Option Investor

Daily Newsletter, Monday, 03/17/2003

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The Option Investor Newsletter                   Monday 03-17-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Diplomacy is Dead
Futures Wrap: More Confirmation
Index Trader Wrap: 
Weekly Fund Wrap: Mixed Results for Stocks and Funds

Updated on the site tonight:
Swing Trader Game Plan: Clearing the Decks

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
03-17-2003                   High    Low     Volume Advance/Decl
DJIA     8141.92 +  282.21  8145.84 7779.73   2003 mln  1852/143
NASDAQ   1392.27 +  51.94  1392.41  1326.28   1834 mln  1665/151
S&P 100   438.64 +  14.57   438.64  420.12    totals    3517/294
S&P 500   862.79 +  29.52   862.79  827.17
RUS 2000  365.40 +  11.01   365.40  352.38
DJ TRANS 2094.06 +  66.97   2096.84 2008.03
VIX        36.46 +   0.13    37.75   36.39
VIXN       46.67 +   0.87    48.65   46.63
Put/Call Ratio 0.70

Diplomacy is Dead
by Steven Price

Finally a decision.  That's what the markets seemed to be saying 
today as the U.S., Great Britain and Spain announced they would 
bypass a vote on a new U.N. resolution and deal with disarming 
Iraq themselves. The announcement came from those countries' 
ambassadors this morning, which cited France's stated intention 
to veto as the reason for not calling a vote.  Just asking, did 
France give the U.S. exactly what it needed - a reason not to 
count votes and a reason not to blame Russia?  President Bush 
will be addressing the nation tonight and according to Colin 
Powell, will be issuing a final ultimatum to Saddam Hussein. The 
U.S. has already suggested that UN weapons inspectors leave the 
country and that the time for inspections is over. Short of 
Saddam lining up his mobile weapons factories and handing them 
over to the U.S., it seems unlikely that the current situation 
will end in anything but an invasion. The U.N. is pulling its 
personnel out of Iraq and the Israeli army has instructed its 
citizens to attain the insulation and other materials they may 
need for sealed spaces in advance of a possible attack by Iraq.  
We also got news late in the day that Turkey would now allow U.S. 
troops.  Apparently they decided to take the money that was 
offered since there was going to be an invasion either way. The 
trick for traders is deciding just how the markets will react. 

There has been talk of a possible war rally, as an invasion would 
finally start the clock ticking toward an end to the uncertainty 
surrounding war. The futures certainly did not indicate that 
would be the case overnight. They started out down severely, 
following similar action in Europe, after last night's 
announcement that the U.S. was giving the UN until today to get 
on board. However, once the UN Ambassadors stepped to the mike 
and said there would be no vote due to France's stated intention 
to veto, the markets caught fire, reversing from morning lows and 
rallying strongly.  The Dow saw a turnaround of 300+ points 
intraday following the announcement.  Think we're just a little 
sensitive to each war-related announcement? Overall the market 
seems to be pricing in a short war.  It just took someone to roll 
the dice and start the game to get the clock ticking. 

The theory on the recent weakness in the stock market has been 
traced back to spending by businesses and their reluctance to 
make any plans ahead of a possible war. Even Alan Greenspan said 
it was difficult to tell just what type of economy we were 
looking at until after geo-political concerns had worked 
themselves out.  Businesses are supposedly holding off on 
spending and hiring until after there is some resolution, either 
through war or otherwise. The high cost of fuel has not helped 
either. However, with the start of war apparently imminent, since 
Saddam Hussein's only response so far has been to threaten 
worldwide terrorism, we should think about what we are seeing in 
the economy, since that's all that we will be left with after the 

Granted, all of the negativity can be traced back to a reluctance 
to spend and bulls are hoping for a quick loosening of the purse 
strings after the uncertainty ends. However, I would be hesitant 
to assume that all of our economic problems are based on fuel 
costs or war hesitations.  The economy was already starting to 
crack, heading into recession last year, before things in Iraq 
started to heat up. The drop in technology spending fueled a 
stock sell-off that experienced some bounces along the way, but 
in reality was largely dependent on disappointing earnings and 
low future outlooks given by both techs and traditional 
companies.  The world economy continues to suffer along with the 
U.S. and it will take more than the completion of a war in Iraq 
to turn things around.  Will a drop in fuel costs after a war 
help things?  Most definitely.  But will it help things to the 
point of a complete economic turnaround?  That seems less likely. 

I can certainly point out numerous reasons to short the current 
rally. The most apparent is the fact that once we have the war 
behind us, we will be faced with the same negativity that ended 
the January rally.  Specifically, the 2003 outlooks by companies 
such as IBM and Microsoft that included the possibility of geo-
political problems eventually ending and still saw a 
disappointing year. Once the beginning of the year fund 
contributions were out of the way, that's exactly what we got - 
bottom line earnings reports and disappointing future guidance. 

However, any casual market observer will note the massive 
reversal we have seen over the past few days and certainly can 
argue that we have seen a reversal in trend off the bottom.  We 
achieved head and shoulders bearish objectives in the Dow, SPX 
and OEX and have been moving higher ever since.  Bears that have 
mad an attempt at shorting the rallies have had no success and 
although we can point out plenty of reasons to go short, so far 
we have not seen signs of weakness.  Trade what you see, right?  
It is certainly hard to do in the current environment and we are 
steaming ahead right into serious resistance levels. The Dow has 
now bounced almost 700 points in less than a week. That certainly 
seems unsustainable and we are likely due for a pullback at some 
point.  But if this constitutes a trend reversal, then should we 
be looking to buy the pullback?  In an uncertain economic 
environment, there are undoubtedly plenty of bears looking to 
short any sign of weakness and today's stall as we got into a 
previous level of resistance from late January and late February 
would seems to indicate we have run into a significant barrier.  
Especially considering the rally came on a news event.  
Unfortunately, we really don't know how much of the recent 
decline came on geo-political concerns and how much was based on 
the poor outlooks from individual companies.  Therefore, it is 
difficult to predict just how far we may bounce when the pressure 
of uncertainty is released. 

For those traders who are looking for a similar recent pattern in 
the charts, look no further back than October. At that time, the 
bullish percents were similarly extended to the downside.  The 
Dow bullish percent was down at 8%, similar to the current 
reading of 10% heading into today's trading. This reflects the 
percentage of stocks in the index giving point and figure buy 
signals. The big rally, with today's extension certainly looks 
like a similar pop. In October, we gained 15% in the first four 
days of the reversal off the bottom, which is certainly greater 
than the 9% gain over the past four sessions, but nevertheless 
was a significant pop and signaled a coming reversal.  While we 
did get a pullback, it was only for a day, before we headed 
significantly higher, eventually reaching a top of Dow 8800 
before a more significant pullback.  Today's rally took out 
significant resistance at Dow 8000, but eventually stopped dead 
at the 8150-8160 level that capped the January bounces repeatedly 
after the Dow broke its head and shoulders neckline earlier that 
month. The high on the day was 8145, but of course that was after 
a rally of 284 points, so we must take that failure in context.  

Daily Chart of the Dow


We also broke the 50 day moving average in the broader indices. 
Rallies in the Dow, OEX and SPX all failed at that level this 
morning, but cruised past those numbers in the afternoon. The Dow 
50-dma of 8097; the SPX 50-dma of 857.76; and the OEX 50-dma of 
434.57 all fell in afternoon trading.

The point and figure charts show a reversal that has been strong 
enough to create buy signals in the Dow, OEX and SPX.  The signal 
in the SPX amounts to a triple-top buy signal at 855, which is a 
very bullish indication.  The triple-top also carries with it the 
possibility of a bull trap, which is a sudden reversal down and 
would require a trade of 860 to break. We got that trade of 860, 
when we topped out at 862.68. Unfortunately for bulls, the 
bearish resistance lines in those averages also lie just above at 
870 in SPX (which coincides with resistance from the end of 
January in the 865-868 range), 8300 in the Dow (which was 
previously strong horizontal support before the January 
breakdown, and 442.50 in the OEX (which coincides with strong 
resistance at 440 from January). 

