Option Investor

Daily Newsletter, Monday, 03/24/2003

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The Option Investor Newsletter                   Monday 03-24-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Bulls First to Surrender
Futures Wrap: The Other Shoe
Index Trader Wrap: Making Predictions
Weekly Fund Wrap: Mixed Results for Stocks and Funds
Traders Corner: Going Against The Grain

Updated on the site tonight:
Swing Trader Game Plan: A Sign From Below

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
03-24-2003                  High    Low     Volume Advance/Decl
DJIA     8214.68 -  307.29  8514.82 8185.20   1535 mln  80/1447
NASDAQ   1369.78 -   52.06  1392.40 1368.37   1301 mln 109/1181
S&P 100   439.67 -   16.69   456.41  438.83   totals    189/2628
S&P 500   864.23 -   31.67  895.79  862.02
RUS 2000  367.25 -   8.98   376.24  366.51
DJ TRANS 2183.35 -  80.14  2263.24 2170.08
VIX        34.75 +   1.13    36.05   34.13
VIXN       46.36 +   0.58    47.34   45.32
Put/Call Ratio 0.85

Bulls First to Surrender
by Steven Price

The recent rally finally ran out of steam, as the weekend war
effort brought roadblocks the market wasn't expecting.  What had
seemed like a cakewalk, with little Iraqi opposition, turned ugly
with captured U.S. soldiers, casualties and some actual
resistance on the way to Baghdad.

The expectation of a quick finish to a war that seemed on pace to
end over the weekend came to a halt  - as did the apparent
combination of short covering ahead of a possible surrender and
the euphoria over the U.S. taking full control of the oil fields
- and sent the markets into reverse.

After an 1100 point gain in the Dow in the previous eight
sessions, we started out the day giving back almost 300 of those
points.   The Dow fell back below a previous significant level of
support that appeared to have been the first possible entry point
at which bulls could have stepped in and bought a dip. With the
recent rally taking out plenty of resistance levels and this
morning's drop taking out previously significant support levels,
playing the technical pivot points is becoming that much more
difficult in an environment that is news driven and seems to
hinge on every advancement, or lack of advancement, by U.S.
troops in Iraq. By the end of the day, the Dow had dropped over
300 points and the Nasdaq Composite had given back more than 50

We also saw tensions escalate between the U.S. and Russia on U.S.
charges that Russia had sold weapons to Iraq in violation of U.S.
sanctions.  Think there may have been another reason Russia
didn't want the U.S. moving into Iraq?  Maybe they were afraid of
what we'd find.  Vladimir Putin said he would investigate the

We pulled back into a pivotal 'zone' however, and how we react to
that zone may determine whether this is truly a direction
changing pullback, or simply a 'buy the dip' opportunity.  The
Dow found support in the 8200-8300 range during the formation of
its head and shoulders patterns during the fall and winter, and
the 440 level in the OEX served a similar purpose. Now that we
are back around those levels, after soaring through them on
Thursday and Friday, a bounce from here would still suggest that
the rally is holding.  After all, a gain of 1100 points, followed
by a pullback of 300, is not necessarily bearish.  However, we
got a break below OEX 440 on the news of an explosion near U.S.
Navy 5th fleet base in Bahrain.  That dropped the broader markets
through yet another level of intraday consolidation.  However,
once it was learned that the explosion was caused by a protestor
blowing up a propane tank, the OEX quickly jumped back above that
440 level.  Bulls can point to that activity as evidence that
support around 440 remains solid.  However, doesn't that activity
show just how driven we are by news, as opposed to technical
levels?  By the end of the day, we ticked down to OEX 439.83, but
0.17 is not exactly a decisive violation and where we head from
here on Tuesday could be crucial for the near future.  A break
below the 437 level would indicate that the 50% retracement of
the August-October high-low range has been violated and would
look bearish.  We bounced from that retracement on Wednesday and
Thursday, so traders can set a bearish alert on a break below OEX

Chart of the OEX

Chart of the Dow

The oil market also reflected the concern that the war may not
end as quickly as had been expected.  Even though we got
continued comments from President Bush that this invasion could
take a while, oil futures had dropped 26% since March 12.  The
May futures fell back into a resistance zone from last fall, when
the U.N. debates were still in the early stages.  The rise in the
price of oil over the past several months reflected both higher
costs to businesses and consumers and also served as a barometer
of the likelihood of war and victory. The inverse relationship
between the price of oil futures and the level of equities has
been like placing a mirror between the two charts and that
relationship continued today.  Oil futures spiked $1.75 per
barrel, bouncing from that zone of support and making up 144% of
the drop from Friday.

Chart of the Crude Oil Futures

Further evidence that the developments in Iraq are dominating the
market action came from the activity in travel related stocks.
The Airlines took a beating, reversing much of Friday's gain in
the XAL, with a loss of 9%.    Some of the biggest losers in the
sector were American (AMR -12%), Continental (CAL -17%) and Delta
(DAL -15%).  The hotel stocks also headed lower, with Starwood
(HOT) losing 10% and Marriott (MAR) dropping 8.6%.  Part of this
was due to Starwood withdrawing first quarter and full-year
guidance, but even that was related to the Iraq situation.  The
company said there was "significant deterioration in business due
to the elongated Iraq negotiations and the related geopolitical
conditions that worsened over the quarter and culminated recently
in armed conflict."  The bleeding continued into the travel
reservation stocks, with big losses in Expedia (EXPE -4%),
Hotels.com (ROOM -6.7%) and Sabre (TSG -5.3%).

