Option Investor
Newsletter

Daily Newsletter, Monday, 03/31/2003

HAVING TROUBLE PRINTING?
Printer friendly version
The Option Investor Newsletter                   Monday 03-31-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Floor Falls Out
Futures Wrap: Consolidation Breaks
Index Trader Wrap: (See Note)
Weekly Fund Wrap: Reversal of Fortune
Traders Corner: What's Working?

Updated on the site tonight:
Swing Trader Game Plan: Out of the Box

Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
03-31-2003                   High    Low     Volume Advance/Decl
DJIA     7992.13 -  153.64  8142.83  7929.31  1626 mln  362/1250
NASDAQ   1341.17 -  28.43  1357.00  1336.61   1530 mln  361/1155
S&P 100   429.13 -  8.81    437.94  427.29    totals    723/2405
S&P 500   848.18 -  15.32   863.50  843.68
RUS 2000  364.54 -  4.16    368.67  361.91
DJ TRANS 2131.21 -  31.99   2162.90 2106.34
VIX        33.37 +  1.19    34.37   32.35
VIXN       43.05 -  0.04    44.91   42.83
Put/Call Ratio 1.31
*******************************************************************

Floor Falls Out
by Steve Price

Back to business - or at least the lack of business. After
another weekend in which the war dragged on with little signs of
a quick end, investors refocused on the economy and showed their
discontent by dropping out in droves.

The morning started out with a big slide, which actually followed
the weekend drift lower in the Asian markets. As of Sunday night
the S&P futures were already down over 13 points and that drift
continued into Monday morning. The drop finally broke the markets
out of the consolidation and drifting they had seen over the past
couple of weeks and tested some important areas of support.

Chart of the Dow




There were a number of factors leading to the morning dip,
including bankruptcy talk from a couple of the largest U.S.
companies.  Altria (formerly Philip Morris) said it is "presently
uncertain" whether it will be able to make the next $2.5 billion
payment to state governments required by its 1998 tobacco
settlement.  The problem is a $12 billion bond the company must
put up, in order to preserve its appeal of a judgment of that
amount levied against it by an Illinois court last week. Standard
& Poor's said it might lower its rating on the company's debt to
junk status and that, "S&P believes that the company would be
seriously challenged to raise the amount. In the event that the
amount of the bond cannot be raised or reduced to a manageable
amount, Standard & Poor's believes Philip Morris USA might have
to consider bankruptcy as an option."

The other big-whig faced with impending bankruptcy is American
Airlines (AMR).  AMR has been in wage concession talks with its
unions that have yet to yield an agreement on a package that aims
to save $1.8 billion on labor costs. The troubled airline lost
$3.5 billion in 2002 and all airlines have seen bookings plummet
since the start of the war - particularly on international
routes.  If this war continues to drag on, as it appears it will,
the problem may only get worse. Insiders are saying that even if
there is an agreement with the unions, bankruptcy may be the
eventual result anyway. The company announced an agreement with
its mechanics and flight attendants mid-day that gave the stock a
boost, but has yet to conclude negotiations with its pilots. The
company is also still trying to put together debtor-in-possession
financing needed to continue operating in Chapter 11.  If it does
file, it would be the industry's largest, following filings by
UAL and U.S. Air, which is set to emerge from bankruptcy today.

Last week's University of Michigan Consumer Sentiment report
showed a big jump in confidence as soon as the war started.
However, it appears that Americans have yet to show that
confidence with their wallets. Last Monday, several retailers
reported that sales were tracking below estimates, but the
biggest of them all - Wal-Mart - said it had seen a minimal
impact from shoppers sitting home watching the war on T.V. and
that sales were still on track.  The tune changed this morning as
the company said its sales were now tracking toward the low end
of its previously predicted range. It is expecting sales to rise
by a low, single-digit percentage. Similar comments came from
Nordstrom (JWN), which warned that its earnings would miss
forecasts.  Federated and J.C. Penney both said sales were weak
and trending below projections for the month. Whether the
reluctance to spend is due to the war or the worsening employment
picture is not entirely clear, as both are assumed to go hand in
hand.  But the bottom line is that consumers aren't spending what
was expected.

One of the unknown factors that started out as a health story,
but is beginning to have an economic impact, is a new disease
called Severe Acute Respiratory Syndrome (SARS).  It is beginning
to affect the tourism industry in Asia, as well as travel
worldwide and has now led economists to lower GDP forecasts for
Hong Kong, which relies heavily on tourism. Salomon Smith Barney
said the disease could slice 0.2%-0.9% from Hong Kong's economy
this year, but in a worst case scenario where the disease goes on
uncontested for months, it could be as much as a third.   So far
doctors identified the disease, which is pneumonia, as related to
the virus that spreads the common cold; but they have been unable
to do anything about it other than isolate and ventilate
patients. If it continues to spread, the tourism industry across
Asia could be affected for months and we may see further weakness
overseas. Companies such as Intel, Motorola and Sony have already
begun sending workers at overseas factories home after
individuals at their locations came down with symptoms.  The
disease was one of the factors in driving the Nikkei back under
8000, along with prolonged war concerns that sent the FTSE, DAX
and CAC lower as well.

