 
has lost twice as much as the market (S&P 500) so far this year.  
Its concentrated style produces some strike outs along with the 
home runs, so those seeking less volatility may prefer its older 
sibling, the Clipper Fund.

Other funds on the list with above average to high relative risk 
versus their respective category peers include Whitehall Growth, 
Buffalo USA Global, Excelsior Value and Restructuring, Federated 
Capital Appreciation, Fidelity Independence, Neuberger and Berman 
Focus, Oakmark, PBHG Large Cap Growth, PBHG Large Cap Value, and 
the Thompson Plumb Growth Fund.  However, the conservatively run 
Thompson Plumb Growth Fund is truly a growth-oriented stock fund 
that because of its prudence lands in the large-blend group.  If 
it were compared with other large-cap growth funds, it certainly 
would have a better risk rating, so I wouldn't rule it out given 
its superior long-term record of performance.

We next looked to see which funds have the lowest expense ratios 
and longest manager tenures.  Nine funds on the list have "below 
average" expense ratios of less than 1.00% of assets (per annum).  
The funds with the lowest expense ratios, per Morningstar are as 
follows:

 Lowest Annual Expense Ratios:
 0.18% Vanguard 500 Index (VFINX)  
 0.54% Dodge & Cox Stock (DODGX)
 0.77% Ameristock (AMSTX)
 0.86% Janus Growth & Income (JAGIX)
 0.87% Neuberger & Berman Focus (NBSSX)
 0.94% Excelsior Value & Restructuring (UMBIX)
 0.98% Sound Shore (SSHFX)
 0.99% Mosaic Investors (MINVX)

The Jensen Portfolio (JENSX) and the Parnassus Equity Income Fund 
(PRBLX) were right behind with an annual expense ratio of 1.0% of 
assets.  Several of these low-cost leaders are also among the top 
long-term performers, so low expenses can help boost returns over 
time relative to the general stock fund universe.

Only two portfolio managers have longer tenures than Gus Sauter's 
Vanguard 500 Index Fund (15 years).  Harry R. Hagey has been with 
the Dodge & Cox Stock Fund for 36 years, while Harry Burn III has 
managed the Sound Shore Fund for the last 18 years.  Eight equity 
managers on the list have tenures of ten years or more, adding to 
their general appeal.  

Favorite Funds

Based on return, risk, expense, management style and tenure, and 
other factors, we like the five funds that scored the highest in 
Morningstar's scoring system: Dodge & Cox Stock (DODGX), Mosaic 
Investors (MINVX), Ameristock (AMSTX), Parnassus Equity Income 
(PRBLX) and Janus Growth & Income (JAGIX).  In each case, you can 
attribute the fund's high score to its current portfolio manager, 
a good thing.  And, each of the five funds has an annual expense 
ratio of less than 1.00% of assets, making them cost competitive.

Dodge & Cox Stock Fund (DODGX) was launched in 1965 and today has 
$14 billion in net assets, a testament to its superior historical 
performance.  It invests in mid-cap and large-cap stocks that are 
"cheap" on a range of valuation measures.  Because it maintains a 
strict value discipline, the fund can sometimes trail other funds 
when value stocks/styles are not in favor.  Still, the fund's low 
expense and seasoned management team add to its appeal, making it 
a fine core holding for the long-term.  It has more mid-cap stock 
exposure than other large-cap value funds, but that hasn't caused 
fund volatility to be excessive.  For average relative risk, this 
fund has produced "high" returns over all trailing periods versus 
similar funds.

Ameristock Fund (AMSTX) has a value-driven style also but invests 
primarily in giant-cap and large-cap stocks.  Manager Nick Gerber 
takes a very long-term view (15-30 years) when selecting equities 
and favors companies with proven business models; hence, his main 
emphasis on the largest value stocks.  Low relative expenses, low 
annual turnover and high tax-efficiency should appeal to buy-hold 
investors, including those in regular (taxable) accounts.  Versus 
its large-value peers, the fund has produced "high" returns, with 
average relative risk over time.  Parnassus Equity Income (PRBLX) 
is another value-driven fund that has produced strong returns in 
relation to its peers over time, while avoiding "excessive" risk.  
In fact, its risk level is rated by Morningstar as below average 
versus other large-value funds.  Todd Ahlsten took over for long 
time manager, Jerome Dodson, in May 2002 but has been an analyst 
and director of research at Parnassus since May 2001.  He served 
as this fund's co-manager from May 2001 until Dodson's departure, 
and now is the fund's sole manager.

Mosaic Investors (MINVX) has been deftly managed by Jay Sekelsky 
since 1990, employing a blend a value and growth characteristics 
in the management of fund assets.  He invests primarily in giant-
cap, large-cap and mid-cap stocks, for an overall large-cap bias.  
According to Morningstar, the fund offers one of the better risk-
reward tradeoffs in the large-blend category.  Over time, it has 
produced above average returns, with below average risk relative 
to other large-cap blend funds.  Of these five funds, it had the 
lowest average P/E, contributing to its below average volatility.

The $5.2 billion Janus Growth & Income Fund (JAGIX), managed by 
David Corkins (since August 1997), is categorized as a large-cap 
growth fund by Morningstar.  It's managed more aggressively than 
most growth and income funds, but has maintained "below average" 
risk relative to other large-growth funds, while producing above 
average relative returns for investors.  Morningstar states that 
the fund may not be for style purists, since Corkins has limited 
the fund's tech exposure, normally fertile ground for pro-growth 
funds.  It tech takes off, this fund may not be able to run with 
the pack.  We'll see.  Janus is known as a growth manager, so it 
is likely to return to its "growth" stripes when growth equities 
return to favor.

Below is a performance summary for the five fund finalists using 
Morningstar data through February 24, 2003.  The 10-year numbers 
are as of January 31, 2003.