Point and Figure Chart of the SPX


The COMP, following a 50 point rally to 1392.25, is also 
approaching its next level of resistance at 1400, powered 
partially by the chip stocks.  The SOX gained 5.6% to close at 
322.25 and has crossed its 200-dma to the upside for the first 
time since May 2002. The next level of resistance in the SOX is 
likely to be 230, where there is heavy horizontal resistance.

The dollar jumped through recent resistance and bonds sold off 
decisively, lending credence to the idea that now that we have 
some certainty, the bears are getting out of the way and money is 
coming back into stocks. 

One of the factors behind today's rally that was also connected 
to the war news was a drop in the price of oil futures. While I 
mentioned above that a decrease in fuel costs might not lead to a 
complete economic turnaround, it certainly will give the economy 
some boost by reducing the operating costs of almost all 
companies, whether they are involved in manufacturing or simply 
pay shipping costs for their products.  Crude Oil Futures dropped 
another 0.50 per barrel on news that the U.S. may tap its 
strategic petroleum reserves.  While that possibility was not a 
new one, talk heated up about the possibility in the wake of 
today's developments.   The fact that we have seen oil futures 
drop over the past few sessions continues the inverse 
relationship between fuel prices and the stock market.  I began 
highlighting the longer term charts going back to last summer 
that charted the general trends between the two and so far, 
little has changed in that relationship.  Of course, much of it 
is due to the fact that both reflect geo-political developments 
in opposite ways, but the action of the past few days is 
particularly interesting, since they have been reacting opposite 
to their traditional behaviors as war becomes more certain, but 
still maintain to inverse relationship to each other. 

Chart of Crude Oil Futures and the Dow


Does it seem that all I want to talk about is war?  Maybe it's 
because that was the driving force behind today's action.  
However, there were some developments that are worth noting and 
could draw some attention after the impact of today's events on 
the markets begins to fade. J.P. Morgan cut its estimates well 
below previous estimates for auto stocks and their suppliers.  It 
said preliminary feedback regarding March sales and a slowing 
momentum of industry incentive spending led it to predict light 
vehicle sales would fall to 15 million or lower in March and 14.5 
million or lower in April. It said it expects the drops to lead 
to production cuts that are more dramatic than those that have 
already been announced.

Oracle releases results on Tuesday after the bell.  This morning 
we got cautious statements from Pacific Growth, which echoed 
statements from Lehman on March 5. Lehman cited concerns that 
ORCL's license revenues could be weak. PG cited similar concerns 
and said the company should match estimates due to currency and 
cost cuts, but that revenues and licenses should be lower than 
forecasts. A disappointing report from Oracle could certainly 
erase much of the gains from the past few days, but if the auto 
news didn't put an anchor on the rally then it is likely even 
results from Oracle will take a back seat to global developments. 

We also got some indications on retail sales that were mixed.  
Wal-Mart and Federated both affirmed earlier predictions for 
March same store sales.  Wal-Mart is expecting an increase in the 
low single digits, while Federated is expecting a drop of 3-4%.  
J.C. Penney, on the other hand, said its department stores might 
miss forecasts for little change or a slight decline. 

One of the more curious developments today was the rise in the 
Market Volatility Index (VIX).  The VIX, which reflects implied 
volatility levels of options in the OEX, generally rises on 
rallies and falls on market drops.  Part of this is due to the 
fact that markets generally drop faster than they rise and the 
other reason is that covered writing (the purchase of stock and 
sale of out of the money calls) creates selling pressure on the 
way up.  The VIX is usually moved by institutional order flow, 
since the OEX is a heavily traded product and small retail orders 
don't usually make much of a dent.  Rather than drop on today's 
big rally, the VIX actually rose, diverging from its usual 
pattern and suggesting institutions may not believe we are out of 
the woods just yet. 

Now we are left to decide where we are headed next.  If we follow 
October's pattern, we could be headed much higher.  However, what 
more can the President say tonight that would make war any more 
imminent than it seemingly became this morning, or any shorter 
than analysts are already expecting? Shouldn't the short-covering 
be over by now?   Won't oil spike up initially? Isn't the risk to 
oil prices greater that Saddam sets the field on fire than that 
he doesn't?  Certainly it is difficult to step in front of a 
speeding train and even those bears who would like to enter in 
front of that resistance at Dow 8150 should do so with only small 
positions.  Overnight futures trading should give us an idea of 
the initial reaction to the President's speech.  A move through 
Dow 8170 could certainly indicate a continued run and if we do 
break that level, I would suggest shorts step to the side and 
wait for a test of bearish resistance at SPX 870. If we make it 
above SPX 870 (actually a break of bearish resistance comes at 
875), look out above.  For now, we need to respect the extreme 
uncertainty surrounding the current environment and make sure our 
bets reflect that uncertainty. I'd like to tell readers just how 
we will react to the President's speech, which I can't; but if 
the action of the last few days is any indication, then we have 
seen a major trend reversal.  However, I would feel more 
comfortable coming to that conclusion if our jittery markets 
weren't making unpredictable moves each time we get new 
information on the global front. 


More Confirmation

Monday, March 17, 2003
By Vlada Raicevic

Daily Settlement Numbers 4:15pm ET

Contract	Last	Net	High	Low

Dow	8141.92	+282.21	8145.84	7779.73
YM 03M	8102	+252	8128	7715
Nas 100	1077.01	+46.56	1077.14	1018.76
NQ 03M	1074	+37.50	1080	1019
S&P 500	862.79	+29.52	862.79	827.17
ES 03M	860.25	+29.75	862.75	822.00

Daily Pivots

Contract	S2	S1	Pivot	R1	R2
YM 03M	8425	8308	8012	7896	7599
NQ 03M	1000.75	1043.50	1061.75	1104.50	1122.75
ES 03M	810.81	840.38	851.56	881.13	892.31

The last few days we looked at daily charts, and tried to figure 
out if the recent move up was a valid turning point in the 
markets, or if it was another mighty bear market rally, doomed to 
failure.  I will continue to leave the geopolitical issues, and 
even the economic issues outside of this forum, and continue to 
focus on the charts to give us a somewhat unbiased view of what 
the futures are doing.

The day opened with a mild gap down, a little selling pressure 
appeared, but the market quickly found a bid and took off in a 
nice pop to fill the gap and to stall out at minor resistance.  
There was ample opportunity to let the bears take over, but the 
market again took off and exceeded yesterday's highs, trading 
above R2 and actually using it for support for a good portion of 
the day, never going back below it again.

While Friday's doji candle at resistance could have been seen as a 
potential ending to the move up off the recent lows, today we have 
some additional confirmation signals that may indicate a 
continuation of the trend.  

ES Daily: 
A big green stick, closes above the upper tine of the shorter term 
regression channel.  A throwover of that line is allowable, but 
shows that momentum is strong enough to get ahead of the 
regression channel movement.  Remember, the regression channels on 
my charts are for two specific periods, 78 and 200 periods.  They 
are redrawn at the end of every period. Therefore they move with 
the price.  If price moves very quickly in one direction, it will 
pierce the outer tines of the regression channel, but rarely stay 
outside of the channel because it can correct within five to six 

Along with this channel pierce, the Macd crossed the centerline, 
fast stochastic does the same, and OBV manages to move above the 
downtrending line.  Also, ADX has a bullish crossover, and RSI 
moves above its recent range and is moving up nicely.   With these 
kinds of signals one has to poke around a bit to try and generate 
any bearish sentiments: Macd crossover is tentative, and is not a 
full crossover, longer term Stochastic is still below centerline, 
and OBV has pierced the downtrend line before and failed the next 
day.  But let's face it, from a purely technical perspective, the 
daily chart is bullish.


YM Daily:
The YM is very similar to the ES.  Note how the ADX crossover is 
the first one  since the bearish crossover in mid-January.