Those traders following the bullish percents of the major indices
have seen the rally produce the first upturn in those percents
since December. That indicates that there has been enough buying
interest to not only make up for recent losses, but establish
enough point and figure buy signals to change the percent of
stocks giving those signals in the Dow from 10% to 40%.  It would
also indicate we should be looking to buy dips, as those percents
are just coming out of oversold territory and are nowhere near
overbought at 70%. But there are a couple of concerns here.
First is picking a support level as a bottom after a meteoric
rise that didn't pause for very long at any particular point.  If
the previous levels of support and resistance weren't very
important on the way up, with the market simply moving on geo-
political developments, then they may not be significant on the
way back down, either.  Which brings us to the second concern -
how much do the technical market indicators mean when we are in
this environment?  If the action from last week is any
indication, the market loves a U.S. victory and if traders
believe we will eventually be successful, then shouldn't we at
least revisit the level we were at before the weekend, when
victory seemed imminent?  Of course a bear would suggest that the
world mostly believes the U.S. will eventually be successful and
we still got a big correction today; so maybe last week's action
was just short covering to protect positions in case of a victory
over the weekend and now those shorts aren't in such a hurry to
cover.  If that is the case, then we could be looking at a return
to the previous downtrend once the war is behind us and traders
are left to focus on the economy.

Chart of the Dow Bullish Percent

Certainly we could have expected the travel related stocks to
suffer during war time, as Americans and even worldwide travelers
would avoid the dangers of traveling and U.S. citizens also want
to avoid the possibility of attacks in foreign countries.  But
how is the war affecting spending here?  Retailers saw a drop of
about 3% in sales during the 1991 conflict.  This time around
analysts have been expecting a drop of only around 1% as a result
of war.  However, Federated (FD) announced it was seeing a drop
of 3-4% since last Wednesday and J.C. Penney said sales were
trending below expectations, as well. Wal-Mart, on the other
hand, said sales were on target over the weekend.   We get
Consumer Confidence numbers out on Tuesday, so we should get a
snapshot of how the war is affecting consumers' willingness to
spend. Of course, with things turning south just over the
weekend, we may have to wait for the University of Michigan
Consumer Sentiment report on Friday for a clearer picture.

The defense sector was one of the few winners today in the
equities, with the DFI gaining 0.55.  These stocks were sold off
hard even as the U.S. moved closer to war.  They bounced on the
invasion and then sank as the U.S. forces got little opposition
in the initial phase.  However, today we saw gains from
contractors such as Northrop Grumman (NOC +$2.08), Lockheed
Martin (LMT +$1.00) and L-3 Communications (+$0.35), following
the possibility that a longer war will require more re-stocking
of the U.S. arsenal.

Traders watching the Semiconductor Index for indications of tech
sentiment saw that group turned back from its exponential 200-dma
(337), where it ended on Friday, as the selling hit all sectors,
with the exception of defense. The SOX, which cracked its simple
200-dma (currently 313) last week, is now sitting between the two
averages and the next move through either should give us an
indication of which way the techs are headed next.

The NYSE ran into some public relations problems on the
nomination of Citigroup CEO Sandy Weill to sit on its board.
After shaking his head at the effect that putting the CEO of a
company that has had some problems with the SEC on the board of
the NYSE, New York Attorney General Eliot Spitzer called NYSE
chairman Dick Grasso and said he would publicly and vigorously
oppose Weill's appointment. Weill eventually withdrew from

We continue to see news driven markets and picking a direction
will be extremely tough under these circumstances.  As long as
OEX 437-440 holds up, traders looking to capitalize on rising
bullish percents can try buying the dip.  However, as this
afternoon's propane explosion highlighted, support/resistance
levels may not hold up the way they would in a traditional market
scenario and traders relying on them should be trading only high
risk capital.


The Other Shoe
Monday, March 24, 2003
By Vlada Raicevic

Daily Settlement Numbers 4:15pm ET

Contract    Last          Net        High         Low

Dow         8214.68      -307.29     8514.82     8185.20
YM 03M      8190         -290        8404        8154

Nas 100     1047.10      -46.02      1068.46     1045.65
NQ 03M      1050         -44.50      1087.50     1047.50

S&P 500     864.23       -31.67      895.79      862.02
ES 03M      863.50       -29.75      885.50      860.50

Daily Pivots

Contract    S2        S1        Pivot      R1        R2
YM 03M      7984      8065      8234       8315      8484
NQ 03M      1019      1030      1059       1070      1099
ES 03M      843       851       868        876       893

That flashing light was the upside explosion of the markets last
week.  It may have briefly blinded those who tend to remember that
there two sides to the market.  A strong down day across the
board, with the only green on my screen coming from gold stocks.
The day started with a large gap down with hardly any attempt to
fill that gap.  Instead, the initial move down was very strong,
forming a large red candle, then, downside momentum virtually
ended, and the rest of the day was spent dribbling down in tiny
increments.  Attempts to move up were barely noticeable, with the
exception of one real attempt after three o’clock, but that ended
without even breaking minor resistance at 868 area before sellers
showed up again.  Prices didn’t reach the day lows after that, but
the lack of any buying has left the markets rather oversold on
shorter term charts.

Even though the markets are now a two-wheeled cart pulled by the
horse of war news, we will attempt to see what the technicals say.
No matter what the news, there will always be some technical
levels that are extremely difficult to ignore.  Although those can
be briefly bypassed when extremely good or bad news hits, it’s
something we can’t plan on.

ES 270 Minute all Session Chart:

Taken a turn to the bearish.  Price has not broken below recent
support areas (861, 857), so there is hope yet for a bounce from
the selloff.  Macd has rolled over and is threatening to break the
centerline, but still has a chance to bounce off it.  Fast
stochastic is getting fairly oversold as well, but longer term
stochastic has crossed and is starting to roll over.  RSI has also
broken below it’s recent trendline, lows, and the centerline.
This chart shows a POTENTIAL breakdown, but is not yet complete.
There is room to turn this around.

ES Daily:
Quick look shows that the break so far above the upper regression
channel is not sustainable for long.  Indicators show slight
rolling over, but after the strong move up last week, they are not
going to tell us much without at least two more days of data.  For
now, the extreme overbought aspect of the market is being allowed
to reset.

