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Daily Newsletter, Monday, 04/07/2003

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The Option Investor Newsletter                   Monday 04-07-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: An Empty Feeling
Futures Wrap: Breakout Failure
Index Trader Wrap: Round Tripped
Weekly Fund Wrap: Stock Prices Rise On War Optimism
Traders Corner: A Change of Heart?

Updated on the site tonight:
Swing Trader Game Plan: Big Reversal

Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
04-07-2003                  High    Low     Volume Advance/Decl
DJIA     8300.41 +  23.26  8520.21 8284.15   1758 mln  1127/608
NASDAQ   1389.51 +  6.00   1430.11 1389.51   1470 mln  921/518
S&P 100   447.25 +  0.56   460.44  446.69   totals    2048/1126
S&P 500   879.93 +  1.08   904.89  878.85
RUS 2000  376.57 +  3.29   382.98  373.28
DJ TRANS 2231.45 + 42.78  2272.68  2190.48
VIX        31.73 -   1.07    32.29   30.51
VIXN       41.44 -   1.41    41.65   40.41
Put/Call Ratio 0.76
*******************************************************************

An Empty Feeling
by Steve Price

The markets continue their pattern of reacting to developments
overseas.  The weekend ramp up in the futures market followed
through on Monday morning, as the March 21 highs were challenged
throughout the major indices.  The SPX and OEX both soared past
those highs in early trading, while the Dow stopped a couple of
points short. Iraq continues to deny that U.S. troops have
entered Baghdad, in spite of tanks rolling through the streets
and U.S. military planes landing at the Baghdad airport.

The other markets I've been using to confirm the equities all
showed bullish confirmation - to a point.  The Ten-Year Treasury
Yield (which moves contrary to the bond itself and generally
represents the moves in the stock market), jumped this morning
and ran right into its 200-dma. That 200-dma level has come into
play in the broad market indices across the board.  The Dow, OEX
and SPX all tested their 200-dmas last week and all eventually
failed those levels.  This morning's extreme bullishness,
however, carried the indices through those levels at the open,
with bears getting out of the way and apparently covering
positions on the break.   The 10-yr yield (TNX) was particularly
interesting, as it failed to confirm the 200-dma breaks, when it
ran into its own and then failed.  It was on this failure
(signaling an end to the asset allocation from bonds into stocks)
that the equities began to pull back and traders got the first
indication that the rally may not hold. Those pullbacks went so
far that the 200-dmas wound up on top by the close and the
patterns look eerily similar to those we saw on September 11 and
December 2, just before big rollovers led the markets lower.
However, the TNX failure wasn't the only driving force for the
pullback.

Chart of the TNX




Chart of the Dow




We got a mid-morning report that more than a dozen U.S. soldiers
had been evacuated from an Iraqi military compound after testing
positive for exposure to deadly sarin nerve gas. Not only were
soldiers contaminated, but so were two journalists and two Iraqi
POWs, confirming the fears that the U.S. troops might be exposed
to chemical and biological weapons once they got closer to the
heart of the city. Later in the day, Donald Rumsfeld said that
the tests had not been confirmed and that the substance could
have been pesticide.  The markets didn't seem to care. Troops
also found what is believed to be am Iraqi storage site for
chemical warheads.  U.S. officials called the discovery a
"smoking gun" and said soldiers found about 20 medium range
rockets with warheads containing sarin and mustard gases.  The
news that soldiers were affected led to the pullback, while the
potential discovery of a "smoking gun" brought back a bid.

The oil market, which has been trading hand-in-hand with the
stock market, in an inverse relationship also gave us some clues
about what to expect.  One of the catalysts for the recent stock
market rally has been the drop in oil prices.  The May Crude Oil
contract has been dropping, but continues to bounce from a rising
200-dma (there's that 200-dma indicator coming into play again).
This morning's drop in oil on the U.S. advancement deeper into
Iraq was short-lived.  By the end of the day, May oil futures had
fallen only 0.66 per barrel, in spite of the war progress.  A
mid-morning announcement that OPEC oil ministers would hold an
emergency meeting on April 24 brought back bids.  OPEC countries
have been ramping up production to accommodate for any shortage
that would result from the war in Iraq, with Saudi Arabia having
upped production the most.  There is now speculation that the
organization will call for countries to reign in overproduction
to keep prices from falling too far.  That could put a crimp in
the equity rally, as a long awaited drop in energy prices may not
be as dramatic as many businesses are hoping.  The rise in fuel
costs has been one of the main contributors to increased
wholesale costs and many companies have cited this as a reason
for disappointing margins. The price of oil is already directly
related to consumers' disposable income.  Higher dollars at the
pump mean less to spend in the retail markets and with consumer
spending making up 2/3 of GDP, lower gas prices would certainly
help any economic recovery.

Chart of Oil Futures




The news for the techs wasn't very good today, but the markets
really didn't seem to care, as the war progress dominated the
landscape. However, we should be paying attention to what we are
seeing below the surface if looking to play anything in the mid
or long-term.  The SARS virus faded into the background a bit
today, but First Albany published a disturbing note on the
sector. The firm cut its growth estimates from +8% to -5%, saying
it believes that the SARS virus will have a larger impact on the
semiconductor economy than the war in Iraq. It said SARS is
likely to have an incremental negative impact over the next
couple of quarters that Wall Street models have yet to
comprehend, noting that 70-90% of all PCs are manufactured in
Asia. Reports of infections in that area of the world are
growing, although the death rate remains in the 3-4% range. In
the meantime, J.P. Morgan downgraded Linear Tech (LLTC) and Maxim
(MXIM) based on valuations and cited long-term concerns regarding
a slowdown in secular growth rates in the high-end analog market.