 5-Year Average Annual Returns:
 + 5.6% Dodge & Cox Stock (DODGX) 1st Percentile
 + 0.1% Mosaic Investors (MINVX) 10th Percentile
 + 4.1% Ameristock (AMSTX) 1st Percentile
 + 8.4% Parnassus Equity Income (PRBLX) 1st Percentile
 + 1.7% Janus Growth & Income (JAGIX) 6th Percentile

 10-Year Average Annual Returns:
 +13.6% Dodge & Cox Stock (DODGX) 2nd Percentile
 + 9.3% Mosaic Investors (MINVX) 14th Percentile
 + -.-% Ameristock (AMSTX) N/a
 +10.6% Parnassus Equity Income (PRBLX) 11th Percentile
 +10.7% Janus Growth & Income (JAGIX) 3rd Percentile

Note that the Ameristock Fund has not been around for 10 years; 
hence, no 10-year return or ranking.  You can see that although 
it adheres to a strict value discipline, Dodge & Cox Stock Fund 
has put up the best long-term investment results over time by a 
wide margin (among the five funds).

Conclusion

This week, we showed you five large-cap U.S. stock funds that we 
like on the Schwab's Select List.  We showed you how we got this 
list and whittled the number of funds down using "scoring" tools  
and other Morningstar data.  The scoring was performed using our 
criteria and weightings, but you may want to experiment with the 
tool and see which funds score highly based on your own personal 
preferences.

For more information of the five funds profiled today, visit the 
respective fund family websites.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

Quite a Show

That was some intraday reversal. Some might even say that if the 
news of the past 48 hours wasn't enough to send the markets to new 
relative lows, then it's time to jump back in from the long side. 
I'm not quite there yet.


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The Option Investor Newsletter                  Tuesday 02-25-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: TRMS
Dropped Puts: None
Daily Results
Call Play Updates: EMC, ZMH, SLAB, TECD, AMGN, MME
New Calls Plays: DGX
Put Play Updates: ATK, CB, MHK, VZ
New Put Plays: UTX


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

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


CALLS:
*****

TRMS $42.00 -1.25 (-1.54) While poor results from trials of
VXGN's AIDS vaccine slammed that stock lower yesterday, our
TRMS play actually rallied on the news, pushing above the $44
level before weakening into the close.  In a sort of delayed
reaction, TRMS got hammered today with the rest of the market
in the early going, falling very close to our $41.50 stop.  The
bulls managed to drive the broad markets higher in the last two
hours of the day on Tuesday, but TRMS really lacked in buying
interest, just barely managing to regain the $42 level at the
close.  While our stop wasn't violated, we're going to let this
play go.  The stock seems to be losing its lustre and we're
moving on to more attractive candidates.  Any subsequent rebound
should be used as an opportunity to exit the play, not initiate
new positions.


PUTS:
*****

None


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

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

CALLS              Mon    Tue    Wed   Thu  Week

AMGN     53.86   -1.16   0.71  Bounce from trend line
DGX      53.45   -0.55   1.50  New, Bullish Engulfing
EMC       7.68   -0.05  -0.14  Held above support
MME      35.24   -0.97   1.21  Sprung off $34
ZMH      44.90   -0.29   1.23  $45 next?
SLAB     26.49    0.12  -0.13  On Hold
TECD     21.96   -0.66   0.30  Need it back over $22
TRMS     42.00   -0.45  -1.25  Drop, Not convincing


PUTS

ATK      49.14   -1.96   1.34  Failed at $50
CB       47.25    0.04  -0.96  New relative low
UTX      59.55   -1.96  -0.09  New, Industry Exposure
VZ       35.59   -0.20   0.14  Testing bottom of range

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

EMC  $7.68 -0.14 (-0.36 for the week) EMC took an early dive with 
the broader markets, following another slew of events from the 
geo-political arena.  North Korea's missile launch and Saddam's 
defiance of the weapons inspectors as far as destroying his own 
missiles created quite a stir that was compounded with the lowest 
Consumer Confidence Index in a decade.  Still, none of it was 
enough to take EMC below the b0ttom of its recent consolidation 
where it has strong support in the $7.30-$7.50 range.  While it 
has not continued its recent gains, that support has held in 
spite of recent market weakness. The only company specific news 
in recent days is a possible agreement between EMC and 
Flextronics, which has boosted FLEX's stock slightly.  The stock 
has yet to register a change on the PnF chart, which remains in a 
column of "X" and on a buy signal that was given at $8.00.  
Aggressive dip buyers may view today's support as a buying 
opportunity, since the rollover was not strong enough to cancel 
the buy signal.  However, momentum traders will want to look for 
a move back over $8.50 to initiate new positions. 

---

ZMH  $44.90 +1.23 (+0.94 for the week) Zimmer got off to a nice 
start with a gain of $1.23 on Tuesday after a small pullback 
Monday.  The stock gave momentum trader targeting a move back 
over $44 a nice entry as it climbed steadily after testing 
support at $43.50 while the broader markets crashed down around 
it early in the session. Relative strength was the story of the 
day for ZMH.  In spite of the Dow and  Nasdaq both falling hard 
to start the day, ZMH was never down more than $0.20.  The other 
positive development comes from a look at the intraday chart.  
After breaking back over $44.00, the stock consolidated in that 
region for a couple of hours before moving higher, indicating a 
struggle between the bears and bulls that was eventually won by 
the bulls.  ZMH then went on to consolidate at $44.50 and then 
test $45, reaching a high of $44.99 in the last 15 minutes of 
trading before settling in at $44.96.  While it wasn't able to 
cross that barrier today, the steady gains since the second hour 
of trading and the close near the high of the day indicate it may 
only be a matter of time. New entries can look for a pullback to 
new support at $44, or target a momentum trade above $45.  