ES 60 Minute Chart:
Shorter term shows all bearish aspect: Macd crosses centerline
since it moved above, as has slow stochastic and RSI.  ADX has
crossed to bearish.  Note however, that price is at a support
point, and that CCI has pulled far away from it’s 13sma, so we’re
overextened on the selling.  Remember though, we stayed
overextened on the upside for quite some time.  Fast Stochastic is
also bottomed, and is crossing up, telling us we have the chance
for a bounce, but how far is the question.  Use the centerline for
this fast stoch as a way of seeing whether there is more downside
left (if so, it will be repelled by the centerline, or close to

NQ 270 All Session Chart:
This broke today, and more so than the ES/YM, showing that the NDX
is showing more relative weakness.  Much of the commentary from
the ES pertains to this chart as well, only with the breaks biting
a little bit deeper.  With three areas of support holding price,
this has a good chance of bouncing.  Note that the ADX did cross
bearish, but that the low volume selloff today has that indicator
going sideways, along with the RSI.  While a bounce should be
expected tomorrow, the strength of that bounce should give more
insight into this longer term chart.

NQ Daily:
Today’s close erased four days of range in the NQ.  Macd and fast
stochastic are just beginning to cross over, RSI and CCI both are
looking bad, with CCI looking to cross below its 13sma.  It looks
like 1034 and then 1020 are next unless the slide is halted.

NQ 60 Minute Chart:
We are at the bottom of the blue regression channel, which should
provide some support.  Macd broke the uptrend line and centerline
but has stalled its descent.  Slow stochastic is still pointing
down but getting to a range where two more bars will get it to
oversold status.  CCI has room to go down more, but has no trend
at the moment.  In fact that is the undercurrent to this chart:
trendless.  After a strong move down to put indicators into
bearish territory, the momentum just completely stalled out.

On all charts, you can see that they tell us the same thing as
price, hard selling out of fear or desire to lock in profits, then
absolutely nothing.  No hint of whether this big down day was a
turn in the overall trend, or just some residue fear that was
lingering behind the extreme bullishness.  For bears, there may be
hope the tide has turned, but nothing definite.  For bulls, there
is fear that the tide has turned.  Which is it?  From a purely
technical view, we needed a strong pullback day to remove the
extreme overbought conditions, and we got one.  True, it was
uglier than expected, and that is the reason we have the right to
wonder if this could be a change in trend.  Let’s not get ahead of
ourselves though.  No real test of support has been attempted.  If
this market weren’t trading on war emotions, we could say tomorrow
may be a good day to judge how the market reacts to either
additional selling, or a rebound from today’s selling.  However, I
fear that all we’ll see is the market reacting to whatever happens
in Iraq overnight and during the day.


Renko Charts.
These will be updated when necessary.  Prices are at highs and

Daily Renko for ES:

Daily Renko for NQ:

Daily Renko for YM:
This one is a little more difficult.  I set the box size to 5
rather than 2, and I don’t display the huge climb from the recent
rally (it would take up most of the chart).  With the larger box
size, the absolute numbers have a slightly larger margin of error.


Making Predictions

After a steady stream of discouraging news this weekend, traders
woke this morning to higher gold prices and lower dollar values
against the euro.  European markets were already reacting to
weekend developments, having dived 3% as they fell toward levels
that would take the European markets down 3-6% by the end of their
trading day.

A televised address by Saddam Hussein, in which he named cities
under attack by coalition forces, proved one catalyst to early
market declines.  A close examination of the televised address
soon showed abrupt camera angle changes, indicating that the
address had been taped and edited.  Soon Pentagon observers noted
that Hussein praised Iraqi commanders who had surrendered last
week without offering a fight, leading many to speculate that the
address had been taped prior to the war's opening.

By the time Pentagon observers were making those remarks, market
participants were learning of downed helicopters and increasing
casualties in intense fighting near the southern Iraqi city of
Nasiriyah. This news drove home the thought that the war might be
more protracted than many had hoped.  In addition, civil unrest in
Nigeria added to worries about crude oil supplies, with Nigeria
being the fifth largest supplier to the U.S.  These worries
propelled crude oil prices off their four-month lows from last
week.  Higher crude oil prices and a more protracted war led many
to question the impact both would have on fragile economies.
Market participants will have their first opportunity to study one
effect tomorrow:  President Bush will unveil his team's estimates
of the war costs, speaking from the Pentagon.  Current estimates
are that the initial request will be for $70-75 billion.

Not to be exceeded by European markets, many U.S. markets achieved
losses larger than 3%, too, with the Dow Jones Industrials falling
3.60%, the SPX falling 3.52%, and the COMPX falling 3.66%.  Volume
patterns started out negative and stayed that way throughout the
day, with down volume being 19 times up volume on the NYSE and
10.75 times up volume on the Nasdaq.  Total volume was 1.26
billion on the NYSE and 1.3 billion on the Nasdaq.  While total
volume wasn't as strong as that on the rallies last week, many
market pundits say that volume confirmation is not as important on
declines as it is on rallies.

What's next?  Last week, a loyal reader wrote with a request that
I provide an expected range for the OEX over the next month.  I
declined to do so last week until I had seen a pullback on the
OEX.  I wanted to see whether the OEX would touch the next light
support and spring up again or whether it would tumble through
support as easily as it had cut through resistance.  Today proved
that the decline would not be a shallow one with a quick bounce,
but today's ending level still left some questions to be answered.
It may still be too early to give a one-month prediction for the
OEX, but let's see what can be determined.

The first question to be asked is whether this is a bear-market
rally or the beginning of a new bull rally.  I wish I knew.
Today's action led to a four-box reversal on the OEX P&F chart.
While far from giving a new sell signal, this quick reversal does
call into question the possibility that the OEX might give a high
pole warning.  This occurs when a column of "X's" rises above
previous column by at least three boxes, which the OEX has done,
and then reverses and gives back at least 50% of the rise, which
the OEX has not yet done.  Until the OEX reverses back into a
column of "X's," however, the possibility exists.