The Semiconductor Index (SOX) got hammered today, losing 4.4%
following the release of data that shows a 3.3% sales decline in
chips from January to February.  The Semiconductor Industry
Association released the numbers and the head of the organization
said that the recovery of the past 15 months appears to have
stalled. SIA president George Scalise said "The traditional
seasonally flat first quarter has been further impacted this year
by geopolitical uncertainty. Demand has softened in the markets
that drove growth throughout the past year, including PCs, global
wireless and consumer."  On a quarter-over-quarter basis, there
was a 20% decline in units in the microprocessor segment and Bear
Stearns said it expects the slowdown to continue until late in
the third quarter of 2003. The SOX made a run last week,
eventually failing at its 200-ema, but has now given back 10% of
its value in the past 6 sessions.

This morning's Chicago PMI report, which reflects manufacturing
data in the region and is generally a precursor to the nationally
based ISM data showed an ugly picture for the sector. The
expectation for the report was a mild 50.8, which equates to a
slight expansion in manufacturing activity (the
expansion/contraction line is 50.0). However, the report came in
at 48.4, showing contraction in the region and the regional
indices appear to be signaling a sub-50 reading in the ISM, which
is due out tomorrow. The drop from 54.9 in February was the
largest decline since March 2001 and the lowest reading since
October. The production index fell from 62.4 to 49.1, for the
largest one month decline since 1980 and the lowest level since
December 2001, just a couple of months after the 9/11 attacks.

The Dow dropped far enough to take out the 8000 level, trading
all the way down to 7929 intraday.  We did get a bounce back to
the 8000 level, where we treaded water for much of the afternoon.
However, if traders are wondering just how much effect the war
news is having, they got more evidence that the answer is still
"a lot" when news hit the wires that U.S. troops had taken
control of oil fields in Kirkuk in Northern Iraq. Those fields
contribute approximately 720,000 barrels of oil per day and the
both the equity markets reflected the capture with a sudden rally
late in the day

However, the May Crude Oil Futures still reflected the ongoing
war and the situation in Nigeria that is strangling that
country's output, as well. As oil prices have risen, the equity
markets have dropped.  That relationship remains consistent,
reflected by today's $1.11 per barrel gain in the futures back
over $30 per barrel to $31.27. Gold futures also reflected global
uncertainty, with a gain of $6 per ounce.

Chart of Oil Futures




The late day rebound after the oil field capture lifted all
boats, but not before certain key levels were broken.  In
addition to the Dow breaking 8000, the SPX broke 850, the OEX
broke below 430 and the COMP fell under 1350.  Those levels were
all retaken on the late day rally, but eventually failed after
the news euphoria wore off. The rally of almost 100 Dow points
reversed itself and headed back toward mid-day lows.  The bond
market may have given us an indication of why we got a bit of a
bounce in the morning before the war news broke.  The treasuries
reached an important level this morning, one which led to a big
reversal in November and December, triggering asset allocations
and sending equities higher. A look at the charts of the five and
ten-year yields shows that this morning's drop ended almost at
the exact point where those reallocations were triggered
previously.  Traders will also note that the big rebound in the
middle of March, while pegged for the start of war, actually
coincided with the drop in yields to their October lows. The war
may have been cited as the main impetus, but it is probably no
coincidence that the bounce in equities came at the exact time
yields hit those October lows.  That tells bears to be careful
now, as well, as we have again reached a pivotal level.

Chart of Five and Ten Year Yields




The percentage of stocks on the upswing according to the bullish
percents is still in rebound mode and those indicators have been
very reliable. While we saw a sea of red and few reasons to be
bullish from the economic front, we do have the major indices and
the treasuries sitting at pivotal levels.  We also continue to
see a news driven market, as this afternoon's bounce on the oil
field news will attest. The breakdown from last week's
consolidation looks bearish and is supported by economic data.
However, we are trading in an unpredictable environment and any
U.S. victory or failure overseas can move the markets out of
whatever the trend happens to be at that moment. The CBOE
put/call ratio is at an extreme 1.31, which can be seen as a
bounce indicator, as well. Interestingly, though, the market
volatility index does not reflect a large increase in downside
fear.  We have conflicting signals at pivotal levels and while
things certainly look bearish for the moment, traders should be
nimble and manage their positions knowing how quickly things can
change.