NQ Daily:
The most bullish of the three, all indicators show a strong trend 
up.  Today's move also filled the rather large NDX gap formed on 
1/17/03.  There is, however, a little more doubt to the NQ bullish 
chart than for ES and YM.  The culprit is the excessively bullish 
nature of the NQ traders.  Look at how steep the Macd and ADX are.  
When these are this steep, there is often a pullback to release 
some of the buying pressure.  A gentler slope is much prefereable.  
The steep quality is due to the large gap up that started this 
whole run.  NQ traders need to make sure that the pullback doesn't 
turn into a rollover that aims for filling that rather large gap.  
(Note: My charting service printed a strange candle for the NQ 
daily today, so the following chart is of NDX).


Let's look at the 60 minute charts.  While the daily charts are 
looking bullish, the 60 minute chart is not.  On the ES you can 
see that price has pulled well ahead of the regression channels, 
and now trades above both outer tines, this generally means that 
some pullback is in order.  Macd, Stochastic, ADX and RSI are all 
forming bearish divergences.  This again implies that a pullback 
is in order.  How shallow or deep that pullback will be, is 
anybody's guess.  It could be only long enough to reset the 
indicators, while still keeping the daily charts bullish.  Look at 
that ADX again, it shows that there have been almost no sellers in 
this move up.  Buying is drying up, but with no selling pressure, 
the market continues to move up.


YM 60 minute chart is nearly identical:


The NQ 60 minute chart has stronger divergences present, and 
unlike for YM and ES, the OBV is rolling over and testing its 
uptrend line.  This is no surprise as these divergences are 
showing up on the Daily chart.


So, it looks like we are definitely short-term overbought and 60 
minute charts are telling us that we need a pullback to blunt the 
extreme bullishness.  There is plenty of support now below us, as 
well as resistance above.  The market seems to be in a very 
strange mood.  There has been much trader talk about how sanity 
will come back soon, and the market will again begin to reflect 
the terrible underlying business conditions.  I say, wait for the 
charts to tell you about this mood change.  As perplexing as it 
is, we have a bullish tint right now.  Wait to see at least a 60 
minute rollover before dismissing this as just another insane bear 
market rally.


War rally cry as Indexes at monthly high

The major indexes surged high today on what looked to be a war 
rally cry that had bulls shouting the indexes to their highest 
levels of March, and finds the NASDAQ-100 Index (NDX.X) not far 
from its 2003 highs set in early January.

While floor traders cited extensive short-covering on some type 
of "resolution" coming to a head with Iraq, a strong round of 
selling, similar to that found from the October lows was found in 
Treasuries today.  

The action in the bond market comes just one day before the FOMC 
meeting, where some expect the Federal Open Market Committee to 
cuts its Fed Funds rate by 1/4 point to 1.0%.  While traders and 
investors might look for Treasuries to find buying as the Fed 
cuts interest rate, I'd suggest traders keep a close eye on bond 
YIELDS and should we see selling, could be a sign from the bond 
market that the Fed might be nearing the end of an easing cycle.

10-year YIELD Chart - Daily Interval


The benchmark bond saw a strong round of selling today, which had 
its YIELD ($TNX.X) jumping higher, not unlike that found on 
October 11th.  In prior wraps, we wanted to be on the alert for 
such action in the bond market to hint that a rally in the 
indexes might still have legs.  A good test tomorrow is to see 
what the FOMC does with its Fed Funds interest rate, which 
currently stands at 1.25%.  

Selling in Treasuries along with a good round of short covering 
had the NASDAQ-100 Index (NDX.X) holding the 1,018 level.  In 
Friday's 01:00 PM intra-day update and Friday evening's market 
monitor, the 1,018-1,019 level looked to be an important level of 
support today for the stronger NASDAQ-100 Index, and while there 
was some weakness at the opening of today's trade, suspicious 
support was found at 1,108.75, which was the morning's low, and 
today's trade into the close looked to have this index, or at 
least stocks within it, experiencing some aggressive short-
covering by bears.  Amazingly, the NASDAQ-100 Index (NDX.X) 
1,077.01 +4.51% closed above its WEEKLY R2 and now has its 
MONTHLY S2 in play at 1,102.  The NASDAQ-100 Index (NDX.X) and 
NASDAQ-100 Tracking Stock (AMEX:QQQ) $26.60 +3.42% are the only 
indexes in our matrix that have been able to trade their MONTHLY 
R2's, which continue to hint that this is the index that bulls 
will continue to look for leadership from, and help pull the 
other major indexes higher.

Here's a quick look at the pivot matrix.  Note that on Friday, we 
updated the WEEKLY portion of the matrix at Friday's close.  

Pivot Analysis Matrix


As the major indexes push higher today, we're starting to lose 
many resistance levels as bullishness continues to take out 
upside resistance.  With strength in the NASDAQ-100 Index (NDX.X) 
a next level of resistance to monitor would be between tomorrow's 
DAILY R1 of 1,096 and WEEKLY 1,102.  Initial support for the NDX 
would be correlative at WEEKLY R1 of 1,066 and MONTHLY R2 of 
1,069.  With the NDX having traded its MONTHLY R2 level of 
support today, I'm now looking for "rock solid" support at the 
MONTHLY pivot of 989.20 and WEEKLY Pivot of 1,006.

NASDAQ-100 Index (NDX.X) - Daily Chart


The 1,018 level kept showing up in the WEEKLY pivot matrix and 
showed up today in the form of 1,019 and despite early morning 
weakness, this level held support.  On Thursday, we looked at QQQ 
chart and the "volume spike" on gap higher and close above 1,018.  
Bears look very eager to cover now and builds support from a 2-
month base, which can serve as a "powder keg" that looks to be on 
fire.  Similar MACD and Stochastics today that were found back in 
mid-October when 10-year YIELD ($TNX.X) made a move from the 

Today's action saw a net gain of 6 stocks to reversing higher 
point and figure buy signals, and that's enough to have the 
NASDAQ-100 Bullish % ($BPNDX) reversing up into "bull alert" 
status at 40%.  Based on this indicator's high of 82% in 
December, I would now put upside potential in the NDX at 1,155 or 
higher should the bullish % approach the December high reading of 
82% bullish, but today's reversal back up shows demand now 
building in a more meaningful matter.  It would currently take a 
reading of 68% for this indicator to achieve "bull confirmed" 

S&P 100 Index (OEX.X) - 5-point box


Today's trade at OEX 435 has the conventional 5-point box of the 
OEX negating the bearish vertical count and turns the vertical 
count bullish to 500.  Past bullish vertical counts have not been 
achieved the prior two years, but serve as a bear's alert of 
upside risk in a bearish position.  I've added "blue dots" on the 
above chart of the OEX to depict that of a bullish channel and I 
see some formidable near-term resistance at the bearish 
resistance trend and WEEKLY R2 of 445.  Bears will most likely 
have covered partial positions today, and will be looking for any 
weakness back near the WEEKLY pivot of 417.50 or MONTHLY pivot of 
423.70 as a cover area.

In October, the NASDAQ-100 Bullish % ($BPNDX) reversed up into 
"bull alert" status on October 11th.  Two session's later (end of 
trading Oct. 15th), the S&P 100 Bullish % ($BPOEX) reversed up 
into "bull alert" status.  Today's action saw a net gain of 3 
stocks generating reversing upward point and figure buy signals, 
which has the OEX Bullish % rising to 26%.  It would currently 
take a reading of 28% to have this indicator achieving "bull 
alert" status.  Aggressive bulls can look 1/4 position long at 
today's triple-top buy signal of 435, but I'd look MINIMUM 3-
months expiration out to try and allow time for the bullish % to 
reverse back high and get the OEX back above its bearish 
resistance trend (red + at 450).

Bear's should be no more that 1/2 position bearish after today's 
trade at 435.

S&P 500 Index Chart - Daily Interval


Today's trade at 855 triggered a triple-top buy signal in the SPX 
and we'll take a look at the point and figure chart in a minute, 
but the SPX has really been slicing through some zones of 
resistance and breaking levels of resistance the bears haven't 
been able to defend.  I'd look for some type of bullish profit 
taking near the WEEKLY S2 of 873, and then look for the pullback 
into the 833-837 zone for an "excellent" bullish entry.  Let's 
quickly revisit out "suck 'em in and spit'em out, then take it 
higher" scenario from our March 5th Index Trader Wrap 
to try and envision the trade.  I've been a little off on my 
price levels, but the SPX action has certainly shown a "spit'em 
out" move, that is now in the "take" part of the trade.  What's 
left I think is the "them" pullback, and then the higher should 
the bullish % reverse up into "bull alert" status.