---

SLAB - $26.49 -0.13 (-0.08 for the week) The good news is that 
SLAB is out performing its peers in the chip sector.  The bad 
news is that means it's trading sideways.  Shares of SLAB have 
been able to maintain their recent gains and the bounce today 
showed at least some strength near the $26 level for SLAB.  When 
the chip sector gets ready to move higher again, SLAB should be a 
leader.  Right now the SOX has been struggling to break the 300 
level and today's lows showed support and a bounce near 280.  
We'll look for another run back to 300 and bulls will be hoping 
for a breakout soon.  This might be an attractive entry point for 
bulls and a stop under today's lows would not be too risky for a 
very conservative trader. More conservative traders may want to 
wait for the SOX to break over 300 before entering the sector 
from the long side. Another level to consider for stops would be 
under $25.50 or under the $25 mark.  We're going to leave ours at 
23.99 for now.

---

TECD $ 21.97 +0.31 (-0.35 for the week) Well, TECD certainly 
can't be accused of being a slow mover.  Last week the stock 
displayed a bullish trend of steady gains as it filled in the 
large February 7th gap.  Profit-taking on Monday and Tuesday 
morning erased some of those gains and briefly took TECD below 
$21.00.  But with the NASDAQ rallying sharply during the second 
half of today's session, the bulls would not be denied.  Shares 
went vertical with about two hours remaining and finished with a 
1.4% gain.  Suddenly the stock is within striking distance of its 
relative high at $22.33.  In our most recent update we said that 
some profit taking could be expected to consolidate last week's 
gains.  Now that this has occurred, we feel that TECD will be 
able to continue towards our upside target at $23.99.  As far as 
new entries are concerned, aggressive short-term traders might 
want to watch for a move above $22.33.  Our stop is set at 
$20.49.  Those looking for less risk could use a stop just under 
today's low of $20.95.

---

AMGN $53.86 +0.71 (-0.74) Proving that it still has relevance,
AMGN's ascending trendline once again provided support on this
morning's pullback.  With the Biotechnology index (BTK.X) deep
in the red and well below the $315 support level, AMGN just
couldn't buck that weakness and fell to just above $52, before
beginning a truly impressive rebound.  One factor driving the
stock's impressive rally today may have been comments from
the company that its sees 25-27% EPS and 30-32% revenue growth
for the 2002-2005 time period.  Aggressive traders that
took advantage of the morning weakness got a great entry into
the play, as AMGN recovered all of the early drop and most of
the losses from Monday as well, closing at the high of the day.
The action of the past few days is a perfect synopsis of how to
play AMGN -- buy the dips and harvest gains on the breakout
moves.  Every time the stock breaks out to a new high (like
last Friday), the bears push it back for another test of support,
which continues to climb.  So it's very likely that the next
high-odds entry point will come on a pullback near the $52.50
level (also the site of the 20-dma), just above that trendline,
now at $52.15.  Aggressive traders that want to game a breakout
move really need to wait for AMGN to clear $55 on continued
strong volume, but beware of the risks.  That strategy has not
been fruitful in this stock lately.  Raise stops to $52, as a
close below the trendline would be a large red warning flag
to the bulls.

---

MME $35.24 +1.21 (+0.44) There's no question about the volatility
of the current market, but some stocks are really starting to
behave well.  After we began coverage of MME over the weekend,
the stock fell right back to solid support at $34 on Monday and
after a brief dip this morning, reversed that loss to then trade
strongly in positive territory all day.  Closing at the high of
the day, the stock was 1 penny shy of triggering our play.
Recall that we're looking for a trade at $35.25 to convert MME
to an active play, and if today's late-day rally continues, we
could get that delivered to us tomorrow morning.  After that
event occurs, there are two viable entry strategies to employ.
The first is to enter on the breakout over resistance, while
more cautious traders may opt to wait for a subsequent dip to
test that breakout level as support.  In either event, our stop
will initially be set at $32.50, just below strong support and
both the 20-dma and 50-dma.


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

DGX – Quest Diagnostics $53.45 +1.50 (+0.64 this week)

Company Summary:
Quest Diagnostics was the result of a 1996 Corning spinoff,
and currently holds the title of the world's #1 clinical
laboratory.  DGX performs more than 100 million routine tests
annually, including cholesterol, HIV, pregnancy, alcohol, and
pap smear tests.  Operating laboratories throughout the US and
in Brazil, Mexico, and the UK, DGX also performs esoteric
testing (complex, low-volume tests) and clinical trials.  The
company serves doctors, hospitals, HMOs, and other labs as well
as corporations, government agencies, and prisons.

Why We Like It:
Almost slipping beneath the radar, it has been interesting the
stealthy nature of the recent firming in several stocks in the
medical sector.  It isn't coming from the list of usual suspects
either, as the HMO an DRG indices are continuing to pound out new
lows.  Rather, the strength that is emerging is coming out of
those stocks involved in the laboratory testing business.  As
the biggest player in this arena, DGX is a good bellwether for
the group and Tuesday's trading action proved instructive in the
vein of comparing reality to investor expectations.  the market
clearly didn't like what the company had to say when it released
earnings and provided guidance back in late January, and the
stock plunged to new 52-week lows after Piper Jaffray and Morgan
Stanley downgraded the stock soon after earnings.  The resultant
weakness sent DGX below the $50 level on a closing basis for the
first time since September of 2001.  But then a funny thing
happened.  Short-covering hit the market and lifted DGX back
above the $50 level on rather strong volume last week.  Since
then the stock has been bouncing between support at $50 and
resistance near $53.75.  This morning, the company updated its
guidance for Q1, saying it sees its results coming in at the low
end of the $0.82-0.87 EPS guidance due to the impact of winter
storms and the recent strike by New Jersey physicians.  However,
DGX did reaffirm its full-year view of $4.00-4.20 EPS.  Then a
funny thing happened.  Rather than trade down on the news, DGX
actually caught a bid, and a big one at that.  Rebounding from a
morning low of $50, the stock surged on strong volume, to end
the day with a nearly 3% gain.  The PnF chart still looks
bearish, but it won't take much to turn it early bullish and we
could be in a position to get in early and ride it higher.  A
trade at $54 will generate a new PnF Buy signal, and give us a
tentative bullish price target of $63.  Of course, before moving
that high, the stock will have to deal with resistance at $55,
the bearish resistance line at $58 and then major resistance
at $60.  But what's life without a few challenges?  Any pullback
near the $51 level looks like a gem of an entry point, but we
aren't likely to get that lucky following today's strong surge.
So for those looking to get in on a pullback, we're recommending
entry on a dip and bounce from above the $52 level.  More
cautious traders will want to wait for the confirming breakout
over $54 before playing, either entering on the breakout move
or on a subsequent pullback to confirm that level as new support.
We are initially placing our stop at $50.50, just below today's
intraday lows after the opening reaction spike.