A similar potential can be discovered on the OEX hourly chart.
OEX 60-minute chart:

As those who have been reading the Market Monitor know, I've been
watching a bearish rising wedge that began forming as the OEX
moved off the March 12 low.  As Meyers and Pring point out, bear-
market rallies often take this shape, and a downside break of the
formation usually results in a sharp fall.  That break actually
came on the 20th, but instead of the expected precipitous fall,
the OEX climbed the outside the wedge.  The precipitous fall came

On the hourly chart, notice that the OEX plunge stopped just above
the support level marked by the two blue lines and one green one.
These lines represent important retracement levels.  The top blue
line marks the 50% retracement of Friday's move at 438.29.  The
green line marks the important 50% retracement of the October-to-
December move at 437.87. That number is also almost exactly the
50% retracement of the July to August rally, so it has double
significance. The lower blue line is the 38.2% retracement of the
rally off the March 12 low.

From looking at this hourly chart, then, we can conclude that the
rising wedge was a bearish formation.  We can conclude that
today's drop was precipitous, but still the drop stopped just
short of those important retracement levels.  One theory suggests
that since the rally off March 12 lows retraced a large proportion
of the previous decline, the subsequent reaction might be shallow.
That would suggest a 1/3 to 1/2 retracement of the recent rally
before another attempt to rally.

So far, then, here's what we've got:  a new P&F buy signal, with a
reversal down into a column of "O's" that may or may not give a
high pole warning; a bearish rising wedge that's typical of bear-
market rallies; a breakdown from that wedge and a precipitous
drop; and a stop short of important retracement levels.

Anyone noting the rise from the March 12 low would observe that
the low was a higher low.  What if the OEX stopped the current
descent at these levels, and then moved above the January 475
high?  That would produce both a higher low and a higher high on
the daily chart.  Would that preclude a continuation of the bear

Not if the Nikkei is any guide.  Jonathan Levinson has often
mentioned the ferocity of the Nikkei's bear-market rallies, and I
decided to take a look at the recent history of the Nikkei.  In
November, the Nikkei rallied from 8246.53 to 9251.83 in nine
trading sessions.  During that sharp rally, it paused once,
forming a tweezer top--a bearish candlestick pattern--with prices
completely retracing the previous day's large gains, then resumed
the rally.  The rally began from a slightly higher low and
surpassed the previous November peak, creating both a higher low
and a higher high.  As it climbed toward that new relative high,
it gave a new P&F buy signal, predicting a new upside target.  It
consolidated another couple of days and then fell again, bouncing
at 8300 support a few times before falling to a fresh 20-year low
in March.  Along the way, it gave several new P&F buy signals that
also failed to achieve their targets.  One of those new signals
pushed the Nikkei two boxes above its bearish resistance line
before that buy signal failed, too.  That November rally, as
fierce as it was and with all the attendant bullish signs, did not
signal the end of the Nikkei's bear market.

If a bear-market rally can accomplish the Nikkei's 13% gain in
nine trading sessions, achieving a higher low and a higher high,
create a new P&F buy signal, and then fail, only to lead the
Nikkei into new multi-year lows, we can't yet discount the
possibility that our markets could do the same.  So how am I going
to provide that range for the loyal reader?

Let's turn to two other indices for a hint.  In March, the Dow
Jones Transports fell to new multi-year lows, but the Dow Jones
Industrials did not.  What happens when the two averages don't
confirm each other?  Which is right?  On page 39 of TECHNICAL
ANALYSIS EXPLAINED, Martin Pring asks the same question when
explaining Dow theory.  His conclusion is that "[s]ince it is
always assumed that a trend is in existence until a reversal is
proved, the conclusion should be drawn at this point that the
Transportation Average is indicating the correct outcome."   When
would that conclusion be proved false?  When both the Dow Jones
Industrials and Transportation Index surpass previous peaks,
giving a new Dow theory buy signal.  That would require a move
over 2425.75 in the Dow Jones Transportation Index along with a
confirming move over December and January peaks in the Dow Jones
Industrials.  Pring cautions that the "movement of one average
unsupported by the other can often lead to a false and misleading
conclusion."  He also cautions that signals can come late.  Today,
the transports fell more than 90 points, below 2190 support, with
a bearish daily candle that hints at downside more than it does of
a continued rally.

Now we have an hourly chart that offers the possibility that the
recent rally was a bear-market rally, but did not fall to levels
that confirm that likelihood.  In the behavior of the Nikkei, we
see that markets can form higher lows, create new P&F buy signals,
rise to a higher relative high, and yet still continue a bear
market.  In the behavior of the transports, we see a lack of
confirmation of the higher high shown by the industrials, along
with Pring's assertion that until both make new relative highs,
the presumption must remain that the transports are right and the
bear market continues.

A scan of the OEX, SPX, DJI, COMPX, and SOX show all turning down
from challenges of their exponential 200-dma's, with oscillators
looking toppy or rolling as the failures occur at these important
moving averages.  Markets that appear to be turning down can turn
back up, however, and the oscillators can turn up along with them.
Ask anyone who tried to enter bearish trades last week on seeming
breakdowns, after which the oscillators promptly redrew themselves
and headed up again.

We still have no answer for the loyal reader.  Let's look next at
the OEX weekly chart.  I'm using a log chart rather than a linear
chart, because many technicians feel that a log chart is
preferable when a big movement has been encompassed.

OEX Weekly Chart:

Note the descending blue line that is the long-term descending
trendline.  That descending trendline has not yet been crossed,
which means we must conclude that the long-term trend is still
down.  On the linear chart, Friday's rally moved the OEX slightly
above the trendline, with today's prices bringing it back below
the trendline again.

On this weekly chart, note also the horizontal red lines that mark
the 385-487 trading range that has marked the OEX's movements in
the last months.  You've seen this chart before, but within that
trading range, I've also marked out a neutral wedge that's forming
on the OEX.  Either the range or the neutral wedge can be
continuation patterns or reversal patterns.  Here's the tough
part.  Until the OEX breaks out of that trading range, we won't
know which they are.

So, here's my prediction for this month.  The neutral wedge is
narrowing down toward its apex.  With that narrowing, I do believe
the OEX will break out of that wedge within the month.  This means
that the wedge will not likely define a range for the OEX for the
next month.  A breakout in either direction might send the OEX to
test the boundaries of the marked-in-red trading range in quick
order, which means that the OEX should see a test of either 385 or
487 within the next month.