S&P 500 Index Chart - 5-point box


Similar to the OEX point and figure chart, the SPX conventional 
5-point box chart gave a triple-top buy signal.  After a "spit-em 
out" type of move after our March 5th update, the MARKET has been 
taking the SPX higher.  A bull that has been a bit hesitant on a 
bullish position looks for a pullback move, perhaps to 835, then 
looks for a 3-box reversal higher, which a bull looks to provide 
a type of "slingshot" or "catapult" type of action as the last of 
the bears head for the exits.

Today's action saw a net gain of 19 stocks to reversing upward 
point and figure buy signals, or a gain of 3.8% in the S&P 500 
Bullish %.  Current reading remains "bull correction," but a 
reading of 34% would be enough for a "bull confirmed" reading at 
a very low level of bullishness.

Should the S&P 500 Bullish % ($BPSPX) reverse up into "bull 
confirmed" status, I would then be willing to call October lows 
an initial bottom as we would have seen higher lows in the SPX 
itself and the bullish %.  However, for a bottom to truly be 
called, the SPX must trade the 955 level.  As you can perhaps 
see, it is VERY early to be overly bullish at this point.

Dow Industrials Chart - 50-point box


I turned further bullish in today's market monitor and suggested 
that bulls that took 1/4 bullish position in a profiled Dow 
Diamonds (AMEX:DIA) $81.46 +3.16% trade from March 5th, look to 
round up in the trade to 1/2 position by adding another 1/4 
bullish position.  At the time, I did not know that the Dow 
Industrials Bullish % ($BPINDU) has reversed up into bull alert 
status at 16.67%, but I really build conviction toward 
bullishness from today's reversal up in this very narrow bullish 
% indicator.  

I'm now looking for strong support to build at the "apex" of the 
triangle that we had been monitoring, and view the ability of the 
Dow to get back above that apex to now become a level of support.

I'm not "sure" if the U.S. is going to war with Iraq, or if 
Saddam Hussein will put up a fight, but I would NOT look to add 
to bullish positions until the Dow breaks above its bearish 
resistance trend.  With the NASDAQ-100 reversing up into "bull 
alert" status and the very narrow Dow Industrials Bullish % 
($BPINDU) also reversing up into "bull alert" status, both from 
lower levels of bullishness, bears should be pressed to begin 
stepping up their short covering, which should begin building 
support for bullish pullback entries as demand look to begin 
outstripping supply.

Jeff Bailey

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Mixed Results for Stocks and Funds

Bargain hunters fueled a huge rally on Wall Street last Thursday, 
enough to put some stocks and funds in positive turf for the week 
ended Friday, March 14, 2003.  U.S. stocks struggled through mid-
week, with a series of economic reports doing little to stimulate 
any "buy" interest.  By Thursday, some investors felt stocks were 
oversold and snapped up tech and other stocks, but the huge rally 
didn't extend into Friday's session.  Stocks were mixed on Friday 
going into the weekend.  


For the week, the S&P 500 large-cap index rose just 0.6 percent, 
while the mid-cap sector declined by 0.2 percent.  Small stocks, 
as measured by the Russell 2000 index, closed the week just 0.1% 
higher.  Large-cap funds produced small net gains over the 5-day 
period along with the S&P 500 benchmark, while mid-cap and small-
cap funds generated small net losses.  Tech funds rose 2.6%, per 
Lipper, a primary beneficiary of Thursday's monster rally.

The MSCI EAFE index of developed foreign markets was 0.4% higher 
in dollar terms for the most recent weekly period, with European 
stock gains more than offsetting declines in the Pacific region.  
Over the weekly period, European stocks rose 1.5%, while Pacific 
stocks dropped 2.5% in dollar terms.  International equity funds 
were essentially unchanged for the week according to Lipper, but 
returns within the broad peer group were mixed. 

The possibility of another Fed rate cut didn't stimulate the U.S. 
fixed income market.  With the exception of high-yield bonds and 
funds, bond prices were generally lower with the Lehman Brothers 
Aggregate Bond Index down 0.4% last week.  A surge in oil prices 
pushed wholesale inflation (PPI) up 1.0% in February, putting an 
end to the recent bond market rally.  Most investment-grade bond 
funds lost ground while high-yield funds rose by 0.4% on average, 
per Lipper.

U.S. Equity Fund Group

 Week   YTD
+0.6%  -4.9%  Vanguard 500 Index Fund (VFINX) 
-0.2%  -7.3%  Vanguard MidCap Index Fund (VIMSX)
+0.1%  -7.3%  Vanguard SmallCap Index Fund (NAESX)
+0.6%  -5.0%  Vanguard Total Stock Market Index Fund (VTSMX)
+0.4%  -4.8%  Lipper Large-Cap Core Equity Fund Average 
-0.2%  -5.9%  Lipper Mid-Cap Core Equity Fund Average 
-0.1%  -8.1%  Lipper Small-Cap Core Equity Fund Average
+0.0%  -4.9%  Lipper Multi-Cap Core Equity Fund Average
+2.6%  +0.2%  Lipper Science & Technology Fund Average

Large-cap growth funds and tech sector funds were the highest-
performing categories in the U.S. equity fund group last week.  
With the tech sector higher, funds with growth styles outpaced 
those with value approaches.  According to Lipper, the average 
large-cap core fund rose 0.4% over the week, while the average 
large-value fund declined 0.3% and the average large-cap growth 
fund gained 1.2% in value.  Mid-cap growth and small-cap growth 
funds also did relatively well last week compared to other U.S. 
equity funds.

A few diversified stock funds gained 2 percent or more for the 
week including the Sequoia Fund (+2.1%), Vanguard LifeStrategy 
Growth Fund (+2.2%), Harbor Capital Appreciation Fund (+2.2%), 
and Fidelity OTC Portfolio (+2.0%).  Laggards included Clipper 
Fund (-1.8%), Vanguard Windsor II Fund (-1.6%), and Legg Mason 
Value Trust (-1.1%).  While tech stocks enjoyed a strong rally 
last week, the natural resources, financial and health sectors 
were down for the week, producing net weekly declines for many 
value-driven stock funds. 

The week's biggest gains were in the tech sector.  For example, 
Fidelity Select Electronics Portfolio had a weekly total return 
of 5.6 percent.  Firsthand Funds Technology Leaders Fund, which 
draws many of its holdings from the Nasdaq 100 index, picked up 
6.3% on the week.  Some of the ProFunds and Rydex mutual funds 
picked up over 8 percent for the weekly period.     

International Equity Fund Group

 Week   YTD
+0.4%  - 8.7%  Vanguard Developed Markets Index Fund (VDMIX)
+1.3%  - 4.8%  Vanguard Emerging Markets Index Fund (VEIEX)
+0.3%  - 8.4%  Vanguard Total International Stock Index (VGTSX)
+0.1%  - 9.2%  Lipper International Fund Average
-0.0%  - 5.4%  Lipper Emerging Markets Fund Average
-3.5%  -12.5%  Lipper Gold Fund Average

If you were invested in the ProFunds Europe 30 Fund last week, 
you did extremely well.  The Europe 30 Fund, which seeks daily 
investment results equal to twice (or 200%) the performance of 
the ProFunds Europe Index, returned 8 percent during the 5-day 
period.  Latin America was also a bright spot, as evidenced by 
the 4 percent gain last week by the T. Rowe Latin America Fund.

The MSCI EAFE index would certainly have generated more than a 
0.4% weekly return (using Vanguard Developed Market Index Fund) 
had it not been for weakness in the Pacific region.  Vanguard's 
Pacific Stock Index Fund, for example, lost 2.5% over the 5-day 
period through March 14, 2003.  As a result, there was a broad 
dispersion of weekly results within the broad peer group.  Some 
funds enjoyed big gains, while others suffered big losses.