The airlines mostly got a boost today, with the possible end to
the war leading more consumers to travel, but the SARS virus
continues to affect this industry as well.  Continental Airlines
is the latest airline to cancel flights to Hong Kong and while
not all carriers will suffer from a loss of those flights, there
are plenty of international travelers from Asia that will not be
making the trip to U.S. travel destinations. The hotels also got
a boost, with Starwood (HOT) +$1.07 and Marriott (MAR) +$0.65,
but if the virus doesn't come under control soon, the "end of
war" euphoria may soon bleed into concern about the lack of Asian
market travelers.  The 180 cases in the U.S. are mostly due to
travelers returning from Asia and the image of Asians walking
around in surgical masks certainly can't be good for
international travel.  The most likely candidates to see a drop
in business from SARS is any airline flying to the Asian
continent, the reservation services such as EXPE and ROOM and the
international hotel chains with locations in Asia.  The CDC has
said this version of the Corona virus is one that hasn't been
seen before and is based on one strain of RNA, making it
malleable and capable of adapting.  However, Dr. Anthony Fauci,
director of the NIH division of Allergy and Infectious Diseases,
testified that the organization is already working on a vaccine.
There is also some thought that the virus from which SARS is
derived is most common in winter months and it could simply run
its course. The airlines also will benefit from approval of $3
billion in aid, as part of the $80 billion war package that was
overwhelmingly approved by Congress on Friday.  While the $3
billion may help, the industry was looking for more than $7
billion and it remains to be seen if this will be enough to help
the troubled carriers keep their heads above water. American is
cutting domestic flights by 2% and international flights by 13%.

The Nasdaq Composite crossed a significant barrier this morning.
The 1426 level is one that has led to much larger gains each time
it has been crossed in recent months.  It crossed over in late
November on its way to its relative high of 1521 on December 2.
After following/leading the broader markets lower throughout the
month of December, it made another run through that level in
January, stopping briefly at its 200-dma, before rallying back a
couple of days later to a high of 1467. I say that level is
pivotal because of the number of times it has reached that high
and then failed. However, this morning's jump has to be called
into question after it rolled over hard enough that it couldn't
even hold support at 1400.  What's more the COMP closed on its
lows, with bears still pounding away.

Chart of the COMP




The U.S. dollar is the other indicator that has been giving us an
indication of what to expect from stocks. As the war effort goes
in the U.S.'s favor, it has rallied, signaling an inflow of cash
into dollar-denominated assets, like stocks. This morning the
dollar index (DX00Y) rallied to a relative high, just shy of 102.
It failed at that 102 level on the last couple of rallies and
dropped hard from the same level this morning.  A move over 102
could signal some real legs for any rally.  However, when we
haven't been posting big victories in Iraq and have instead been
faced with a troubled economy, it has sunk and has been declining
since early 2002. By the end of the day, it couldn't even hold
101.00 and finished near its lows of the day as well.

Chart of the Dollar Index




Another indication of a pullback in the works came from the
Market Volatility Index (VIX), which tested support at 30%.
There was not enough institutional option selling to lower it
below that support level, indicating that firms were not yet
believers in the rally.   A move back below the 29-30% range
would indicate a rally has some life, at least until the VIX re-
tests its relative low at 26%.

One of the biggest decisions traders face is judging whether or
not to believe their eyes. Those looking at technical indicators
saw a rising market this morning, which broke through significant
barriers - namely the 200-dmas that have kept a lid on the
broader indices for the past year. They were broken briefly on
another similar occasion March 21st, when the markets were
preparing for what appeared to be a quick end tot he war. When
the war dragged on and we were left to focus on the economy, we
saw a quick reversal down that found bids only when the U.S. made
progress in Iraq again.  It would be nice if a victory would
suddenly turn the economy around.  However, the economic data
from the past week has indicated that the manufacturing and
service sectors have dropped into contraction and the number of
earnings warnings has outstripped the upside surprises.  The
danger of economic recession is still hanging over us and once
the war is over, we'll have little else to focus on. The bet most
bulls are making is that the economy will improve as businesses
begin spending once the geo-political picture clears up.  I'd
like to believe in that theory, but so far we have no concrete
evidence that it will happen.  My general response is "show me
the money" before I take an overall bullish view of the markets.
That doesn't mean we can't move higher in the short-term. The
bullish percents (stocks giving point and figure buy signals in
an index) are climbing and we certainly saw rallies reach higher
than the current levels in August, November-December and January.
However, today's fade from the highs this morning and a rally
that took place on relatively low volume leaves us wondering just
how much gas the bulls have left.  The post-war rally in 1991
gave traders a blueprint and it is possible that it started
early, with market players trying to get in beforehand.  The
other similarities to those August, November-December and January
rallies is the formation we saw at the top and that looks an
awful lot like today's pattern. We have yet to see evidence of a
large cash flow into stock funds and there is no evidence that
the buyers in the current market are truly investors, as opposed
to traders. Without investor money coming back in, the rally will
be difficult to sustain.  And with the economy contracting, there
are fewer 401(k) dollars entering the market.