Which is it going to be?  I don't know.  Sorry, loyal reader, but
the direction is not predictable with consolidation patterns.
Since the OEX entered this consolidation pattern while descending,
the presumption is that the pattern is a continuation pattern.
Therefore, I feel safer suggesting a 487 or even a 475 (January
high and location of descending trendline) high for the OEX over
the next month than I do suggesting a low.  My best guess at this
point is that the OEX will break out of the neutral wedge to the
downside and then retest the lower end of the trading range.

However, we should have better evidence as the week progresses.  A
move below those retracement levels shown on the OEX 60-minute
chart would probably next send the OEX down to test the 50%
retracement of the rally off the March low.  That retracement
would come at 428.30, and a failure there would probably propel
the OEX down to test that lower supporting line of the neutral
wedge.  That may all happen this week.  The alternative version--a
push up through the neutral wedge and a test of the upper end of
the OEX trading range and the descending trendline--is within
reach this week, too.

Many of the characteristics of the OEX chart are apparent on other
index charts today:  bearish candlestick formations and toppy-
looking oscillators on daily charts.  So as not to neglect the
other indices or to disappoint readers who look forward to Jeff's
updates on pivot analysis, I've included calculations for daily
pivots for the major indices.  I note that Jeff makes his
calculations from Stockcharts.com, which sometimes includes
slightly different high, low, or closing figures than does Q-
charts.  To maintain uniformity, I've made these calculations
using Stockcharts.com's information.  Please check Jeff's weekend
update for weekly and monthly pivots, support, and resistances, as
those will not have changed.  Consider verifying this information.

S2 840.24
S1 852.24
Pivot 874.01
R1 886
R2 907.78

S2 427.38
S1 433.52
Pivot 444.98
R1 451.12
R2 462.58

S2 7975.28
S1 8094.98
Pivot 8304.90
R1 8424.60
R2 8634.52

S2 1030.97
S1 1039.03
Pivot 1053.77
R1 1061.83
R2 1076.57

S2 1352.87
S1 1361.33
Pivot 1376.87
R1 1385.33
R2 1400.87

Please note that other quote services show differing highs for
both the OEX and the SPX today.  While I've utilized the
Stockcharts.com numbers in the above computations, these are the
computations that would result from using 890.91 and 453.66 SPX
and OEX highs of the day shown by other quote services:

S2 843.50
S1 853.86
Pivot 872.39
R1 882.75
R2 901.28

S2 429.22
S1 434.45
Pivot 444.05
R1 449.28
R2 458.88

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Mixed Results for Stocks and Funds

U.S. stocks finished the week with their eighth straight session
of gains Friday as U.S. troops thrust into Iraq and a "shock and
awe" air campaign fueled hopes for a quick end to the war.  Over
the 5-day period through March 21, stocks as measured by the S&P
500 index, rose by 7.5%, putting the benchmark up 2.2% on a year-
to-date basis.  Other U.S. indices were also higher, such as the
Wilshire 5000 Total Market Index, which climbed 7.2% on the week.

European stocks advanced 5.8% in U.S. dollar-equivalent terms as
the pacific stock index returned 3.5% for the 5-day period.  The
returns of the developed market indices weren't as strong as the
U.S. market due partly to currency translation (stronger dollar).
Emerging market indices were positive, but weaker than developed
markets abroad.

As traders and investors poured money into stocks, the U.S. bond
market took a pounding.  For the week, the Lehman Aggregate Bond
Index declined 1.3%, while the intermediate- and long-term fixed
income indices tumbled even further.  Those indices dropped 1.9%
and 3.4%, respectively, over the most recent 5-day period.  U.S.
bond market declines spilled over into the international markets.

The Fed opted to leave interest rates unchanged, taking a wait-n-
see approach.  In all three sectors - U.S. equity, international,
and fixed income - mutual funds followed suit.

U.S. Equity Fund Group

 Week   YTD
+7.5%  +2.2%  Vanguard 500 Index Fund (VFINX)
+6.6%  -1.2%  Vanguard MidCap Index Fund (VIMSX)
+6.2%  -1.5%  Vanguard SmallCap Index Fund (NAESX)
+7.2%  +1.8%  Vanguard Total Stock Market Index Fund (VTSMX)
+7.0%  +1.9%  Lipper Large-Cap Core Equity Fund Average
+5.7%  -0.6%  Lipper Mid-Cap Core Equity Fund Average
+6.1%  -2.5%  Lipper Small-Cap Core Equity Fund Average
+6.6%  +1.3%  Lipper Multi-Cap Core Equity Fund Average
+6.3%  +6.5%  Lipper Science & Technology Fund Average

Don't look back, but technology sector funds are now up 6.5% for
the year-to-date period through March 21, including last week's
6.3% average gain.  But, the advance last week included all U.S.
economic and capital sectors.  Several funds posted double-digit
percentage returns for the week, led by the ProFunds UltraDow 30
ProFund, up 17.2% and the ProFunds Internet UltraSector Fund, up
17.2% as well.  So, from Dow stocks to Internet stocks, the U.S.
market was broadly higher.

Among U.S. stock funds with assets of $500 million or more, last
week's highest performer was Neuberger & Berman's Focus Fund, up
10.7%.  Other notables included the "tech-heavy" White Oak Growth
Stock Fund (+9.7%), Ariel Appreciation Fund (+9.3%), and the PBHG
Clipper Focus Portfolio (+9.1%).  Several more funds finished the
week in the 8%-9% range.

Large-cap growth funds were the top performers in terms of style,
averaging a 7.2% weekly gain, per Lipper.  At the opposite corner
of the Morningstar style box, small-cap value funds, lagged their
large-cap growth peers.  Small-cap value funds had a 5.9% gain on
average for the week.  Still no one was complaining, perhaps only
those who missed the boat trying to time the market.  Last week's
surge proved one point, that the market often move quickly to the
upside and if you're not on board ("invested in the market"), the
ship will leave you behind.

