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Daily Newsletter, Thursday, 02/27/2003

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The Option Investor Newsletter                Thursday 02-27-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: The Waiting Game
Futures Markets: Efficient
Index Trader Wrap: (See Note)
Market Sentiment: International Market of Mystery
Weekly Manager Microscope: Robert Smith: T. Rowe Price Growth 
Stock Fund (PRGFX)


Updated on the site tonight:
Swing Trader Game Plan: International Intrigue


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      02-27-2003           High     Low     Volume   Adv/Dcl
DJIA     7884.99 + 78.00  7924.62  7789.95 1.54 bln 2117/1050
NASDAQ   1323.94 + 20.30  1331.79  1305.56 1.23 bln 1933/1281
S&P 100   423.50 +  4.78   426.46   418.60   Totals 4050/2331
S&P 500   837.28 +  9.73   842.19   827.55 
W5000    7939.72 + 87.30  7979.11  7852.45
RUS 2000  361.43 +  3.46   362.35   357.97 
DJ TRANS 2040.41 +  0.70  2063.30  2026.63   
VIX        35.18 -  1.84    37.05    34.90   
VXN        46.16 -  0.81    48.72    46.00 
Total Volume 2,965B
Total UpVol  2,146B
Total DnVol    746M
52wk Highs  163
52wk Lows   199
TRIN       0.81
PUT/CALL   0.55
************************************************************

The Waiting Game

Thursday's have not been good for economic reports recently 
but today may have marked a change in that trend. However, 
the report attracting the most investor attention was the
change in the terror alert status back to yellow from orange. 
That report overcame red in the housing sector and produced
some green in the markets. 

Dow Chart - Daily


 
Nasdaq Chart - Daily


 

Things started out bad before the first share traded with 
the Jobless Claims soaring to 417,000 with last weeks numbers
revised upward to 406,000 an increase of +6,000. Continuing
claims were revised up for the prior week by another +127,000.
Now which number do you think the talking heads were hyping 
in the news? Surprise, "continuing claims fell this week by
-45,000 which indicates Americans are finding work." No 
kidding. New claims were the highest in months and the four
week moving average hit 400,000 but reporters went out of 
their way to misreport the event. In reality there were 
probably some new jobs created but the vast majority of
declines in the continuing claims comes from people running
out of time and losing benefits from being unemployed too
long. The 3.37 million continuing claims understate the
real unemployment with an additional 1.5 million workers
dropping off the rolls in the last year due to expired 
benefits. IBM also announced another round of layoffs
today in its global services division.

The Help Wanted Index rose one point to 40, the same level 
it has held for most of the last four months and indicates 
there is still no advertising for new employees. This was
only marginally off the cyclical low of 39 last month. 
Layoffs are increasing and there are no new help wanted
ads. Draw your own conclusion. 

New Home Sales fell to an annual rate of 914,000 compared
to already lowered estimates of 1,050,000. This was down
from 1,077,000 in December. Analysts had already lowered
their estimates due to the cold weather but the severity
of the drop surprised everyone. One small problem with
blaming the weather for the drop. The northeast, the region
with the worst weather, posted the strongest gains while
the Midwest and the South posted losses. Other commentators
suggested there was a lack of inventory due to the 
bad weather and the strong sales in December. Wrong again!
A quick check of the numbers showed that inventory levels
surged to 4.5 months from 3.8 months in December. Prices
paid for homes also fell which indicates stronger competition
for the fewer buyers. Let's recap, higher jobless claims,
no help wanted ads, a -15% drop in new home sales and a
Consumer Confidence index at a 13 year low of 64. Yep, 
definitely a soft patch. 

There was some good news. The Durable Goods Orders jumped
a higher than expected +3.3% compared to estimates of +1.0%. 
Shipments rose +3.5%. Nondefense capital goods rose +2.1%
and it was the second consecutive month over 2%. Computers
rose +3.2% and are at the highest pace since June-2001. 
The bad news to this good news report was another drop in
the backlog of orders which fell for the sixth consecutive
month and 23 of the last 24 months. Inventories also
continued to fall. My take on this is that retailers
ordered just enough merchandise to fill obvious holes in
their inventory from holiday sales but did not order in 
depth. Instead of a standard inventory level of a particular
item at 20 units they may have only reordered 5-10 to keep
stagnant inventory from going obsolete waiting for a recovery
to appear.

The competing economic reports had the markets headed south 
at a high rate of speed until the news hit at 10:AM that
the terrorist alert level had changed. That came just about
the time the Dow broke 7800 again and lately any Dow level
that begins with 77 tends to attract buyers. Those buyers
ran the average up to resistance at 7925 but then the 
rumors started flying again. 

French President Jacques Chirac said that using force
against Iraq could not be ruled out. In the context he
was speaking it was deemed a weakening of his stance 
against the US resolution and the war. Opposition to the
French plan to stop the war is growing. Many leaders are
questioning the repercussions of trying to face off with
the US. They are afraid the US will turn a cold shoulder
to France and claim the use of a French veto would be "a
decision with great ramifications of great gravity". 
France has not used its veto against the US since 1956. 
Claude Goasguen, a senior French lawmaker, called a veto
"unimaginable". "We are not going to break up the UN and
Europe just to save a tyrant." France will not have to
use its veto unless the US lines up the needed nine votes
required to pass the resolution. Should that happen only
Chirac can authorize a veto and it would be the equivalent
of putting a gun to his own head claimed one lawmaker.
France does several billion dollars of business with 
Iraq each year and once the US takes control they will
not want to be at our mercy for future business deals. 
The market dropped on these comments since it appeared
more likely that opposition to the resolution was getting
weaker and war was imminent. Duh! Did somebody think we
spent $3 billion to move 250,000 troops to the gulf just
to make a show of force?

The consensus opinion tonight is that the US is going to
war next week regardless of any resolution. This means 
countries are faced with voting with the US to maintain
unity and peaceful relations while knowing a negative
vote would not stop the war. Or standing on principal
and knowing the US is going to war anyway and vote
against them. Boy, that is a tough decision. Either way
you cannot stop the war but with one option you can 
create a serious enemy by stabbing Uncle Moneybags in 
the back. Make no mistake. The US will make anyone who 
embarrasses them in public pay a heavy price in the 
future. Since the Arab nations have joined the team it 
is highly doubtful anybody else will end up sitting in 
the stands. 

The sudden resumption of immediate war fears sent oil
prices to $39.99 a barrel intraday. This is a huge number
and represents fears that Iraq will blow up its wells. 
Since Saudi Arabia has already agreed to increase its
output by any amount lost from Iraq there is no real
risk. It is only perceived risk. There was talk of an 
oil boycott by Arab countries but now that they have
joined the team that is far less likely. Talk of $80
oil "if" the war goes bad is similar to the $100 talk
just before the 1991 war. 

Saddam through a wrench in the war plans once again
on Thursday. Just when the support seemed to be falling
in line, Iraq said it had decided in "principle" to
destroy the missiles. No details were given. If this
decision is as conditional as the U2 over flights then
I don't expect any explosions on Saturday. That is the
day the UN inspectors have set as a deadline for the
destruction. This decision helped reverse the market
drop after the Chirac news. 

It would be nice to have some fundamental stock news 
to move the market instead of competing rumors, half 
truths and misreported news events about Iraq. 
Unfortunately that news may be better left unreported. 
According to First Call 57% of the S&P-500 has warned 
for the first quarter and only 19% have raised guidance. 
If the markets did not have a war to worry about I think
those kind of numbers would be very harmful to any
rally hopes. It may be best that our attention is 
focused on Iraq and not the economy. I know the Durable
Goods Orders was positive on the surface but the internals
were still weak. Once the war is over fundamentals are 
what will provide the motive force. 

The Dow appears locked in a range between 7950 and 7700
and is hell bent on testing each end of the range on a
daily basis. The volume is not strong enough to push out
of either side and the last two days that range has shrunk
to 7800-7925. The Nasdaq is also hovering in the middle of 
its recent range between 1295-1330. It appears that anybody
who wants to buy or sell before the war has done so already
and everybody is simply waiting. I do not know what it 
would take to produce a major move. Short of a retirement 
announcement by Saddam there is little potential for
positive movement. However, even an earnings warning by 
IBM, MMM and GE on the same day would have a tough time 
pushing the market lower. It is a tie with buyers and 
sellers appearing evenly matched around Dow 7900. Grab an 
easy chair, a good book on trading, a blanket and thermos 
of hot chocolate because we may be here awhile.     

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

Efficient
By John Seckinger
jseckinger@OptionInvestor.com   

All three futures contracts are at very efficient areas heading 
into trading on Friday.  Could this give us reason to believe 
Friday will be a directional move from open to close?

Thursday, February 27th at 4:15 P.M. 

Contract       Last    Net Change    High        Low       Volume    

Dow Jones     7884.99    +78.01    7924.62     7789.95      
YM03H         7892.00    +82.00    7922.00     7774.00     34,560 
Nasdaq-100     994.80    +20.29    1000.98      976.60      
NQ03H          996.50    +22.50    1002.50      971.50    244,399
S&P 500        837.28     +9.73     842.19      827.55    
ES03H          838.25    +10.50     842.75      825.25    727,383

Contract         S2         S1       Pivot        R1         R2    

Dow Jones      7731.85    7808.42   7866.52    7943.09    8001.19
YM03H          7715.00    7803.00   7863.00    7951.00    8011.00
Nasdaq-100      966.41     980.60    990.79    1004.98    1015.17
NQ03H           959.25     977.75    990.00    1008.75    1021.25
S&P 500         821.03     829.15    835.75     843.75     850.25
ES03H           818.00     828.00    835.50     845.50     853.00

Weekly Levels

Contract         S2         S1        Pivot        R1         R2    

YM03H         7748.00    7874.00    7970.00    8096.00    8192.00
NQ03H          967.50     991.00    1006.50    1030.00    1045.50
ES03H          820.00     833.50     843.50     857.00     867.00

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

Contract        S2         S1        Pivot       R1         R2    

YM03H         7237.00    7642.00    8253.00    8658.00    9269.00
NQ03H          875.75     930.25    1019.25    1073.75    1162.75
ES03H          775.00     814.75     876.00     915.75     977.00

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

Note: The 03H suffix stands for 2003, March, and will change as 
the exchanges shift the contract month. The contract months are 
March, June, September, and December. The volume stats are from 
Q-charts. 