BUY CALL MAR-50 DGX-CJ OI= 584 at $4.70 SL=2.75
BUY CALL MAR-55*DGX-CK OI=1522 at $1.60 SL=0.75
BUY CALL APR-50 DGX-DJ OI=  10 at $5.40 SL=3.50
BUY CALL APR-55 DGX-DK OI=   5 at $2.55 SL=1.25

Average Daily Volume = 1.27 mln



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

ATK $49.14 +1.34 (+0.25) After the dramatic slide of the past
week, Defense stocks were due for a bit of a rebound and the
late-day broad market rebound seems to have been the catalyst
for that to occur on Tuesday.  Given the depth of the prior
slide, today's minor rebound (0.77%) in the DFI index doesn't
look like much.  Our ATK play actually rebounded stronger than
the overall index, launching off the $47.50 support level and
trading all the way up to $49.50 before relaxing somewhat at
the end of the day.  The primary point of concern for the bears
though comes from the volume picture.  On what was a strong day
in terms of price, ATK traded 30% more shares than the ADV,
making this its strongest volume day in nearly two weeks.  We
need to be cognizant that this may be an important reversal
session, although with the frequent whipsaws in the market, it
could just as easily be a setup for new entries.  The first clue
will come when the stock tests the 10-dma ($49.74), as a rollover
there would make for a solid entry, while a breakout will likely
embolden the bulls.  At this point, waiting for a rollover to
materialize is the prudent strategy for those not yet in the
play.  Our stop is currently set at $51.50, as a close above that
level (taking out the closing highs of the past couple weeks)
would confirm that the bulls have taken charge.  More
conservative traders can use a stop at $50.75, just above the
20-dma.

---

CB $47.25 -0.96 (-01.02) The progression of lower highs and lower
lows continues, with CB breaking down this morning to trade a
new 52-week low of $46.60.  Bears that thought they could short
the stock with impunity were in for a rude awakening this
afternoon though, as short-covering hit the broad market,
lifting the stock back above the key $47 level at the close.
Despite the late-day rebound though, we have to chalk this up
as another bearish victory, as the closing bell left behind
another new closing low.  As long as the broad markets continue
their volatile pattern of rallying one day and selling off the
next, the most prudent entry strategy into our CB play will
continue to be entering on failed rallies, rather than chasing
the breakdowns.  Resistance continues to drop, with this rebound
likely to stall out in the $48.00-48.50 area, with resistance
reinforced by the 10-dma, now at $48.45.  Stops should now be
lowered to $49.50, just above last Monday's closing high.

---

MHK $49.53 +1.03 (+0.70) Just when it looked like MHK was
destined to test its recent lows down near $46.50, along comes
another short-covering rally to stymie the bears.  To be fair,
MHK's rebound on Tuesday actually began before the rest of the
market really caught fire, as traders reacted to another strong
report out of the housing sector this morning.  MHK has been
testing the $48 level as support over the past 3 days, and when
it held up in the face of the broad market weakness this morning,
that was all the excuse needed for eager bulls and nervous bears
to hit the "Buy" button.  But MHK isn't out of the woods just
yet, as it is just approaching the descending trendline (right
at $50) that has been capping each rally since the middle of
December.  A rollover at that trendline will provide our next
likely entry point into the play, while a break above that line
should have the shorts covering more aggressively.  With strong
resistance just below $51, reinforced by the 20-dma at $50.54,
it still seems prudent to keep our stop set at $51.10.

---

VZ $35.59 +0.14 (-0.05) As a testament to the rangebound nature
of the current market, our VZ play is still trading inside the
range defined last Thursday, when an SBC downgrade weighed
heavily on the Baby Bells, knocking VZ down to the $34.25 level.
Since then the stock has continued to look weak, but not quite
weak enough to break below that low.  It actually looked like
the bears might get the job done this morning, with the broad
market deep in the red and the North American Telecoms index
(XTC.X) breaking to new multi-month lows.  But then along came
the short-covering and both the XTC and VZ recovered off their
lows.  It wasn't a bullish move by any stretch of the
imagination, but it was impressive the way the stock was once
again pulled back from the brink.  The trend is still down, but
we need to be aware of the possibility for the stock to
stabilize and possibly even recover from the site of its recent
lows.  We're still looking at the $36 area as the best area to
initiate new positions on a rollover, but more conservative
traders might want to wait for the stock to break below the
$34.25 level before entering.  We're maintaining a tight stop
at $36.75, just above the still-declining 200-dma.


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

UTX - United Technologies - $59.55 -0.09 (-1.97 for the week)

Company Summary:
United Technologies Corp., based in Hartford, Connecticut, 
provides a broad range of high-technology products and support 
services to the building systems and aerospace industries. 
(source: company release)

Why We Like It:
UTX is diversified in the defense, elevator and jet engine 
sectors.  While we don't have a bullish or bearish opinion on 
elevators, there has been weakness in the commercial real estate 
markets over the past year, in spite of strength in the 
residential market.  That weakness has been highlighted in 
several Beige Book and Fed reports and would indicate fewer 
office buildings going up in the recent past or near future.   
Moving on to UTX's aerospace/defense business, this has not been 
an investor favorite when it comes to sector choices over the 
past couple of months.   In fact, over the past six weeks, the 
Defense Index (DFI) has lost 20% of its value and now sits at 
multi-year lows. As the maker of Black Hawk Helicopters and jet 
engines for both commercial and military use, UTX has exposure to 
both industries.  The commercial airlines have not fared well, 
either, with many delaying new plane deliveries and seeing a 
decline in the leasing business.  While the troubles of the 
airlines have been well documented, companies that make the parts 
and engines for the planes have escaped some of the headlines.  
UTX is one such company and the bears have had it in their sights 
since the middle of January.  After topping out just below $67, 
the stock rolled over hard, bounced from just below $60 and has 
now moved back below that level.  