************
FUTURES WRAP
************

Consolidation Breaks
By Vlada Raicevic

Daily Settlement Numbers 4:15pm ET

> DOW
Last: 7992.13
Net: -153.64
High: 8142.83
Low:  7929.31

> YM 03M
Last: 7939
Net: -181
High: 8075
Low:  7891

> S&P 500
Last: 848.12
Net: -15.38
High: 863.18
Low:  843.68

> ES 03M
Last: 844.25
Net: -18.75
High: 859.75
Low:  840

> Nas 100
Last: 1018.40
Net: -28.32
High: 1032.91
Low:  1014.96

> NQ 03M
Last: 1019
Net: -32.50
High: 1048.50
Low:  1015

DAILY PIVOTS

> YM 03M
R2: 8145
R1: 8031
Pivot: 7961
S1: 7847
S2: 7777

> ES 03M
R2: 867
R1: 854
Pivot: 847
S1: 834
S2: 827

> NQ 03M
R2: 1058
R1: 1035
Pivot: 1025
S1: 1001
S2: 991

Futures opened with a large gap down with war and the SARS virus
news taking center stage over the weekend.  Right after the open
there was barely a bump upward before selling took hold and pushed
the market down further.  The Chicago PMI came out with terrible
numbers and selling picked up again, but the low of 840 was not
breached.  At this point buyers showed up and attempted to move
into the gap, but were not able to close above the opening 5
minute candle, and price then went into a two hour sideways
consolidation.  At two o'clock the recent range broke to the
downside but buyers showed up and rocketed the futures up to a
high of 857.25 before simply rolling over and completely selling
off by printing 9 consecutive red candles on the ES 5 minute
chart.  So I admit it.  The day was very perplexing.  Continued
selling after a huge gapdown does not happen too often.  This kind
of bearishness is not normally dispelled by buying after a
horrible economic number is released.  And in such a bearish
environment, a long consolidation breaks down, not up.  Then, a
strong, 10 point move up either consolidates or, after a pullback,
attempts another run up, it doesn't just roll over and continue
selling for 15 points without a pause.  End of month, end of
quarter window dressing could have something to do with it, but
all I can do is shrug, throw my hands in the air, and look at the
charts.

The following 270 minute all sessions chart shows price selling
off and bouncing off the lower regression channel support.  ADX
shows a definite selling trend, but MACD, RSI and Stochastic are
all getting close to oversold levels.

ES 270 Minute All Sessions Chart:





Taking a look at the day session chart, the difference shows that
the selling is just getting under way.  ADX has crossed to
bearish, Macd has just crossed the centerline to the downside, and
RSI has plenty of room to move down.  Price however, is just
entering that area where we had sideways trading for quite some
time, so there is plenty of support that you can take you pick
from.  In fact, now we are in an area where you can say we have
"support" almost every 2 points.  How do we know which of these
many support areas will stop the decline?  We don't.  This market
is still news driven, and all but the strongest areas of
horizontal support and resistance are worth paying attention to.

ES 270 Minute Chart:





The ES daily chart is now what I would call bearish level 1.
Meaning that there are several levels of bearish signals.  Macd
has crossed over, fast stochastic is trading under slow
stochastic, RSI has crossed below the centerline, and CCI is below
its moving average.  Also, price has broken below the
consolidation support area.  However, Slow stochastic is still
well in its upper range, and fast stochastic is nearing the first
area of a potential bounce after a little bit more selling.  Macd
is still well above the centerline as well. The trend is
definitely down for the short term, but that does not mean we
can't bounce back to the 861-65 area with ease.

If you look at all the horizontal lines I've drawn on this chart,
you can see by what I meant about "pick your support".  All of
those are potential bounce points depending on the mood of the
market and of news.  Today's move up is another example of bears
needing to be careful:  horrible economic news still led to a
sizeable bounce.  If economic news was actually being noticed,
there could have been a bounce due to the strong gap down, but
then we should have moved back down to test the lows again,
instead of attempting a rally to close the sizeable gap.  Again,
the real test will be when we hit some point of support and then
bounce for one or two days.  The strength of that bounce will be
the real test of market's views.  Also, we did move down below the
50% retrace of the entire move up from 3/12, but we closed above
that 50% level.  As long as we continue to close above that level
we are well within the ability of the market to turn back up
toward the highs.

ES Daily Chart:





I also wanted to show the following chart: a daily chart with the
13ema High/Low bands.  You can see the purple arrows show
long/short entries, and with the exception of the February 18
arrow where it looked like we had changed to a long signal, all
the previous signals gave at least several days of follow through.