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

Short 832.00, exit 834.25, change -2.25
Long  835.00, exit 838.25, change +3.25
Short 837.50, exit 839.75, change -2.25
Short 837.00, exit 839.00, change -2.00
Short 834.75, exit 832.75, change +2.00
Long 833.50, exit 833.00, change -0.50

Total for the day: -1.75
Total for the week: -2.00
Total since inception: +59.00

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

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

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

The ES contract once again traded mostly with the range outlined 
below from 826 to 839.50 (see chart).  The daily pivot was at 
833.25 and basically right in the middle of this area, making it 
hard to increase conviction at either end of the spectrum.  As 
the second chart below shows, one way to trade this kind of 
pattern recognition is via projection analysis.  I use it to 
simply double a "possible" range in the ES to get an objective if 
there is a breakout higher (or lower).  There is an article on 
this method in tonight's Investors Education section.  

Also interesting was that the ES failed to test its weekly pivot 
on Thursday (843.50 versus 842.75), but did manage to close above 
Friday's calculated pivot.  To me, the 838 settlement is more 
neutral than anything else.  I would prefer to see prices 
stay underneath the 839.50 area and then take out the pivot to 
the downside, giving shorts an entry near 839.50 and also under 
the pivot.  If prices start to spend time above this 839.50 
intermediate level (close on a 120-minute chart), I could see 
looking for a move first to the weekly pivot and then much higher 
to 854.  The daily R2 comes in at 853.  Below the pivot, support 
is seen from 826 to 828. 

Chart of ES03H, 120-minute


 

Looking at a 5-minute chart of today's trading, it is interesting 
that the ES closed just above Tuesday's pivot (838) at 838.25.  
I can visualize in the chart below a "P" formation from today's 
low of 825.25 (bear trap, since 826 was taken out) up until the 
2:00 p.m. area.  This is a short-covering pattern, and it does 
look like the apex of this pattern is somewhere between 838 and 
839.50.  Efficient, by definition, but I will be looking for a 
solid move from this area towards either 854 or 826.  If long, be 
nervous if 838 is taken out.  If short, bulls could get 
interested above 839.50.

Chart of ES03H, 5-minute


 

Bullish Percent of SPX: This indicator rose 0.20% to 33.60 on 
Thursday, which is a little bit less than expected; however, not 
at least not a divergence seen the last two sessions.  This 
indicator does remain in "Bull Correction" status with a column 
of O's rising to 15.  The last column of "O's" ended at 20 
percent.  Looking at P&F chart of the SPX, the contact didn't add 
an "X" on-top of yesterday's new column, and resistance is still 
solidly higher at 850 and then between the 860-865 area.  On a 
bar chart, closing under 839.50 is slightly bearish.  This level 
is an intermediate pivot level and just above Thursday's 
settlement.  A rise above 839.50 would quickly get us to more 
neutral levels.  

The March E-mini Nasdaq 100 Contract (NQ03H) 

Once again, prices were kept under the highly discussed 1003 area 
(intra-day high was 1002.50).  Moreover, as the chart below 
shows, the drawn bearish regression line has worked rather well 
during the last few sessions and could continue to do so.  It 
does portend weakness from current levels, and bears could use a 
stop just above the 1003 area.   If there is immediate weakness, 
look for a test of the daily pivot at 990 with an objective of 
at least daily S1 at 977.75.  I do feel that we are at a more 
neutral place than anything else, but traders should be aware 
that there is a good chance of a directional move on Friday.  
With that said, bulls could look for a move above 1003 as a 
catalyst towards the monthly pivotal area of 1019.25.  Tight 
stops should be implemented; just in case above 1003 is a bull 
trap.  I would be more inclined to buy a rally than sell 
weakness; however, the drawn regression channel would allow for a 
move all the way down to 961.75 and an intermediate support area.  
An entry could be under the day's pivot, and then move a trailing 
stop to 986 once 981 is taken out.  Further move the trailing 
stop to 978 if 970 is cleared.  On the upside, once above 1009, 
move a trailing stop to the 1003 area.  Look to exit around the 
monthly pivot.

Chart of NQ03H, 30-minute


 

Bullish Percent for NDX:  The bullish percent for the NDX 
was unchanged at 35% on Thursday, and will stay in "Bear 
Confirmed" status.  It will take a print of 40% to reverse back 
into a column of X's.  The last column of O's ended at a reading 
of 14%.  The NDX, according to P&F charts, will have to get a 
1025 print in order to produce a new column of X's, or a 925 
print to add to the recent column of O's.  Resistance at 1000 and 
1025, with support at 925.  

The March Mini-sized Dow Contract (YM03H) 

The YM did bid on Thursday, making its way to Tuesday's pivot at 
7915; almost the session high.  Moreover, 7754 was not tested on 
the downside; therefore, bulls didn't have to worry about an 
extended fall.  Unfortunately, predicting direction on Friday 
appears to be rather difficult.  Thursday's settlement is
neutral in nature, but we can point out that Friday's pivot is 
just underneath current prices.  Friday's objective should be for 
a move to either 7969 or 7748.  If the market opens lower on 
Friday and under the daily pivot of 7863, I could see a session 
of extended weakness into the close.  If prices open up higher, I 
could also see putting a stop under the day's pivot (if not to 
far away) and then look for a move to the range of 7917 to 7934 
before pausing.  Shorts should look for a possible bounce at the 
7800 level, or daily S1.

Chart of YM03H, 120-minute


 

Bullish Percent of Dow Jones: Using P&F analysis, the Dow didn't 
add to its new column of X's set on Wednesday.  The bearish 
objective for the blue chips remains at 7100, and a buy signal 
will be given at 8200.  Resistance is seen at 8150, with support 
still not seen until 7600.  As far as the bullish percent is 
concerned, this indicator was unchanged at 13.33% but continues 
to show oversold conditions.  Of course, it will take a move to 
20% in order to get the index into "Bull Alert" status.  The 
column of O's remains at twenty-three. Note: The last column of 
O's ended at 10%.  

Good Luck. 

Questions are welcomed, 

John Seckinger


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

Check the Site Later Tonight For Jeff’s Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_022703_1.asp


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


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

International Market of Mystery
by Steven Price

If anyone doubts what is truly moving the markets, all they need 
to do is study today's intraday chart of any of the major 
indices. What began as a weak rebound that began to rollover and 
take out Wednesday's lows suddenly changed directions and headed 
higher as soon as news hit the wires that Iraq was once again 
throwing the UN a bone and the U.S. was lowering its terror alert 
level to yellow.  An Egyptian news report surfaced that said Iraq 
would go ahead and destroy the missiles that the UN weapons 
inspectors requested it destroy, thus removing an easy excuse for 
the U.S. to hang its hat on when deciding to move forward with 
invasion plans. While it remains questionable whether this 
happen, with Iraq saying it does not know how to destroy the 
missiles and wants a technical mission to discuss the details, it 
was enough to get the bears on the sidelines for at least a few 
hours.  We saw a quick 120-point reversal up in the Dow, back to 
Wednesday's highs, where it struggled to maintain momentum.  The 
fact that the U.S. lowered its terror alert level from orange to 
yellow also figured into the boost, as the government is 
apparently a little less worried about a major attack being 
imminent. While the rally eventually failed and pulled back to 
7884, 30 points off the highs of the day, the sudden swing still 
underscores the sensitivity of the markets to international 
developments. 

That bullish sentiment flew in the face of yet another increase 
in unemployment, reflected by the weekly claims released this 
morning and not so hot news on the housing front.  On the plus 
side were durable good orders, which increased by more than twice 
as much as expected.   

Durable goods orders rose 3.3% in January, led by an increase in 
demand for cars and communications equipment.  Communications 
orders increased more than 46%, the largest increase since 
October. Non-defense capital goods grew 2.1%, following a 
December increase of 2.4%.  New orders, excluding transportation, 
were up 2.5%, while non-defense orders were up 3.6%.  An 
important note is that defense spending, which had been the main 
support for prior reports, actually decreased. 

That was about all the good news from the economic front.  We may 
finally be seeing a small whole in the so-called housing bubble, 
as well. New home sales dropped more than 15% in the past month, 
to an annualized rate of 914,000.  That is the lowest level in a 
year, since January 2002's rate of 870,000.  Some of the drop was 
blamed on the weather, but anyone who has seen more homes sitting 
on the market for longer periods of time can attest that the 
sellers' market we've seen for the past year seems to have topped 
out. Granted, it is only one month of declines after a torrid 
pace of increases over the past year, so saying the bubble has 
popped seems premature.  However, it does seem to confirm what 
I've been seeing in my own neighborhood, as well as what many of 
our readers have communicated - that we are seeing a slowdown in 
the housing market.  As traders will recall, Alan Greenspan has 
said that money taken out of homes has generally fueled recent 
consumer spending, with about half of every dollar heading back 
into the economy. While this is a new homes report, as opposed to 
an indication of refinancing, it implies that the low interest 
rates that have fueled the market may have finally drawn in most 
of the buyers and most likely those who were going to refinance. 
That is not good news for consumer spending, which makes up 2/3 
of GDP.   The Midwest, which had been the strongest region in the 
last report, dropped 42%. 