The last rollover, touching down for the second time at $59 on 
the point and figure chart, constituted a breakthrough of the 
bullish support line, which rises at a 45-dgree angle and gave 
UTX its last bounce.  With that line now broken, the only barrier 
to a more significant drop appears to be the $58.50 support 
level. It bounced from $58.50 on the last drop and again this 
morning.  There is some support in the $55-$56 range, but we will 
be targeting another trip toward $49, which is its more recent 
support level. The current bearish vertical count is $51, which 
would coincide nicely with that support at $49. 

As a Dow stock, UTX will no doubt be carried or dropped along 
with other stocks in the group, as program trading scoops the 
group along. However, the stock under-performed the Dow today, 
dropping into the red, while the Dow's mid-day reversal took it 
up 50 points.  UTX's exposure to the airline and defense business 
should continue to keep it heading south, but just to be sure we 
don't expose ourselves to another bounce in the same area, we 
will use a trigger at $58.24 to assure a support break. We will 
target $50 and place our stop at $63.10, just above the 
converging 21, 50 and 200-dmas. 

BUY PUT MAR-60*UTX-OL OI=1943 at $2.70 SL=1.15
BUY PUT APR-60 UTX-PL OI= 65  at $3.80 SL=1.90

Average Daily Volume = 2.15 mil



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The Option Investor Newsletter                  Tuesday 02-25-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: CALL - DGX
Traders Corner: Trading Systems
Futures Corner: Managing Risk via Pivot Analysis


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

DGX – Quest Diagnostics $53.45 +1.50 (+0.64 this week)

Company Summary:
Quest Diagnostics was the result of a 1996 Corning spinoff,
and currently holds the title of the world's #1 clinical
laboratory.  DGX performs more than 100 million routine tests
annually, including cholesterol, HIV, pregnancy, alcohol, and
pap smear tests.  Operating laboratories throughout the US and
in Brazil, Mexico, and the UK, DGX also performs esoteric
testing (complex, low-volume tests) and clinical trials.  The
company serves doctors, hospitals, HMOs, and other labs as well
as corporations, government agencies, and prisons.

Why We Like It:
Almost slipping beneath the radar, it has been interesting the
stealthy nature of the recent firming in several stocks in the
medical sector.  It isn't coming from the list of usual suspects
either, as the HMO an DRG indices are continuing to pound out new
lows.  Rather, the strength that is emerging is coming out of
those stocks involved in the laboratory testing business.  As
the biggest player in this arena, DGX is a good bellwether for
the group and Tuesday's trading action proved instructive in the
vein of comparing reality to investor expectations.  the market
clearly didn't like what the company had to say when it released
earnings and provided guidance back in late January, and the
stock plunged to new 52-week lows after Piper Jaffray and Morgan
Stanley downgraded the stock soon after earnings.  The resultant
weakness sent DGX below the $50 level on a closing basis for the
first time since September of 2001.  But then a funny thing
happened.  Short-covering hit the market and lifted DGX back
above the $50 level on rather strong volume last week.  Since
then the stock has been bouncing between support at $50 and
resistance near $53.75.  This morning, the company updated its
guidance for Q1, saying it sees its results coming in at the low
end of the $0.82-0.87 EPS guidance due to the impact of winter
storms and the recent strike by New Jersey physicians.  However,
DGX did reaffirm its full-year view of $4.00-4.20 EPS.  Then a
funny thing happened.  Rather than trade down on the news, DGX
actually caught a bid, and a big one at that.  Rebounding from a
morning low of $50, the stock surged on strong volume, to end
the day with a nearly 3% gain.  The PnF chart still looks
bearish, but it won't take much to turn it early bullish and we
could be in a position to get in early and ride it higher.  A
trade at $54 will generate a new PnF Buy signal, and give us a
tentative bullish price target of $63.  Of course, before moving
that high, the stock will have to deal with resistance at $55,
the bearish resistance line at $58 and then major resistance
at $60.  But what's life without a few challenges?  Any pullback
near the $51 level looks like a gem of an entry point, but we
aren't likely to get that lucky following today's strong surge.
So for those looking to get in on a pullback, we're recommending
entry on a dip and bounce from above the $52 level.  More
cautious traders will want to wait for the confirming breakout
over $54 before playing, either entering on the breakout move
or on a subsequent pullback to confirm that level as new support.
We are initially placing our stop at $50.50, just below today's
intraday lows after the opening reaction spike.

BUY CALL MAR-50 DGX-CJ OI= 584 at $4.70 SL=2.75
BUY CALL MAR-55*DGX-CK OI=1522 at $1.60 SL=0.75
BUY CALL APR-50 DGX-DJ OI=  10 at $5.40 SL=3.50
BUY CALL APR-55 DGX-DK OI=   5 at $2.55 SL=1.25

Average Daily Volume = 1.27 mln



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

Trading Systems
By Leigh Stevens
lstevens@OptionInvestor.com 

You may well know that, as a trader, you are pitted against some 
quick reacting fellow traders that seem to place orders in a 
heartbeat.  Ever wonder why the order flow at market turning 
points is so fast? – besides the fact that there are a number of 
sharp professional traders (e.g., so-called “scalpers”) who trade 
for small index option moves, there is also an order flow from 
trading system “signals” that are generated in an instant. 

Suppose you sense that market momentum MAY be starting to shift – 
no sooner than you sense it, let alone react to it, buy or sell 
orders are streaming in.  Ever wonder why?  Well, one reason is 
the number of computerized trading systems that are being used. 