As bad as the U.S. market has been this year, last week's advance
put the S&P 500 index into the green on a year-to-date basis.  As
good as the investment-grade bond market has been this year, last
week's decline essentially erased all of its YTD price gain.  So,
what a difference a week can make in terms of the returns you may
actually receive.

International Equity Fund Group

 Week   YTD
+5.2%  -4.0%  Vanguard Developed Markets Index Fund (VDMIX)
+3.6%  -1.4%  Vanguard Emerging Markets Index Fund (VEIEX)
+5.1%  -3.8%  Vanguard Total International Stock Index (VGTSX)
+4.6%  -5.0%  Lipper International Fund Average
+2.4%  -3.1%  Lipper Emerging Markets Fund Average
-4.1%  -16.1%  Lipper Gold Fund Average

Foreign bourses moved higher along with U.S. stocks, but returns
in "dollar-equivalent" terms weren't as strong.  The U.S. dollar
rose against major foreign currencies last week, as oil and gold
prices fell.  The average international equity fund returned 4.6%
for the week, per Lipper.

Only a handful of international funds returned more than 10% last
week, unlike U.S. equity funds, where weekly returns were as high
as 17%.  Last week's best performers included ProFunds UltraJapan
ProFund, up 12.0%, followed by Rydex Large-Cap Europe Fund, which
ended the week 11.4% higher.  Dessauer Global Equity Fund notched
a 10.4% weekly return for investors.  So, foreign returns were up
strongly in both Europe and Japan.

Gold funds lost 4.1% on average and are now down 16.1% on average
since December 31 per Lipper.  The group's largest fund, Fidelity
Gold Fund, has a negative YTD total return of 18.0%.

U.S. Fixed Income Fund Group

 Week   YTD
-0.6%  +0.3%  Vanguard Short-Term Bond Index Fund (VBISX)
-1.9%  -0.1%  Vanguard Intermediate-Term Bond Index Fund (VBIIX)
-3.4%  -0.7%  Vanguard Long-Term Bond Index Fund (VBLTX)
-1.3%  +0.1%  Vanguard Total Bond Market Index Fund (VBMFX)
-0.4%  +0.4%  Lipper Short Investment-Grade Fund Average
-1.1%  +0.5%  Lipper Intermediate Investment-Grade Fund Average
-1.4%  -0.4%  Lipper U.S. Government Fund Average
-1.3%  +0.3%  Lipper Corporate A-Rated Debt Fund Average
+0.6%  +5.2%  Lipper High-Yield Fund Average

As traders and investors dove back into stocks, safe-haven bonds
posted sharp losses.  Vanguard Long-Term U.S. Treasury Fund fell
by 3.6% for the week.  Other Vanguard long-term bond funds ended
the week down more than 3% also.  For instance, the $3.8 billion
Vanguard Long-Term Corporate Bond Fund posted a 3.2% weekly loss.

Real-return ("inflation-indexed") bond funds were also hit hard.
PIMCO Real Return Fund lost 2.9% over the week, while Vanguard's
Inflation-Protected Securities Fund posted a negative 3% return.

Low-quality ("high-yield") bond funds continue to do well versus
investment-grade funds.  High-yield bond funds rose 0.6% for the
week on average, per Lipper, while the average intermediate-term
investment-grade bond fund lost 1.1%.  The high-yield fund group
is now up 5.2% on average this year, Lipper shows.

Among bond funds with assets of over $500 million, the week's top
performers were Fidelity Adviser High Yield Fund (1.7%), Fidelity
Capital & Income Fund (1.6%), and Pioneer High Yield Fund (1.1%).

Federated Government Ultrashort Fund was the top performer among
U.S. government bond funds.  It was essentially flat on the week.

International Fixed Income Fund Group

 Week   YTD
-1.8%  +0.8%  Lipper Global Income Fund Average
-2.5%  +0.1%  Lipper International Income Fund Average

With the U.S. dollar stronger last week, international bond fund
losses were steeper than comparable U.S. bond funds.  Per Lipper,
the average international bond fund lost 2.5%, pretty much giving
back all of its reported year-to-date gains.

The group's largest fund offering, the $1.1 billion T. Rowe Price
International Bond Fund had a negative 2.7% weekly return to lead
the group lower.  The American Funds' Capital World Bond Fund was
2.6% lower.

Balanced Fund Group

 Week   YTD
+3.7%  +1.2%  Vanguard Balanced Index Fund (VBALX)
+4.1%  +0.8%  Lipper Balanced Fund Average

Balanced funds recorded a 4.1% average weekly return, per Lipper,
slightly better than the Vanguard Balanced Index Fund, which uses
the Wilshire 5000 index for its 60% equity allocation performance
benchmark.  Many balanced funds invest in large-cap stocks, which
as a group, outperformed the other capital sectors of the market.

The country's oldest traditional balanced fund, the $18.9 billion
Vanguard Wellington Fund, produced a 4.2% weekly return while its
more income-oriented sibling, Vanguard Wellesley Income generated
just a 1.1% weekly gain.  So, the more exposure the balanced fund
had to bonds, the more it lagged its peer group.  Fidelity, Dodge
& Cox, Hartford and T. Rowe Price's balanced funds all had weekly
total returns of 4% or better.

Money Market Fund Group

1.04%  Vanguard Prime Money Market Fund (VMMXX)
0.75%  iMoneyNet.com All Taxable Money Market Fund Average

The iMoneynet.com all-taxable money market fund average held at
0.75% for a second consecutive week.  The highest 7-day (simple)
yield among "prime-retail" money market funds remains the PayPal
Money Market Fund at 1.28%.