The fade from today's highs amounted to more than a 200-point
intraday sell-off in the Dow.  It's not the type of action we
usually see on continuing rallies. We will likely continue to
trade on news in the short-term.  However, if today's bullishness
could fade so quickly, then it appears that one of two things is
happening. One - the threat of biological agents is serious
enough to scare investors and put doubt in their minds about when
the war will end; however, this seems unlikely considering the
state of the Iraqi resistance.  Two - We got our war rally a
little early and the bulls have finally run out of gas, with just
the economy to focus on now that the war is coming to a close. It
wouldn't be the first "sell the news" drop we've ever seen. It
was still a gain, but it didn't feel that way in the end. In
either case, the feeling the bulls had this morning certainly
vanished and left us wondering just what happened. And that
sounds an awful lot like the feeling we got as the markets
dropped over the past couple of years.  Definitely not a feeling
you get in a bull market.


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

Breakout Failure
By Vlada Raicevic

Daily Settlement Numbers 4:15pm ET

> DOW
Last: 8300.41
Net: +23.26
High: 8520.21
Low:  8284.15

> YM 03M
Last: 8255
Net: +5
High: 8500
Low:  8251

> S&P 500
Last: 879.93
Net: +1.08
High: 904.89
Low:  879.78

> ES 03M
Last: 877
Net: -1.50
High: 905
Low:  876.25

> Nas 100
Last: 1053.28
Net: +2.57
High: 1091.74
Low:  1053.22

> NQ 03M
Last: 1051
Net: +1
High: 1095
Low:  1050.50

DAILY PIVOTS

> YM 03M
R2: 8564
R1: 8380
Pivot: 8315
S1: 8130
S2: 8066

> ES 03M
R2: 912
R1: 891
Pivot: 884
S1: 863
S2: 855

> NQ 03M
R2: 1106
R1: 1073
Pivot: 1062
S1: 1029
S2: 1017

Huge gap up today to just under 900 on the ES, a slight pause, and
then a run up to 905 before sellers too it down to 894.25 which
then led to two hours of low volume, low volatility drift.  An
attempted selloff was bought, but then rolled over again and price
stair-stepped down with absolutely no bounce to close at 877.  I
do not have the faintest idea on why this selloff happened, or why
it did so with absolutely no dip buyers showing up.  We have been
bullish in the face of nothing but bad news.  Curving roads I
like, but abrupt u-turns are really annoying.  Every stock
technician, and every neo-technician is going to notice that
incredibly bearish candlestick on the daily charts.  It can't be
missed.  It rises from the island reversal like a stiff palm tree.
On one hand we can say that anything so obvious would almost
certainly fail to hold it's true meaning: that of a reversal to
the recent run.  On the other hand, tomorrow is much more likely
to open based on news events rather than to underlying strength or
weakness in the market.  Suffice to say that the close was very
bearish across all the indices.

Those that don't watch the market all day long may look at today's
daily chart and notice that aside from the not-so-pretty
candlestick, things are still looking rather good.  Macd is still
above it's uptrend line, fast stochastic is still pointing up with
no convergence of lines, RSI, ADX and CCI all look fine, having
turned up from their flat stance at the close of Friday.  However,
if you look at that 5 minute chart you would see just how the
entire selloff found absolutely no buyers.

ES Daily Chart:




However, if you look at that 5 minute chart you would see just how
the entire selloff found absolutely no buyers.  In looking at the
15 and 30 minute charts, there was nothing bullish about them.  On
the 60 minute chart, we finally see a little bit of indicator
support, but not much.  Macd is still above its trendline, but
slow stochastic continues to decline in the face of higher prices
from its peak.  RSI broke below its trendline and CCI is below the
moving average.  ADX shows a glimmer of hope but will cross if we
don't close positive in the first hour tomorrow.  You can see just
how much damage the selling did to the 60 minute chart, even
though price closed less than points lower than the close on
Friday.
The ES 270 minute chart shows

ES 60 Minute Chart:




The 270 minute chart shows us that ES is at a crossroads. The RSI
has crossed below the trendline, and fast stochastic has moved
below the slow stochastic, a bearish signal,  but everything else
is holding up well.  Note that price gapped above the downtrend
line, but sold off to below both the downtrend line and the
intermediate up trend line, at the moment, the uptrend line from
the 3/12 low is at around 864.

ES 270 Minute Chart:




Another noteworthy event today was the failure of ES to pierce its
200ema, which held as resistance.  Even more bearish is the fact
that for the second time, ES pierced, but did not close above its
200 simple moving average.

ES Daily Chart - Moving Averages:




The NQ daily chart closed a little bit more neutral then the ES.
It attempted to gap above the recent downtrend line, but closed
well below it.  Indicators are not as bullish as on the ES, and
they maintain a more bearish stance.  Only the fast stochastic is
pointing up, but it too, is right against resistance at the center
line.

The NQ Daily Chart:




The NQ 60 minute chart is just as bearish as the ES, plus the ADX
has a bearish crossover, and the D- rose above the red downtrend
line.  Macd and slow stochastic are both on the verge of crossing
the centerline.  Note that on the regression channel, support on
the 60 minute chart is in the 1020 area.

The NQ 60 Minute Chart:




In looking at the NQs, I am puzzled by how the 200ema can be
broken so many times as if it were irrelevant.  The 200 period
moving average is supposed to be important, and once above or
below it, price should heed that importance.  Today, yet again,
price closes below this key level.  Let us see how it handles the
50ema as we approach it near the 1029 area.