Technical trading systems are a product of the computer age, in 
that computer power is what has allowed System Testing And 
Development which I may refer to my its acronym “STAD”.  Trading 
systems are typically composed of a set of entry and exit 
conditions that are set up in specialized software.  The most 
widely used software is TradeStation.  They are in the forefront 
of this activity and the company provides many seminars on the 
STAD (System Trading And Development) approach – moreover, there 
are a substantial number of TradeStation user groups out there 
that meet and swap ideas.  

When was the last time you met to share trading ideas with a 
like-minded group of fellow option traders?  Probably never, but 
these groups are out there and are very dedicated to constantly 
improving their trading systems. There are also books on devising 
and using trading systems, such as by Martin Pring.  TradeStation 
(the company) has developed some of their own resource materials; 
for example, basic booklets on designing trading systems, which I 
found to be excellent.  

If I mention TradeStation a bunch it’s cause they are the ones 
that have a business model based on selling and promoting this 
type of trading software.  No one has been able to catch up to 
them in this regard, as far as I know.   

The basics of what “systems trading” is, is the subject of this 
Trader’s Corner column.  While learning how to set up trading 
systems takes the right software and some dedication, the basics 
are not all that difficult, particularly such tools as 
optimization. I think its something that well-informed option 
traders should at least know is out there as its part of the 
“competition” so to speak.     

These entry and exit conditions must be “back-tested” on 
historical market data to see how profitable these “trigger” 
conditions for entry and exit would have been in the past.  Back-
testing, in turn, allows refinement of the technical rules and is 
another key part of STAD -- without computer applications to 
handle this, trading systems could have not have evolved as a 
popular means for systematic investing and trading.  

Finally, use of the method going forward must be monitored to 
prevent a serious drawback of the systems approach – that of  
“curve-fitting”, which is finding a set of rules that worked 
perfectly with the benefit of hindsight and past events but will 
not necessarily be effective going forward in new types of market 
conditions and cycles.  

I will concentrate on demonstrating some basics of trading 
systems and not so much on the pitfalls and shortcomings of 
developing and using trading systems.  There are strengths and 
weaknesses in the “systems approach”, but this discussion can be 
left to a specialized study of trading systems, should you become 
interested in applying technical analysis in this manner.  

I would just note that the obvious appeal and a strength of 
trading systems very much relates to the common investing and 
trading pitfalls – lack of a plan and discipline in carrying out 
a plan that includes rigid risk management principles and the 
difficulties in taming negative emotions like fear, greed and 
“fantasy” – seeing market conditions in a way that reflects our 
bullish or bearish bias rather than objectively.

As I said, specialized computer applications are required to 
develop and use trading systems.  The one I am familiar with is 
TradeStation.  The TradeStation application product is also 
probably the best known for trading systems development in use by 
individuals – although many institutional traders also use this 
or similar software. 

The software that allows trading system development and testing 
doesn’t look that different from ordinary charting applications – 
there is a real time (or end-of-day) data feed, which charts and 
applies chart markings (e.g., trendlines), indicators and other 
studies; e.g., fibonacci retracements.  The similarity stops here 
as there is a vast amount more involved and which makes the 
software a relative memory hog – the faster computers and a more 
memory (RAM) are very desirable. 

Trading systems can be broadly broken down into ones that use
1. technical indicators 
or, ones that use 
2. chart patterns 
or, a combination of both methods.  

The validity of each approach stems from a basic principle of 
technical analysis – the knowledge that market cycles repeat and 
are identifiable.  The sample systems I employ might be “applied 
to” – tested on – daily or weekly charts, but systems that employ 
intraday data are not any different in construction. The concept 
is that systems calculate a certain number of “bars” or trading 
periods – whether this is 5, 10 or 60 minutes, a day or a week. 

INDICATOR-BASED TRADING SYSTEMS
A popular technical indicator, of the “oscillator” type study, is 
the relative strength index or RSI.  In the past it has been hard 
to identify how well the RSI worked in terms of its use as a buy 
or sell “signal”.  A rule-based trading system using the RSI is 
demonstrated here as written in the TradeStation programming 
language (i.e., EasyLanguage): 



 


This may all look “greek” to you!  However, it’s not that 
complex.  First you define some terms or “inputs”. Then you 
define a condition involving those inputs.  Lastly, the trading 
rules are defined; e.g., above it’s the “BUY RULE” and “SELL 
SHORT” rule.  The sell short rule in options will typically be to 
buy puts.  It doesn’t much matter – the system is generating a 
“sell signal” and you decide how you will attempt to profit from 
a decline. 

A common use of the RSI is to buy a market or individual item (a 
financial instrument) when the RSI is registering an oversold or 
overbought condition – for example, buying below 30 and selling 
above 70.  However, because markets can stay at overbought or 
oversold readings for some time, the system shown above takes a 
position only when the RSI crosses ABOVE 30 or BELOW 70 – that is 
only when the RSI is retreating from an extreme.  Early exit may 
be desirable if the RSI moves back into those extreme readings.  
Such a move is an alternative exit “signal” as shown in the way 
the system is written. 

PATTERN RECOGNITION SYSTEMS
Most investors and traders that analyze charts based on technical 
analysis principles will tell you that they are looking for clues 
to future market direction based on particular patterns that they 
have found meaningful.  For example, we want to spot any period 
of a few days duration, when a market begins making higher daily 
highs or lower daily lows, relative to the preceding session.  

You find, for example, that its quite meaningful in terms of 
predicting a good-sized advance in the indexes or stocks you 
follow, when there are at least three days of higher highs.  The 
trading system rule that defines this “condition” can be quite 
simple.  

First we define the condition we are looking for: a high greater 
than (>) the high of one [1] bar ago and that the high of 1 bar 
ago is also greater than the high of two [2] bars ago and the 
high of 2 bars ago is greater than all the high of three [3] bars 
ago – all conditions must be true.  The reverse situation applies 
to a series of lows less than (<) than the 1-3 bars preceding it.  