The unemployment picture continues to worsen, as we get further 
away from the unreliable data of the holiday season.  While the 
end of the year tends to fluctuate due to seasonal patterns, we 
are getting back into the business year and so far the trend is 
not encouraging.  Initial jobless claims in the past week rose 
11,000 to 417,000, which is the highest level in ten weeks. More 
importantly, the 4-week moving average, which is used to smooth 
out weekly fluctuations, rose to a seven week high of 399,750.  
The 400,000 plateau is generally used by economists to measure a 
worsening labor market and if the recent trend of increases in 
the weekly numbers aren't enough to throw up a red flag, then the 
moving average sitting just 250 claims away from an officially 
worsening picture should make the point.  The help wanted index, 
released by the Conference Board, also increased mildly, moving 
from 39 to 40, but still sits no higher than it was last fall. 
Conference Board economist Ken Goldstein said, "The fact that job 
advertising was no higher in January 2003 than in October 2002 
shows how flat the labor market has been.  Hiring intentions are 
not expected to turn more bullish as long as the overall economy 
remains stuck in neutral."

In spite of all the negative economic data, the markets still 
posted a healthy gain of 78 points in the Dow and 20 points in 
the COMP.  While we can analyze all the data we want, it is 
apparent that until the situation with Iraq is behind us, we may 
just be spitting in the wind.  What happens on the geo-political 
front is still driving the major indices and unless a trader has 
a line to Washington, Iraq and Kofi Annan, he/she will have to be 
willing to roll with the punches until further notice.


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

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  7884

Moving Averages:
(Simple)

 10-dma: 7881
 50-dma: 8274
200-dma: 8623



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  837

Moving Averages:
(Simple)

 10-dma:  836
 50-dma:  874
200-dma:  912



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     :  995

Moving Averages:
(Simple)

 10-dma:  993
 50-dma: 1012
200-dma: 1012



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

The Dow Jones Home Construction Index (DJUSHB):  The home 
construction index dropped hard today, following new home sales 
data that showed a 15% decline in the month of January. The 
previously strong Midwest saw a drop of more than 40%.  It was 
the first time in a while that we did not get an upside surprise 
and most homebuilders finished the day in the red.  There was 
some recovery toward the end of the day, however, with the DJUSHB 
climbing back above recent support at 319.  The low of the day 
was 315.22, and it looked like the bubble had finally burst. That 
319 level has now provided strong support on a closing basis 
since the group got a big boost on February 18.  Even with the 
recovery, bulls should be cautious of strong resistance at the 
200-dma.  It failed there in January and again over the past 
week.  330 is also a significant resistance level as the failure 
in October also came at that level when the 200-dma was higher 
and the index has not been able to crack the 330 barrier since 
last September.  

52-week High: 397
52-week Low : 260
Current:      319

Moving Averages:
(Simple)

 21-dma: 319
 50-dma: 316
 200-dma: 325

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


The VIX worked like clockwork today, bouncing off the 35% support 
level just as the Dow/SPX/OEX pulled back from their intraday 
highs.  It traded as low as 34.90, before jumping back to 35.18 
on the pullback.  It actually sat just on top of 35% for most of 
the day and the 5-minute chart shows repeated tests of that 
level.  If the rally continues, look for a break below that 
level, however, it served as strong support today and it will be 
interesting to see just how much of a rally will be required to 
break it.  It could also be giving us a signal for a continued 
pullback, as the VIX found premium buyers at that level all day.  
Institutions don't generally buy premium in a rising market 
unless they are expecting the rally to fail.


CBOE Market Volatility Index (VIX) = 35.18 -1.84
Nasdaq-100 Volatility Index  (VXN) = 46.16 -0.81

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.55        469,645       257,587
Equity Only    0.44        359,070       156,749
OEX            1.31         12,608        16,579
QQQ            0.72         29,488        21,271


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

Bullish Percent Data

           Current   Change   Status
NYSE          39.4    - 0     Bull Correction
NASDAQ-100    34.0    + 1     Bear Confirmed
Dow Indust.   13.3    - 0     Bear Confirmed
S&P 500       33.6    - 0     Bull Correction
S&P 100       28.0    - 0     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  1.15
10-Day Arms Index  1.12
21-Day Arms Index  1.29
55-Day Arms Index  1.32


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       1924           895
NASDAQ     1888          1228

        New Highs      New Lows
NYSE        60               59
NASDAQ      59               68

        Volume (in millions)
NYSE       1,561
NASDAQ     1,240


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

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 MANAGER MICROSCOPE
*************************

Robert Smith: T. Rowe Price Growth Stock Fund (PRGFX)

Robert Smith has been a vice president with T. Rowe Price since 
1992, and has been the portfolio manager of the $3.8 billion T. 
Rowe Price Growth Stock Fund since March 1997, generating above 
average returns with below average risk relative to other large-
cap growth funds.  Smith follows in the footsteps of the firm's 
founder, Thomas Rowe Price Jr., who's best known for developing 
the growth stock style of investing and starting this fund back 
in 1950.  Price felt that investors could earn superior returns 
by investing primarily in well-managed companies whose earnings 
and dividends could be expected to "grow faster" than inflation 
and overall economy.

Over the years, T. Rowe Price as an investment firm developed a 
strong reputation in growth stock investing, but today offers a 
complete equity fund lineup that includes value-driven, sector-
focused, tax-efficient, and quantitative, index-oriented styles.

Smith has been an investment manager with T. Rowe Price for the 
past 11 years.  In addition to serving as a vice president with 
T. Rowe Price, Smith has been a vice president of T. Rowe Price 
International (formerly Rowe-Price Fleming International) since 
1996.  Prior to joining T. Rowe Price in 1992, Smith spent five 
years as an investment analyst for MFS (Massachusetts Financial 
Services).

In terms of academic credentials, Smith received a B.S. degree 
from the University of Delaware and earned his M.B.A. from the 
University of Virginia, Darden School of Business.  The firm's 
website (www.troweprice.com) didn't indicate whether Smith has 
earned the right to be called a C.F.A., or Chartered Financial 
Analyst.

T. Rowe Price's flagship Growth Stock Fund has no front-end or 
back-end load fees and carries a minimum initial investment of 
$2,500 for regular accounts ($1,000 for IRA accounts).  Annual 
expenses are low compared with similar funds, giving it a cost 
advantage and adding to its appeal.  The fund may be purchased 
directly from T. Rowe Price (800-638-5660), or from one of the 
many brokerage fund networks that offer the fund to the retail 
marketplace.  

Investment Style/Strategy

According to the fund's prospectus, the primary objective of the 
Growth Stock Fund is to provide long-term growth of capital.  It 
also seeks increasing dividend income as its secondary objective.  
In pursuit of these objectives, Smith invests at least 80 percent 
of portfolio assets in the common stock of a diversified group of 
established growth companies.  Historically, the fund has favored 
companies with large market capitalizations that have the ability 
to pay increasing dividends through strong cash flows.

According to Morningstar's latest report, Smith had 97% of assets 
invested in stocks at year-end 2002, with 8.3% of assets invested 
in foreign stocks.  Approximately 90% of net assets were invested 
giant-cap and large-cap stocks for a median market capitalization 
of $30.3 billion.  Nearly 10% of assets were invested in mid-caps 
with no exposure to small- or micro-cap stocks.  The fund's price 
valuations are high enough to land it in the growth style box per 
Morningstar, but are not excessive relative to the S&P 500 target 
index.  Accordingly, the Growth Stock Fund has all the makings of 
a core growth stock investment.

Because Smith looks for growth at reasonable prices, the fund has 
generally incurred less risk than the average large-growth equity 
fund.  While not overreaching in terms of price, Smith packs this 
portfolio with companies that have greater long-term earnings and 
historical earnings than the market (S&P 500) overall, as well as 
greater sales, cash flow, and book value growth than the S&P 500.  
The result is a portfolio that at times may fall into the "blend" 
style box, as it did in 2000, but maintains its "growth" stripes.

At year's end, the Growth Stock Fund had a total of 109 holdings 
with 27.2% of assets invested in the fund's top 10 holdings.  At 
that time the fund's top holdings were Citigroup (4.0%), Freddie 
Mac (3.3%), United Health Group (3.2%), Pfizer (3.1%), and First 
Data (3.0%).  No other stock holding represented more than 3% of 
net assets at December 31.  Smith also maintained broad industry 
sector exposure, not too far out of line with the S&P 500 index.  
The result is a well-diversified portfolio of growth stocks that 
participates in advancing markets, and holds up better than most 
pro-growth funds in declining markets.

In terms of risk/reward potential, the fund is a suitable choice 
for investors seeking to build capital or accumulate assets over 
time that can accept the significant price fluctuations inherent 
in common stock investments.  Accordingly, the Growth Stock Fund 
is an appropriate choice for both regular (taxable) accounts and 
tax-deferred accounts, such as IRAs.  

Fund Returns/Ratings

When Robert Smith took over the Growth Stock Fund in March 1997, 
his conservatism resulted in below average returns when compared 
to other growth stock managers.  Between 1997 and 1999, when the 
tech-led growth market spiraled upward and other growth managers 
were willing to pay up for stocks, Smith didn't overreach and it 
appeared as if he was lagging behind.  That's if you call annual 
returns of 26.6% (1997), 27.4% (1998), and 22.2% (1999) lagging, 
but that in fact was the case during that crazy period.  In '99, 
Smith's 22.2% return ranked in bottom quartile of the large-cap 
growth category, per Morningstar.

However, and that's why you try to look at a fund's performance 
over at least one full market cycle, Smith's conservatism would 
ultimately benefit shareholders greatly.  In 2000, Smith had an 
annual return of +0.3%, compared to an annual loss of 13.9% for 
the average large-cap growth fund.  Smith's performance in 2000 
ranked in the top 7% of the category.  In 2001, he limited fund 
losses again relative to other growth stock managers, producing 
an annual loss of just 9.8%, compared to a loss of 22.3% by the 
average large-growth fund, per Morningstar.  That ranked in the 
category's top 5%.