NQ Daily Chart - Moving Averages:




Do not doubt for a moment that this market can turn on a dime and
go directly against your charts and your trades.  There is ample
evidence today that the recent rise may be done.  On the other
hand, today was the second very large gap in the indices, and it
was not that great of a surprise that it filled.  The market was
just too shaky without a stronger level of support, and two large
areas of air was not enough support.  The real test of the market
will be to see how that first gap holds up in the face of any
additional selling.  That, and a possible fill of that gap will be
the most telling for any real insight into how strong the bullish
case is.


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

Round Tripped
Jonathan Levinson

There was a massive rally in the futures this morning, and in the
manner to which we've recently grown accustomed, the entire move
today occurred before the cash markets opened.  They gapped open
within a few points of their highs of the day, and then bled
lower, pausing briefly to pay their respects to the various
support levels on the way down to their closes at the lows of the
day.  Volume was moderate at 1.75B NYSE shares and 1.51B Nasdaq
shares.

Treasury yields got huge boosts, rallying strongly right out of
the gate, but drifting lower to close near their lows of the day
for respectable gains nonetheless, with FVX + 9.9 basis points,
TNX +7 bps and TYX +4 bps.

The TRIN opened at .18 and closed at its high of the day, at .91,
while the TRINQ opened and printed a low of .10, closing at .73.
Volatility was negative for all the indices, with the VIX down
1.07 to 31.73, VXN –1.41 to 41.44, and QQV -.62 to 36.59.
Breadth- and sentiment-wise today was bullish, but the direction
intraday was bearish, as we'll see below.

Without frontrunning my review of the chart action and pivot
points, the day did not have that doji "feel" to it, in which a
strong trendlike move is blown off and followed by a desperation
reversal.  This was caused primarily by the slowness of the day's
trading after the initial hysterical gap up open.  In fact, much
of the session was sideways, as price flatlined the indicators
within what appeared to be an intraday bull flag.  It was only
with a print below the lower reaches of that flag around INDU
8375, COMPX 1400, and SPX 893 that the decline began to
accelerate.  The day ended with gap fills or near-fills on all
the indices.

I have posted the daily pivots based on today's ranges.  These
numbers represent potential support and resistance and pivot
levels.  They should be referenced in the context of your own
technical analysis and targets.


On to the charts:

Chart of the INDU





The INDU is trading on buy signals across the indicators I follow
but they're looking long in the tooth.  Today's gravestone doji
print closed right above the widely-watched 8275 support level.
While the oscillators are not giving sell signals, the MacD is
close to it and the stochastics have stopped in mid-run higher.
Today was a lighter volume day, which leads me to two possible
conclusions.  On the one hand, it shows a lack of conviction at
these potential breakout levels, which is bearish.  However, the
cash INDU traded steadily lower all day, and to that extent, one
could argue that the lighter volume indicated a lack of
conviction to the sell side.  The lower VIX despite the downside
trading sets up a potentially bullish divergence.  On the other
hand, it could signal apathy in the options market on a price
decline, setting up the INDU, OEX and SPX for a potentially
steeper fall.  The price action did little but fill the opening
gap, closing above key support.  Neither bulls nor bears are out
of the woods yet, and conclusions are difficult to draw.

My strategy continues to be to watch support and resistance
levels.  I am trying hard to keep an open mind as to direction,
because of the violent upside surprises we're getting into the
habit of seeing.

R2  8604.32
R1  8452.37
P   8368.26
S1  8216.31
S2  8132.20


Chart of the SPX




The SPX showed us similar action today, failing to take out
resistance and closing right above critical support just above
the 875 line.  The stochastics, which tend to be earlier than the
MacD, are close to a sell signal, but not there yet, while the
MacD is still in "buy the dips" mode.  Lastly, the 5 dma (blue
line) is above the 13 dma (red line), which is also a buy signal.
While today felt quite bearish, as the bulls failed to hold their
gains from the open and most buyers of the SPX lost money with a
close a few cents above the lows, the support underneath never
got challenged.  Bears should remain cautious, because the party
for the bulls is not necessarily over.

R2  913.93
R1  896.93
P   887.89
S1  870.89
S2  861.85


Chart of the OEX




The OEX did not diverge from the SPX in any appreciable way,
closing within a .01% change of the SPX.  Little can be inferred
from this, other than that today was relatively orderly for the
S&P 500 and 100 indices.  The close above support would signal
traders to wait for a test of support and to go long for the
bounce.  However, the toppy MacD and imminent crossing on the
stochastics will make that a riskier trade than you probably want
to see.  Tomorrow's open should hold a clue, as the big moves
tend  to occur after hours anyway.  I would be more inclined to
go short on a test of resistance than to try to catch a bounce,
but the premarket will likely make the decision for us.

R2  465.21
R1  456.23
P   451.46
S1  442.48
S2  437.71

Chart of the COMPX




The COMPX outperformed today, holding onto more of its gains than
the other indices.  However, the QQQ, which closes 15 minutes
later than the COMPX, filled the opening gap completely, and
presumably the COMPX would have done so as well.  Please note
that the chart above shows a marubozu candle (one with little or
no shadow), where it was actually a gravestone doji as well,
blowing off the entire top and closing at its low of the day.
The chart above seems to misrepresent that.  Volume was lighter
than on the other indices, and my comments about the volume
action in the INDU apply equally to the COMPX.  Combined with the
low VXN today, it is difficult to predict tomorrow's action.
Either the COMPX will resume its upward march from support in the
1380 area, or it will resume its slide.  The prevailing economic
and fundamental news has been not only ignored but in fact faded
by the COMPX, moving higher on increasingly bad news and causing
QQQ bears (like me) to pull their graying hair out.