ES Daily 13ema Bands Chart:




NQ was again much weaker today, with the NDX being down nearly 1%
more than the SPX.  The 270 minute all sessions chart shows that
NQ is definitely getting into an oversold area, with RSI going
below 15, and price reaching the lower end of the regression
channel.  Both slow and fast stochastic are also below 20.
However, just like the ES charts above, the day session chart of
the NQ shows that indicators are just beginning to break, with the
exception of the fast stochastic which is reaching an area where a
bounce could be expected.  Also, whereas the ES Pivot chart broke
above and even closed above the S2 level briefly, the NQ could
only pierce S2 briefly before selling off.

NQ 270 Minute All Sessions Chart:





So, in conclusion, we have prices breaking down from
consolidation, and down from the descending triangle that I
pointed out a few days ago.  We are starting to reach an oversold
condition on shorter term charts, and so we are in for a bit of
potential bounce, but whether that bounce lasts one hour or two
days is difficult to gauge since the market is not moving on
technicals alone, nor even on economic news, but a strange brew of
multiple, and sometimes competing outside influences.


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_033103_1.asp


************************Advertisement*************************
Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.
Anything else is too slow!

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


****************
WEEKLY FUND WRAP
****************

Reversal of Fortune

Stocks fell, while bond prices rose, for the week ended Friday,
March 28, 2003, with weak economic reports and no quick end to
the war with Iraq sending investors back into safe haven bonds.
While oil and gold prices moved higher, the U.S. dollar slumped
against major foreign currencies.

For the week, the S&P 500 index of U.S. stocks lost 3.6% using
Vanguard's 500 Index Fund as the proxy.  Both growth and value
stocks lost ground.  Mid-cap stocks fell 2.2% for the week, as
small-cap stocks lost 1.9%.  Equity mutual funds followed suit,
with tech-heavy, large-cap funds faring the worse.  Tech funds
lost 4.0% on average last week, according to Lipper.

The MSCI EAFE index of foreign stocks fell 2.4% for the week in
dollar terms, using the Vanguard Developed Market Index Fund as
the benchmark.  European stocks were 3.2% in the red, while the
Pacific stock index fell just 0.4%.  Concerns that a protracted
Iraq war will hurt an already-weak economy caused the dollar to
fall against major foreign currencies last week.  That cut down
on the reported losses of international stock funds.

Investors sought haven in bonds and bond funds last week amidst
the stock market's sell-off.  For the week, the Lehman Brothers
Aggregate Bond index rose 0.9% using Vanguard Total Bond Market
Index Fund as the benchmark.  The intermediate-term index ended
the week 1.5% higher, while long-term bonds were 1.7% higher on
average.  U.S. government and corporate bond funds posted 5-day
total returns that were close to the market's 0.9% return, with
global and international bond funds doing even better thanks to
dollar weakness.

U.S. Equity Fund Group

 Week   YTD
-3.6%  -1.4%  Vanguard 500 Index Fund (VFINX)
-2.2%  -3.3%  Vanguard MidCap Index Fund (VIMSX)
-1.9%  -3.4%  Vanguard SmallCap Index Fund (NAESX)
-3.3%  -1.5%  Vanguard Total Stock Market Index Fund (VTSMX)
-3.3%  -1.5%  Lipper Large-Cap Core Equity Fund Average
-2.2%  -2.8%  Lipper Mid-Cap Core Equity Fund Average
-1.9%  -4.4%  Lipper Small-Cap Core Equity Fund Average
-2.8%  -1.5%  Lipper Multi-Cap Core Equity Fund Average
-4.0%  +2.2%  Lipper Science & Technology Fund Average


Fidelity Magellan, the largest actively-managed stock fund in the
nation, lost 3.8% for the week, representative of the declines in
the large-cap sector.  The widely held Janus Fund incurred a 4.0%
weekly loss for investors, while Harbor Capital Appreciation Fund
declined in value by 4.4% for the week.  So, the worst damage was
among large-cap U.S. equity funds and tech sector funds, which on
average lost 4.0% per Lipper.  T. Rowe Price Science & Technology
Fund, the largest fund in the sector, was 4.2% in the red for the
week.  Fidelity Select Electronics Fund lost 6.0% of its value in
the last five days.

Some large-cap funds deserve credit for limiting losses last week
relative to their peers, including the Janus Twenty Fund (-1.8%),
Fidelity Contrafund (-1.6%) and the Hartford Capital Appreciation
Fund (-1.8%).  Brandywine, a $3 billion mid-cap growth fund, lost
just 0.1% for the week.  Also deserving recognition was Waddell &
Reed Adv Science & Technology Fund, up 0.5% for the week compared
with the average tech fund, down 4.0% for the week.