In 2002 and so far this year, Smith has continued to limit fund 
losses relative to other growth managers.  The result is strong 
return, risk, and risk-adjusted return ratings from Morningstar.  
For the trailing 3-year and 5-year periods through Jan. 31, the 
T. Rowe Price Growth Stock Fund's ratings were as follows:

 Morningstar (3-Year) Ratings:
 Return Rating: High
 Risk Rating: Average
 Overall Rating: 5 Stars

 Morningstar (5-Year) Ratings:
 Return Rating: Above Average
 Risk Rating: Below Average
 Overall Rating: 5 Stars

The 5-year ratings are equivalent to the fund's overall ratings, 
so Smith has maintained this fund's superior risk-reward profile 
through a volatile cycle for growth stocks.  To give you a sense 
of what you might expect over longer time periods, note that the 
fund sports a trailing 10-year annual average total return as of 
January 31, 2003 of +9.6%.  That was 0.6% a year better than the 
S&P 500 index, and 3.0% a year more than the Russell 1000 Growth 
index.  It also was strong enough on a relative basis to rank in 
the top 7% of the Morningstar large-growth category.

According to the T. Rowe Price website, the fund has grown at an 
annual-equivalent rate of 10.8% since inception (April 11, 1950).  
So, over a 50-year period, this fund has produced "double-digit" 
percentage annual returns for investors.  That's getting the job 
done.  Contributing to the fund's superior long-term performance 
is also its low operating expenses - a la the Vanguard Group way.  
At 0.77%, the fund's annual expense ratio is around half that of 
the average large-cap growth fund, per Morningstar, giving it an 
appreciable cost advantage which translates into better relative 
return performance over time.  

Conclusion

There is much to like about Smith's conservative growth stock 
management style.  As time has proved, he will participate in 
growth rallies but won't overreach (overpay) for stocks.  The 
fund's price consciousness helps to keep it from sinking when 
growth stocks are out of favor.  Individuals looking to build 
wealth over a long period of time and who accept the risks of 
growth stock investing have a solid "core" equity option here.

For more information or to download a prospectus, go to the to 
the www.troweprice.com website.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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The Option Investor Newsletter                 Thursday 02-27-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

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


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

EMC $7.14 -0.37 (-0.90 for the week) We hung on to EMC, which had 
managed to hold above firm support from the middle of January - 
until today.  While the Nasdaq saw a nice rally, EMC was unable 
to hold its recent gains and it looks like the breakout has been 
put on hold for the moment.  The stock does still remain above 
its 200-dma, which is currently sitting at $6.75 and if it finds 
support above $7, the pullback can still be considered a higher 
low.  The trend we were trying to capture here, however, appears 
over and we will let it go for now.  Those traders who would like 
to give it some more time may want to set a stop loss just below 
the 200-dma.  We still have the stock sitting on our stock pick 
list, so we have not lost faith for the long term; however, as an 
option play, we are choosing to avoid further time decay, as well 
as shorter-term directional pain.


PUTS:
*****

None


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

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

CALLS              Mon    Tue    Wed   Thu  Week

AMGN     54.06   -1.16   0.71  -0.17  0.81  Trending
BDX      34.18   -0.75   0.39  -0.13  0.76  New, new high
DGX      53.35   -0.55   1.50   0.02 -0.45  new support
EMC       7.14   -0.05  -0.14   0.00 -0.37  Drop, trend break
MME      34.90   -0.97   1.21  -0.38  0.05  200-dma support
SLAB     26.17    0.12  -0.13  -0.71  0.37  aggressive entry
TECD     22.08   -0.66   0.30   0.06  0.22  Back over $22
ZMH      44.83   -0.29   1.23  -0.27  0.16  Held recent gain


PUTS

ATK      49.16   -1.96   1.34   0.25  0.01  Failed at $50
BBOX     39.87   -0.84  -0.25  -0.73  0.47  New, $40 resistance 
CB       47.47    0.04  -0.96  -1.51  1.72  Oversold bounce
UTX      58.64   -1.96  -0.09  -1.76  0.70  Resistance below $60
VZ       34.85   -0.20   0.14  -0.42 -0.13  Back under $35


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

ZMH $44.83 +0.16 (+0.97 for the week) ZMH has been flirting with 
the $45 level for the last three days, reaching a high of $45.55 
on Wednesday. While it hasn't forged much further ahead, it has 
managed to hold its recent gains and appears to be experiencing 
some slight consolidation after the move. A study released on 
Thursday proved the point we made in the original write-up on the 
play.  That point was that ZMH's new MINI procedure, which is a 
less invasive knee replacement procedure, will reduce the cost of 
a knee replacement by reducing hospital stays.  The study showed 
that hospital stays were reduced to an average of less than three 
days. Dr. Luke Vaughan, who conducted the study, said, " "What we 
found was that by adapting instruments and technique to a smaller 
incision, we could shorten the hospital stay, lower blood loss 
and speed the patient's rehabilitation, all while leaving the 
patient with a more cosmetically appealing scar."  The positives 
of the new procedure should lead to an increase in its use, which 
ZMH is betting on with a webcast of the procedure as a training 
tool for surgeons on March 22, 2003.  Since our last report, ZMH 
added another box on the PnF at $45 and new entries should look 
for a move above the relative high at $45.55.  We are raising our 
stop on the play to $41.75, just below the rising 21-dma and 
recent pullback low on Feb 13. 

---

SLAB $26.17 +0.37 (-0.41 for the week) The Semiconductor stocks 
have been a bit of an enigma the past few days.  Just when they 
looked as though they had exhausted themselves, with the SOX 
dropping back to 280 for the third time in as many days, we got a 
big bounce once again.  Both the Semiconductor Index (SOX) and 
SLAB held ground all morning, made a mid-day run and then went 
mostly sideways for the afternoon.  While it was not a terribly 
exciting day for the play, it did finish in the green and has 
held its recent gains with the move back over $26. Bulls will 
point out the possible formation of a bullish wedge pattern, but 
it will likely take a move back over $27 to bear that pattern 
out. There has been no change in the PnF chart, which remains 
pinned just under its bearish resistance line.  That line sits at 
$29 and the boost to $28.49 on February 20 achieved the last 
movement on that chart. The pullback to a higher low after the 
recent rally may be seen by aggressive bulls as an entry point, 
but they will also note the pattern of lower highs over the past 
few sessions.   More conservative traders may want to wait for a 
move back over $27, which would break that pattern and also lend 
credibility to the possibility of a bullish wedge.

---

TECD - $ 22.08 +0.22 (-0.24 for the week) Flip between 5-minute 
charts of today's action in the NASDAQ and TECD, and you'll see 
almost no similarities.  That's pretty rare.  While most tech 
stocks don't follow the Composite tick-for-tick, there definitely 
tends to be a correlation; especially when it comes to general 
direction.  TECD actually faded the NASDAQ this morning as it 
pulled back to an intraday low of $21.63.  Then, while the rest 
of the market was experienced a post-lunchtime hangover, Tech 
Data recovered its losses and moved back into positive territory.  
The index and stock finally traded in tandem during the final 
hour, when both posted some rapid gains.  This late-day 
bullishness was enough to push TECD above short-term resistance 
at $22.00.  The fact that shares closed over that level indicates 
that a test of the relative high ($22.23) could be forthcoming on 
Friday.  A move above that level might give aggressive traders a 
chance to target new entries.  Should TECD experience a pullback, 
we'd expect to see continued support near $21.60.

---

AMGN $54.06 +0.81 (-0.54) As the broad market continues to
vacillate in its current range, our AMGN play continues to behave
in a methodical and predictable manner.  Dips to the ascending
trendline (now at $52.40) continue to be bought, as the bulls
struggle to finally break convincingly above the $54.50 level.
Tuesday's drop to that trendline provided a great entry into the
play and the continued rebound in the stock has been dragging
the lagging Biotechnology index (BTK.X) along for the ride.
There's still no sign of the broad market breaking from its
current range, but AMGN is looking like it really wants to break
out, as On Balance Volume continues to climb, now at its highest
level since December of 2001.  Pressure to the upside is starting
to build, and it should result in a breakout over last week's
high of $54.70.  The conservative approach is still to buy on
the dips near support, now in the $52.50-53.00 area, supported
by the 20-dma ($52.71).  Aggressive traders can target new
entries on a breakout over $54.75, keeping in mind that there
is significant overhead resistance beginning at $55-56, which
will likely take some time to work through.  Raise stops to
$52.25.

---

DGX $53.35 -0.45 (+0.54) Yesterday's early push up to the $55
resistance level looked almost too good to be true, and by the
end of the day, it was clear that it was.  the late day fade in
shares of DGX dropped the stock back to give back all its
intraday gains and the weakness persisted on Thursday, with
the stock falling back to support near $53.  But all is not
grim, as yesterday's surge was enough to print another X on the
PnF chart, giving us that expected Buy signal, with a
corresponding bullish price objective of $63.  It won't be all
clear sailing from here though, as the pullback to near support
shows.  The first upside obstacle is clearly the $55 level and
momentum entries taken on a breakout over that level certainly
hold merit.  Above there, we have the PnF bearish resistance
line at $57, which will probably hold as resistance, at least
on the first test.  The best entries will still come from a
rebound at support in the $52-53 area.  Keep stops set at $50.50.

---

MME $34.90 +0.05 (+0.10) MME has been struggling the past few
days, continually knocking at resistance, but unable to break
through.  It is for precisely this reason that we initiated the
play with a trigger at $34.25.  Tuesday's high of $34.24 was as
close as we've gotten so far this week, but it is encouraging
that the stock is holding up remarkably well, finding support
above the 200-dma ($34.43) the past two days.  With On Balance
Volume continuing to rise, we have the evidence that pressure
is building for a breakout.  While aggressive traders may want
to try to jump the gun and buy the dips near the 200-dma, we're
sticking with our plan and waiting for that trade above $35.25
before recommending entry into the play.  An entry on that
breakout will certainly make sense, as the market has been
demonstrating the significance of that level.  More conservative
traders will want to wait for a subsequent pullback to support
after that breakout before entering the play.  