R2  1443.65
R1  1416.58
P   1403.04
S1  1375.97
S2  1362.43


Chart of the QQQ




QQQ suffers from the same candlestick confusion as the COMPX,
having closed at its low of the day.  Note that this frequent
leader amongst the different indices is on a sell signal from the
MacD, the only one of those reviewed above.  The stochastic has
yet to cross but it appears to be not far behind.  The Qubes
could not take out resistance, but they closed right above
Friday's support level of 25.90-26.00.  I would not be looking to
short this or any of the other indices until we see this and its
equivalent support taken out.  I say this in light of the fact
that there have been no gradual moves higher in many weeks.  The
declines are quite orderly, but the upside has been explosive,
often fast enough to make all but market orders difficult to set
and fill.  If going short, I'd suggest setting active stops
instead of merely mental ones, or at least leave your finger on
the trigger.

R2  27.58
R1  26.83
P   26.45
S1  25.70
S2  25.32

Whatever you do, do it defensively.  Protecting capital remains
job one in this dangerous market.  It seems as if war news is
finally loosening its grip on the markets, but I suspect that
we've been seeing irregular moves continue.  Whether those moves
begin to show us some downside for a change, or whether we see
yet more flagpole rallies like this morning, time will have to
tell.


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

Stock Prices Rise On War Optimism

American and European stocks were higher last week as coalition
forces moved swiftly into Iraq, renewing hopes that the war may
end quickly.  Meanwhile, U.S. economic conditions continue to be
soft, with economic reports indicating more layoffs and a slowed
manufacturing sector.  For the week ended April 4, 2003, the S&P
500 large-cap index rose 1.8% while the MSCI Europe index posted
a 2.9% weekly gain in dollar-adjusted terms.






The U.S. bond market eked out a narrow 0.1% weekly gain using the
Vanguard Total Bond Market Index Fund as the benchmark.  Both the
short-term and intermediate-term bond indices had small gains for
the week, while the long-term bond index finished 0.1% lower.  It
was another good week for the high-yield sector, with the average
high-yield fund up 1.5% for the week.

Money market yields remain very low, with the average taxable MMF
yielding just 0.74% (5-day simple yield) as of April 1, 2003, per
iMoneyNet.com latest weekly MMF survey.

U.S. Equity Fund Group

 Week   YTD
+1.8%  +0.4%  Vanguard 500 Index Fund (VFINX)
+0.6%  -2.7%  Vanguard MidCap Index Fund (VIMSX)
+1.3%  -2.2%  Vanguard SmallCap Index Fund (NAESX)
+1.7%  +0.1%  Vanguard Total Stock Market Index Fund (VTSMX)
+1.6%  +0.1%  Lipper Large-Cap Core Equity Fund Average
+0.8%  -2.0%  Lipper Mid-Cap Core Equity Fund Average
+1.0%  -3.5%  Lipper Small-Cap Core Equity Fund Average
+1.3%  -0.2%  Lipper Multi-Cap Core Equity Fund Average
+0.3%  +2.5%  Lipper Science & Technology Fund Average

Large-company stock funds led the way again last week, with some
U.S. stock funds returning more than 3% for the week.  Among the
highest performers last week were White Oak Growth Stock (+3.4%),
Federated Kaufmann (+3.4%) and Neuberger Berman Focus Fund (+3%).
Mid-cap fund returns were generally lower than those produced by
large-cap funds, according to Lipper's weekly indices.  In terms
of sectors, the financial services sector was relatively strong.
Invesco Financial Services Fund, for example, returned 3.0% over
the most recent 5-day period.

Not all domestic-stock funds shared in the gains last week, with
a few funds sustaining weekly losses.  The $5.9 billion Hartford
Capital Appreciation Fund, for instance, lost 0.4% over the week.
The Fidelity Destiny II (-0.1%) and Fidelity Independence (-0.4%)
funds lost ground as well.  The $26+ billion Fidelity Contrafund
gained just 0.3% for the week, lagging its large-cap stock peers.

International Equity Fund Group

 Week   YTD
+1.5%  -4.9%  Vanguard Developed Markets Index Fund (VDMIX)
+1.8%  -2.1%  Vanguard Emerging Markets Index Fund (VEIEX)
+1.5%  -4.7%  Vanguard Total International Stock Index (VGTSX)
+1.3%  -5.8%  Lipper International Fund Average
+2.0%  -2.7%  Lipper Emerging Markets Fund Average
-1.9%  -15.4%  Lipper Gold Fund Average


For the week, the MSCI EAFE index of "developed" foreign markets
rose 1.5% in dollar terms, while "emerging" foreign markets were
1.8% higher using Vanguard's index funds as the benchmark.  That
fueled strong weekly returns for international stock funds, with
the exception of those non-U.S. funds with heavy exposure to the
Asia/Pacific region.  While the MSCI Europe index rose 2.9% last
week, the MSCI Pacific index fell 1.9% in dollar-adjusted terms.
Gold prices also declined as optimism about the war in Iraq grew
last week.