Billion-dollar international stock funds up more than 1 percent 
for the week included T. Rowe Price International Stock (+1.4%), 
T. Rowe Price Foreign Equity (+1.5%), Harbor International Fund 
(+1.5%), Lazard International Equity Fund (+1.7%), and Longleaf 
Partners International (+1.9%).  Laggards included Liberty Acorn 
International (-1.3%), Nations' International Value Fund (-2.0%), 
and ING International Value Fund (-2.0%).

As with U.S. equity funds, foreign stock funds with heavy stakes 
in large-cap growth/technology stocks were among the week's best 
performers.  Non-U.S. funds with heavy exposure to weaker sector 
groups such as financials and healthcare generally lagged behind, 
producing losses last week.  The $13 billion Vanguard Healthcare 
Fund, for example, had a 2.1% negative weekly return, similar to 
the losses produced by Fidelity and Putnam's health sector funds.

U.S. Fixed Income Fund Group

 Week   YTD
-0.3%  +0.9%  Vanguard Short-Term Bond Index Fund (VBISX)
-0.6%  +1.9%  Vanguard Intermediate-Term Bond Index Fund (VBIIX)
-0.6%  +2.7%  Vanguard Long-Term Bond Index Fund (VBLTX)
-0.4%  +1.3%  Vanguard Total Bond Market Index Fund (VBMFX) 
-0.2%  +0.8%  Lipper Short Investment-Grade Fund Average
-0.4%  +1.7%  Lipper Intermediate Investment-Grade Fund Average
-0.4%  +1.0%  Lipper U.S. Government Fund Average 
-0.4%  +1.6%  Lipper Corporate A-Rated Debt Fund Average
+0.4%  +4.6%  Lipper High-Yield Fund Average

The imminent threat of war has continued to push oil prices and 
inflation higher, bad news for the investment-grade bond market.  
Not helping bond prices either is the belief that war with Iraq 
is imminent and will end quickly, allowing oil prices to subside 
and the U.S. economy to begin to recover.  

For the week, the Lehman Brothers Aggregate Bond index lost 0.4% 
with intermediate-term and long-term bond funds doing worse than 
short-term bond funds.  Among the laggards were "inflation-index" 
or "real return" bond funds.  For example, Vanguard's Inflation-
Protected Securities Fund fell by 1.1% while PIMCO's Real Return 
Fund declined in value by 1.2 percent last week.

The only bond fund sector to perform well last week was the high-
yield group, which extended its recent run.  According to Lipper, 
the average high-yield fund returned 0.4% last week, with the top 
performers returning upwards of 1 percent.  For instance, Pioneer 
High Yield Fund gained 1.0% over the 5-day period.     

International Fixed Income Fund Group

Week   YTD
-1.5%  +2.6%  Lipper Global Income Fund Average
-2.5%  +2.6%  Lipper International Income Fund Average

Global and international fixed income funds sustained big losses 
last week, giving back a significant portion of their YTD gains.  
While its international stock funds were among the stock leaders 
last week, T. Rowe Price's International Bond Fund was among the 
week's fund laggards, losing 2.7% over the 5-day period.  Dollar 
strength last week made matters worse for foreign bond funds (in 
dollar-reported terms). 

Balanced Fund Group

 Week   YTD
+0.1%  -2.4%  Vanguard Balanced Index Fund (VBALX)
-0.0%  -3.1%  Lipper Balanced Fund Average

Balanced funds did their job once again, holding fund losses to a 
minimum.  Within the peer group, weekly investment results ranged 
from negative 1 percent on the Oakmark Equity & Income Fund, to a 
positive 1.5 percent on the Vanguard LifeStrategy Moderate Growth 
Fund.  As with pure equity funds, those funds with heavy exposure 
to large-cap growth and technology stocks did better than hybrids 
with value-driven styles and heavy stakes in weaker areas of the 
market (healthcare, financials, etc.).

Money Market Fund Group

1.06%  Vanguard Prime Money Market Fund (VMMXX)
0.75%  iMoneyNet.com All Taxable Money Market Fund Average

Current 7-day simple yields among taxable money market funds are 
continuing to drift lower.  According to iMoneyNet.com, the fund 
average is now just 0.75 percent.  Vanguard's Prime MMF, the low 
cost leader, holds one of the better yields in the "prime-retail" 
MMF group (1.06%).

The Fed funds rate currently stands at 1.38% per Bloomberg, down 
from 1.62% six months ago, but slightly higher than the 1.25% of 
two months ago.  So, the money markets do not seem to be pricing 
in another Fed rate cut at this time. 

Mutual Fund News

Morningstar.com reports more fund liquidations, as the industry 
deals with more discouraging news.  The GAO (General Accounting 
Office) reportedly investigated fund industry charges from 1998 
and 2001 and found that fund costs had risen during that period 
of time.  The House Financial Services Committee, which ordered 
the GAO to review fund costs, also examined other areas such as 
fund companies use of "soft dollars" to pay for market research.  
There's also debate about how "independent" fund trustees truly 
are, mirroring concerns raised by investment guru, Warren Buffet 
in his most recent shareholder report (i.e. Berkshire Hathaway).

Add to that other unsettling news, such as last week's findings 
by a joint committee of regulators that brokers regularly over-
charged investors who bought mutual funds with "front-end" load 
fees.  Financial advisors are supposed to provide "independent" 
advice and investment counsel but many "load" fund companies do 
in fact push their own products to derive asset-based revenues.

On the fund merger/liquidation front, Schroder Ultra Fund plans 
to merge into the Schroder U.S. Opportunities Fund (SCUIX), per 
Morningstar, while the PBHG Funds plan to merge away three fund 
laggards.  PBHG announced that it will be dropping "value" from 
the names of four funds and taking the "value" language it uses 
in the prospectuses out, to reflect the likelihood that they'll 
be more blended in their style.  Each of these funds seek long-
term growth by investing in stocks of companies that have "low" 
price valuations as well as "high" growth rates.  According to 
Morningstar, three of the four funds already land in the blend 
style box.

Steve Wagner
Editor, Mutual Investor 

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Clearing the Decks

I'd like to talk about significant resistance levels that were left 
untouched today, but there aren't many left.

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The Option Investor Newsletter                   Monday 03-17-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:

Stop Loss Updates: ERTS
Dropped Calls: AMGN, ZMH
Dropped Puts: TIN
Play of the Day: Call - BVF
Leaps (Sunday Edition): Better Late Than Never

Updated on the site tonight:
Market Posture: Looking Way Up
Market Watch: New Highs Everywhere

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ERTS - call
Adjust from $53 up to $56


AMGN $58.50 +0.86 (+0.86) Dropping our AMGN play tonight is
like saying goodbye to an old friend, as we've been riding
the consistent uptrend for over a month now.  Each bounce off
that ascending trendline provided a solid entry into the play,
but the bullish action has really accelerated over the past few
days, with the help of the broad market.  While there may still
be more upside in the play, the long-term descending trendline
at $60 looks like it will be formidable resistance and we're
going to call today's intraday top just below $59 "close enough".
Traders willing to stay in the play for one more push towards
resistance shouldn't be willing to give much back at this point
and should ratchet stops up to no lower than $57, just below
today's morning low.


ZMH $48.97 +2.28 (+2.28) How many ways can we say "overextended"?
Our ZMH play has performed like a champ, holding key support
last week as the broad market plummeted, and then blasting
through the key $45.50 resistance on Friday.  As pleased as we
were with that performance, we were truly amazed to see the
stock surge nearly 5% on Monday on continued heavy volume.
Closing at the high of the day, ZMH is well outside its upper
Bollinger band and a pullback from here seems likely.  That
isn't to say the bullish trend is wrung out by any stretch of
the imagination, but we're going to err on the side of caution,
closing out with a solid gain since we began coverage near $44.
Traders opting to try to squeeze more out of the play should
be aggressive with their stops here, raising them to no lower
than $47.60, just below today's intraday consolidation.