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

BDX - Becton Dickinson - $34.18 +0.76 (+0.10 for the week)

Company Summary: 
Becton Dickinson is a medical technology company that serves 
healthcare institutions, life science researchers, clinical 
laboratories, industry and the general public. BD manufactures 
and sells a broad range of medical supplies, devices, laboratory 
equipment and diagnostic products. For the fiscal year ended 
September 30, 2002, BD reported total revenues of $4.033 billion. 
(source: company release)

Why We Like It: 
Not many companies have shown immunity to market swings over the 
past couple of weeks.  While this call play slid with the rest of 
the market at the end of January, it appears to have righted the 
ship and is flirting with relative highs and possible breakout 
territory. The company is engaged in the business of medical 
supplies and devices, such as hypodermic needles, microbiology 
testing products and diagnostic systems.  While none of these get 
the blood boiling, it is a consistent business model, as health 
care remains in demand, even in a weak economy. Part of the 
reason for the recent surge may have to do with Merrill Lynch 
recently raising its estimates for several medical technology 
companies, including BDX.  The raised guidance was due to 
favorable currency exchange rates, which could lead to stronger 
revenue for companies in the group that derive significant sales 
from outside the U.S.  BD was one of these, deriving 47% of its 
sales from overseas.  Merrill's analyst raised his estimates for 
the BDX's second quarter sales by $12 million to $1.14 billion, 
which would represent 12% growth.

BDX's technicals also appear strong, on both the daily and point 
and figure charts. The stock had flat-lined around $30 for much 
of the past several months, until January 23, when it released 
its earnings.  The earnings release was followed by a Goldman 
Sachs upgrade and then a 10 million share stock buyback 
announcement.  It was enough to get BDX rolling and send it 
through the 200-dma.  It hen pulled back to that moving average 
where it bounced and again headed to new relative highs.  It has 
been testing the $34 level, reaching a high of $33.84 on 1/28 and 
$34.17 on 2/21.  That trade of $34 put the stock in a precarious 
position on the point and figure chart.  It is now right up 
against its bearish resistance line, which is drawn on a 45 
degree angle down from it previous high.  While there is no real 
horizontal resistance until the $38-$39 area, the bearish 
resistance line could pose a challenge. However, after 
consolidating for the better part of six months and then getting 
a bounce off its 200-dma, the stock is moving into territory it 
has not seen since last summer.  We like long positions on a move 
above $34.25.  Conservative traders may want to wait for a break 
of that bearish resistance, however, before jumping in.  The 
issue at that point, however, will be a lower risk reward, since 
we are targeting $39 to start. The last time the stock began to 
roll over, it bounced off the 21-dma, which now sits at $32.66 
and is rising. We'll allow for another test of that average and 
set our stop at $31.98.

BUY CALL MAR-30*BDX-CF OI=268 at $4.30 SL=2.15
BUY CALL MAR-35 BDX-CG OI=268 at $0.55 SL=0.00
BUY CALL APR-30*BDX-DF OI=N/A at $4.40 SL=2.20
BUY CALL MAR-35 BDX-DG OI=N/A at $0.90 SL=0.00

Average Daily Volume = 1.16 mil



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

ATK $49.16 +0.01 (+0.27) What's wrong with ATK, and why won't
it break down?  Does that question sound familiar?  Despite
the continued deterioration in the Defense index (DFI.X), ATK
has been stubbornly rising since Tuesday's rebound from the
$47.50 support level.  While the stock did manage to give back
all its intraday gains by the closing bell, it seems to be
finding support at the $49 level, which provided resistance
earlier in the week.  The strength certainly isn't coming from
the DFI index, which is still sitting very near its all-time
lows, even after today's anemic rebound.  A relative strength
chart of ATK vs. the DFI index provides a clue, as that chart
shows an inexorable bullish rise since the stock initially
dropped down to the $47.50 level on February 3rd.  That makes
it clear that this play is an aggressive approach to playing a
continued breakdown in the DFI index.  Failed rallies below
$51 (like we saw today) can be used for aggressive entries
into the play, but more conservative traders need to wait for
the decisive break below $47.50 before playing.  That breakdown
should be confirmed by the DFI index breaking below $439.  Our
stop remains at $51.50.

---

CB $47.47 +1.72 (-0.80) If the recent action in our CB play
is telling us anything, it is giving us a confirmation that
chasing breakdowns lower is not the way to trade this stock.
Yesterday's breakdown to new lows had all the earmarks of a move
that would continue, as it came on strong volume and the stock
ended right at the low of the day.  Then miraculously, CB gapped
up this morning and traded up throughout the day, ending at the
high of the day.  Such is the market environment with which we
are currently faced.  This pattern will likely continue, so the
only viable entry strategy is to fade the rallies, opening new
positions on rally failures near resistance.  And with today's
bullish move, CB could deliver that tomorrow morning.  The stock
is currently just below the descending trendline ($47.75) that
has been pressuring the stock since early February, and then
there is the 10-dma ($48.05), which has defined a ceiling for
the stock since late January.  A rollover near the $48 level
should be the optimum entry into the play, and we're keeping
our stop nice and tight at $48.50.  Use the action in the
Insurance index (IUX.X) to confirm weakness in CB before entry.
The IUX ended the day on Thursday just below its 20-dma, and
if it pushes through that level to the upside, the $232
resistance level will be in play.  A breakout over that level
will more than likely result in CB moving higher, so traders
will want to see a rollover in the IUX to confirm that
weakness in CB before playing.

---

MHK $49.32 +0.66 (+0.49) Volatile trade has been the name of
the game in our MHK play this week, as the stock has bounced
between support near $47 and resistance at $50.  For all the
bouncing around, the stock has accomplished very little since
we began coverage last Thursday.  But it appears to be wedging
up for a break in the near future, as the 2-month descending
trendline and the 2-week ascending trendline converge to a point
next Monday at $49.  Resistance looks firm near the $50 level
and entries on a failed rally near that level look good.  On
the downside, while the trendline break will occur with a drop
back under $48.50, the better entry is likely to materialize on
a break below the $48 support level that propped the stock up
earlier this week.  The PnF chart still looks exceedingly
bearish, with a price target of $34.  But to get moving in that
direction, we'll first need to take out the recent lows and
print $46, generating a fresh PnF Sell signal.  The 20-dma at
$50.23 should still stop any weak rally attempts, but we're
going to give the play a bit more room, leaving our stop in
place at $51.10.

---

VZ $34.85 -0.13 (-0.79) Is support going to break or not?  Since
the large drop late last week, VZ has twice tested the $34.50
level, where the bulls have successfully defended it.  But there
sure hasn't been much upside conviction following those rebounds,
as the intraday highs continue to drop, ever so slowly.  Every
day this week, the stock has tested resistance near $35.70, but
each attempt has been turned back and the past three days have
seen the stock closing just a bit lower each day.  VZ has the
look of a stock that wants to break down below that $34.25 level
(the low from last Thursday) and it is once again starting to
underperform the North American Telecoms index (XTC.X).  Failed
rallies below the $36 level should offer the best entry into the
play, although those looking for confirmation before playing
will want to wait for VZ to break below the $34.25 level first.
Should the XTC return to its pattern of weakness on Friday, that
would be a nice point of confirmation as well.  Lower stops to
$36.25, just above last Friday's intraday high.

---

UTX $58.64 +0.70  (-2.88 for the week)  This Dow component 
bounced strongly today, but still made up only a portion of 
Wednesday's big drop. It's action mirrored that of the Defense 
Index, which remains in a strong downtrend and can't seem to get 
much of a lift, even when the news regarding Iraq remains 
hawkish.  Today, however, the news that Iraq would go ahead and 
destroy the missiles the weapons inspectors had requested gave 
the entire market a boost and a rising tide swept along most 
boats. UTX established a clear PnF bullish support breakdown with 
Wednesday's box at $58 and the next visible support levels 
remains in the $56 area.  Below $56 it looks like a straight shot 
to $50. Today's rebound failed at $59.00, indicating new 
resistance squarely below $60 and conservative traders may want 
to lower their stop on the play to just above $60.  We are going 
to give it a little more room to fail at the 21-dma, which now 
sits at $62.01.


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

BBOX – Black Box Corporation $39.87 +0.47 (-1.89 this week)

Company Summary:
As a technical services company, Black Box Corp. designs, builds
and maintains network infrastructure systems.  The Black Box
team serves more than 150,000 clients in 132 countries,
providing technical services on the phone, on site and online.
Through its catalogs and Website, the company offers more than
90,000 infrastructure and networking products, and designs and
builds more than 650,000 custom products each year.

Why We Like It:
In this increasingly schizophrenic market, it seems the economy
and fundamentals are becoming less and less relevant.  Each new
development on the geopolitical front is the excuse of the day to
either buy stocks indiscriminately or else dump them wholesale.
But there is an important exception to that rule.  Technology
stocks that fail to impress investors are being sold off in a
very repeatable pattern.  One such example is BBOX.  After
beating earnings estimates in the middle of January, the stock
saw a severe selloff the next day.  The cause?  The company came
in a bit light on the revenue for the quarter.  Since its
pre-earnings level above $50, BBOX has plunged more than 20%
and the chart pattern is really starting to look bearish as the
once-supportive 200-dma ($41.51) is now acting as resistance,
most recently tested late last week.  When the stock broke down
in January, it left behind a long line of O's on the PnF chart,
producing a bearish price target of $24.  That's actually below
the stock's October low, and it isn't likely to reach that level
in the near term.  But there's a big gap in the $33-35 area that
is just begging to be filled in and that will be our target for
the play.  The early February low near $38.50 coincides nicely
with the top of the October 17th gap, so a breakdown below that
level can be used for momentum entries, keeping in mind the
potential for a bounce from the bottom of that gap just below
$38.  The better entry strategy appears to be to target a failed
rally below the 200-dma.  Looking at the hourly chart, the
resistance looks pretty firm in the $40.50-41.00 area.  Place
stops initially at $41.75, just above the 200-dma.