Fidelity Europe Fund returned 3.3% for the week; evidence of the
strong weekly results in the European stock fund group.  Nations
International Value Fund had a 2.9% weekly return for one of the
better returns among diversified foreign stock funds.  Bernstein
Emerging Markets Value, which applies Bernstein's value approach
to the emerging markets, gained 2.8% for its shareholders on the
week.  Some of the laggards in the group last week were Fidelity
Overseas Fund (+0.3%), and the First Eagle Overseas Fund (-0.1%).

U.S. Fixed Income Fund Group

 Week   YTD
+0.2%  +1.1%  Vanguard Short-Term Bond Index Fund (VBISX)
+0.1%  +1.5%  Vanguard Intermediate-Term Bond Index Fund (VBIIX)
-0.1%  +0.9%  Vanguard Long-Term Bond Index Fund (VBLTX)
+0.1%  +1.0%  Vanguard Total Bond Market Index Fund (VBMFX)
+0.1%  +0.9%  Lipper Short Investment-Grade Fund Average
+0.2%  +1.6%  Lipper Intermediate Investment-Grade Fund Average
-0.1%  +0.4%  Lipper U.S. Government Fund Average
+0.1%  +1.3%  Lipper Corporate A-Rated Debt Fund Average
+1.5%  +7.6%  Lipper High-Yield Fund Average

The fixed income market was a tale of two cities last week, with
investment-grade bond prices flat to slightly higher on the week
while high-yield bond prices climbed higher.  Leading the way in
the domestic high-yield bond fund group was the Fidelity Advisor
High Yield Fund, up 3.1% for the week.  Its sibling, Capital and
Income Fund produced a 2.6% weekly total return.

International Fixed Income Fund Group

 Week   YTD
+0.1%  +2.4%  Lipper Global Income Fund Average
-0.1%  +2.0%  Lipper International Income Fund Average

The story was similar in the international bond fund group, with
investment-grade funds producing lackluster results while higher
yielding categories (global high-yield and emerging-markets bond
funds) were solidly higher.  Fidelity New Market Income Fund had
a 2.6% weekly total return to lead the way among emerging-market
bond funds.  The MainStay Global High Yield Fund gained 2.7% for
the week.

Balanced Fund Group

 Week   YTD
+1.0%  +0.6%  Vanguard Balanced Index Fund (VBALX)
+1.0%  +0.1%  Lipper Balanced Fund Average


Balanced funds captured some of the stock price gains last week,
with the average balanced fund up 1.0% for the week, per Lipper.
Some asset allocation funds were on the mark, including Fidelity
Asset Manager Growth Fund (+1.9%), Vantagepoint Asset Allocation
Fund (+1.9%), and Vanguard Asset Allocation Fund (+1.8%).

Brinson Tactical Asset Allocation Fund, a fund that adjusts its
asset mix based on short-run conditions, produced a 1.8% weekly
return for shareholders.

Money Market Fund Group

Yield
1.00%  Vanguard Prime Money Market Fund (VMMXX)
0.74%  iMoneyNet.com All Taxable Money Market Fund Average


The iMoneynet.com all-taxable money market fund average drifted
higher by one basis point to 0.74%.  The top 7-day simple yield
among prime retail, money market funds remains the PayPal Money
Market Fund at 1.28% (+0.02% for the week).  The second highest
yield belongs to the RBB MMP/Sansom Street Class Fund, at 1.14%
(unchanged for the week).

Mutual Fund News

The Associated Press ran an interesting article last week about
the mutual fund manager layoffs that occurred last year.  About
725 single fund managers (those that manage a fund individually
and are not in teams) last year lost their jobs.  Those numbers
would reportedly be greater if you incorporated co-managers who
left a team.  Compared to a base year of 1996 when 454 managers
were let go, the 725 layoffs last year represent a 60% increase.
That's a lot of management change.

Speaking of changes, Morningstar.com is reporting that Vanguard
will replace S&P indices with MSCI indexes on five of its stock
index funds.  And, a sixth index fund will switch from a Russell
index to an MSCI index.  The flagship Vanguard 500 Index Fund is
left alone, and will continue to track the return of the S&P 500
index.  According to Morningstar, Vanguard is making the switch
because it was dissatisfied with some of the ways the S&P equity
indices were constructed.

The Vanguard index fund changes are as follows (per Morningstar):

 Vanguard Index Fund/ New Index Benchmark:
 Value Index Fund (MSCI US Prime Market Value Index)
 Growth Index Fund (MSCI US Prime Market Growth Index)
 Mid-Capitalization Index Fund (MSCI US Mid Cap 450 Index)
 Small-Cap Index Fund (MSCI US Small Cap 1750 Index)
 Small-Cap Value Index Fund (MSCI US Small Cap Value Index)
 Small-Cap Growth Index Fund (MSCI US Small Cap Growth Index)

That is going to take some getting used to, but the moves should
improve fund index benchmark results.  Morgan Stanley uses eight
criteria to determine whether a stock should go into a growth or
value index, and also has buffer zones between market-cap levels
and styles which will reportedly make the transition between the
two sets of indexes smoother.  The indexes are re-balanced at the
end of May and November.

That's it for this week's fund wrap.  Have a good week.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

A Change of Heart?
by Mark Phillips
mphillips@OptionInvestor.com

After seemingly endless weeks of trading only on the war news,
can it be that the bulls are getting a bit tired.  We've had
piles of poor economic news, earnings warnings, downgrades and
concerns about the growing SARS epidemic and still this market
continues surging forward.  Each significant development on the
war front has trumped all else, sending the indices surging
higher, with each resultant dip being eagerly bought.  Today
looked a bit different that the past 2 Mondays, as we gapped
sharply higher on the war news, but in the end the result was the
same.

Shortly after the open, the S&P 500 (SPX.X) tagged an intraday
high of 904.89 as the opening order imbalance was equalized.
That led to a fairly predictable mild pullback and consolidation
through the lunch hour.  It is at that point that the market
action deviated from what we have seen lately.  Rather than
consolidate for the remainder of the day, the rather tight range
of the first few hours broke to the downside and it did so with
vigor.  The SPX did manage to close positive by just over a
point, but the afternoon decline left behind a truly ugly looking
candle formation.

Now I know Steve Price will likely cover the major indices in
sufficient detail tonight for readers that are looking for
direction for tomorrow.  I don't want to focus so much on where
things are going over the very near term, as I do on learning to
interpret the changing signals being given by the market in our
never-ending quest to understand the ever-changing world of
technical analysis.  So let's start with a simple daily chart and
see what nuggets of wisdom it might offer us.

Daily Chart of the S&P 500 (SPX.X)




There's really a lot going on in the chart above, so let's see if
we can break it down.  The first thing that grabs my attention is
the fact that we got another penetration of the 200-dma that
failed to hold.  It was just over 2 weeks ago that the SPX
penetrated its 200-dma first time since early March of 2002.  The
historical parallel is really interesting, don't you think?  It
has been almost exactly a year since the last time the SPX
flirted with (and eventually failed at) its 200-dma.  While the
daily candle pattern is different today than what we saw 2 weeks
ago, the net result is the same.-- a euphoric rally was swiftly
reversed, while at the same time daily Stochastics posted a
bearish reversal in or near overbought territory.

Let's operate under the assumption (I know it's a stretch, but I
think it holds some validity) that today's large reversal is
functionally equivalent to that reversal of March 21 and 24.
Today's candle is known as a Shooting Star formation, which is a
bearish formation in an uptrend.  That seems to be a fitting
description of what transpired today.  The last time we saw a
bearish reversal of this magnitude was on December 2nd, and that
intraday reversal marked the top of the last bear market rally.
We also notice that top was marked by the daily Stochastics
reversing from overbought territory, just like we saw today.

Even if the bulls can battle back above the 200-dma later this
week (or even next week), there are significant obstacles ahead.
First up is the descending trendline from the August highs, which
currently sits at 915.  Not far above that is the upper channel
line of the descending channel that has capped every major rally
since the fall of 2000.  That channel line currently rests at
930, which is very close to the highs posted in January.  And
then there will likely be heavy resistance found near 940 and
then 960, the respective closing highs in November and August of
last year.

With the SPX ending the day just below 880 on Monday, that still
leaves some significant upside potential for the index before its
likely rejection at one of those formidable resistance levels.
Is it reasonable to expect a failure right here, or is there the
potential for the bulls to take another run at new highs for
2003?  Let's zoom in a little and see what we can learn.

Daily Chart of the S&P 500 (SPX.X) - Close Up




Ignoring the brief penetrations of those levels since the middle
of March, the SPX has been trapped between the 50-dma (red) and
the 200-dma (gray).  With today's reversal in both price and
Stochastics, we have a classic bearish divergence setup.  The
higher highs in price were not confirmed by a higher high in
Stochastics and that has clear bearish implications over the near
term.

As clear as that technical setup appears to be, traders are left
with the very clear recollection that technical indicators have
been far less useful than usual with the markets knee-jerking to
every breaking news announcement out of the Iraq war theatre.  If
the war news maintains its dominant effect in determining market
action, then it is entirely possible we could see that bearish
divergence setup fail to produce the expected drop in price.

How's that possible you ask?  For that answer, I turn to the
bullish percent charts.  Jeff Bailey focuses a lot of attention
on these readings in his Index Wraps, because they really help to
define the maturity of either a bullish or bearish market move.
With the SPX bullish percent sitting at 44% in Bull Confirmed, we
have a market that is near-term showing some weakness, but in the
midst of a powerful correction from oversold territory.  That
tells me not to count out the bulls just yet as supply/demand
indicates there is still significant buying interest in this
market.  While much has been made of the belief that the bullish
action in the market in recent weeks has been due to positive war
developments (a view that I won't dispute), we are also faced
with the reality that technically (based on the bullish percents)
the bulls are still very much in charge.  Even if today's
reversal does extend to the downside over the next few days, I
will be very surprised if the 50-dma is unable to provide support
for another rebound.

I don't really want to deviate from the issue of technicals
tonight, except to note the following information.  The economic
picture looks horrible, earnings season is just getting started
and it is hard to imagine how there can be much good news waiting
in the next series of corporate reports.  To top it off, by the
time April winds down, we'll be exiting that "good 6 months" of
the year.  Unless this forthcoming earnings season turns out much
better than I expect, it seems difficult to imagine how the SPX
can break out of its long-term descending channel.

Let me see if I can summarize what I see.  We had a strong (and I
believe important) intraday reversal today that looks like it
should continue to the downside over the next few days.  The
fundamentals certainly would support such a move.  But I'm not
convinced that investors have given up on the idea of a post-war
rally, even though I think most of that rally has already
happened.  Foremost in my mind for the bigger picture is the
bullish percents, which are indicating we are likely about half-
way through the correction from the oversold condition that
existed a month ago.  It has been said many different ways, but I
think it bears repeating -- this market is really stuck in the
middle.  It could go higher from here, even though technically it
would make sense to have a continued pullback first.  What that
leaves us with is a rather tenuous situation.  As I've stated
recently, the market is caught in the middle, not at major
support, but not at major resistance either.  The fundamentals
(and near-term technicals) say down, while sentiment and
intermediate term technicals point up.

My conclusion after looking at all of this evidence is that we
are likely still stuck in the war market and it is difficult to
make a strong case for either a powerful rally or a precipitous
decline from here.  Unfortunately that dichotomy makes it
dangerous to be taking big positions in either direction right
now.  As I said when we started this discussion, my intention was
not to forecast where we're going this week.  Rather, I wanted to
dissect the various technical factors that are currently in play.
Hopefully this discussion helps to give you a glimpse into the
process I go through when trying to make trading decisions, both
in terms of direction, as well as size.

Questions are always welcome!

Mark


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Big Reversal

It's a good thing I didn't start writing early today, because
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closet by the close.

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Contact Support
The Option Investor Newsletter                   Monday 04-07-2003
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: AIG
Play of the Day: Put - ROOM


Updated on the site tonight:
Market Posture: Shifting Sentiment
Market Watch: Confusing Signals


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

None


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

None


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

Elliott Wave Plays Update
By Steve Gould

AIG breached the 56.05 stop loss this morning (4/7/2003)

Chart: AIG Stopped Out
http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-07/AIG040703.gif



Close out the position.


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

Hotels.com - ROOM - close 54.71 change: +0.36 stop: 57.50*new*

Company Summary:
Hotels.com is a provider of discount hotel rooms and other lodging
accommodations, allowing customers to select and book hotel rooms
in major cities through the company's websites and its toll-free
call centers.  ROOM contracts with hotels in advance for volume
purchases and guaranteed availability of hotel rooms and vacation
rentals at wholesale prices and sells these rooms to consumers,
often at discounts to published rates.  In addition, its hotel
supply relationships often allow the company to offer its
customers hotel accommodation alternatives for otherwise
unavailable dates.  At the end of 2001, ROOM had room supply
agreements with over 4500 lodging properties in 178 major markets
in North America, the Caribbean, Western Europe and Asia.

Why We Like It:
As expected, shares of ROOM have not responded well to the ongoing
war, with the additional pressure being provided by the ongoing
SARS virus.  Whether perceived or real, investors are operating
under the assumption that travel is going to be curtailed
(especially to the Middle East and Asia) and are deciding that the
best course of action is to be out of stocks that are tied to this
part of the economy.  Last week was one continuous deterioration
for the stock, as it broke first below the 10-dema (now at
$57.25), then the $56 support level (which served as intraday
resistance on Thursday) and is now testing the $54 support level.
Reinforcing this support level is the 20-dma ($54.04) and we
expect that a break below this level will make for both a solid
momentum entry and the beginning of a swift decline towards our
eventual downside target of $50.  Since that level is also the
site of the 200-dma, we want to use a drop to that level as our
cue to exit the play for a very nice gain.  Thursday's early print
at $56.80 looks like bad data, but even if it isn't it shows that
there is no interest in pushing the stock higher at this point.
Another rollover near the $56 level looks like a solid entry into
the play, with a remote possibility for a slightly better entry on
a bounce failure near $57.  Once ROOM breaks below $54 on a
closing basis, we'll look to lower our stop, but for now it
remains at $58.

Why This is our Play of the Day
More good news on the war front sent the market soaring at the
open, and our ROOM play went along for the ride, tagging an
intraday high of $57.20.  We've gotten used to these ramp jobs
over the past few weeks but Monday's action was a bit different.
Instead of grinding sideways all day or continuing up, this one
fell apart mid-afternoon, with nearly all the intraday gains
vanishing by the closing bell.  That rollover near $57 turned out
to be a gift of an entry to traders tuning in to the play a bit
late.  Investors seem to be wising up that there are some serious
problems to contend with, especially in the travel arena with the
SARS epidemic getting worse.  ROOM reversed almost perfectly at
the 10-dma before falling back to just above the $54 support level
at the close.  Rally failures below the 10-dma continue to look
like the best entry setup, although given the bearish tone of
Monday's afternoon session, the next likely opportunity might be
presented to the momentum set, with a breakdown under $54.  Should
that support level give way, ROOM could make a quick trip down
towards our $50 target where we're recommending harvesting gains.
Since the 10-dma held as resistance today, we're lowering our stop
to $57.50.

Suggested Options:
Short-term traders will want to focus on the April 55 Put, 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 55 strike.
Aggressive traders can use the May 50 Put, with the understanding
that ROOM will need to reach the our $50 target for that choice to
really pay off.

BUY PUT APR-55 URD-PK OI=2962 at $2.75 SL=1.25
BUY PUT MAY-55 URD-QK OI= 224 at $5.10 SL=3.00
BUY PUT MAY-50 URD-QJ OI=  91 at $3.10 SL=1.50

Annotated Chart of ROOM:
http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-07/ROOM040703.gif



Picked on March 30th at $58.58
Change since picked:       -3.87
Earnings Date         04/24/03 (unconfirmed)
Average Daily Volume = 1.39 mln


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options,” claims author Larry Spears in his new compact guide book:

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

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


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

Shifting Sentiment

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/mp_040703.asp



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

Confusing Signals

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/wl_040703.asp


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