Mutual Fund News

Earlier, I said what a difference a week makes.  And, now I have
to say what a difference a day makes.  In Friday's session, Wall
Street surged higher as investors hoped for a quick end to war in
Iraq.  However, events over the weekend dashed hopes that the war
will end quickly, sending stocks lower in today's (Monday's) Wall
Street session.  So, today we're seeing a reversal of last week's
fortunes with stocks getting pummeled, oil prices moving up over
a dollar per barrel, and investors flocking back into safe-haven

According to Morningstar, Putnam Investments' shake-up continues.
The struggling Boston-based fund family announced changes to its
research personnel on Friday, which Morningstar says will likely
bring changes to the way their more-aggressive growth stock funds
are managed.  The article states that many of Putnam's pro-growth
funds have suffered deep losses, causing shareholders to head for
the exits.

The Vanguard Group announced that Ian MacKinnon will step down as
managing director of the company's fixed-income group on June 30,
2003.  According to Morningstar, MacKinnon had been in that role
for 21 years.  Assuming the lead fixed income role will be Robert
Auwaerter, who has managed the Vanguard Short-Term Corporate Bond
Fund for almost 20 two decades.   In addition to this change, the
Vanguard Group also appointed index-guru, Gus Sauter as their new
Chief Investment Officer.

For more information on these and other mutual fund stories go to
the Fund Times section of the www.morningstar.com website.

Steve Wagner
Editor, Mutual Investor


Going Against The Grain
by Mark Phillips

Over the past several months, investors have shown their
conviction that they expect the Iraq war to be a short-term
affair.  Additionally, the price action in the Defense sector
(DFI.X) has been ugly enough to show that expectations are that
regardless of the length of the conflict, any additional spending
by the military is unlikely to have a material impact on the
bottom lines for the major defense contractors.  This reality is
shown clearly in the chart of the DFI index, which fell to an all-
time low near $410 on March 12th, the day that the broad market

Weekly Chart of the Defense Index (DFI.X)

You see, the market is an efficient mechanism for pricing in
future risks and growth potential for companies in any sector of
the economy.  While the DFI index wasn't created until after the
September 11, 2001 terrorist attacks, the price action between its
creation and the beginning of this year showed that the $500 level
was an important line in the sand.  When the index broke down
below that level in February, it showed that market participants
were "pricing in" the collective belief that no matter what
happened in Iraq, it wasn't going to be able to provide the
revenue growth necessary to support valuations above that level.

Drilling down to the daily chart level, we can see that the DFI
index rebounded off its March 12th low with the rest of the
market, quickly recovering back near the $465 area.  As the war
effort got underway, that bounce began to fade last week, showing
that investors were still staying away from this area of the
market.  That tells us the lion's share of that rebound was
confined to short covering.

Daily Chart of the Defense Index (DFI.X)

What I believe has happened in this sector over the past 18 months
is the pricing in of significant new business in the wake of the
9/11 attacks.  That "new-business" premium has been methodically
removed from the group since the DFI index topped out last April.
While this argument is hard to justify just from the charts of the
DFI index (due to the limited historical data), a quick look
through the weekly charts of some of the major Defense contractors
would seem to indicate the concept has merit.

Lockheed Martin (NYSE:LMT) recently bottomed near $40, and it is
interesting how that price level had been firm resistance for the
stock for the six months leading up to the 9/11 attacks.  After
breaking above that level when trading resumed in late September,
LMT soared to north of $70.  That was the terrorism premium, which
now appears to have been completely removed from the stock and it
is now trading on its own merits near the $46 level.

General Dynamics (NYSE:GD) had broken through the $60 resistance
level and was confirming that level as support when 9/11 occurred.
The ensuing action in the Defense sector launched the stock on a
strong rally that culminated last summer with the stock trading
north of $110.  Sliding down the razor blade of life, the stock
first plummeted to the $80 level on concerns over its Gulfstream
jet business and then when the DFI index broke down earlier this
year, GD again broke south, satisfying its price target of $50 on
March 12th.  I covered this stock in some detail in last weekend's
LEAPS column, as it is our new LEAPS Call candidate.  Further
details about the price objective can be found there.  Note that
by trading below $60, GD has now eliminated any terrorism premium
that previously existed in the stock.

How about one more?  Northup Grumman (NYSE:NOC) is a current put
play on the OI playlist.  The stock bottomed a couple weeks ago
near the $79 level (which just happens to be its PnF bearish price
target) and then rebounded right to resistance with the rest of
the defense sector.  That rebound didn't last long, as the stock
plunged again last Friday, hitting an intraday low just above $80.
Look at the stock's price action just before the 9/11 terrorist
attacks, and you can see it consolidating in the $78-82 area.  The
ensuing rally that began in the fall of 2001 took NOC all the way
up to $135 before the excitement started to fade.  Once again, we
have a defense-related stock that has made a round-trip from the
pre-9/11 lows to euphoric highs and back to where it started that

Am I trying to make a case for another stellar rally in this group
over the next few weeks as the war progresses?  No.  What I am
noticing though, is that this group of stocks (among others in the
sector), are probably very close to fair and reasonable values, at
least based on current expectations.  Both NOC and GD have
recently achieved bearish price targets.  Are they likely to
rebound strongly over the next couple weeks?  I sincerely doubt
it.  I'm not trying to make a case for a short-term trade here.
The PnF charts are still painfully ugly (at least to the bulls)
and some significant consolidation/repair needs to take place
before a significant price advance will be in the cards.

What I am noticing though is that the next several weeks and
months could have this group consolidating near its recent lows.
There has been a lot of technical damage done in these stocks and
it is time for the repair to begin.  Patient investors that
recognize the value can now start to look for that bottom to
solidify and can then take advantage of near-term price weakness
to establish long-term positions.

I don't like to use the term "reasonable valuation" without some
sort of justification.  So let's step away from the technical
aspect for a few minutes and look at some basic fundamentals.

GD - After the recent plunge, GD is trading at a P/E ratio of 11,
with a dividend yield of 2.25%.  While not super cheap, the stock
is looking like a pretty decent value, especially near its recent
lows at $50.

NOC - The P/E ratio here is a bit higher, but at 14.4, it
certainly isn't expensive.  Throw in a 1.9% dividend yield and I
could make an argument for taking a small position back near the
$79-80 level.