BUY PUT MAR-40*QBX-OH OI=255 at $1.95 SL=1.00
BUY PUT APR-40 QBX-PH OI= 20 at $2.90 SL=1.50

Average Daily Volume = 302 K



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


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**********

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The Option Investor Newsletter                 Thursday 02-27-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: Put - BBOX
Traders Corner: When The Going Gets Tough, Don’t Be A Dead Hero
Traders Corner: Putting it all together
Futures Corner: How to Project the Future
Options 101: Gold Reality vs. Media Myth

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

BBOX – Black Box Corporation $39.87 +0.47 (-1.89 this week)

Company Summary:
As a technical services company, Black Box Corp. designs, builds
and maintains network infrastructure systems.  The Black Box
team serves more than 150,000 clients in 132 countries,
providing technical services on the phone, on site and online.
Through its catalogs and Website, the company offers more than
90,000 infrastructure and networking products, and designs and
builds more than 650,000 custom products each year.

Why We Like It:
In this increasingly schizophrenic market, it seems the economy
and fundamentals are becoming less and less relevant.  Each new
development on the geopolitical front is the excuse of the day to
either buy stocks indiscriminately or else dump them wholesale.
But there is an important exception to that rule.  Technology
stocks that fail to impress investors are being sold off in a
very repeatable pattern.  One such example is BBOX.  After
beating earnings estimates in the middle of January, the stock
saw a severe selloff the next day.  The cause?  The company came
in a bit light on the revenue for the quarter.  Since its
pre-earnings level above $50, BBOX has plunged more than 20%
and the chart pattern is really starting to look bearish as the
once-supportive 200-dma ($41.51) is now acting as resistance,
most recently tested late last week.  When the stock broke down
in January, it left behind a long line of O's on the PnF chart,
producing a bearish price target of $24.  That's actually below
the stock's October low, and it isn't likely to reach that level
in the near term.  But there's a big gap in the $33-35 area that
is just begging to be filled in and that will be our target for
the play.  The early February low near $38.50 coincides nicely
with the top of the October 17th gap, so a breakdown below that
level can be used for momentum entries, keeping in mind the
potential for a bounce from the bottom of that gap just below
$38.  The better entry strategy appears to be to target a failed
rally below the 200-dma.  Looking at the hourly chart, the
resistance looks pretty firm in the $40.50-41.00 area.  Place
stops initially at $41.75, just above the 200-dma.

BUY PUT MAR-40*QBX-OH OI=255 at $1.95 SL=1.00
BUY PUT APR-40 QBX-PH OI= 20 at $2.90 SL=1.50

Average Daily Volume = 302 K



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

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

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


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

When The Going Gets Tough, Don’t Be A Dead Hero
By Mike Parnos, Investing With Attitude

I’m a devout coward and I’m proud of it.  It’s my religion.  I’ve 
been in countless battles – gruesome, devastating, life-
threatening battles -- and I’ve lived to tell about it.  There 
are those who think you can’t get into too much trouble sitting 
on a cushy sofa.  They have no idea.

A few steps to the left of the sofa sits the precious white box 
that holds life’s nourishments.  Only a few steps to the right is 
our battlefield – flickering with charts, indicators, streaming 
quotes, bid and ask prices.  Front and center is the 36-inch 
diagonal oasis that helps us cope and brings a measure of joy 
into our lives – despite the incessant interruptions call 
commercials.

At the Couch Potato Trading Institute, we teach you how to 
navigate the minefields – and there are many.  We help you tiptoe 
through the tulips so you can come out smelling like a rose (or 
the odor of your choice).  There’s an interesting invention is 
available to help you navigate through the oasis.  It’s called a 
TV Guide.  Don’t you just love high tech?
____________________________________________________________

Mining For Gold
Today, we’re encountering one of those mines.  XAU, the PHLX Gold 
& Silver Index is testing a support level.  Some CPTI traders 
strayed from the pack.  They established a March Iron Condor with 
a range of $70 - $85.  The March $70 short put is being 
threatened.  

Cries of “Help!” can be heard across the country.

First, let me reiterate that traders should not venture into a 
trade unless they have an escape plan.

Your position is:  Short 10 March $70 puts and long 10 March $65 
puts.  
First, we’re going to unwind the position.  We’ll use Thursday’s 
closing prices.  We buy back the March $70 put for $3.20 and sell 
the March $65 puts for $1.10 for a debit of $2.10.

Because XAU is only traded on the PHLX (Philadelphia Exchange), 
we should be able to shave a minimum of $.20 from the bid/ask 
spreads – leaving us with a debit of about $1.90.

Let’s Roll, Baby!
So, how are we going to make up that $2.10?
Let’s look at the April option chain.  We could sell the April 
$65 put to take in $2.15 and buy the April $60 put for $1.15 for 
a credit of $1.00.  As above, we should be able to shave $.20 
from the bid/ask spreads to arrive at a total of a credit of 
$1.20.

We’ve taken in $1.20, but we spent $1.90 to close the first 
spread.  How are we going to make up the difference?  By 
increasing the number of put spreads.  We would need to establish 
a 16-contract position.

What did we accomplish?  And At What Price?
Basically, we bought ourselves a month and given ourselves an 
additional five point cushion.  The price we’ve paid is that our 
exposure has increased by an extra six contracts.  Plus, there is 
additional maintenance requirement of about $3,000.

This is only one of a number of ways to deal with Iron Condors 
gone bad.  Go back in the OI archives and read my column dated 
February 9, 2003 to review some other methods.
_____________________________________________________________

All Aboard
Since there is so much interest in Iron Condors, let’s continue 
on that track.  But remember, you may be on the right track, but 
if you don’t keep moving you’ll still get run over.  There’ll 
always be another train coming.
_____________________________________________________________

Hi Mike,
I am very interested in doing Iron Condors. Do you have a rule of 
thumb about how big a credit you want to receive for an Iron 
Condor? I am using $2.00 (on $5 wings) as the minimum, but it 
makes it harder to find trades. I like the 1/1.5 reward/risk 
ratio though. 

Also, I'm trying to keep the one standard deviation move range in 
between the two long strikes. Do you think that is sufficient? Do 
you have any other ideas about how to make these trades 
consistently profitable?

When primarily selling premium I have always been under the 
impression that the expiration month should be as close as 
possible. For example, right now I would only be looking for Iron 
Condors with a March expiration. Once there is less than two 
weeks left I would switch to the next expiration month.

Response:
I don't necessarily have a rule of them.  I like 1/1.5 
risk/reward ratios too, but I’d also like to be 30 again and 
spend two weeks with behind closed doors with Carmen Electra and 
a soft-serve machine.  If I recover from those two weeks, I’ll 
realize that I was dreaming and that a 1/1.5 risk/reward ratio 
ain’t gonna’ happen.  I believe that if you're expecting to 
receive $2, you will be limited to trades with very narrow range 
for the stock/index to bounce around in.  That trade has too much 
risk and would require too much babysitting and adjustment.

Regarding the “one month” exposure, I agree – if there is 
sufficient premium to make it worthwhile.  If there is not enough 
premium to be had using a range that would allow for some 
volatility, you can consider expanding the range and going out 
another month.  Yes, there is more time for things to go wrong, 
but the additional range can, to a degree, balance out the risk.

Consider an Iron Condor trade for BBH -- going out to April.  The 
range is $75 to $95 -- 20 points.  The credit was about $1.20.  
It seems safe and safety my first priority. Also consider a 
similar IBM 70 - 90 April condor.  Roughly same credit.  Same 
safety priority.
____________________________________________________________

CPTI Portfolio Update
Position #1 – OEX Bull Put Spread – Trading at $423.50.
Believing the market is not likely to go down to retest its July 
and October lows near 400, we sold 10 contracts of the OEX March 
400 puts and bought 10 contracts of the OEX March 390 puts for a 
credit of $1,400.

If war breaks out, it might be a quickie.  The market may spike 
up.  How high?  Who knows?  That’s why we didn’t put a bear call 
spread on top to create an Iron Condor.  We may put on the bear 
call spread at a later date.
______________________________________________________________

Position #2 – XAU Iron Condor – Trading at $70.28..
An Iron Condor is a credit position consisting of both a bull put 
spread and a bear call spread. The collected premium will come 
into your account the very next business day.  The objective is 
for the underlying, at expiration, to finish anywhere within the 
spread. 

So we created an Iron Condor with a 15-point range $65 to $80 for 
March.  We were able to place spread orders and increase our 
credit by $.30 to a total of $1,400 for our 10-contract position.
_________________________________________________________________  

Position #3 -- OIH -- Diagonal Calendar Spread – Trading at 
$57.56
It seems that there’s about $8-9 of uncertainty built into the 
price of a barrel of oil.  When, and if, the war is resolved, the 
price of oil should work its way down, along with the price of 
oil stocks.

We bought 10 contracts of the July OIH $55 puts and sold 10 
contracts of the March OIH $50 put at a debit of $3.85.  We have 
five months to sell short-term puts and reduce our cost basis 
while we’re waiting for oil to fall.
______________________________________________________________  

Position #4 -- QQQ ITM Strangle – Currently trading at $24.77.
This is a long-term position we created two months ago to 
generate a monthly cash flow.  We own the January 2005 $21 LEAPS 
call and the January 2005 $29 LEAPS puts.  We sold 10 contracts 
of the QQQ April $28 calls and 10 contracts of the QQQ April $22 
puts for a credit of $950. We moved our short sells in by one 
point because a lot of premium has disappeared from the QQQs in 
the last two months.  Never fear, it will be back.
______________________________________________________________

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


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

Putting it all together
By Leigh Stevens
lstevens@OptionInvestor.com 

To profitably employ technical analysis in the real world of 
market action given the emotional or psychological pressures that 
develop in the financial markets takes time and considerable 
perseverance.  There are many mistakes along the way to 
profitable and consistent results.  You may make a trading 
decision based on an apparent double bottom or a base a trade on 
the apparent formation of a bullish flag consolidation, only to 
see the double bottom give way and the flag pattern fall apart. 