TIN $40.96 +1.39 (+1.39) Even a lead brick will go up in a
rising elevator, and that certainly is true with our TIN play.
While it performed quite well for us on the downside last week,
that action has been reversed over the past few days, with a
string of 3 very bullish candles now.  The play skated on the
knife edge last Friday, flirting with the $40 resistance level
before pulling back a bit into the close.  But today's action
sealed the play's fate, driving the stock up through our $40.25
stop, then the 2-month descending trendline and closing above
the 20-dma for the first time since the middle of January.
We're taking our lumps tonight, dropping TIN as the downward
trend has apparently run its course.  A pullback near the $40
level would be the ideal situation for exiting open plays that
weren't stopped out today.

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BVF – Biovail Corporation $39.71 +0.65 (+0.65 this week)

Company Summary:
Biovail Corporation is a full-service pharmaceutical company that
applies its proprietary drug delivery technologies in developing
"oral controlled-release" products throughout North America.  The
company applies its proprietary drug delivery technologies to
successful drug compounds that are free of patent protection to
develop both branded and generic oral controlled-release
products.  BVF has applied its technologies to develop 18
products to date and currently has 16 others under development.

Why We Like It:
It is becoming increasingly clear that we can't call an entire
sector strong or weak, as there are exceptions to every rule we
might like to make.  On one hand, we are playing the bearish
trend in shares of LLY, while here today we have a fresh bullish
candidate, also from the Drug sector.  After bottoming in July,
BVF has been working its way higher in a broad ascending channel
for months now.  The latest victory for the bulls was breaking
above the $35 level, which marked a top back in early December,
before the stock fell to support at the bottom of the channel.
While BVF is now near the top of that channel right now, things
look a bit different, with the 200-dma turning up, the 50-dma
above the 200-dma and BVF above both.  We're looking for a
breakout over the $40 level to really get some legs and run, but
we've got to get over that level first.  So we're setting a
trigger of $40.10 for the play and will only consider new
entries after that trigger is hit.  Aggressive traders can enter
on the initial move above that level, while more conservative
typed will want to wait for a subsequent pullback to the $39
level before entering on a rebound.  Note that the PnF chart's
bullish price target is $49, which coincides with significant
overhead resistance.  That will be our eventual target for
harvesting gains, but would be entirely happy with a short
term move into the April 29th gap between $43.50-46.45, as the
top of that gap will probably offer some stiff resistance as
well.  After being triggered, our initial stop will be set at
$36, just below last week's lows and the 20-dma ($36.06).

Why This is our Play of the Day

It may seem strange to list BVF as our Play of the Day, as the
stock hasn't yet satisfied our entry target of $40.10.  But
therein lies the beauty of it.  BVF did have another solid day
on Monday, but the magnitude of the 1.67% upward move seems
muted when compared to some of the outsized short-covering type
gains seen in other issues.  This hints that the action in BVF
is more likely real organic buying, rather than short-covering.
So if the move in the broad market is for real, we ought to see
a real breakout over the $40 level.  If the broad market move
fades, then the play will likely not be triggered until it can
build up more strength.  In essence, we're using the BVF play to
give us some insulation from the potential that the current
stellar rally fades.  Keep the trigger in place at $40.10, and
then enter on the breakout according to your risk profile.
Aggressive traders will want to go long on the initial break,
while more conservative players can wait for a pullback to
confirm support at old resistance near the $39 level.  In either
case, stops should initially be set at $36.

BUY CALL APR-40*BVF-DH OI=6197 at $1.90 SL=1.00
BUY CALL APR-45 BVF-DI OI= 390 at $0.45 SL=0.25
BUY CALL JUL-40 BVF-DH OI=1637 at $3.80 SL=2.00
BUY CALL JUL-45 BVF-DH OI= 708 at $1.25 SL=0.60

Average Daily Volume = 1.17 mln

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Better Late Than Never
By Mark Phillips

First off, let me apologize for the tardiness of my column this
week.  Unfortunately, it couldn't be helped, with strong winds
knocking the power out for much of the day on Saturday, keeping
me from getting my ideas put down on screen.  But we managed to
get it all working just fine later on the weekend, and I think
you'll agree it was one heck of a week!

By late Tuesday, I had pretty much resigned myself to the fact
that we were going to break below the DOW 7500 area and our DJX
play was going to be toast.  Adding to that frustration was the
fact that there wasn't a single bearish position in the LEAPS
portfolio with which we would be participating.  Don't get me
wrong -- I made the decision to eliminate any possible bearish
plays weeks ago, based primarily on the depressed levels of
bullish percent across the major indices.  But that doesn't make
it any less frustrating, as a trader.  We all know the hazards
of second-guessing trading decisions, but it is human nature --
whether you've been trading for 10 weeks or 10 years.

Fortunately, the LEAPS Portfolio is readjusted based on closing
prices.  Otherwise, our DJX play would have been stopped out
on Wednesday when the DOW plunged to an intraday low of 7417.
But the asset allocation gnomes appeared out of nowhere at the
critical juncture, resulting in decent rebound into the close
that took on truly magnificent proportions by the end of the
day on Thursday.  While the strong rebound at the end of the
week is encouraging, we shouldn't let it fool us into thinking
that ANYTHING in the market has changed.

The broad market is still in a downtrend and market participants
are still on pins and needles, trying to determine when we're
going to war, who's going to help (in the war and the
reconstruction after the fact), and how successful/quick it is
going to be.   Don't forget, the economy is still a wreck and
getting worse.  Elevated price levels for Crude Oil and related
products certainly aren't helping, but when you carve away all
the meaningless drivel, its about rising unemployment, high
levels of debt (both at the consumer and business level) and a
complete lack of capital spending growth at the corporate level.
The economy is weak, and that is being reflected in the equity
markets.  The war situation is a side-show in terms of
determining the trend of the market, providing just one more
area of uncertainty.

We're going to war and probably sooner than later.  Those hoping
for a strong and sustained rally after the beginning of Gulf War
II are likely to be in for a rude awakening.  I see no hope of
any rally powerful enough to lift the broad market (SPX) out of
its long-term descending channel.  Technology is a somewhat
different issue though.  I've gone into the reasons for my
position on the NASDAQ, but what it really boils down to is the
steep losses in this area of the market were taken out in the
first 2 years of the bear market, and there are some stocks
that are really looking attractive at current values.  Hey,
we've got some of them in our LEAPS Portfolio!

But the relative strength in the NASDAQ is likely to result in
this area of the market being the place to be for bullish moves
over the balance of 2003.  That doesn't mean to go out and buy
the QQQ tomorrow and hold through to the end of the year.  But
I do think that is the best way to capitalize on the sharp,
brief rallies between now and the end of the year.  Just to
align the Watch List (and hopefully the Portfolio) with that
perspective, I'm adding a new play on the QQQ this week.  I
really like the way the QQQ is now above both the 50-dma and
200-dma and finally broke out on Thursday over the descending
trendline that began back in May of 2001.

With respect to what to expect from the market in the near-term,
I reluctantly report that we should expect more of the same.
That's right, weakness should predominate, with short and sharp
bullish moves while we all try to best position ourselves for
the rally we all "know" is coming.  You see that is the part
that bothers me the most.  The entire market seems to have
accepted that there will be a quick resolution to the Iraq
conflict and the market will respond by putting on a powerful
rally.  Hey, nothing would make me happier, but there is nothing
to base it on.  The reason it concerns me is that it seems most
investors (and certainly the financial media) have accepted it
as fact.  To me, that is very dangerous, since the market is
called the Great Humiliator for a reason.

The VIX is not showing any signs of a market that has changed
its stripes, meandering back near the 36 level at the close on
Friday.  Aside from the failed push through 40 on Wednesday,
the VIX remains confined below the descending trendline (38.25)
that we've been talking about for weeks on end now.  Take note
of the 200-dma of the VIX, which is now at a new all-time high
of 35.40.  Using the maximum possible downward deviation of 18%
below the 200-dma, I now peg the "floor" for the VIX in the
vicinity of 29.  That's right, a VIX of 29 (historically a top)
may now be a bottom, signaling us to buy puts.  If you're
wondering about the logic behind that statement, I'll refer you
to my February 12th Options 101 article, "Fixated on the VIX".
There I went into great detail about the changes I see in
VIX-land, and so far I haven't been proven wrong.  GRIN

I really haven't said anything about the technicals in this
market, and the primary reason is that they haven't changed. 
Sure the H&S targets were achieved in the DOW, SPX and OEX,
but we still have bullish percents in the bear confirmed
condition.  There is very little sign of internal strengthening
just yet, and I don't expect to see it until we get resolution
to the Iraq mess.  But in the midst of that confusion and
indecision there will always be the opportunity for gains.
Along those lines, I think we've managed to pick up on some
viable targets in the past few weeks and from the look of the
LEAPS Portfolio, things are looking good.  Care to take a look
with me?