International Equity Fund Group

 Week   YTD
-2.4%  -6.3%  Vanguard Developed Markets Index Fund (VDMIX)
-2.4%  -3.8%  Vanguard Emerging Markets Index Fund (VEIEX)
-2.4%  -6.1%  Vanguard Total International Stock Index (VGTSX)
-2.2%  -7.0%  Lipper International Fund Average
-1.5%  -4.6%  Lipper Emerging Markets Fund Average
+2.6%  -13.8%  Lipper Gold Fund Average


As you can see, the average international equity fund lost 2.2%,
according to Lipper, slightly better than the EAFE index's 2.4%
decline.  Some funds in the group lost more than 3.0% last week,
including American Funds' New Perspective Fund (-3.2%), Fidelity
Overseas Fund (-3.2%), and Artisan International (-3.5%).

Liberty Acorn International Z Fund, meanwhile, limited its 5-day
loss to 0.3%, so it may have been more heavily weighted to Japan
and Pacific stocks, which held up much better than Europe stocks
last week in dollar-equivalent terms.  Gold funds gained 2.6% on
average, per Lipper, benefitting from the market volatility last
week amid concern over the war with Iraq.

U.S. Fixed Income Fund Group

 Week   YTD
+0.6%  +0.9%  Vanguard Short-Term Bond Index Fund (VBISX)
+1.5%  +1.4%  Vanguard Intermediate-Term Bond Index Fund (VBIIX)
+1.7%  +1.0%  Vanguard Long-Term Bond Index Fund (VBLTX)
+0.9%  +1.0%  Vanguard Total Bond Market Index Fund (VBMFX)
+0.4%  +0.8%  Lipper Short Investment-Grade Fund Average
+1.0%  +1.5%  Lipper Intermediate Investment-Grade Fund Average
+0.9%  +0.5%  Lipper U.S. Government Fund Average
+1.0%  +1.3%  Lipper Corporate A-Rated Debt Fund Average
+0.8%  +6.0%  Lipper High-Yield Fund Average


Bond mutual funds scored big gains last week, with the average
intermediate-term, investment-grade bond fund up 1.0% over the
weekly period per Lipper.  Long-term bond funds performed even
better as evidenced by the 1.7% weekly return generated by all
three Vanguard long-term bond funds last week.  Other funds up
strongly on the week included Loomis-Sayles Bond Fund, a multi-
sector bond strategy that produced a 1.5% weekly total return.

Several investment-grade and high-yield bond funds returned in
excess of 1.0% for the week.  Some popular funds doing well for
the week included the PIMCO Real Return Fund (+1.3%), One World
Bond Fund (+1.3%) and the Vanguard Intermediate-Term Bond Index
Fund (+1.5%).  The high-yield bond funds for the American Funds,
PIMCO and Fidelity fund families returned 1.1%-1.2% to lead the
high-yield group higher.

International Fixed Income Fund Group

 Week   YTD
+1.6%  +2.4%  Lipper Global Income Fund Average
+1.9%  +2.0%  Lipper International Income Fund Average


Dollar weakness enhanced the reported returns last week for non-
U.S. bond funds, with the average international bond fund rising
1.9%, per Lipper.  T. Rowe Price International Bond Fund (+2.1%)
and American Funds' Capital World Bond A Fund (+2.3%) were among
the top-performing funds in the group last week.


Balanced Fund Group


 Week   YTD
-1.6%  -0.4%  Vanguard Balanced Index Fund (VBALX)
-1.7%  -0.9%  Lipper Balanced Fund Average


Balanced funds held up better than pure equity funds, with fixed
income assets providing income and stability.  Hybrid funds with
heavy bond stakes preserved capital better than those funds with
heavy stock allocations.  For example, Vanguard Wellesley Income
Fund, an income-oriented hybrid, lost only 0.4% last week, while
its equity-oriented sibling, Vanguard Wellington Fund, ended the
week 1.6% lower along with most traditional balanced funds.  But,
the 1.6% loss was still considerably better than the average U.S.
large-cap stock fund, which lost twice that.

Money Market Fund Group

Yield
1.02%  Vanguard Prime Money Market Fund (VMMXX)
0.73%  iMoneyNet.com All Taxable Money Market Fund Average


The iMoneynet.com all-taxable money market fund average drifted
lower by two basis points to 0.73%.  The top 7-day simple yield
among prime-retail, money market funds remains the PayPal Money
Market Fund at 1.26%, down 0.02% for the week.  The second best
yield belongs to the RBB MMP/Sansom Street Class Fund, at 1.14%.

Mutual Fund News

It was T. Rowe Price's turn in the spotlight last week with the
news that star-manager Brian Rogers has stepped down as manager
of the Value Fund (TRVLX) to focus efforts on his other mandate,
the T. Rowe Price Equity Income Fund (PRFDX).  Morningstar said
his numbers on the Value Fund were "lackluster" in recent years.