I get asked a lot what indicators I look at most and what weight 
should be given to the different technical factors.  An example 
came up recently. Someone asked me how my assessment that a 
recent consolidation pattern (after a first upswing) was 
suggesting another rally to come, stacked up against an apparent 
hourly oscillator/price divergence - there was also an apparent 
double top on another index. The question is about the relative 
priority of an apparent "bull flag" pattern versus a 
price/indicator divergence or one chart pattern versus another.  

The answer is that divergences "trump" apparent consolidations, 
as do double tops or bottoms. A double top on intraday charts is 
a more bearish sign than an apparent consolidation on daily 
charts. This is why its important to look at different time 
frames in assessing trend direction – some technical factor will 
become clear on the hourly or weekly chart, not apparent on the 
daily.  Since, as always, in technical analysis, (chart) pictures 
are worth thousands of words, here are some charts of the recent 
price action I describe.  



 

So, what was I missing when I relied overly much on this picture 
above, up to the point where the momentum shifted back to the 
downside?  Namely, this – 



   

Then there was another divergence of sorts that shaped up in SPX 
as one chart pattern (hourly) was suggesting a top and another 
pattern (daily) was suggesting there might be upside follow 
through – 



 

Taking a closer up view (hourly) resulted in the tip off that 
there was a lid on the rally off the lower envelope band – 



  

Now, you could say that that any bullish expectations for this 
market were suspect given the political situation with a possible 
war looming.  However, I find that just on a technical basis 
there is almost ALWAYS also a technical tip off suggesting 
reversals.  Only, what happens is that your attention gets 
focused just on a bullish or bearish interpretation or one set of 
factors.  My trading mentor was always looking, looking, looking 
at all chart and indicator aspects.  

I long ago devised a checklist of all that should be considered 
in forming a technical outlook and if I ignore going through it, 
even mentally, I tend to miss clues that would have gotten me in 
trades quicker. HERE IS ONE SUCH CHECKLIST – followed by a recap 
of ALL my Trader's Corner articles by alphabetical listing of 
topics.  

I call this my big-10 list and these are NOT listed in the order 
of their PRIORIY: 

1. Background information – major averages, bellwethers and the 
market sector. For indexes, look to see if the indexes are 
"confirming" each other; e.g., is a rally a "solitary walk of the 
Dow", or is SPX also in synch. On individual stocks, it can be 
important to look at the technical picture for the sector chart.  
Checking bellwether indexes or stocks may be of use here.  If a 
commodities market is involved, bellwethers might include the key 
futures market in that complex; e.g., for heating oil, the crude 
oil chart.  Here, it would also be appropriate to focus on any 
obvious wave pattern.  

2. Look at all timeframes – hourly (or other intraday), daily, 
weekly, monthly: Study longer-term charts, volume and indicator 
patterns before making any decisions based on the daily charts.  
Look at the daily chart and indicators, if trading on an intraday 
basis and vice versa.

3. TREND considerations – whether there is a trending or 
consolidation pattern:  Basically, this is always having an eye 
to whether the market is trending, up or down – or is in a 
sideways consolidation or trading range.  If in a trading range, 
is it well-defined, wide-ranging or relatively narrow and how 
long has it gone on – for example, is it's duration as long as 
the extent of the prior trend in terms of weeks and months.  When 
a consolidation has gone on as long or longer than a prior price 
swing, be alert for a trend change.

4. Overbought/oversold - long and short-term:  As a further 
technical backdrop, it is recommended to be aware from day to day 
or week to week, of the relative position of price momentum 
oscillators like RSI and MACD on an hourly, daily, and weekly 
basis.  Be aware if the index or stock is approaching an 
overbought or oversold extreme, whether momentum up or down has 
been strong, or has slowed significantly.  If an extreme reading 
is at hand or if momentum measured by these indicators has 
stalled, then it's important to follow the price and volume 
patterns closely for signs of a reversal.  A sideways trend may 
be an event that bears watching too in terms of protecting 
existing profits if prices are near any expected objectives – it 
may be time to take profits or raise protective stops. 

5. Predictive patterns -- price and volume:  The determination of 
what patterns, if any, are developing such as rectangles, flags, 
triangles, double bottoms, double tops, etc. with a possible 
measurement of an associated "minimum" upside objectives.   
Volume bars (on-balance volume also) is something to look at, 
along with price, to determine if the volume pattern is 
"confirming" price action or not.

6. Trendlines and price channels: Constructing any relevant 
trendlines and price channels is very basic to effective 
technical analysis and a study of the trend – even if you merely 
use a straight edge to make more of a mental check of where 
trendlines are forming or get pierced.  While not an everyday 
occurrence, a return to a previously broken trendline often 
offers a second opportunity for a trade entry.

7. Retracement calculations:  This is making ongoing calculations 
for any return or rebound of 38, 50 or 62% of a prior price swing 
is essential – a strong move that retraces more than 62% on up to 
2/3rds or 66%, often suggests that momentum will carry back to 
the prior high or low. 

8. Moving averages:  Keep track of some of the basic or key 
moving averages such as 21, 50 and 200-days for stocks – others 
are useful too and this depends on how you trade, such as how 
short-term, etc. 

9. Oscillators: Another frequent check is of the relative 
position of at least one of the popular oscillator-type 
indicators like RSI, (slow) stochastics or MACD on an hourly, 
daily and weekly basis – even on a monthly chart to remind 
yourself of the MAJOR trend.  I tend to prefer RSI with a length 
calculation of 14 and sometimes 21 as well.  On weekly charts I 
keep tabs on the MACD usually after the end of the trading week.  
On hourly charts I like to trade when BOTH the 5 and 21 period 
Stochastics are at extremes.

10. Last, but NOT least as you see from the start of this 
discussion are Divergences. One of the great values of the 
oscillators, and volume indicators as well, is when they diverge 
from price action such as failing to accompany prices to a new 
relative high. This type of divergence is much more crucial when 
the market has been trending for a long period and is, or has for 
some time previously, registering an extreme; e.g., below 25/30 
and above 70/75 on a 14 or 26-day RSI.  

Such divergences alert you to a possible reversal – this 
situation should then cause you to check where key trendlines or 
moving averages would be violated.  "Surprise" often is the enemy 
of quick market action as there is initial disbelief in a 
reversal – preparedness alone is important.  You need never be 
surprised when a market reverses in such a situation – the 
reasons "why" or the "news" explaining it, tend to be lagging 
events.  Even when there is a fundamental "surprise", such as an 
unexpected earnings shortfall, the reaction to this news is 
usually far more severe when there is an overbought situation and 
conversely, less so, when the market is oversold.  

For a quick reference list of Leigh's prior articles, 
please visit our website.

Click here for tonight's Trader's Corner by Leigh
http://www.OptionInvestor.com/traderscorner/tc_022703_2.asp


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

How to Project the Future
By John Seckinger
jseckinger@OptionInvestor.com

Projection Analysis can be very helpful when a market appears to 
be in a range and suddenly breaks out.  

A few disclaimers:  When using the projection tool, I would 
prefer to have a sizable range for the first five-minutes of 
trading in the Dow (50 points or greater).  Moreover, there has 
to be that "feeling" of a possible range in the equity markets.  
This is done by solidly rejecting levels just outside this 
defined range of this first five-minute period.  Example:  The 
range in the Dow during the first five-minutes is from 7800 to 
7875, and then we get a spike down to 7775 and then right back 
into the range from 7800 to 7875.  Of course, it would be even 
better if the daily pivot is inside this possible range bound 
area.  Illustrations will follow to make this point clearer. 

Getting back to the Hierarchical Elements within my methodology; 
I first calculate daily, weekly, and monthly pivots.  I then do a 
longer-term retracement studies based off obvious 'waves' 
(October low to December high) and compare what I have found.  
These give me my solid levels to work with; however, using 
projection analysis under certain situations can definitely help 
with execution and give a trader an idea where prices are going.  
Thursday was one of those days, since upside projections were not 
as clear as I would have liked. 

Looking at a chart of the Dow below, the first five-minutes 
encompassed the pivot of 7842.23 in the Dow between the 7807 to 
7854 area; however, notice how price action stayed within this 
first period range for the next twenty minutes.  In the monitor, 
I first thought bullish and then 'range bound' as weakness took 
over shortly after the opening bell.  It was then AFTER the bear 
trap under 7800 when I began thinking "Ok, still range bound and 
not expecting a breakout."  Of course, only 15-minutes had passed 
and the Dow broke-out higher from this possible range bound range 
from 7807 to 7789.  Objective?  Well, we are now above the daily 
pivot.  Daily R1 comes in at 7890, so that was my first thought.  
That was also weekly S1, so it made sense.  However, it is this 
neat projection tool device that actually can get a little bit 
better execution.

I anchor the bottom of the projection tool to 7789, and then drag 
the top to the 7854 area and top of the morning's range.  It 
simply DOUBLES the range and gives a projection of 7918 (seen in 
chart at right hand side).  It really is this simple, but also 
very effective.  

Contract         S2         S1       Pivot        R1         R2    

Dow Jones      7710.31    7758.65   7842.23    7890.57    7974.15

Chart of Dow Jones, 5-minute


 

Using this projection tool on the ES contract, it was also 
interesting to see the daily pivot of 832.25 fall within both the 
"cash" 9:30 open and within the projected range.  As the example 
above has shown, simply double the range and get a projected 
high of 841.  Remember, this tool is used to get BETTER 
execution, not worse.  With that said, since R1 is at 838.75 and 
the projected high falls at 841; look for an objective of 841 
instead.  On the other hand, if the projected high was 841 and 
the daily R1 was seen at 842, I would then use R1 instead.  

Chart of ES03H, 5-minute


 

If a trader is flat, does it make sense to SELL the contract at 
the projected high.  I believe that it does, since any movement 
outside of this new range up to 841 is a move with much greater 
magnitude than expected.  Therefore, probabilities in selling the 
contract and it being profitable definitely is high.  The 
intra-day high was less than two-points above this area; 
therefore, shorts didn't have to sweat it out that much.  