QCOM - After spending the better part of a month meandering
between the $33-36 levels, it was certainly reassuring to see
the stock take part in the broad market rebound on Thursday, and
then hold onto the majority of those gains heading into the
weekend.  Of course, that just lifted the stock back up to the
broken ascending trendline (just under $38), and the bearish
resistance line of $38 on the PnF chart.  It is going to take
another strong push to vault QCOM through that level and we're
going to need to see a trade at $40 to get the PnF chart back
on a Buy signal.  But this is one of the distinct benefits of
getting a good entry point.  It gives us the ability to wait
for the move in our favor, without constantly worrying that the
play is in the red.  With the break out of the recent
consolidation area, it seems safe to raise our stop to just
below the bottom of that area.  It is now set at $33.

DJX - We've got several recent examples of excellent entry points
into bullish plays.  Our DJX play is an example of a poor entry
point.  Even after the strong short-covering late last week,
we're just barely back to break even on the play.  Of course,
if the market can get some upside conviction (other than a brief
bout of short-covering), then we'll be in the green and far less
concerned with a poor entry, except for an interest in avoiding
another one in the future!  Weekly Stochastics are still
pointing north, but there's some strong resistance first at $79,
then $80.50 and then $81.50, all of which will have to be cleared
before the bulls can challenge the H&S neckline near $83.  With
the DOW Bullish Percent still buried down at 10%, we haven't
yet seen any of the internal strengthening necessary to suggest
an extended upside move.  At least not yet.  But at these
levels, risk is more in favor of the bulls than the bears.  Keep
stops set at $74.50  As mentioned in the mid-week update, if
this position is stopped out, we'll look to re-enter the play
on a rebound from the $72 area.

MSFT - Finally!  A move in our favor.  After that incessant
downward bleed, I was starting to wonder if this play was going
to be a lemon.  But that rebound from the lows on Wednesday sure
has the play looking a lot better this weekend, don't you think?
Make no mistake, there's some significant technical damage on
the chart that needs to be repaired, with Mr. Softee coming to
rest right at the 50-dma ($24.86), which is still below the
200-dma ($25.45).  There are also numerous levels of resistance
overhead, and the stock won't really be on the road to recovery
until it can close that big gap left behind on January 17th
($26.47 -27.67).  While the PnF chart doesn't show a Sell signal
due to the split, we're really going to want to see a new Buy
signal at $30 to convince us that MSFT really wants to run.

ADBE - We may have jumped the gun on entering the ADBE play, as
described in the mid-week update.  But we didn't miss it by
much, as the stock dropped to the intersection of the 200-dma
and ascending trendline and rebounded smartly.  The stock was
already looking good on Thursday before the company released
its earnings results.  Beating estimates by 3 cents was well
received on Friday, with the stock gapping up strongly and
seeing heavy buying interest (more than triple the ADV)
throughout the day, ending with its highest close since June
14th of last year.  That surge in price created a powerful
Triple-Top Buy signal on the PnF chart.  The vertical count of
$50 (generated last October) is still in play, although it will
likely take some time to get there.  The next obstacle to the
upside is the June gap from $32.64-36.19, which will likely
present formidable resistance.  Now that we've gotten the first
strong move out of the consolidation pattern, it seems safe
to raise our stop to $26.50.

Watch List:

BEAS - Alright, it appears I exercised a bit too much patience
on our BEAS play, but I think I corrected the error of my ways
in time.  This one moves to the Portfolio this weekend.

NVDA - See why we weren't interested in chasing NVDA higher?
Thursday's short-covering spurt got stopped cold at the 200-dma
on Friday.  That isn't to say that this chip stock can't power
through that level, but I like our odds much better if we can
enter on a pullback to strong support first.  Given the
consolidation above the $12 level over the past several weeks,
that level is looking like pretty strong support.  So let's
raise our entry target to $12 in hopes of one more solid
pullback before NVDA breaks above the 200-dma.  It is worth
noting, that last week's trade at $14 puts the PnF chart back
on a Buy signal, with the bullish price target of $23.50.  If
only we can get a favorable entry into the play, we could be
in for an exciting ride.

AA - When initially added to the Watch List, I pointed out that
we were going bottom fishing on this play and at first blush it
looks like we caught a winner.  The stock found support near
the $18.50 level on Wednesday and that was good enough for a
new Portfolio play this weekend.

EMC - Last weekend we talked about waiting for EMC to fall into
the $6.50-7.00 area before initiating a position, and that
patience was rewarded this week.  EMC dipped to an intraday low
of $6.54 on Wednesday before the rebound took it solidly higher
by the end of the week.  EMC moves to the Portfolio this
weekend as well.

NEM - In tandem with the short-covering burst in equities on
Thursday, gold got whacked to the tune of an $11 loss.
Interestingly, the gold stocks didn't really get hit that
hard, suggesting that the bulk of the selling has already taken
place.  At any rate, our $24 entry target hasn't been achieved
yet, and we won't take the plunge until after the war starts or
Saddam retires by other means.  It is that initial post-war
plunge that is likely to give us that attractive entry into
the NEM play, while the masses make the error of selling their
gold shares, losing sight of the real reason they should be
held -- currency weakness.

Despite having several fairly new bullish positions in the LEAPS
Portfolio, I'd be lying if I said I was really wild about ANY of
them.  While I think they are among the best opportunities for
long-term trades in the current market environment, we must not
lose sight of the fact that this environment is HIGH RISK.  If
you can take the risk and sleep at night then feel free to play
along.  For those of you that aren't comfortable with the risk,
there's no harm in remaining on the sidelines in cash until the
geopolitical situation becomes more stable.  Once that happens,
it will allow us to make decisions based on the economy and
corporate profits once again, not the next war-related press

Have a great week!


LEAPS Portfolio

Current Open Plays


QCOM   02/14/03  '04 $ 40  LLU-AH  $ 4.60  $ 5.30  +15.22%  $33
                 '05 $ 40  ZLU-AH  $ 7.90  $ 8.70  +10.13%  $33
DJX    02/25/03  '03 $ 80  DJX-LB  $ 6.40  $ 6.20  - 3.13%  $74.50
                 '04 $ 80  YDJ-LB  $ 9.30  $ 9.40  + 1.08%  $74.50
MSFT   02/27/03  '04 $ 25  LMF-AE  $ 3.20  $ 3.80  +18.75%  $22
                 '05 $ 25  ZMF-AE  $ 5.10  $ 6.00  +17.65%  $22
ADBE   02/28/03  '04 $ 30  LAE-AF  $ 4.70  $ 6.60  +40.43%  $26.50
                 '05 $ 30  ZAE-AF  $ 7.50  $ 9.60  +28.00%  $26.50
AA     03/12/03  '04 $ 22  KJP-AX  $ 1.15  $ 1.80  +56.52%  $17.50
                 '05 $ 25  XAP-AE  $ 1.50  $ 2.05  +36.67%  $17.50
BEAS   03/12/03  '04 $ 12  LZP-AV  $ 1.55  $ 2.40  +35.42%  $7.50
                 '05 $ 12  ZWP-AV  $ 2.75  $ 3.70  +34.55%  $7.50
EMC    03/12/03  '04 $  7  LUE-AU  $ 1.40  $ 1.65  +17.86%  $5.50
                 '05 $  7  ZUE-AU  $ 2.15  $ 2.60  +20.93%  $5.50