Replacing Rogers at T. Rowe Price Value Fund is John Linehan, a
research analyst with the firm since 1998.  According to Rogers,
the transition was in the works for some time.  Rogers serves as
the head of T. Rowe Price's investment committee and manages the
Morningstar 5-star rated T. Rowe Price Equity Income Fund, which
has $9.4 billion in assets.

Other fund families in the news included Federated Funds, PIMCO,
Fremont, and London-based Amvescap, which intends to consolidate
its two U.S. sales forces under the "AIM Investments" roof.  AIM
is Amvescap's largest U.S.-based fund subsidiary, the Morningstar
story reports, followed by the Invesco Funds Group.

In another Morningstar story, the SEC is taking a look at "stable
value" funds, which purchase wrap agreements in an effort to keep
the fund's net asset value stable.  These stable-value funds have
increased in popularity in the past year as investors seek income
and more so, stability.  The SEC is looking to shed further light
on the number and quality of insurers that these funds "contract"
with, Morningstar said.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

What's Working?
by Mark Phillips
mphillips@OptionInvestor.com

Late last week, I received a reader email that I think
effectively states the dilemma currently being faced by many
traders.  The question centered around how to manufacture profits
in such a volatile and uncertain market environment.  Let's start
with the text of that email as our reference point and see if we
can learn something together.

Because of this rangebound index environment, I'm trying to
generate some profit from the OI stock option plays and was
wondering if you could provide a quick recap of current plays and
also provide your thoughts on your methodology or "system" for
manufacturing profit when the "macro" trading environment is so
unmanageable in relation to the individual or "micro" stock or
even sub/sector index plays?

You see, that is really the key isn't it?  I doubt any of us
really care where the market (or the basket of stocks we choose
to trade) are going.  All we want to do is be able to hitch our
wagon to a trend that we can ride long enough to put some
additional cash into our collective trading accounts.  Anyone who
has been attempting to trade ANYTHING over the past 2 months
knows just how difficult this current environment is.  First we
languished in a relatively tight range for about 6 weeks.  Then
we finally broke down out of that range only to explosively rally
for 8 days as the war with Iraq got underway.  The past week has
seen the market giving back those gains, and we're now sitting at
the upper edge of that range that confined broad market action
from late January through early March.  If there is a trend, I
certainly don't see it, and I believe it is frustration with this
reality that prompted the question above.

Aside from the rebound off the lows on March 12th, most of the
turns in the broad market are not regularly coming at
recognizable technical levels.  Some are, and some aren't.  This
statement applies to the larger moves over a period of days and
weeks, as well as the more "micro" moves that begin and end in a
day.  Take a look at the commentary from the guys running the
Futures Monitor over the past few days.  One of the more frequent
comments I've seen (I'm paraphrasing here) is "I don't see any
reason for the turn to have come at that level".  Another popular
one is "Why didn't that level prove to be significant to the
market?"

The short answer to all of this is one that we are as tired of
stating as you are of hearing.  Over the past couple weeks, the
market has ceased paying attention to economy or the state of
corporate health and earnings, and is instead fixated on the
ongoing war with Iraq.  Oh there are probably a million different
factors at work on any given day, but the reason (in my never to
be humble opinion) that technical levels and oscillator readings
have been so unreliable lately is that each batch of "Breaking
News" launches myriad Buy or Sell programs that don't seem to
care about where the technical levels are at that particular
moment.

Over the past couple weeks, I've had several trades that made
perfect sense from a strictly technical standpoint, only to have
them blown out literally within an hour of the entry.  I've also
had trades that looked to be questionable on a technical basis,
but I was gaming what I expected to be a shift in sentiment.
I've had several of those trades turn out to be winners.  Am I
confused?  You bet!

I would say that balancing my winners against the losers
throughout the month of March comes out to be just about even.
In other words, I've worked very hard just to break even.  And I
consider that to be a huge success!  You see, I am a technical
trader, first and foremost.  Oh sure, I will pay attention to the
fundamentals, news and underlying sentiment, but I take my cues
from the charts.  I began to recognize in mid-January that the
preponderance of false signals from the charts was creating a
very dangerous environment for me.

You see, option trading is not conducive to profitable trades on
small price moves.  Option trading really shines when we can
capture large moves (in relation to the price we originally pay
for that option).  Traders that employ the strategy of buying
options (either puts or calls) have an immediate deficit of the
bid/ask spread and then have to deal with the reality of time
decay and changes to volatility, along with all the other Greek
factors.  So we have to pick our targets VERY carefully and
especially in the current environment, we need to have our plan
of action very clearly defined before ever placing that trade.