What about an objective to the downside?  A scalper could use the 
838.75 area, while a swing trader might look for a test of the 
833.75 area and the top of the projected range.  The ES did fall 
as low as 830.50, and I am sure a trader will ask, "why not use 
the pivot at 832.50?"  The breakout was at 833.75, and getting 
greedy might work once, but it will be costly in the long run.  I 
know from experience.   

As a good-rule-of thumb, look to the Dow first when trying to 
understand if the market "feels" range bound.  It takes some 
experience, but I always try to think "What are the other traders 
thinking?"  If I am looking for resistance at the top of the 
first five-minutes, I am sure that a lot of other traders are as 
well.  This means a good short squeeze could be in order.  What 
if a trader did sell the top of the first five-minutes when in 
fact the market rallied strongly?  Well, where can we define 
risk?  The pivot is below at 832.75 (versus breakout of 833.75), 
and reward is either to 832.75 or 826.25 area; therefore, what I 
would do is look to sell AFTER the market fell under the pivot 
once more.  If long and looking for the breakout, a trader can 
put a stop just below the pivot.  

With that said, it really doesn't make sense to sell at 833.75 
because risk to the upside it really undefined.  First establish 
levels, then define risk/reward, then execute properly, and then 
move trailing stops to lock in gains.  If short at 833.75, I 
would be at a loss as to where to put a stop above.  Note:  The 
weekly S1 level was at 833.50, putting the 833.75 level just 
above.  Selling just above weekly S1 would be hard to do as well.  
The market obviously could sell-off dramatically, but I am trying 
to increase probability of a profitable trade.  

Ask Away,

John


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

Gold Reality vs. Media Myth
Buzz Lynn
buzz@OptionInvestor.com

I live for the day that investors blow up their television in 
unison having become disgusted with the idiocies uttered in the 
name of journalism.  I will also probably die with that dream 
unfulfilled.  

Be that as it may, I'm on a rant today about the completely false 
premise that Iraqi war jitters are the cause of gold's rise in 
recent months.  Makes me want to revert back to the days when I'd 
"mute" the volume on CNBC, as I watched parades of analysts talk 
about compelling values, great buys, market bottoms, and last 
chances to buy stocks while the train was leaving the station - 
for the last three years, and so far, this year too.  

Come to think of it, the train never left the station and 
thankfully, I still have a "mute" button!  Honestly, the War with 
Iraq has been the explanation de jour for the market's movements 
either up or down, and I say that for both equities AND gold.  
There are no shortage of talking heads noting that, "Fears of war 
sent the market tumbling today", or "Iraq is deciding whether it 
will dismantle its missiles this weekend, which helped the markets 
close sharply up today", or some other such flimsy explanation 
that begins with, "In the war on terrorism today, . . . "

Talking Heads, please forgive me for this public service 
announcement, however, this is a bear market!  Equity values 
decline in general.  Bear market rallies always suck in bulls who 
still want to believe in the magic of Free Money From Greenspan.  
Undesirable outcomes, often unforeseen, happen.  It is the nature 
of the bear.  

It is also the nature of humans everywhere to find, right or 
wrong, an answer to every question we have.  Since we are 
collectively asking, "Why did the market move today?", those "in 
the know" (who really know no more than any of us in the trenches) 
are searching for a sound bite answer rather than devoting a 
segment to education.  Today, we dispense with the sound bites, 
and as Jethro Bodine of Beverly Hillbilly's fame would say, "Let's 
commence to educatin'!"

Please note that I am not infallible, nor am I a guru.  The 
trouble is that gurus are wrong eventually, and I will be wrong on 
many occasions, as I have been in the past.  I hope I never attain 
the status of guru.  For I would know then that my reputation and 
integrity will soon be destroyed.  And that is too valuable to 
risk.  But back to Professor Bodine. . .

Myth

Gold is also presumed to be rising and falling on investors' moods 
regarding an Iraqi war and the War on Terror.  When uncertainty is 
thought to eventually lead to conflict, common wisdom is that 
'fraidy cats and the delusionally paranoid will buy gold, and that 
that must be the reason we've seen the price rise in recent 
months.  Similarly, common wisdom also states that when war 
jitters ease, the paranoid leave their mountain huts and revert 
back to a diet of speculative stocks and 110% equity financing to 
assimilate with society.  Gold is for kooks.

What we often hear in the press are references to "barbarous 
relic", thing of the past, gold fever, currency of the wacked-out 
hermits, etc.  The presumption is that when the war is won quickly 
and easily, gold will be recognized as a sideshow, uncertainty 
will end, and gold will sell off.  No longer in need of protection 
from uncertainty, we are cautioned now about the probable sell-off 
once the nerves of a nation on the brink are calmed, and 
terrorists are brought to justice.  

In short, the thinking is that gold prices are in an Iraqi war/War 
on Terror bull market, and the bull will die when the war is over.  
I disagree with both premises.  In fact, I would postulate, as 
have many smarter than me, that gold is in the early stages of a 
secular bull market and that the prices will continue to rise.

Reality

How can I say that when, "All the experts are saying otherwise"?  
The question contains part of the answer.  Experts are often 
wrong.  See "guru" above.  But contrarianism is a small, empirical 
phenomenon compared to the mechanical reasons supporting my 
theory.  Let me first start with the timetable.

$GOLD weekly (Stockcharts.com)


 

Notice that gold bottomed in early 2001 - eight months before the 
9/11 attack and certainly before war with Iraq became a blip on 
America's and the world's collective psyche.  Clearly gold's rise 
has little to do with war jitters in Iraq.  Gold was rising before 
most knew how to spell Iraq.  That alone should tell us that the 
mainstream media has it all wrong.  But for the skeptics, let us 
continue.

Second  - and all else stems from this - The Fed, who can print 
money at "virtually zero cost" per Fed Governor Bernanke, has 
turned into a giant printing press, both paper and electronic, 
which is flooding the market with the equivalent of Monopoly 
money.  The Dollar (an every other currency in the world, to be 
fair) is only valuable because the specific country's central 
bankers say it is valuable.  The only currency that can ever hold 
its value through the ages is gold.  It will not take long before 
foreigners and those at home realize that a decrease in scarcity 
of currency, aka increase in supply, is a recipe for inflation and 
they demand gold in place of a currency with inflated supply.  
"Inflate or die", has to be the slogan of the century tacitly 
implied by the Fed.  Deflation is worse.

Third (we can hit these in nearly bullet point form from here on 
out, as they flow from #2 above), there is less supply of gold 
produced every year than is demanded.  Demand outstrips supply.

Fourth, the U.S. trade deficit is explosive, which puts tremendous 
pressure on the Dollar to devalue.  We have counted on an infusion 
of over $2 bln per day under the notion of keeping the Dollar 
strong.  Just how long will foreigners want to possess Dollars as 
they devalue?  Europe's Euro value has already risen 8% against 
the Dollar this year.

Fifth, this brings up the idea of deflating currencies.  With 
other nations also teetering on recession, the only way to keep 
their citizens employed is to make their goods cheaper to produce 
than the next country's.  That is accomplished by devaluation in 
order to undercut your neighboring country's ability to sell 
cheaper products compared to yours.

Remember Felix Zulauf from the January 30th Options 101?  "Other 
central banks will at some point then try to support the dollar, 
because if it declines too much, it hurts their exports. They will 
be forced to adopt the same policy as the U.S. central bank, and 
you will have the whole world creating more fiat currencies.  That's 
when gold will really run."

Zulauf goes on:  "How far? In 2000, the ratio of an ounce of gold 
compared to the Dow stocks was 45 to 1. It took 45 ounces of gold 
to buy the Dow. Now, the ratio is down to 25 to 1."

Sixth, which reminds me, China's Yuan is tied to the Dollar, which 
makes Chinese goods cheaper to produce as the Dollar declines in 
value.  Few will find it attractive to purchase goods other than 
those from China.  I might add here too that China bought over 1 
mln ounces of gold in December.  Are they doing this for fun?  Not 
on your life.  They will buy on the sly.  Remember, China set up a 
gold exchange less than 18 months ago and is encouraging its 
citizens to buy it.  

As a point of historical fact, countries with gold as the standard 
of currency have become great powers in the world.  Those who 
abandon it have eventually faded from glory.  Not that I enjoy the 
thought, but I'm thinking that our granddaughters may be doing eau 
paire work in China 30-50 years from now.  That ought to get some 
hate mail!

Seventh, security spending will likely produce huge deficits at 
the Federal level.

Last, a mortgage debt bubble promises to slow the U. S. economy as 
homeowners realize what they have done (borrow up to their 
eyeballs) and begin to repay loans, thus foregoing the ravenous 
consumer spending that has fueled the economy for years.

My point is that all this goes un-noticed or at least unreported 
in the dominant financial media.  Gold's ascent isn't just about a 
war with Iraq, contrary to popular belief.  It's an investor's 
reckoning that the Fed printing press will render the Dollar worth 
much less than it is now, and/or that China will export deflation 
of goods to every producing nation on Earth.  Either way, gold 
wins - with or without war anywhere.

Frankly, this was not a pleasant piece to write today.  But all of 
the above reminded me why I felt compelled to get interested 
preserving wealth in the first place.  And the Fed is certainly 
not there to HELP us preserve it.

That said, I increased my exposure to gold today through the 
purchase of more CEF, as all the technical and fundamental 
information available suggests it's a good trade while gold enjoys 
the early stages of a bull market.  I am pleased that few talking 
heads believe that, which tells me gold has yet to be adopted as a 
mainstream investment.  I'll know it's time to sell when CNBC is 
high-fiving the headiness of the whole thing and gold becomes the 
social chatter at cocktail parties in much the same fashion as Dow 
11,000 in February, 2000 was.

Between now and the time gold brings grins to the majority of 
everyday investors, I will sleep well knowing my financial ark is 
watertight and survivable if the economic storm worsens, and 
others too begin to realize the importance of a financial ark.

Until next time, make a great weekend for yourselves!

Buzz


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