LEAPS Watchlist

Current Possibles


NVDA   02/02/03  $12           JAN-2004 $ 12  KMF-AV
                            CC JAN-2004 $ 10  KMF-AU
                               JAN-2005 $ 12  XMF-AV
                            CC JAN-2005 $ 10  XMF-AU
NEM    03/09/03  $23.50-24.00  JAN-2004 $ 25  LIE-AE
                            CC JAN-2004 $ 20  LIE-AD
                               JAN-2005 $ 25  ZIE-AE
                            CC JAN-2005 $ 20  ZIE-AD
QQQ    03/16/03  $24.00-24.50  JAN-2004 $ 26  KLF-AZ
                            CC JAN-2004 $ 22  LKF-AU
                               JAN-2005 $ 26  ZWQ-AZ
                            CC JAN-2005 $ 22  ZWQ-AU
DJX    03/16/03  $72           DEC-2003 $ 76  DJX-LX
                            CC DEC-2003 $ 72  DJX-LT
                               DEC-2004 $ 76  YDJ-LX
                            CC DEC-2004 $ 72  YDJ-LY


New Portfolio Plays

AA - Alcoa Inc. $18.87  **Call Play**

For the first part of last week, AA was looking anything BUT
bullish, as the selling pressure in the broad market drove the
stock further below its February lows.  But it was interesting
how the stock found strong support near the $18.50 level, right
at the bottom of the October 11th gap.  As noted in the mid-week
update, the mild rebound from that level on Wednesday looked
good enough to me to call that a solid entry point into the
play, and were we ever rewarded for that one.  Thursday was a
runaway success for the bulls, and AA was dragged (albeit
kicking and screaming) back towards the $20 level by the end of
the day on Friday.  To say that the bulls have a lot of work to
do on this one is an understatement, but we have the advantage
of having nabbed an excellent entry point, where we can very
effectively manage our risk.  We've got just over $1 of risk to
our $17.50 stop and it will likely take a breakdown in the broad
market below the October lows to trigger that kind of selling in
AA.  So here's how we're going to manage the play.  When the
stock manages to crest the $21 level on a closing basis, we'll
raise our stop to $18.50 and once over $22, we can ratchet up to
$19.25 (just below the top of Thursday's gap).  Needless to say,
the first big obstacle will be the 50-dma at $20.74, but I like
the technical picture here.  Keep in mind that AA was one of
only 3 DOW stocks during the latest market decline that did not
generate a PnF Sell signal.  And with the broad market doing its
best to put in a near-term bottom, AA could very well challenge
its 200-dma ($24.14) in the next couple months, market
permitting.  While LEAPS on AA are incredibly cheap, that is a
notable advantage to the play.  The stock is only up a little
over $1 from our entry on Wednesday, but the listed LEAPS are
showing a very nice paper gain already.

BUY LEAP JAN-2004 $22 KJP-AX $1.15
BUY LEAP JAN-2005 $25 XAP-AE $1.50

BEAS - BEA Systems, Inc. $10.00  **Call Play**

As we've noted in recent weeks, our desired entry target into
BEAS was in the $8.50-9.00 range, and given the persistent
weakness in the broad market, I was sure that it would be
imprudent to rush the entry.  Well, that rebound from the
$9.15 level looks like the best we could have done, as the
bulls really came out to play during the latter half of last
week.  The push back up to the $10 level (exactly) at the
close on Wednesday convinced me that the rebound was underway,
in large part due to the increasing volume.  That rebound
continued on Thursday, with the stock plowing through the
20-dma and coming to rest just below the 50-dma at the close
on Friday.  The short-covering surge on Thursday broke the
stock's descending trendline from the January highs, but I'm
not convinced that we're out of the woods just yet.  We could
very well see another drop to test that bullish support line
on the PnF chart at $8.50, and that is the primary reason why
I'm keeping the stop rather generous, down at $7.50.  Weekly
Stochastics are very much in our favor, as they are just
starting to poke up out of oversold territory, but we need to
keep in mind that the PnF chart is still bearish until we see
a trade at $13.50, generating a new Buy signal.  I would view
any return to the $9.50-10.00 area as a second chance for an
entry into the play, but I would not be interested in chasing
the stock higher from here.  If you missed this entry, wait
for the stock to come to you.  Our first target on the upside
is $14 (the January high) and then the $20 level, which will
likely be very strong resistance.

BUY LEAP JAN-2004 $12 LZP-AV $1.55
BUY LEAP JAN-2005 $12 ZWP-AV $2.75

EMC - EMC Corp. $6.93  **Call Play**

While just a shadow of its former self, EMC has really been
looking much healthier in recent months.  Sure the stock has
been weak with the rest of the market since the middle of
January, but I like the way it rebounded on Wednesday, finding
support near $6.50.  The low of the day ($6.54) was just above
the bottom of the January 6th gap, and the rebound showed a
rejection of that intraday breakdown below both the 200-dma
($6.72) and the 38% retracement of the rally off the October
lows ($6.71).  I'm thinking that's an important level.  Below
the aforementioned gap, there is strong support at $6, and the
fact that EMC didn't challenge that support level indicates a
bit of relative strength to me.  Sure enough, a look at the
relative strength chart (relative to the COMPX) shows a steady
series of higher lows since the middle of October.  Don't look
now, but EMC's PnF chart is still on a Buy signal, and the
bullish price target equates to $15.50.  Isn't it interesting
that the bearish resistance line is currently $15?  There's no
guarantee the stock will get there, but it at least gives us a
long-term target to shoot for.  The big obstacle to deal with
right now is the 18-month descending trendline that is
currently at $7.90.  That trendline turned the stock back in
January, and will take some serious bullish enthusiasm to crest
on the next test.  Then we'll have to deal with the January
high (also the August 2002 high) at $8.50 and the July 2002
high near $9.40.  So it should be clear that there is a lot of
work that needs to be done to the upside (and an improving
economy would certainly help!), but now that we've gotten a
solid entry, the rest should take care of itself.  We're
starting out with our stop at $5.50, as a trade at that level
is what would be required for a PnF Sell signal.

BUY LEAP JAN-2004 $7 LUE-AU $1.40
BUY LEAP JAN-2005 $7 ZUE-AU $2.15

New Watchlist Plays

QQQ - NASDAQ-100 Trust $25.72  **Call Play**

We've been talking for the past few months in this column as well
as others about my expectation for the NASDAQ market to
outperform the broader market this year.  This belief is based
on relative strength studies, the fact that the NASDAQ suffered
a steeper fall than the rest of the market, and just the basic
chart patterns.  A perfect measure of that relative strength is
seen on the daily chart of the QQQ, which seems to be finding a
firm bottom in the $23.50-24.00 area, well above the October
lows.  Contrast that to the SPX or INDU charts, which show the
broader indices very close to testing their October lows in the
middle of last week.  But here's the real clincher.  Thursday's
rally took the QQQ through both its 50-dma ($25.00) and its
200-dma ($24.80) on strong volume.  Note that the 50-dma is back
above the 200-dma and the 50-dma is just starting to turn up. 
Finally, QQQ broke above its descending trendline ($24.93), and
this is no short-term trendline.  It has been capping every rally
in the stock since May of 2001!  Demonstrating the significance
of that breakout, it came on volume of more than 128 million
shares vs. the ADV of about 67 million.  Is this the end of the
bear market in Technology?  I sincerely doubt it.  But it does
look like an important inflection point that could result in a
pretty impressive rally in the months ahead.  Our challenge now
is to try to grab a solid entry point.  Risk is starting to
shift in favor of the bulls with the NDX bullish percent
appearing to be reversing from the 30% level.  Now we just need
to look for one more dip near strong support to give us an
entry into the play.  My preference would be for a rebound from
the site of Thursday's gap ($24.23-24.64), but I recognize we
may not be that fortunate with the apparent inflection point
seen on Thursday.  So let's target a rebound from the
$24.75-25.00 area for new entries.  After entry, initial stops
will be set at $23, just below the recent lows.

BUY LEAP JAN-2004 $22 KLF-AU **Covered Call**
BUY LEAP JAN-2005 $22 ZWQ-AU **Covered Call**




Looking Way Up

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New Highs Everywhere

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