These system “rules” can be written in a shorthand form within 
the application, such as in TradeStation’s EasyLanguage as:

Condition1 = High > High[1] and High[1] > High[2] and High[2] > 
High[3];

Condition2 = Low < Low[1] and Low[1] < Low[2] and Low[2] < 
Low[3]; 

If Condition 1 then buy this bar on close; If Condition2 then 
sell this bar on close. 

(“If condition 1” means that there is a fulfillment of the rules 
making up “Condition1”.) This is about as simple as a trading 
system gets.  Exit in the above system is triggered only by the 
reverse conditions and there is always a position in the market, 
at least absent the addition of a stop-loss “rule”.  

Entire trading systems, and very profitable ones at that, are 
sometimes constructed this simply. The software application 
usually then triggers an audible and visual alert when a trading 
system, applied to any market or individual item, is triggered – 
for example, when you download your end of day data or are 
trading in real time with a live (real-time) data feed.  

STOPS –
There can be rules to exit long if there is a “key downside 
reversal” and exit short positions if there was a “key upside 
reversal”.  You can also build in stop protection and test the 
results of different size stops; e.g., stop out in OEX if, after 
entry, there is an adverse move of 3 points.   

BASICS OF TRADING SYSTEM DEVELOPMENT
An exit is assumed if a position contrary to the original is 
triggered.  If the “system” is long and short conditions are met, 
selling triggers both an exit and a new position on the sell 
side, whether that is a short (e.g., of QQQ) or buying Index 
puts. 

Creating the systems “rules” is only part of the process of 
creating profitable trading systems.  
A trading strategy should have components that govern:  
1. entering the market
2. exiting the market while capturing profits 
3. exiting the market in order to minimize losses  

The above three components often involve three different rules 
and corresponding “signals” when the conditions (the system rule 
or rules) are met.  For example, if you create a “signal” that 
enters the market based on a momentum indicator, you add a 
“trailing” stop signal that will capture profits and a stop-loss 
exit signal that will limit losses.  A trailing stop is one where 
the “rule” is that a stop is in place that “trails” the current 
price by some amount; e.g., 5 points in OEX.  An initial stop 
might be 3 points, then once the Index has moved in your favor, a 
trailing stop condition kicks in.  Again, these are common 
elements of trading systems but, there are no RULES to say what 
rules have to be in your trading system.   

Once you have a well-defined set of rules to enter and exit 
positions and perhaps a system of risk protection or stops 
(exits), it is then necessary to see how well the ideas 
comprising the systems performed in the past. This is basically 
WHY you have to have defined rules – only by defined rules, can 
the software “apply” the system to a market; e.g., show the 
results of the system to the last 3 years of OEX price history. 

Testing involves applying the system to as much price history as 
can find – this could be 5 or 10 years or more.  “Optimization” 
of a rule-based system is often applied here – “optimization” is 
a computerized test to determine WHICH variables (e.g., which 
specific moving average or averages) resulted in the most 
profitable or the most consistent profits for the back period 
being examined.  

Or, to use our above example, which “length” setting of RSI works 
best along with which specific overbought or oversold extreme is 
the most profitable as the “trigger” point for trade entry.  What 
the software does is test all possible combination of lengths and 
overbought/oversold extremes – or, the ones that had the greatest 
profits.  For example, the outcome may be to use a 17 period RSI, 
and sell after the RSI retreats from a reading above 75 and buy 
when the indicator rebounds from an extreme below 25.   

MORE ADVANCED - 
Such techniques as “walk-forward” optimization can guard against 
the tendency to select only variables in indicator or pattern-
recognition systems that fit past conditions, but that might not 
work as well going forward – the “walk-forward” technique 
involves testing some period for the most profitable system 
inputs, then applying them for a later period and adjusting the 
values, then testing “forward” again.   

Regardless of the rules and markets, one of the things that has 
to be on your checklist when studying results is why did the 
losing trades lose money? How are they different from the winning 
trades? It is important to scrutinize the losing trades and 
investigate what happened on each occasion.  The software 
applications that have well-developed systems testing and 
development capabilities, have templates and tools that allow the 
study of all these aspects of trading system results.       

Analysis of the biggest losing trade is a starting point to see 
how a system doesn’t work, so there are no ‘holes’ in the system 
rules though which a trade could slip and cause significant 
losses or more that the maximum you are willing to take. 

A system should be studied on two levels: 
1. As a trading strategy that gives positive trading results or 
the net results of the strategy over time 
And – 
2. At the trade-by-trade level to determine is the individual 
trades are “normal” compared to one another and to the group.   
For this type of analysis to be correct, all trade results need 
to be comparable to one another.  

Since we are working in the financial world, this means that we 
should see all our results in terms of dollars (or monetary 
units). For example, it’s not correct to compare the return on 
investment of buying 100 shares of a 10-dollar stock with buying 
100 shares of a 100-dollar stock.  The comparison would only make 
sense if buying or selling some set dollar amount of each; e.g., 
$10,000.     

SUMMARY OF THE TRADING SYSTEM APPROACH
Regardless of whether you have any interest or inclination to use 
trading systems now or ever, it is useful to know that there is 
an option to supplement (or substitute) what is typically the 
more subjective and personal methods we use to make market 
decisions.  I find that the more investing and trading experience 
that I have, the easier it is becomes to define what may be sound 
“rules” or conditions that need be met to get into a stock or 
other market.  

Moving from the stage of ideas that “may be” profitable to back-
testing these rules is a fascinating and worthwhile process that 
serves as a “reality check”.   Often, through the results of back 
testing, it becomes apparent that even with a promising system, 
slight changes will result in an investing or trading method that 
has even greater profit potential.  

Systems testing and development might be something you are not 
immediately attracted to, but is something that is may be useful 
after a lengthily experience in using technical analysis.  This 
was the case with me and I thought I would never warm to the 
approach of a “mechanical system”.  