LMT - Of the 3 stocks we've discussed here today, LMT is by far
the least appealing from a fundamental standpoint.  With a P/E
ratio over 35 and a dividend yield just barely over 1%, I would
classify LMT as one of the more expensive stocks in the sector.

One other stock that is worth considering is Raytheon (NYSE:RTN),
as its valuation is more in line with NOC and GD.  The P/E ratio
is 15 and the dividend yield is a solid 2.9%.  Add in the fact
that its price action has been similar to that of the other stocks
we've talked about, and it is at least worth a look.  RTN just
rebounded from the $24 level, which just happens to be the stock's
low prior to launching as high as $45 in the wake of the 9/11
attacks.  Once again, a round trip.

While I think these stocks may prove to be good long-term
investments if entered near their recent lows, that's only part of
my motivation for today's discussion.  You see, while I've really
only scratched the surface here, this is a typical starting point
for a process of discovery when looking for under-appreciated
values.  The Defense sector makes a great talking point, as it is
so clearly out of favor right now.  I expect that to change in the
months ahead.  But of course, I could be all wet.  Maybe we'll
come back to this issue a few months down the road and see if
there was any merit to the idea.

More importantly though, hopefully this gives you a glimpse of the
thought process I go through in trying to identify groups of
stocks where most of the risk has been taken out.  Then it is just
a matter of looking for some improving price patterns, new PnF Buy
signals and even developing relative strength.  This can be done
with any area of the market.  The Defense sector is just a great
example that we can all relate to right now, with the hostilities
currently going on in Iraq.  Do a little digging and there's no
telling what other gems you might come up with.

Happy Hunting!


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A Sign From Below

I wrote last week that we had yet to see signs of weakness in the
current rally. That sign came through loud and clear today.

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Contact Support
The Option Investor Newsletter                   Monday 03-24-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:

Stop Loss Updates: None
Dropped Calls: None
Dropped Puts: None
Play of the Day: Put - OTEX

Updated on the site tonight:
Market Posture: You Mean There's Still a Downside
Market Watch: Big Stumble

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OTEX - Open Text Corp $27.27 -0.94 (-0.94 this week)

Company Summary:
Since 1991, Open Text Corporation has delivered innovative
software that brings people together to share knowledge, achieve
excellence, deliver innovation, and enhance processes. Its legacy
of innovation began with the successful deployment of the world's
first search engine technology for the Internet. Today, as the
leading global supplier of collaboration and knowledge management
software for the enterprise, Open Text supports six million seats
across 4,500 corporations in 31 countries and 12 languages
throughout the world. As a publicly traded company, Open Text
manages and maximizes its resources and relationships to ensure
the success of great minds working together. (source: company

Why We Like It:
It was tough to find weakness in today's market, with the Dow
gaining almost 3% and the COMP jumping through its 200-ema and
adding 1.3%.  However, one sector that was noticeably weak was
the software sector.  The GSO dropped more than 2% after a profit
and revenue warning from Intuit (INTU), which was taken to the
woodshed with a $12 loss.  That warning was ominous, as the
company said, "We're disappointed to see a sluggish economy
worsening in the past few weeks with a further decrease in
customer spending in all our categories. This is not an issue
with just one of our businesses -- all our businesses have been
affected."  This is not good news for software makers that had
enjoyed a nice gain last week, but already had begun to show
cracks the past few days.

OTEX was one of those stocks that seemed to find a top and had
already begun to roll over from previous resistance at $30. The
stock made its most recent run at $30 in late February, but saw
its last bounce end at $29 over the past few days. It has been
setting a series of lower highs the last three sessions (today's
high at $29.67 was a bad tick) and stochastics have rolled over
into a sell signal from overbought territory. The most recent
analyst rating came from Fulcrum on February 27.  The firm
reiterated its sell rating with a $13 price target, citing OTEX's
acquisition of Corechange.  It said the acquisition was one with
a low quality of earnings and unsustainable growth.  It also said
OTEX trades at a premium to more established companies that won't
be impacted by increased competition in the collaboration space,
and said that OTEX shares justify a  discount to peers because
its 2003 estimates are at substantial risk. If INTU was the first
domino to fall, then based on that rating, OTEX's future could
certainly be tenuous.

Our pick is based more on relative weakness in the stock and the
sector and the rollover from resistance, than an analyst
recommendation, but in a world in which most analysts are pumping
stocks that are weak, it's encouraging for bears to see some
honesty.  We like entries in the play below today's low of
$28.15, with a trigger of $27.98; but more conservative traders
will want to wait for a break below the 21-dma (currently
$27.68), where the stock bounced on Thursday.  Our initial target
will be a move to $25, where there is strong support from January
and the beginning of the march.  However, a move below that level
could be seen as a head and shoulders breakdown and would likely
lead to a test of the 200-dma (currently at $23.18).  Our stop
will be placed at $30.55, just above recent highs.

Why This is our Play of the Day
Investors were hit with a dose of reality over the weekend, as
it became clear that the war with Iraq would not be as quick or
clean as many had hoped.  That sent the broad market tumbling at
the open and our OTEX play went with it.  Satisfying our $27.98
trigger shortly after the open, the stock provided a nice ride
for aggressive traders that entered on that breakdown.  After
taking out last week's lows at the open, there just wasn't any
buying interest in the stock, as it drilled lower throughout the
day, ending at its low.  OTEX is now under its 20-dma ($27.51),
and with daily Stochastics now in a full bearish roll, the play
is definitely looking good.  Traders looking for a more
conservative entry will now want to look for a failed rebound
below the $28.10 level, the bottom of today's gap.  OTEX is now
resting just above its 50-dma ($27.11), and a break below that
level should have next support at $26 in play, enroute to our
$25 target.

BUY PUT APR-30*QFT-PF OI=222 at $3.40 SL=1.75
BUY PUT MAY-30 QFT-QF OI= 25 at $3.90 SL=2.50

Average Daily Volume = 306 K

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



You Mean There's Still a Downside

To Read The Rest of The OptionInvestor.com Market Watch Click Here


Big Stumble

To Read The Rest of The OptionInvestor.com Market Watch Click Here


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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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