The first rule when the markets are not behaving in a manner I
consider to be rational is to drastically limit position size.  I
personally haven't traded larger than a 1/4 position since the
end of January.  I understand that I can't predict market action
and have taken protective measures to ensure that I can't hurt
myself.  Next up is position management.  Since I am playing with
much smaller positions, I have less capital at risk.  That works
to my advantage in that I can then work with a broader stop to
prevent being whipped out of a play on a smaller adverse move.
The problem this creates though is that by the time I start
tightening stops, I find that the move is over and I really ought
to be getting out of the play with a relatively small (20-40%)
gain.

Now this flies in the face of my chosen trading style.  I am not
a hyper-active day trader.  I choose to trade trends that last
from a few days to as much as 2-3 weeks.  I can look at any
number of charts and see where there WAS a tradable move over the
past several weeks, but in most cases, that move was largely over
shortly after it became evident on the chart.  This is the
hallmark of rangebound trading.  We need to be able to ANTICIPATE
a move before it occurs and then be ready to exit about the time
it looks like it is really getting underway.

I will continue to use the same tools that have served me well
over the past several months, including relative strength charts,
trendlines, oscillators, sector bullish percent charts and the
like.  But the market has proven to me over the past several
weeks that those are not the dominant factors at play in the
market, whether talking about individual equities, sector indices
or broad market indices.  Until the market can prove to me that
it is willing to once again march to the tune of the tools to
which I am accustomed to using, I will continue to approach the
market as a vicious and dangerous beast.  And when in that mode,
I have two primary objectives.  The first is to preserve capital
until I deem the market to be more rational and the second is to
learn as much as I can about the current trading environment
while it lasts.

The question we started with was asking for a method or strategy
for "manufacturing" profits in the current market environment.
Astute readers will note that I have not provided an effective
strategy to attaining that goal.  I didn't want to cloud our
discussion with charts or talking about individual sectors or
stocks, as I view the dominant theme in the market right now as
psychological, not fundamental or technical.  But if you think
I've evaded the question, then I think you've really missed the
point that I'm trying to convey.  This has been and remains a
very challenging trading environment and I believe capital
preservation is far more important than trying to derive a new
strategy that works in the current environment.  If you have a
trading strategy that has worked in the recent past, then don't
abandon it.  Cut down on position size and continue to employ
that strategy when it provides the setup that you typically look
for.  You see, I view the current fixation with the Iraq war as
an aberration that will soon be resolved as investors once again
focus on the fundamentals in the economy.  As we head into the
April earnings cycle, we could get a big push in that direction!

Good Luck!

Mark


************************Advertisement*************************
If you trade options online, then you need an online broker that:
offers true direct access to each option exchange
offers stop and stop loss online option orders
offers contingent option orders based on the price of the option or
stock
offers online spread order entry for net debit or credit
offers fast option executions

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

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


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

Out of the Box

We finally broke out of the range that has contained the broader
indices for most of the last two weeks and it wasn't pretty. By
the end of the day, the Dow, OEX and SPX had all given up
important levels of support - levels that I was looking to play a
bounce from - and even erased a war-news rally that had real
economic impact.

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


************************Advertisement*************************
"If you haven't traded options online – you haven't really traded
options," claims author Larry Spears in his new compact guide book:

"7 Steps to Success – Trading Options Online".

Order today and save 25% (only $15) by clicking on PreferredTrade
and clicking on the link to the book on its home page.

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


*******************
FREE TRIAL READERS
*******************

If you like the results you have been receiving we
would welcome you as a permanent subscriber.

The monthly subscription price is 39.95. The quarterly
price is 99.95 which is $20 off the monthly rate.


We would like to have you as a subscriber. You may
subscribe at any time but your subscription will not
start until your free trial is over.

To subscribe you may go to our website at

www.OptionInvestor.com

and click on "subscribe" to use our secure credit
card server or you may simply send an email to

 "Contact Support"

with your credit card information,(number, exp date, name)
or you may call us at 303-797-0200 and give us the
information over the phone.

You may also fax the information to: 303-797-1333


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

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


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

For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support
The Option Investor Newsletter                   Monday 03-31-2003
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 - CB


Updated on the site tonight:
Market Posture: Changing Course
Market Watch: Support Breakdown


************************Advertisement*************************
Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.
Anything else is too slow!