I became enthusiastic about this type of application when I saw 
that it could validate or, invalidate, long held personal beliefs 
about what kinds of technical analysis techniques worked best as 
a basis for market action.  

Moreover, I found that the more I knew about technical analysis 
and the more months and years that I had observed the unfolding 
of many different chart patterns, the more I got out of the 
ability to create trading systems with the new software seen in 
the 1990’s especially – this was quite the opposite result of 
what I expected.  

Systems testing and development is a natural continuation of 
learning technical analysis, especially for those who are more 
oriented to the use of computers and software.


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

Managing Risk via Pivot Analysis
By John Seckinger
jseckinger@OptionInvestor.com

If a trade can be put on based on quantifiable analysis instead 
of emotions, risk can be controlled and traders will certainly 
have an edge. 

The session in question is Tuesday, February 25, 2003.  The ES 
contract gapped lower during the "cash open" (9:30 a.m.), first 
trading underneath the profiled 829 level (50% of the move from 
February 13th to 18th; 805.25 to 853.25).  Moreover, the ES 
opened underneath the daily S1 reading of 825.50.  With the cash 
opening at 824.25, I kept thinking about the Weekly S2 level of 
820.  The daily S2 reading was 818.50, and this level certainly 
had to be respected during the trading session.  It is my feeling 
that the DAILY levels will actually "expire" in importance after 
a few hours after being hit, while the weekly and monthly levels 
will certainly keep their significance for a longer period of 
time.

Chart of the ES03H, 5-minute


 

The $64,000 dollar question is, "As a trader, how can you 
capitalize on this pattern recognition?"  A few things come to 
mind for future trades.  Notice that the second relative low 
around 12:10 p.m. failed to hit the daily S2 level, let alone 
test the intra-day low at 817.25.  At the time, I worried about 
the price action breaking the possible bullish trend line (blue, 
for support).  It is important to realize that the DOW had not 
broken its similar trend line (hitting it exactly - see chart 
below).  It is very common for prices to collapse in free-fall 
mode, set an intra-day low, and then fail to come back and test 
this initial level.  By setting a higher low, a trader can have a 
possible bullish trend line to use throughout the session.  When 
trading the ES contract, always look for ways to draw a trend 
line that will be watched by fellow traders.  

It is also interesting in the chart above how the retracement 
from S2 to R2 on a daily level provided some levels that traders 
appeared to be using; 826.25 in particular.   In fact, because of 
this line on my chart at 826.25, going long above the Daily S1 
level was questioned.  Moreover, the Dow didn't retrace more than 
50% of its opening period's range (seen below).  Once prices fell 
under 818.50, I definitely began thinking about a scenario when 
prices would continue to collapse for the entire session.  In 
fact, I think that selling the ES at 818 would be fine.  A loser, 
yes, but part of my methodology and allowable under any 
circumstance.  Not all trades will be winners.  The catch is, as 
soon as the ES closes back above S2 on a five-minute period, any 
short has to be covered.  This is proper risk management.  In 
this situation, it would have cost a trader roughly 1.50-points.  

As far as my methodology is concerned, I really would not have 
been able to predict the move from daily S2 to daily S1; however, 
the aforementioned relative low just before 12:30 definitely made 
it clear that shorting the ES contract was risky.  A wedge was 
defined, and it was right at 2 p.m. when traders got their 
confirmation that bulls were fully in control.  I like to 
disseminate as little as possible, and a trader would have to 
tell themselves at this moment "If anything, do not be short.  
Levels under S2 were rejected, and the wedge broke out higher and 
above the daily S1 level."  Objective would of course be the 
daily pivot, 838.  The nine-points is allowable because risk was 
not as great, possible failure back under S1 at 825.50.  Would we 
have captured all nine points?  Doubtful; however, notice how 
developing a solid set up during the day via pivot analysis can 
really help odds of a profitable trade.

If scalping, a trader can certainly put in a resting order as 
early as 12:30 p.m. to either buy above 836.50 or sell under the 
818.50 level.  Either of these trades would be a breakout.  
Moreover, a trader really could look to sell at 835.50 or buy at 
819; however, as noted before, a tight stop would have to be 
initiated, and then it really would make sense to flip sides (if 
long, get stopped out and go short) during this unexpected 
breakout.  

Looking at the Dow below for confirmation, it was the timeframe 
from 14:00 to 14:05 that cleared BOTH the top of the wedge at 
7808 (daily S1) AND the halfway point of the first period's range 
at 7817.  With that kind of confirmation, a futures trader 
following the ES contract has to be able to make a decision.  A 
breakout above the S1 level that corresponds to the top of a 
wedge doesn't come along too often.  It was a spike higher in 
both markets, so I can see how it would be difficult to put on a 
trade; however, if you blink, or fail to see the move's 
significance, money will be left on the table.  

Not shown, nevertheless interesting, is the fact that volume 
within the ES was significant from 2 p.m. until 2:05; further 
reinforcing the possibility of a breakout move.  Risk in the Dow 
would be a move back under the 7800 level, which never took 
place.  

Chart of Dow Jones, 5-minute


 

In conclusion, what have we learned?  When trading futures, try 
to recognize what the market is looking at.  On Tuesday, they 
were focusing on both S1, S2, and the retracement levels between 
this area.  A higher low was seen, and a wedge developed with an 
apex between S1 and S2.  Now we can get an entry point and define 
risk.  Play the breakout on either side, but make sure you do NOT 
allow the market to get back into the range of S1 to S2.  The 
upside objective would be the pivot, which was eventually tested.  
MACD was trending higher, volume spiked, the halfway point of the 
first five-minutes was cleared in the Dow, and clearly there was 
a 'shock' to the market.  What would I do at the close?  
Absolutely go flat, since I viewed Tuesday's pivots in both the 
Dow and ES to be strong resistance.  That has not changed.    

Ask Away,

John Seckinger


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