Option Investor

Daily Newsletter, Monday, 05/05/2003

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The Option Investor Newsletter                   Monday 05-05-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Mixed Monday
Futures Wrap: Negative Confirmation?
Index Trader Wrap: NASDAQ Composite comes within a "frog's hair"
of December high
Weekly Fund Wrap: Stock Market Advance Continues
Traders Corner: The Case For Futures

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
05-05-2003                  High    Low     Volume Advance/Decl
DJIA     8531.57 - 51.11  8601.94 8511.11   1747 mln  1590/1259
NASDAQ   1504.04 +  1.16  1519.70 1502.66   1872 mln  1782/1325
S&P 100   469.29 -  2.58   473.72  468.79   totals    3372/2584
S&P 500   926.55 -  3.53   933.88  924.55
RUS 2000  409.80 +  2.13   410.18  407.67
DJ TRANS 2460.80 + 12.75  2477.29 2459.94
VIX        23.24 -  0.37    24.13   23.06
VIXN       31.69 -  0.67    32.77   31.33
Put/Call Ratio 0.73

Mixed Monday
by James Brown

It was a day of rest for the markets on Monday.  The bulls' push
higher in Friday's trading took so much energy that the big name
market averages all paused or slipped backwards.  The Dow Jones
Industrials ended the session with a 51-point loss but managed to
close above previous resistance of 8525.  The NASDAQ Composite
did rally higher intraday and traded near the 1520 level twice
before falling back towards the close.  The S&P 500 index merely
consolidated sideways with a little bit of profit taking and two
bounces at the 925 level.

Chart of the Dow Jones Industrials

Chart of the NASDAQ Composite

Foreign Exchanges

Lack of any significant earnings or economic news coupled with
traders waiting to hear from the FOMC tomorrow held the U.S.
markets on hold.  Meanwhile, overseas exchanges traded up on
Monday in response to the breakout in American indices last
Friday.  The London FTSE 100 jumped 1.87% or 75 points to 3952.
The German DAX 30 added almost 1% or 27 points to 3013.  Even the
French CAC 40 rallied 1.12% or 33 points to 2996.  Ignoring new
cases of SARS or celebrating the small number of new infections
over the weekend was the Chinese Hang Seng index, which rose 108
points or 1.23% to 8916.  Japan's NIKKEI 225 index followed suit
with nearly a 44-point gain to 7907 and the Singapore Strait
Times outperformed them all with a 2% gain to 1325.

Sector Results

Back home the headline numbers don't tell the whole story.
Overall market internals looked pretty good.  The INDU and the
SPX may have ended in the red but most major market sector
indices were green on Monday.  Exceptions to this rule was the
$FPP Forest & Paper Product sector, down 1%.  The DFI and DFX
defense sector indices were both down only 1 point.  This was
probably due to small red candles on BA, LMT and NOC, of which
NOC actually affirmed its profit targets for 2003 before the bell
this morning.  Also closing in the red were the BIX and BKX
banking indices, both down less than 1%.  These two financial
indices had broken out above tough resistance on Friday and the
pull back today merely looked like some profit taking.  The BIX
remains above resistance at 290 and the BKX remains above
resistance at 800.  Considering how much of the S&P 500 is
comprised of financial stocks the three and a half points lost on
the SPX is not bad.

Market Internals

The U.S. exchanges advance-decline ratio was positive.  The NYSE
saw almost 16 advancers for every 12 decliners.  The NASDAQ
witnessed nearly 18 advancing stocks for each 13 decliners.  New
52-week highs appear unbeatable.  They have continued to pummel
new 52-week lows and Monday was no exception with 350 new highs
and only 34 new lows.  Overall volume was 1.7 billion on the NYSE
and 1.87 billion on the NASDAQ.  More importantly, up volume on
the NYSE was 996M to 728M in down volume.  The NASDAQ fared
better with 1,267M in up volume over 587M in down.

Mixed Economic Signals

The economic calendar this week is a lot more open that last
week's reporting but Wall Street remains eager (or apprehensive)
about each report.  Today's results were a bit mixed.  The most
significant was the ISM non-manufacturing index or the services
index.  The service sector makes up a huge 85 percent of the U.S.
economy.  Yet surprisingly most economists still put more weight
in last week's manufacturing report, which is older and more
tested indicator.  Last month (March) the ISM came in at 47.9.
Estimates for April were 48.7.  Numbers under 50 mean the sector
is contracting and over 50 it is expanding.  The quick end to the
Iraqi conflict appears to have helped push the ISM number for
April to a surprising 50.7.  This is great news and reflects the
huge jump in consumer confidence seen last week as well.
Contrasting this bit of good news was the Challenger, Gray &
Christmas report.  This private research group has been measuring
planned layoffs in the U.S.  Today's numbers showed a 71% jump in
management's desire to trim their payrolls.  Remember, these are
planned layoffs, not actual firings, and they could be carried
out over time or through early retirements.  However, March's
planned layoff number was 85,396.  April's report revealed that
businesses had planned for 146,399 layoffs.  The job market is
already a weak spot in the economy and this doesn't offer any

The Fed

Of course the big economic "report" this week that everyone will
be watching is the Federal Open Market Committee meeting
tomorrow.  Alan & Company will once again be expected to share
their opinion on the economy and the overall risks to economic
growth.  Last time the Fed met together they actually chose to
pass claiming that the war's affect on the economic climate had
caused too much interference and they would have to wait and
share their opinion later.  Well, this is "later" and Wall Street
doesn't want to hear how Greenspan can't "full categorize" any
risks to the economy.  Once again the markets look to Alan for
succor and woe to the bulls should he disappoint.  While almost
no one expects the Fed to lower rates tomorrow many are expecting
to hear the FOMC change to an easing bias.

The Dollar

Speaking of green one cannot ignore the failing U.S. greenback.
Monday's trading session saw the dollar fall to a four-year low
against the euro.  The intraday "low" for the dollar was $1.13
per Euro before falling to $1.129.  The dollar hasn't been this
weak against the euro since February 1999.  Foreign investors'
faith in the U.S. appears to be failing under the growing shadow
of our trade deficit.  If the economy doesn't start to pick up
steam soon this sell-off in the dollar will only get worse.


It has been no secret on Wall Street that Barry Diller's USA
Interactive (USAI) has had acquisitions plans.  I believe it was
only 12 to 18 months ago that analysts uncovered USAI's plan to
spend up to two billion in acquisitions.  I've haven't been
keeping track of the dollar amounts but we do know USAI has
recently agreed to buy Expedia (EXPE) and Hotels.com (ROOM), both
online travel-related services.  Today's merger news that USAI
would buy Lending Tree (TREE), the online mortgage lender, is a
bold step into the financial services and real estate sectors.
Diller must feel pretty strongly about it as USAI is offering a
stock-for-stock deal worth $734 million.  Shares of TREE jumped
41 percent to $20.71 by the close.


Tuesday will see some more big earnings announcements.  Leading
the pack will be networking giant, Cisco Systems (CSCO).  In the
software sector we'll see Electronic Arts (ERTS).  For the
insurance-financial sector it will be Prudential (PRU).  The
consumables candidate will be Gillette (G).  Of course the big
focus will be on the Fed meeting.  Don't expect a lot of action
until the interest rate decision is known.  Let's hope that Alan
has been able to clear up the reception on his crystal ball.


Negative Confirmation?
by Jim Brown

   05-05-2003           High     Low
DJIA     8531.57 - 51.11  8601.94  8511.11
NASDAQ   1504.04 +  1.16  1519.70  1502.66
S&P 500   926.55 -  3.53   933.88   924.55
NDX      1136.26 -  0.25  1152.96  1132.99
ES03M     926.25 -  1.25   933.50   923.50
YM03M    8518.00 - 26.00  8591.00  8484.00
NQ03M    1138.00 -  1.00  1155.50  1134.50

Daily Pivots (rounded to nearest point)
           R2     R1    Pivot   S1     S2
DJIA      8639   8585   8548   8494   8457
COMPX     1526   1515   1509   1498   1492
ES03M      938    932    928    922    918
YQ03M     8638   8578   8531   8471   8424
NQ03M     1164   1151   1143   1130   1122

Was today confirmation, negative confirmation of simply indecision?
After last week's gains and the breakout to new relative highs on
Friday the indexes needed to extend their gains on heavy volume to
confirm the up move. The NYSE traded less volume than it did on
Friday and the up/down volume was almost even. The Nasdaq traded
1.88 billion shares but it was only 23 million more than Friday.
The up/down volume was 2:1 to advancers. Neither of these showed
any confirmation but they did not indicate any serious selling
either. I see serious indecision at these higher levels more than
any specific direction.

The Dow rallied to try and touch the downtrend from Dec-2nd at
8600 three times but was only successful once. The -50 point drop
is not that important as profit taking before the Fed meeting on
Tuesday could be the primary motive. The index is trading at the
top of its uptrend channel and could easily trade down to 8450
without breaking the longer term uptrend.

Dow Chart - Daily

The Nasdaq was the star performer but there was a high profile
failure at strong resistance near the Dec-2nd 1521 high. The index
rallied to +16 intraday before slipping to close flat. The Nasdaq
could suffer on Tuesday from the JDEC warning on Monday after the
bell and the CSCO earnings on Tuesday night. CSCO is expected to
do well and have positive guidance which sets the potential for
a negative market reaction if they don't follow through. There is
a lot of profit in the tech sector and there is the potential for
some selling prior to the Fed announcement at 2:15. You would hate
to be a fund manager with hefty profits and have some negative
guidance from the Fed knock you back to last month. The Nasdaq has
support at 1450 and we could easily trade there without breaking
the current uptrend.

Nasdaq Chart - Daily

The ES futures struggled all day with trying to break out of its
uptrend channel. The contract high at 935 and resistance at 932
proved too much to overcome. The ES did not however sell off. It
closed flat at 926 and appeared weak. Intraday support from Friday
was 924 and Monday's Pivot was 923. These levels provided support
and that support held. The ES could trade down to 912 without breaking
the current uptrend. To break out on the upside the Nasdaq would
have to break 1521 and the Dow 8600. This is sizeable resistance.

ES03M Chart - 120 min

The Nasdaq futures retested their uptrend resistance at 1155 and
failed with a drop back to 1138 at the close. The NQ is very
extended in this current move and could easily drop back to 1100
to rest. The JDEC and CSCO news will pressure the NQ on Tuesday.

NQ03M - 240 min (Qcharts problem with daily)

The Dow futures topped at 8591, just short of the psychological
8600 level. The downtrend from November at 8650 will be the next
problem should 8600 be broken. The most likely retest will be the
support at 8400. This is the bottom of the uptrend channel and
the spot the bulls will most likely feel more confident about
buying the rally.

TM03M Chart - Daily

There are two major problems for the markets on Tuesday. The first
is the FOMC meeting which concludes at 2:15. The Fed is not expected
to make any change in interest rates but their guidance could be
critical. The Fed heads have been saying positive things in speeches
but mostly geared to the 4Q and into 2004. If that continues to be
the "official" stand then we could see some cooling in the markets.
There is a remote possibility that they could cut based on the 3rd
straight month of job losses which normally produces rate cuts. The
Fed Fund Futures is only showing about an 18% chance of this happening.

The second problem is Cisco, which announces earnings after the close.
Cisco has been making positive noises as well so they are expected to
beat and/or raise guidance. If they do not say positive things in the
earnings guidance there is the potential for a sell off. The good news
is already baked in the cake.

For Tuesday I would look to stay short under 923 and long over that
level. This was the key support and Pivot on Monday and remains a
key level on Tuesday.

See you in the Futures Monitor on Tuesday!

Jim Brown


NASDAQ Composite comes within a "frog's hair" of December high

One of the more "exciting" technicals in play today was to see if
bulls could push the NASDAQ Composite (COMPX) 1,504.04 +0.07%, or
the NASDAQ-100 Index (NDX.X) 1,136.26 -0.02% hopping to, or above
their December relative highs and give a major index a "first"
new relative high after a higher low, but bulls came within a
"frog's hair" of such a trade, as the very broad NASDAQ-Composite
came up short (by 1.74 points) to near its session lows.

Traders were active again today, especially at the NASDAQ.
NASDAQ volumes reached the 1.88 billion-share mark, which
outpaced Friday's 1.82 billion, both marking volume levels not
seen this year.  NASDAQ internals finished the session positive
with advancers outnumbering decliners by an 18 to 13 margin,
while 220 four and five-lettered stocks traded new 52-week high
compares to 23 stocks being sold to new lows.  Friday's breadth
for this category was 210:16.

I don't know about you, but after tracking some of these
internals for the past couple of months, my best impression today
would have been that of a Russian weight lifter trying to squat
1,500 lbs, his face red, and jugular vein protruding from the
side of his neck as he looked to press the weight to a complete

While the NASDAQ was able to turn a higher rate of volume that in
Friday's trade, the NYSE Composite (NYA.X) 5,207 +0.11% turned a
growingly steady 1.4 billions share, but didn't exceed its 1.52
billion shares traded from Friday (highest levels this year have
been 1.78 billion and 1.79 billion on 01/30/03 and 03/21/03
respective).  Advancer outpaced decliners by an 18 to 13 margin,
while new highs reached a new peak at 191 compares to 18 stocks
trading new lows.  Friday's new high / new low showed 191 stocks
having traded new 52-week high, compared to just 4 stocks having
traded new lows.  While not certain, I don't remember that even
during the great bull market of the late 1990's that we would
have only seen 4 new lows in the NYSE on any given day!

I've learned to not OVERLY-trade a "gut feel," by my gut is
turning a bit after today's trade with such impressive volume
build, such BULLISHness from the new highs/new lows.  This market
is definitely BULLISH, but I may well have to think.... "too

Today's a great day to simply look at the NASDAQ Composite
(COMPX) 1,504.04 +0.07% as it came soooooo close to trading its
December high.  There's just over 3,000 stocks listed on the
NASDAQ and while it is easier to control and move around the
NASDAQ-100 (just 100 stocks) it remarkable that the NASDAQ could
press the December highs of 1,155.68 and not be able to see bulls
press the additional 1.74-points needed to get a matching high.

NASDAQ Composite ($COMPX) Chart - Daily Interval

Stockcharts.com hasn't tabulated all of their point and figure
charts at the time I finished "marking up" the above chart, but
today's is as good a day as any to benchmark the COMPX itself
against the bullish %.  One thing I'm noting for the first time
when doing so, is that past "status" changes in the NASDAQ
Composite came very close to the 50% retracement level of 1,314.
This is "interesting" in my opinion, as during the advance back
in October-December, the conventional retracement (pink) as drawn
above would not have been "known" at that time.  Not marked on
the above chart (ran out of space) was the recent reversal back
UP in the NASDAQ-Composite Bullish % ($BPCOMPQ) on April 3rd,
which came at NASDAQ Comp 1,400, just prior to the last test of
38.2% retracement at 1,363.69.

One of the "points" I want to make with this VERY broad bullish
%, is the AMOUNT OF TIME and change to the market internals
(needs 6% change to reverse status on the bullish % chart) to
reverse course, and why the narrower NASDAQ-100 Bullish %
($BPNDX) becomes important as it is "faster-moving" as it is

Some may think it is crazy to begin setting up the "next" bullish
entry trade, but right now, I'd be assessing downside risk in the
NASDAQ Composite (COMPX) to the 1,363 level, should the market
look to take some gains and remove some of the bullish risk that
has been built into things the past couple of months.

The ability of the NASDAQ-Composite Bullish % ($BPCOMPQ) to build
a series of higher highs and higher lows is encouraging, but as
I've mentioned before, the bullish % are not a good indicator for
predicting price action, but better for ascertaining what part of
the "field" you're operating in, market internals and "who's got
the risk" (bulls or bears).  A longer-term bull at this point
would "feel" much better about things longer-term if the NASDAQ
Composite itself could build a higher relative high.

Ah, here we are.  Today's action saw the NASDAQ Composite Bullish
% ($BPCOMPQ) see a net gain of 1.2%, which has about 36 stocks
generating new point and figure buy signals.  This is up from
Friday's net gain of 1.33% (roughly 40 stocks) and now has this
bullish % reaching a bullish cycle high of 54.67%.  In May of
2001 and then again in January of 2002, this very broad indicator
reached levels of 56% before eventually reversing lower.  This
tells us we're at similar risk levels found during those previous
times, but internals continue to show good bullish strength.

I received a mixed bag of requests to last week's self-wonderment
if "too many" retracement brackets (conventional/monthly/weekly)
was too noisy.  Some traders (believe it or not) wanted me to ad
a DAILY retracement onto the charts for their intra-day trading.
Whew!  I'm thinking if you're a day trader and trading the intra-
day swings, you've got a high-level trading platform set up with
real-time charts and good retracement brackets that you can
attach from the DAILY S2-R2 levels and make notes each day on
where the S1 and R1 levels are at.  To tell you the truth, the
thing that takes me the "longest" with my charts is updating my
weekly charts each Monday and getting all the other things done I
need to do in a day.

So, I'll try and mix in various charts as each day passes.  Some
"love" the more simplistic point and figure charts with notations
as to how a MONTHLY or WEEKLY level ties in.  I guess we all have
our preferences, but I was hoping to "reach a consensus," but
that doesn't look achievable after review of my e-mail.

So, here's a chart of the QQQ, which I find compelling and
perhaps ties in or relative to the NASDAQ-100 Bullish % ($BPNDX).

NASDAQ-100 Tracking Stock (QQQ) - Daily Chart

The QQQ, came close to trading its December 2nd relative high of
$28.79, which would form the "upper-end" of yet another "zone of
resistance."  The QQQ also came close to testing our new WEEKLY
R1 of $28.73.  However, unlike other moves higher since the
reversal up in the NASDAQ-100 Bullish % ($BPNDX) since March,
risk hasn't been as high as depicted by the bullish %.  Three-
bars ago (Thursday) I profiled an bearish trade intra-day for
partial positions in the QQQ puts for September expiration.  Yes!
I still hold them!  That trade was put on at a level now below
this WEEK's S1 of $27.39.  Right now, the FIRST sign of any
weakness in the QQQ would be brought on by DIVERGENCE, where the
QQQ would actually close below the last downward trend on its
chart, at approximately $28.00.

I've pointed out in the market monitor that these VERY SHORT-TERM
downward trends, when broken to the upside have been serving
support on weakness.  I don't think I'm seeing things either and
I believe it is cause by bears, with some larger positions,
looking for cover after each of these trends have been broken.

NASDAQ-100 Track Stock (QQQ) - 30-minute chart

At this point, I wouldn't call today's "highs" in the QQQ any
more relevant or "sign of weakness" that April 21-22 trade that
came UP into the $26.92-$27.06 zone (remember, the red
retracement is MAY MONTHLY and wasn't there in APRIL).  The only
alert to any "new weakness" in the QQQ would be if there were
some type of break and better yet, CLOSE below the downward
trend, which is near $28.00.  I do need to adjust my "thinking" a
bit near-term as it relates to when I profiled the QQQ as
bearish.  I wouldn't have profiled the trade unless I thought it
would trade $27 and break below the $26.90 level.  With today's
test of "upper zone" I've got to be thinking there will be some
support found on a pullback very close to my bearish entry and
this week's WEEKLY S1 of $27.39 and more likely the $27.00.  ONLY
on a trade into the zone of $27, would I then begin to think "I
was onto something" and perhaps risk as depicted by the Bullish %
is coming into play.  Also, if we were to see a QQQ trade back
near $27 this week, DO NOT be surprised if the current "downward
trend" comes back into play as resistance.

Today's action saw the narrower NASDAQ-100 Bullish % ($BPNDX) see
a net gain of 3%, so 3 stocks gave new point and figure buy
signals.  This has the bullish % rising to 76%.  Still not as
"risky" as December's 82% reading, and nowhere near as risky as
November 1999's 93%.

S&P 100 Index ($OEX.X) Chart - Daily Interval

Aside from the January relative high there would appear to be
little technical resistance in play on the bar chart until 477.
The S&P Bank Index (BIX.X) 292.45 -0.78%, which matched its
November and January high on Friday, exhibited what I'd call
"profit taking" ahead of tomorrow's FOMC data.  Aside from
Treasury bonds, the banks would also be a group that would be
greatly influenced by tomorrow's FOMC decision on interest rates.

I would think the MARKET would view a RATE CUT and an UNPLEASANT
surprise from the Fed.  The reason I say this is that I think the
BANKS have RISEN based on the thought of economic improvement.  I
would view a Fed rate CUT as concern among FOMC policymakers that
the economy is in trouble.

The S&P Bank Index (BIX.X) did trade the upper-end of its bullish
regression channel in Friday's trade, where the BIX.X traded a
high of 295.15 and closed at 294.76.

S&P 500 Index Chart - 5-point box

A 3-box reversal back to 915 wouldn't be overly surprising for
the SPX's PnF chart as it moved 1-box above our "bullish
resistance" trend line.  Most of the overhead supply the remained
from January should be gone by now and sets the stage for a test
of WEEKLY R1 of 940.  The first sign of weakness on the SPX chart
would be a double-bottom sell signal at 900, something that the
SPX hasn't done since giving the triple-top buy signal at 855.

I thought I placed the various "inflection points" of the bullish
% on the SPX's point and figure chart in the past, but I got a
couple of e-mails over the weekend from traders asking me to do
this.  Starting in the upper-left, I "tied in" how the bullish %
most likely read after reaching the "peak" in early December (red
C on a PnF chart).  The decline to 58% was enough to see the
bullish % reverse the needed 6%, but a "sucker rally" into
January (red 1 on PnF chart) wasn't quite enough to see an UPWARD
6% reversal on the bullish % chart.

I think the SPX chart with Bullish % tied in does a VERY GOOD job
of explaining how EARLY it would be for BEARS to be taking full
positions at this stage in the game.  Was there time or decent
entry point to look short in January?

Did any BEAR "need" to pick a top and be FULL POSITION short/put
in December?  No.  The "best" trade came AFTER a breakdown, not
only in the SPX chart, but the bullish % also showing internal

Today's action saw the broad S&P 500 Bullish % ($BPSPX) see a net
gain of 1.4%, so 7 stocks saw new point and figure buy signals.
Remember, when the bullish % grows higher, these aren't stocks
that are giving "just another" consecutive buy signal.  These are
stocks that had generated a "sell signal" at some point, but
today traded at a level above a point where there was enough
supply to limit further upside price gains.  Today's action has
this bullish % growing to 60.8% and still may have some room to
December's 68% level.  As it would relate to the "euphoric" state
of bullishness in March of 2002 as noted in the VERY broad NASDAQ
Composite Bullish %, the SPX Bullish % reached 77% in March of

Dow Industrials ($INDU) Chart - Daily Interval

The Dow traded 8,600 right out of the gate this morning, and that
was enough to generate a double-top buy signal.  Once the
Challenger report was released for April announced layoffs, the
Dow lost its steam and the afternoon rally attempt to 8,580 came
about 10-points shy of the morning high.

I checked the intra-day charts and only the NASDAQ Composite and
NASDAQ-100 came close, or achieved their morning highs.  The SPX,
OEX and Dow all came up short.

The first sign of trouble on the Dow's point and figure chart
wouldn't show up until a double bottom sell signal at 8,300 and
that's right at the apex of the Dow's "bullish triangle."

We can perhaps see that 8,300 level represented by the above bar
chart, but first-thing-first!  The Dow did work itself above a
"zone of resistance" from 8,476-8,493.  I would have thought
however that the Dow would have "launched" toward those 4-levels
of resistance near 8,700.

On Friday, the Dow Industrials Bullish % ($BPINDU) saw a net gain
of 6.66% as two stocks gave new point and figure buy signals.
Today's action saw no net change in this VERY NARROW bullish%.
Still "bull alert" as its bullish % grows to 56.67% and would
need a reading of 62% to achieve "bull confirmed" status.

Pivot analysis matrix

There are few MONTHLY levels that would come suspiciously close
to correlating.  I do see some correlation tomorrow with the NDX
MONTHLY R1 and DAILY R1, but that's as close as today's.  One
could think.... "If the NDX/QQQ reached its bull run peak," then
today might have been the day.

Lots of levels show up as support tomorrow at the WEEKLY pivots
and DAILY R1s.  As noted in Friday's late-evening market monitor
and briefly in tonight's wrap, it has been awhile since we've
seen the WEEKLY S1s traded and support looks formidable tomorrow
at the WEEKLY pivots.

"Red arrows" are still have the buying in Treasuries drawing my
concern with regards to where the cash is coming from to keep the
major indexes at these highs.

Jeff Bailey

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Stock Market Advance Continues

Stock mutual funds enjoyed another good week as investors pushed
stock prices higher in reaction to better than expected economic
reports.  Over the 5-day period through May 2, 2003, the S&P 500
index rose 3.5%, with large-cap U.S. equity funds following suit.
Increases in personal income and consumer confidence were two of
the upbeat economic reports last week which lured investors back
to Internet, tech, telecom, and other equities.

According to Lipper, the three large-cap U.S. equity fund groups
averaged in the range of 3.3% to 3.6% for the week, similar with
the 3.5% weekly return for the S&P 500 large-cap index.  Mid-cap
and small-cap U.S. stock funds did even better with "pro-growth"
funds leading the way.  For example, mid-cap growth funds picked
up 4.5% on average for the week, while small-cap growth funds on
average rose 5.4%.  Science and technology funds gained 5.7% for
the week and are now up 12.3% on average for the YTD 2003 period.

International stock funds produced strong weekly returns as well,
with the average international fund up 3.8% for the 5-day period,
per Lipper.  That was similar to the 3.9% weekly total return by
the MSCI EAFE index of foreign stocks.  Gold funds averaged 4.2%
for the week and are now down less than 10 percent on average on
a YTD 2003 basis through May 2.

Fixed income investors enjoyed gains as well last week, with the
total U.S. bond market (Lehman Brothers Aggregate Bond Index) up
0.2% for the 5-day period.  The U.S. high-yield sector continued
to perform relatively strongly, with the average high-yield fund
producing a weekly total return of 1.3% per Lipper.  The average
international fixed income fund did even better, gaining 1.5% on
average for the week.

The average 7-day simple yield of all taxable money market funds
held at 0.71% last week, according to fund-tracker iMoneyNet.com.

U.S. Equity Fund Group

 Week   YTD
+3.5%  +6.3%  Vanguard 500 Index Fund (VFINX)
+4.0%  +4.0%  Vanguard MidCap Index Fund (VIMSX)
+4.9%  +6.8%  Vanguard SmallCap Index Fund (NAESX)
+3.7%  +6.4%  Vanguard Total Stock Market Index Fund (VTSMX)
+3.3%  +5.4%  Lipper Large-Cap Core Equity Fund Average
+4.2%  +5.2%  Lipper Mid-Cap Core Equity Fund Average
+4.7%  +4.8%  Lipper Small-Cap Core Equity Fund Average
+3.8%  +6.1%  Lipper Multi-Cap Core Equity Fund Average
+5.7%  +12.3%  Lipper Science & Technology Fund Average

According to Lipper, all of the U.S. equity fund indices put up
strong numbers last week, increasing their YTD 2003 gains.  The
tech sector was particularly strong, with the average tech fund
rising 5.7% for the week.  Some sector funds returned more than
10% for investors, including those relating to the Internet and
global technology.  The highly focused American Heritage Growth
Fund, a multi-cap growth objective fund, was the week's highest
performer.  It produced a return of 16.7% for investors for the
5-day period.

Among funds with assets of at least $500 million, the Neuberger
Berman Focus Fund, a multi-cap value objective fund, posted the
week's highest total return, +7.3%.  The Buffalo Small-Cap Fund
gained 7.2% for the week.  Three of Legg Mason's funds produced
above-average results last week: Special Investment Trust (7.1%),
Value Trust (+7.0%), and the Opportunity Trust (+6.9%).  Several
Fidelity Select Portfolios did well also, including the Software
and Computer Services Portfolio, which gained 6.6% for the week.

The week's only losers were funds that short the market, such as
the ProFunds UltraShort OTC Fund, which lost 9.5% over the 5-day
period.  The bottom 25 funds last week produced weekly losses of
between 2.4% to 9.5%.

International Equity Fund Group

 Week   YTD
+3.9%  +1.7%  Vanguard Developed Markets Index Fund (VDMIX)
+4.0%  +3.0%  Vanguard Emerging Markets Index Fund (VEIEX)
+4.0%  +1.9%  Vanguard Total International Stock Index (VGTSX)
+3.8%  +0.9%  Lipper International Fund Average
+3.6%  +3.5%  Lipper Emerging Markets Fund Average
+4.2%  -9.3%  Lipper Gold Fund Average

International equity fund returns were also good last week, with
the total international stock index up 4% over the weekly period
and the average international stock fund rising 3.8%, per Lipper.
ProFunds UltraJapan Fund returned 9.4% over the week to lead all
global/international equity funds.  Matthews Korea Fund produced
an 8.7% weekly return for investors, while the Korean Investment
Fund rose 8% for the week.  European funds performed well too as
evidenced by the 8.0% weekly total return by the ProFunds Europe
30 Fund.

Oakmark International Fund's weekly total return of 5.8% was the
highest among international funds with more than $500 million in
total assets.  Other larger-asset international funds to perform
well last week included Nations International Value Fund (+5.7%),
American Funds' Smallcap World Fund (+5.5%), ING International
Value Fund (+5.4%) and GMO International Small Companies (+5.0%).
So, international small-cap funds were among the best performers
last week (as was the case for the U.S. equity fund group).

The average gold fund returned 4.2% last week, bringing its 2003
YTD loss back under 10 percent, per Lipper.

U.S. Fixed Income Fund Group

 Week   YTD
+0.1%  +1.5%  Vanguard Short-Term Bond Index Fund (VBISX)
+0.2%  +3.0%  Vanguard Intermediate-Term Bond Index Fund (VBIIX)
+0.3%  +3.7%  Vanguard Long-Term Bond Index Fund (VBLTX)
+0.2%  +2.1%  Vanguard Total Bond Market Index Fund (VBMFX)
+0.1%  +1.3%  Lipper Short Investment-Grade Fund Average
+0.3%  +2.9%  Lipper Intermediate Investment-Grade Fund Average
+0.1%  +1.1%  Lipper U.S. Government Fund Average
+0.2%  +2.6%  Lipper Corporate A-Rated Debt Fund Average
+1.3%  +11.9%  Lipper High-Yield Fund Average

With the equity markets doing well, high current yield funds had
another strong week.  Some funds, such as Excelsior's High Yield
Fund, Institutional Class, returned as much as 4.5% in the last
five days.  Among high-yield funds with $500 million or more in
assets, the week's best performance came from Fidelity Advisor
High Yield Fund, which returned 2.5% for the week.  Its popular
sibling, Fidelity Capital & Income Fund gained 2.1% over the 5-
day period.

In the investment-grade bond fund sector, those funds with high-
yield exposure performed better than those without.  For example,
American Funds' Bond Fund of America returned 0.65% for the week,
nearly twice the intermediate-term, investment-grade average per
Lipper.  The nation's largest bond fund, PIMCO Total Return Fund,
had a weekly return of 0.35%, to keep pace with its intermediate-
term bond fund peers.

International Fixed Income Fund Group

 Week   YTD
+1.1%  +5.5%  Lipper Global Income Fund Average
+1.5%  +5.8%  Lipper International Income Fund Average

The solid weekly performance of U.S. high yield funds was matched
by global/international fixed income funds, which produced weekly
total returns in the 1.1%-1.5% range, per Lipper.  Top performing
funds for the week included the Alliance Global Dollar Government
Bond Fund, up 3.2%, and Mainstay Global High Yield Fund, up 3.0%,
as well as several other "emerging-market" debt funds.

Among funds with assets over $500 million, the week's best return
was produced by Fidelity New Markets Income Fund, +3.1%.  The SEI
Emerging Markets Debt Portfolio posted a 3.1% weekly total return
for institutional investors.

Balanced Fund Group

 Week   YTD
+2.3%  +4.8%  Vanguard Balanced Index Fund (VBALX)
+2.4%  +4.4%  Lipper Balanced Fund Average

The average balanced fund returned 2.4% last week using Lipper's
number.  Bob Markman hit the mark on his Markman Multifund Trust:
Markman Moderate Allocation Fund (MTRPX), returning 6.4% over the
5-day period.  At April 30, 74% of assets were invested in stocks
and stock mutual funds.

Other U.S. hybrid funds performing well for the week included the
Morningstar 5-star rated Thompson Plumb Balanced Fund, which rose
4.5%.  Oppenheimer Quest Balanced Value Fund posted a 4.0% weekly
total return.  Leuthold Core Investment Fund, another Morningstar
5-star rated fund, finished the week 3.8% higher.

Money Market Fund Group

0.71%  iMoneyNet All Taxable Money Market Fund Average

The average taxable money market fund's trailing 7-day (simple)
yield remained at 0.71%, per iMoneyNet.com's latest MMF report.
Among prime retail money funds, the top current yield continues
to be offered by the PayPal Money Market Fund (1.22%).  RBB MPP
Sansom Street Class is second with a 1.13% 7-day average simple

The nation's largest retail MMF, Fidelity Cash Reserves, has an
average simple yield of 0.95%, down 0.01% for the week.

Mutual Fund News

The top story on the www.brill.com website today is on emerging-
market bond funds, an interesting read for those investors that
may be considering such an investment.  Theoretically, emerging
market bond funds have more risk than global/international bond
funds; therefore, they have greater total return potential over
the long term.  The Brill.com site also reported about a recent
Standard & Poor's study indicating "focused" funds had produced
better long-term investment results than non-concentrated funds.

Morningstar fans, note that the funds tracker has just unveiled
11 new fund categories and eliminated one to make it easier for
investors to find the fund they're looking for.  Morningstar is
splitting the domestic hybrid fund group into new categories on
the basis of the fund's asset mix.  Those funds with 20% to 50%
in stocks and 50% or more in fixed income will be classified as
"conservative allocation" funds.  Funds with higher than 50% in
equities will be labeled "moderate allocation" funds, according
to Morningstar.

For more information on the Morningstar category changes, go to
the Funds Section of the www.morningstar.com website.

Steve Wagner
Editor, Mutual Investor


The Case For Futures
by Mark Phillips

Life is a never-ending series of lessons.  Some come quickly, like
a bolt of lightning, while others are the result of a slowly
dawning realization.  Today's discussion is one of the latter.
I've been watching with detached interest as the activity on the
Futures Monitor has become more refined in recent months, but
considered it little more than a passing distraction.  But then I
started noticing that more and more of the index traders I am in
regular communication with are shifting the bulk of their efforts
away from index options in favor of index future.  Some of these
individuals are very accomplished traders and in the past have
pulled in very nice 6-figure incomes doing nothing more than
trading index futures.  That got me thinking that maybe I needed
to take a serious look at this vehicle.

By way of introduction, I need to make it clear that I am not
altogether unfamiliar with futures trading.  In fact, my earliest
trading activities were in the futures arena -- commodity futures.
You know, Pork Bellies, Coffee, Natural Gas and of course Gold and
Crude Oil.  I made some money and lost some money, but never
really hit my stride in that arena.  Then along came the late
1990s and the roaring bull market in equities and I shifted my
focus into the equity options arena.  I've traded options on all
the major indices, and on more individual equities than I care to
remember.  When the market is trending, it really doesn't matter
what vehicle you select, options can be the next best thing to
your own personal ATM.

But with the essentially trend-less and increasingly choppy nature
of the equity market over the past 10 months, it has become more
difficult to consistently string those winning option trades
together.  Back when I initially made the shift over to the equity
world, the E-mini futures contracts on the S&P 500 and NASDAQ-100
were still in their infancy -- they looked like interesting
trading vehicles, but there just wasn't enough liquidity there to
interest me at the time.  But things change.

Have you noticed the rarity of a trend move that lasts for more
than 3-4 days?  When I was heavily trading index options (which I
still do, from time to time), it was fairly common that I could
enter a trade on Monday or Tuesday and ride it right into Friday
afternoon for a nice return.  That has become increasingly
difficult to do lately (especially during the latest Gulf War),
with gap opens being the rule rather than the exception.  In fact,
I have found myself trying to day-trade using index options
because of my preference to not hold a position over the closing
bell due to market's propensity for gap open moves.  But that
ushers in a whole host of other problems, which we'll get to in a

So, with all the apparent interest in the index futures arena, I
decided it was time to take another look.  Guess what?  The ES
(S&P 500 E-mini) and NQ (NASDAQ-100 E-mini) contracts aver VERY
liquid, with the former trading on the order of 500K contracts and
the latter trading on the order of 200K contracts per day.  So
apparently we've got some good liquidity to work with.

In order to make the case that these E-mini contracts are worth a
trader's consideration, I think it would be useful to compare
these contracts to the world of equity options.  In order to keep
things simple, I'm going to compare the ES contract to trading
options on the S&P 100 or OEX.  My primary reason for comparing to
the OEX rather than the SPX is due to the closer spacing of option
strikes, which makes contract selection and comparison more

First some basic data.  The OEX has $5 strike prices at or near
the money, so for a current price of $469, we would be looking at
the $465, $470, or $475 strikes.  As of today's close, here are
the prices for May calls and puts at those strikes.

Strike          Call                       Put
465             $9.20b x $9.90a            $5.20b x $5.40a
470             $6.40b x $6.70a            $7.30b x $7.70a
475             $4.10b x $4.40a            $10.10b x $10.70a

The ES contract requires an initial margin of $1800 per contract,
so the cost to enter an ES Futures trade is roughly double that of
entering an OEX May option trade.  One nice thing about trading
futures, is that it is exceedingly easy and consistent to
determine both risk and potential reward for any given trade.
Each ES point is equivalent to $50, so a 10-point move would be
good for a $500 change in the value of the ES contract.  If you
want to limit your risk to no more than $250, then set a 5-point
stop.  Very simple, very easy!

It is in the day-to-day market action that the merits of futures
trading really begin to show themselves.  Let's use today's action
for the sake of discussion.  The ES traded in exactly a 10-point
range, and if we use the idealized example of shorting the high
tick and covering at the low tick, we captured that 10-point move
for $500 net gain on $1800 margin, for a gain of just over 27%.
That's not bad.

So how does it stack up against trading OEX options?  For the sake
of simplicity, let's utilize the May $470 option, once again
assuming we have the exceedingly good fortune to buy puts at the
high tick and cover at the low tick of the day.  The OEX traded in
a range of $468.79 - $473.72 on Monday for a total range of just
under $5.00.  The May $470 put traded from a high of $8.20 to a
low of $5.80 on Monday for a total range of $2.40.  So capturing
the full range today would have netted a 29% gain on investment.
At first blush, I would say the two different approaches are
roughly equivalent.

But those of you that trade index options already see the flaws.
What about the bid/ask spread and what if you only caught a
portion of the day's move, and what if the market reversed midway
through the move?  How would the two approaches vary?

Bid/Ask Spread:
When trading options (or futures for that matter), we rarely are
able to buy at the Bid sell at the Ask.  Even on the best of days,
we're entirely happy if we can split the difference, buying and
selling mid-way between the bid and the ask.  Looking at the
difference between bid and ask in the table above, we can see that
we're probably going to have about $0.20 slippage on each end of
the trade, which reduces our profit from $2.40 to $2.00.  then the
ROI drops from 29% to 24% and suddenly the ES trade is looking
more favorable.

But what about the spread on the ES contract, you ask?  It's
always a whopping 0.25 point, which translates to $12.50.  So
let's slice a 0.5 point slippage allowance off of the ES trade and
we now have a $450 gain on the trade for a 25% ROI.  That makes
the two trades pretty equivalent, don't you think?

There's one caveat to the foregoing.  The bid/ask and slippage
issues move more and more in favor of options as we approach
option expiration because of the dwindling time decay.  May
options have less than 2 weeks of life left in them and much of
the excess time decay has been bled out already.  But if we move
out to the June contracts, the $470 put trades for $13.90b x
$14.90a, with a whopping $1.00 spread.  That will tilt the balance
steeply in favor of the ES trade in terms of bang for the buck and
risk control.

Risk Control:
What do you do with an OEX option trade if the market moves 3
points in your favor and then unexpectedly reverses?  There isn't
enough movement yet to move place a stop anywhere near break-even,
so more than likely the trade will end up being closed for a loss.

On the other hand, with the ES, if we maintain a 4-point stop loss
from the low of the day, then we can very methodically and
consistently take gains out of the market.  Can you make money in
a directional OEX option trade with a 6-7 point move in the S&P
500?  Not likely, as it probably equates to only about 2.5-3.0
points on the OEX.  However, you should be able to glean a 2-3
point gain in the ES from such a move through the judicious use of

I'm running right up against my deadline here today, but hopefully
this gives you a glimpse of some of the advantages of the world of
index futures.  Next Monday, I'll extend this conversation,
showing you the process I've been going through in trying to
quantify the viability of trading the ES, in addition to
describing my process for paper trading this vehicle and comparing
it to what could have been accomplished through the use of index

I'll leave you with one final thought.  Volatility and time decay
have no meaning in the world of index futures.  We all know what a
menace these factors are in the options trading world.  So ask
yourself this question.  What precise advantages are available
from a vehicle that gives me the same rate of return as index
options, but without a wide bid/ask spread, volatility concerns or
the issue of time decay?  I'll give you a hint -- it's a big deal!

Tune in next week and we'll enjoy more learnin' together!  In the
meantime, consider tuning into the Futures Monitor and learn from
Jim Brown and Alan Hewko.  The two of them certainly seem to have
their fingers on the pulse of this fast-paced trading action.


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
offers online spread order entry for net debit or credit
offers fast option executions

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

"7 Steps to Success – Trading Options Online".

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



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Contact Support
The Option Investor Newsletter                   Monday 05-05-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:

Stop Loss Updates: ADTN, AZO, KSS
Dropped Calls: None
Dropped Puts: None
Play of the Day: Put - KSS
Market Watch: Lots of Strength

Updated on the site tonight:
Market Posture: Catching Their Breath

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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!



ADTN - call
Adjust from $40 up to $41.50

AZO - call
Adjust from $80.00 up to $82.00

KSS - put
Adjust from $58 down to $57.40





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
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.



Kohl's Corporation - KSS - close: 54.31 change: -1.14 stop: 57.40

Company Description:
Kohl's Corporation operates family-oriented, specialty department
stores, primarily in the Midwest.  The company's stores sell
moderately priced apparel, shoes, accessories and home products
targeted to middle-income customers shopping for their families
and homes.  Kohl's stores have fewer departments than full-line
department stores, but offer customers assortments of merchandise
displayed in complete selections of styles, colors and sizes.  Of
the 420 stores the company operates, 116 are takeover locations,
which have facilitated the entry into several new markets,
including Chicago, Illinois; Detroit, Michigan; Ohio; Boston,
Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri,
and the New York region.

Why we like it:
The action in KSS was certainly perplexing early last week, as the
stock dipped under our $54.70 entry target Monday morning, before
rebounding strongly.  Fortunately, that rebound failed under the
$58 resistance level and the last 3 days have seen the stock
continuing with its downward trend.  The $55 support level is
still holding, supported by the 50-dma ($55.05), but appears to be
weakening.  With the strong bullish performance by the broad
market on Friday, as even the Retail index (RLX.X) posted a 1.67%
gain, KSS' inability to post a gain certainly looks bearish.
We're still looking for a solid break under that $55 support level
to usher in another wave down.  While the 10-period Stochastics
(shown below) is trying to turn up, the faster 5-period
Stochastics (not shown) is rolling over at its 4th consecutive
lower high in the past 6 weeks and also portends near-term
weakness.  Another failed rebound below the $57 level (just below
the 20-dma at $57.34) can be used for aggressive entries, while a
break below last Monday's intraday low of $54.35 should work for
more conservative players.  We're leaving our stop set at $58
until we get a close under the 50-dma.

Why This is our Play of the Day
After last Monday's sharp bounce from below the $55 level, it took
our KSS play a full week to make the round trip back below that
level.  Despite the bullishness in the broad market, KSS has been
showing significant relative weakness and today's session saw the
stock falling back under the 50-dma ($55.12), this time without so
much as a hint of a bounce.  The session ended with KSS just
starting to top over the $54.30 support level and once this level
gives way, it ought to be a quick trip into the low $50s.  Our
initial target is $52 and then we're looking to exit the play in
the $50-51 area, which should provide solid support for a rebound.
Traders still looking for an entry into the play will want to
focus on a failed rebound below the $56 level, which provided
intraday resistance on both Thursday and Friday.  Aggressive
traders can play a breakdown under the $54.30 level, with the
understanding that it would likely be a quick trade, as we'll be
looking for an exit as support is found at one of our listed
targets.  We're lowering our stop to $57.40, just above both the
20-dma as well as resistance from last Tuesday and Wednesday.

Suggested Options:
Short-term traders will want to focus on the May 55 Put, but need
to use caution, as May expiration is less than 2 weeks away.
Those looking for additional staying power to hold through the
recent (and expected future) volatility will want to use the June

BUY PUT MAY-55 KSS-QK OI=17968 at $2.35 SL=1.25
BUY PUT JUN-55 KSS-RK OI= 1124 at $3.60 SL=1.75
BUY PUT JUN-50 KSS-RJ OI= 1092 at $1.60 SL=0.75

Annotated Chart of KSS:

Picked on April 27th at $55.02
Change since picked:     -0.71
Earnings Date         05/15/03 (confirmed)
Average Daily Volume = 3.73 mln

"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".

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



Lots of Strength

Northrop Gruman - NOC - close: 88.50 change: -1.33

Both the daily and the point-and-figure (PnF) chart for NOC look
intriguing.  Shares have been battling with the $90 level lately
and bulls have been building on a pattern of higher lows.  The
PnF has broken descending resistance and looks ready to take off.
We see plenty of congestion in the $93-94 region but longer-term
traders might want to target a move to $100 or its 200-dma should
the strength in the defense sector remain.



Magna Intl - MGA - close: 59.35 change: +0.05

There's been a lot bullish comments lately about the auto and
truck parts business.  MGA's stock price has been ascending
nicely and looks ready to breakout above the $60 level.  Earnings
are expected on May 8th and this may be one to watch.



Resmed Inc - RMD - close: 38.00 change: +0.49

Shares of RMD have been strong both before and after their April
22nd earnings report.  Of course it took beating the estimates by
2 cents to breakout above long-term resistance at 435.  Now
shares have found new support at $36 and shares are climbing
higher on stronger volume.  Another dip to $36 looks like an
entry point to go long but you may not get it.  The PnF chart is
showing a quadruple top breakout.



Merck & Co - MRK - close: 58.96 change: -0.33

The DRG drug sector broke out to the upside on Friday and MRK
contributed to that gain.  Unfortunately, MRK is stuck below
resistance at $60.00.  Bulls are building on a trend of higher
lows but MRK has failed at $60 before in November 02, January 03
and just a couple of weeks ago.  It might be best to watch for a



Clear Channel - CCU - close: 38.90 change: -0.50

While most people tend of CCU as a radio company they also do
broadcasting for 34 TV stations.  The TV/Cable sector has been
pretty strong lately.  A breakout over $40 might be worth a move
to the $44-45 area.


RADAR SCREEN - more stocks to watch

COF $44.42 - This credit-card company was on the watch list last
Wednesday and we outlined a possible buy the dip to $40.  Shares
dipped towards $40 on Thursday and haven't looked back since.
The stock even added another 3.78% today while the banking
sectors pulled back on profit taking.  It looks overbought and
we'd still look for a dip to $40-41 with a tight stop.

DELL $29.50 - Just a heads up... DELL is expected to announce
earnings on May 13th.  The stock price has run up into multi-year
resistance in the $30-31 area.  A breakout over $31 could be a

MCO $48.71 - Not the fastest mover but Moody's Corp has been
trying very hard to build up enough steam and breakout above the
$50 level.  It has failed numerous times so you're probably
better actually waiting for the breakout.

RYL $54.00 - The housing sector continues to look extremely
overbought.  Sooner or later there will be some profit taking.
Unfortunately, there's a lot of bears feeling a lot of pain.  One
to watch.

WFMI $61.38 - This high-end grocery retailer has been bucking the
trend in the grocery stocks for a while.  The recent
consolidation has broken out to new highs.  Watch for their
earnings announcement on May 7th.


Catching Their Breath

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


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