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


*****************
STOP-LOSS UPDATES
*****************

None


*************
DROPPED CALLS
*************

None


************
DROPPED PUTS
************

None


************************Advertisement*************************
If you trade options online, then you need an online broker that:
offers true direct access to each option exchange
offers stop and stop loss online option orders
offers contingent option orders based on the price of the option or
stock
offers online spread order entry for net debit or credit
offers fast option executions

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

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


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

Chubb Corporation - CB - close 44.32 change: -0.50 stop: 47.50

Company Summary:
Chubb Corporation, incorporated in June 1967, is a holding company
with subsidiaries principally engaged in the property and casualty
insurance business. The Company presently underwrites most forms
of property and casualty insurance. The Company's Property and
Casualty Insurance Group writes non-participating policies.
Several members of the Property and Casualty Insurance Group also
write participating policies, particularly in the workers'
compensation class of business, under which dividends are paid to
the policyholders.

Why We Like It:
Exciting it isn't, but we'll take the consistency of CB's price
action any day.  Especially in such a nervous and volatile market
environment as we currently find ourselves, the stock's relentless
deterioration is refreshing.  Insurance stocks have certainly not
been at the top of anyone's Buy list lately, and with the poor
action in the Insurance sector (IUX.X), it's no great surprise.
The mid-March rebound didn't get the index anywhere near its 200-
dma (currently up at $258), and last week's deterioration has the
IUX back under its still-declining 50-dma ($234).  CB got off to a
negative start last week with the S&P debt downgrade and the
aftermath of that news release drove the stock first under the
late February low of $45.75, and then $45.  Looking at the daily
chart and the lack of buying interest (as demonstrated by the new
lows in On Balance Volume), it certainly looks like CB is headed
back to test its March 12th low just below $42.  That remains our
initial target for the play.  At this point, a failed bounce below
the $46 level looks like our best bet for new entries into the
play.  But given the lack of buying interest, we may have to
settle for entries on further weakness below $44.25 (just below
Friday's intraday low).  With the break below $45 last week, we're
now looking for the 20-dma ($46.11) to provide moderate
resistance, backed up by the rolling lower 10-dma at $46.81 and
recent support (now turned resistance) just over $47.  Lower stops
to $47.50 this weekend.

Why This is our Play of the Day
April Fools Day was interesting for about the first 2 hours of the
day, before the broad markets settled into their narrow-range
sideways grind into the close.  Our CB play started off with some
excitement as well, plunging with the rest of the market at the
open and hitting an intraday low of $43.87 before the buyers
appeared.  They certainly didn't show up in volume, but just
enough to lift the stock off its lows of the day and push it back
over $44, where it spent the remainder of the day.  It is
interesting to note that the stock remained pinned below its
closing level from last Friday, and this hints at further weakness
ahead.  A big part of why CB looks attractive as our Play of the
Day is that it is continuing to exhibit the weakness that
originally attracted us to it, but without the extreme volatility
that has been present in so many other sectors of the market. The
rollover at the close on Monday may have been a solid entry point,
but looked dicey due to the seemingly-artificial bid in the
market.  Another failure to push through the $45 level looks good
for new entries, but with the proximity of our eventual $42 price
target, we aren't advocating new entries on breakdowns at this
point.  Another possible entry would come from a failed rally
below the $46 level, which now looks like solid resistance, but
based on the recent price action, that looks like a rather
unlikely setup.  Maintain stops at $47.50.

Suggested Options:
Short-term traders will want to focus on the April option, as it
will provide the best return for a short-term play.  Those looking
for additional staying power to hold through the recent (and
expected future) volatility will want to use the May strike.

BUY PUT APR-45 CB-PI OI=817 at $2.15 SL=1.00
BUY PUT MAY-45 CB-QI OI=145 at $2.90 SL=1.50

Picked on March 25th at $45.73
Gain since picked:       +1.41
Earnings Date         04/30/03 (unconfirmed)

Average Daily Volume = 1.42 mln



************************Advertisement*************************
”If you haven’t traded options online – you haven’t really traded
options,” claims author Larry Spears in his new compact guide book:

“7 Steps to Success – Trading Options Online”.

Order today and save 25% (only $15) by clicking on PreferredTrade
and clicking on the link to the book on its home page.

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


**************
MARKET POSTURE
**************

Changing Course


To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/mp_033103.asp



************
MARKET WATCH
************

Support Breakdown


To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/wl_033103.asp


*******************
FREE TRIAL READERS
*******************

If you like the results you have been receiving we
would welcome you as a permanent subscriber.

The monthly subscription price is 39.95. The quarterly
price is 99.95 which is $20 off the monthly rate.


We would like to have you as a subscriber. You may
subscribe at any time but your subscription will not
start until your free trial is over.

To subscribe you may go to our website at

www.OptionInvestor.com

and click on "subscribe" to use our secure credit
card server or you may simply send an email to

 "Contact Support"

with your credit card information,(number, exp date, name)
or you may call us at 303-797-0200 and give us the
information over the phone.

You may also fax the information to: 303-797-1333


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

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


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

For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support

DISCLAIMER

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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives