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Daily Newsletter, Monday, 05/19/2003

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The Option Investor Newsletter                   Monday 05-19-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Markets Get Snowed
Futures Wrap: The Bear Awakens
Index Trader Wrap: See Note
Weekly Fund Wrap: Mutual Funds Pound Out More Gains
Traders Corenr: Is It MOPO Yet?


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
05-19-2003                  High    Low     Volume Advance/Decl
DJIA     8493.39 -185.58  8676.59 8483.31   1647 mln   170/1468
NASDAQ   1492.77 - 45.76  1536.04 1492.46   1635 mln   234/1387
S&P 100   464.05 - 11.67   475.72  463.60   totals     404/2855
S&P 500   920.77 - 23.53   944.30  920.23
RUS 2000  408.32 -  6.37   416.11  408.32
DJ TRANS 2360.94 - 58.37  2418.28 2356.56
VIX        23.04 +  2.03    23.33   21.25
VIXN       31.10 +  0.08    31.74   30.37
Put/Call Ratio 1.00
*******************************************************************

Markets Get Snowed
by James Brown

A flurry of negative news and comments over the weekend snapped
traders back to attention as two weeks of market gains dissolved
by day's end.  Leading the international headlines has been a
string of new suicide bombings in Israel as Palestinian
resistance groups seek to undermine the new "road map" for peace
before either country has a chance to exit the on ramp.  Much
closer to home investors had to deal with negative news in the
drug business.  The U.S. Supreme court has temporarily dealt
prescription drug makers a blow by allowing the state of Maine to
revive its discounted drugs for the uninsured law to take effect.
Yet the leading story today was not the Leading Indicators report
out this morning but more comments from U.S. Treasury Secretary
John Snow and his opinion that the declines in the U.S. dollar
against the Euro and the Yen have been "fairly modest".

We had been waiting for a catalyst to reawaken the bears, or at
least someone willing to hit the sell button, and after weeks of
ignoring bad news the markets finally decided to take some
profits off the table.  The DJIA dropped 185 points to lose 2.1%
and close below the 8500 level, which should have been support
for the index.  The NASDAQ Composite fell a steeper 2.97% or
almost 46 points to close at 1492.  This index closed very close
to its low for the day and below the 1500 level, which many had
expected to be at least some form of support.  The S&P 500 index
dropped 2.5% but managed a close just above the 920 level, which
has been so critical in the past.  Contributing to the U.S.
market weakness were losing sessions across both oceans.  The
Japanese NIKKEI lost 78 points to close at 8039, down nearly 1%.
The Chinese Hang Seng fared better with a 5.8-point loss to 9087.
The English FTSE 100 dropped 107 points to 3941, down 2.66%.
Outpacing them all were the German and French markets.  France's
CAC 40 crashed 4.26% or 127 points to 2867 while the German DAX
fell 4.63% or 138 points to 2850.

Market internals broadcast just how wide the pull back was volume
numbers and the advance-decline ratios swung deeply into bear
territory.  The NYSE closed with advancing stocks numbering only
7 for every 21 decliners.  The NASDAQ managed almost 9 winners
for every 21 losers.  Down volume was 8.6 times greater than up
volume on the NYSE and almost six times greater on the NASDAQ.

Chart of the Dow Jones Industrials:




Chart of the NASDAQ Composite:




Leading Indicators

So what happened this weekend that suddenly brought traders back
to the office thinking "maybe the economy isn't growing as fast
as we thought...this market looks overbought... better take some
money off the table."  It's not like the Leading Indicators
report this morning showed us anything new.  We've known for
weeks that the economy is stalling.  In reality the report was
positive as the Leading Indicators index rose 0.1 percent in
April, which was an improvement over March's 0.2 percent decline.
Maybe it is the fact that any post-war economic bounce remains
elusive.  The Leading Indicators index is supposed to forecast
performance three to six months down the road.  Here's an excerpt
from the Conference Board report:

    Despite rebounding financial indicators and consumer
    expectations, there is still weakness in the labor market and
    manufacturing indicators.  Weakness in these components
    reflects the recent declines in manufacturing capacity
    utilization.... The coincident index, a measure of current
    economic conditions, decreased in April after holding steady
    in March.  The slight decline in the coincident indicators in
    April is consistent with the weakness in the leading
    indicators in the first quarter of 2003.


Gold, Dollars & Snow

This weekend held a finance minister summit in France and when
asked about the declines in the U.S. dollar, Treasury Secretary
John Snow said that the 8% decline (YTD) in the greenback versus
the euro has been "fairly modest".  Snow has reversed an eight-
year "strong-dollar" policy and his comments this weekend drove
the dollar to new lows.  Of course the "official" story is that
U.S. policy on the dollar has not changed but we haven't seen
much defense of the dollar during its more than 20% decline
against the euro in the last two years.  Snow rightly believes
that the weak dollar will help U.S. exports.  He's hoping that as
the dollar continues to fall, exports will rise (and they are)
and help stimulate the U.S. economy again (and thus help re-elect
his boss, George Bush).  Currency traders are reacting strongly
to Snow's comments and the apparent lack of concern over the
dollar's weakness.  The dollar fell to $1.1702 against the euro
this afternoon and some speculate it will hit $1.20 by the end of
the year.

The combination of a weak dollar, no expectation for the U.S. to
stop the dollar's slide, and weak equity prices sent the price of
gold soaring.  Gold futures rocketed $9.50 by the end of the day
closing at $364.40 an ounce.  The June contracts appear to be
aiming for February highs near $380.  Meanwhile the XAU gold &
silver index added 3.13%, closing near 74 today.

Falling Drugs

The drug sector index, DRG.X, fell more than 4% today after the
U.S. supreme court offered the state of Maine a favorable ruling
on its discounted drugs for the insured law.  The state of Maine
is now free to pursue a local state law forcing drug companies to
offer steep discounts for the uninsured.  While the state of
Maine alone will not derail the drug industry there are already
20 or so states who are crafting or considering similar statutes.
If Maine's law is allowed to become permanent it is safe to
assume that the entire nation may follow suit.  The decision
today was a temporary one as the legal battle continues.  Shares
of Merck & Co (MRK) were the leading decliners in the Dow, down
4.7% today.

Fading Retailers

By the looks of it Wall Street is quickly growing concerned that
the U.S. consumer, the pillar of the economy, is getting tired.
The RLX S&P retail index dropped another 3.77% and closed under
what should have been support at the 300 level.  Fueling the
decline today was earnings news from Limited Brands (LTD), home
improvement retailer Lowe's (LOW) and Toys "R" Us (TOY).  Shares
of LTD slipped lower as its sales numbers failed to meet
expectations.  LOW was hammered today, gapping lower and closing
down 9% at the $40 level just above its 200-dma.  Traders can
look for potentially more weakness from Dow component Home Depot
(HD).  Home Depot fell 3.8% in sympathy with LOW's declines and
in fear that they'll follow suit tomorrow morning with their own
earnings report before the bell.

Tomorrow

After recording their largest losses since March 24th the major
indices look ready to do it again.  The closing numbers under
support for several major and minor indices don't bode well and
bulls who have been riding this rally up from the March lows are
going to be quick to protect their gains.  The correction we've
been waiting for is here.  The next question is where will the
markets find support?


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

The Bear Awakens
Jonathan Levinson

Daily Pivots (generated with a pivot algorithm and unverified):

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
DJIA      8744   8618   8551   8425   8358
COMPX     1551   1521   1507   1477   1463
ES03M      950    935    927    914    905
YM03M     8701   8597   8532   8428   8363
NQ03M     1169   1142   1127   1100   1086

The markets gapped down, tried a weak headfake for a few minutes,
and then proceeded to decline throughout the session, managing
only the weakest of bounces, really just pauses, during the
oscillator up-phases before closing just off their lows of the
day.  Volume was on the lighter side of average, with the NYSE
trading 1.7B shares and the COMPX 1.67B shares.

The VIX added 2.03 to close at 23.04, the VIX .08 to 31.1 and the
QQV +1.15 to 27.04.  Gold had a huge day, with GC3M adding 11.70
to 366.60 as of this writing:

30 minute 20 day chart of GC3M




Gold was expected to move higher, given astounding overnight and
intraday weakness in the US Dollar, and some astounding
statements from John Snow during the session and noted in the
Market Monitor.  Equally astounding was that the Federal Reserve
saw fit not to report the addition of a 4.75B overnight
repurchase agreement.  I had to telephone the NY Fed to find out
about it, but the omission on its website and in its press
releases had not been corrected to the best of my knowledge as of
this writing.  Then again, at least none of the exchanges failed
or were otherwise halted.

30 minute 20 day chart of the US Dollar Index





Daily QQQ chart





QQQ gave the downside break out of the primary bear wedge and,
negated the ascending triangle scenario that had been giving
bearish traders night tremors for weeks.  As depicted in the
chart above, a secondary ascending support line was challenged
but not violated by today's selloff, leaving the potential for
dippers to do what they do best.  Any further selling and that
hope will fail too.  Note the bearish crosses on the MacD and
stochastic oscillators, while the ADX on this 6 month timeframe
showed a weakening of the bullish trend.  We see on the shorter
30 minute candles that the ADX gave a strengthening trend to
today's selloff, which sets up today's decline as a short term
trending move which is countertrend to the longer trend.
Confused?  It will take more days like today to make today's
bearishness into a longer term trend.

30 min QQQ chart




On to the futures:

Daily chart of the NQ3M




We see the same action on the NQ3M daily candles as on the QQQ
chart.  Sell signals on the oscillators, with a secondary rising
support line yet to be tested seriously.  However, the failure of
the ascending triangle is good enough for this bearish trader
today.  The complete, upper failure to put together anything
beyond a feeble bounce was the most significant component of
today's session, as it indicated that either bulls are very
patient here, or that they're fully committed.  Note that today's
close wiped out the gains from the past 2 weeks.

30 minute 20 day chart of the NQ3M




As with the other 30 minute/20 day charts, note the bearish
divergences on the stochastic and MacD oscillators.  Intraday,
watch those 30 minute candles, as the descending oscillator trends
can help you to anticipate failure levels on the coming bounce(s).

Daily chart of the ES3M




Unlike on the NQ and QQQ charts, there's no secondary ascending
support line, and today's break of The Wedge implies a return to
the 775 ES level.  I say "implies", because chart patterns are
not certain, but Bulkowski makes the case for his bear wedge
targets.  Bulls in AMGN and the ES should take a look at the
bearish ascending or rising wedge, as Bulkowski terms it in the
Encyclopedia of Chart Patterns.  Watch for a break of the 21 day
EMA (dark green line above) which provided support today.

30 minute 20 day chart of the NQ3M




Note that where the NQ3M and QQQ took out the lows of the past
two weeks, ES did not.  The NQ and QQQ tend to lead the ES and YM
contracts, and if this is the case again, expect to see new lows
from the ES in coming sessions.  As we see on the other charts,
the stochastics are bottomy on the 30 minute candles but just
rolling out of extreme overbought territory on the dailies.  This
implies a short term bounce, but within a larger trend downward.
I note further that this apparently contradicts my reading of the
ADX, but I'm less familiar with the ADX, and would go with my
reading of the oscillators first.

Daily chart of the YM




Of the three indices, the YM saw the weakest break.  The MacD
gave the weakest sell signal of the bunch, though the signal on
the stochastic is clear, as is the violation of the lower
trendline on The Wedge and the failure of the bullish triangle
formation below.

30 minute 20 day chart of the YM3M




A retest of the failed trendline would not be out of the
question, although as we observed in today's Market Monitor, the
pathetic bounces make it pretty difficult to imagine that much
strength.  My read of the ADX is that on a short term basis,
bounces should be sold.  I would expect any bounce (such as that
implied by the oversold stochastic and MacD oscillators) to be
countertrend on a short term basis, good shorting opportunities.
But, if today's action taught us anything, it is that dogma and
opinion aren't strengths for traders.  The last two weeks saw an
awful lot of bullish pontification, proclamation and exclamation.
Well, the market just took all those bulls to the cleaners.
Trade what you see, honor your stops, and protect your profits.


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_051903_1.asp


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

Mutual Funds Pound Out More Gains

For the second straight week, all of Lipper's mutual fund indices
were higher as the "stealth" rally continues.  For the week ended
Friday, May 16, U.S. stocks as measured by the S&P 500 index rose
1.2%, while the MSCI EAFE index of foreign stocks climbed 2.0% on
a dollar-equivalent basis.  Europe was relatively strong, gaining
2.7% in dollar terms for the week, with the Euro currency trading
higher against the dollar.

The tech sector was hot again with the average science/technology
fund returning 2.5% for the week, according to Lipper.  Multi-cap
value funds also performed relatively well, rising 2.3% last week
on average.  Gold funds were the other stock fund type to average
over 2.0% for the weekly period through May 16.  Most diversified
U.S. and global equity funds produced weekly total returns in the
1.0% to 2.0% range, using Lipper's numbers.

Meanwhile, bond mutual funds generated weekly total returns of up
to 1.0% per Lipper, with the Lehman Brothers Aggregate Bond Index
up 0.6% for the week.  U.S. government bond funds were up 0.8% on
average last week, while global bond and international bond funds
averaged 0.9% and 1.0% over the week, respectively.  The dollar's
recent slide continues to boost the returns of foreign bond funds
relative to similar U.S. bond funds.

Equity Fund Group

 Week   YTD   Lipper Equity Indices (May-16-03)
+1.1%  +6.3%  Lipper Balanced Fund Average
+1.6%  +5.6%  Lipper Equity Income Fund Average
+1.7%  +4.8%  Lipper International Fund Average
+1.2%  +7.2%  Lipper U.S. Large-Cap (Core) Fund Average
+1.6%  +7.8%  Lipper U.S. Mid-Cap (Core) Fund Average
+0.4%  +6.7%  Lipper U.S. Small-Cap (Core) Fund Average
+1.8%  +8.7%  Lipper U.S. Multi-Cap (Core) Fund Average
+2.5% +16.7%  Lipper Science & Technology Fund Average


Above are selected Lipper equity fund indices for the 5-day and
year-to-date periods through Friday, May 16, 2003.  Returns for
the week varied depending on geography, market cap and style of
equity management.

With the Euro rising versus the dollar, Europe region funds and
U.S. stock funds with Euro stock exposure were among the week's
top performers.  No fund is capitalizing more on this situation
than the ProFunds: Europe 30 ProFund (UEPSX), which gained 8.0%
over the 5-day period.  Fidelity Europe Fund, one of the larger
funds in the Europe region fund group, produced a weekly return
of 3.5%.

In the diversified U.S. stock fund group, mid-cap and multi-cap
funds were the best relative performers last week.  For example,
Legg Mason Opportunity Trust (LMOPX) returned 8.2% for the week,
while its mid-cap sibling, Legg Mason Special Investment (LMASX)
picked up 6.2% over the week.  Both funds were profiled earlier
this month as part of our fund family profile on the Legg Mason
Funds.  Another mid-cap fund we have profiled recently, Fidelity
Leveraged Common Stock Fund (FLVCX) gained 4.9% during the week.

Style also played a part in returns last week, with value-driven
funds outperforming other fund styles (blend, core, growth, etc).
Legg Mason Opportunity Trust (+8.2%) discussed above has a value
style, as does its Value Trust (LMVTX) sibling, which produced a
weekly total return of 3.8%.  PIMCO's Renaissance Fund (multiple
share classes) averaged 4.7% for the week.  Other mid-caps doing
well include Sound Shore Fund (+3.4%), Dreyfus Midcap Value Fund
(+3.3%), and Neuberger Berger Partners Fund (+3.3%).

For the week, the S&P 500 index of U.S. large-cap stocks climbed
1.2%, while the MSCI EAFE index of developed foreign markets was
2.0% higher in dollar-equivalent terms.

Fixed Income Fund Group

 Week   YTD   Lipper Fixed Income Indices (May-16-03)
+0.7%  +4.4%  Lipper Corporate A-Rated Debt Fund Average
+0.1%  +1.2%  Lipper GNMA Fund Average
+0.9%  +8.1%  Lipper Global Bond Fund Average
+0.3% +12.5%  Lipper High Yield Fund Average
+1.0%  +9.2%  Lipper International Bond Fund Average
+0.6%  +4.4%  Lipper (Interm.) Investment Grade Fund Average
+0.8%  +2.7%  Lipper U.S. Government Bond Fund Average

Above are selected Lipper fixed income indices for the 5-day and
year-to-date periods through Friday, May 16, 2003.

According to Lipper, the average (intermediate-term) investment-
grade bond fund returned 0.6% for the week, matching the return
of the LB Aggregate Bond Index.  To perform significantly better
than the total bond market index, a U.S. bond fund had to have a
longer average maturity/duration or have some international bond
exposure.  For example, Vanguard Long-Term Treasury Fund (VUSTX)
produced a weekly total return of 2.6%, while Vanguard Long-Term
Bond Index Fund (VBLTX) and Long-Term Corporate Bond Fund (VWETX)
both returned 2.2%.

High-yield funds generally didn't do as well as investment-grade
bond funds, but were higher for the week, improving their strong
year-to-date results.  Pioneer High Yield Fund returned 1.1% for
the week, one of the better 5-day performances in the high yield
class.  International fixed income funds were up 1.0% on average
last week, helped by a stronger Euro (versus U.S. dollar).  SEI:
International Fixed Income Fund (SEFIX) returned 1.2% last week,
one of the better returns in the global/international bond fund
segment.

Money Market Fund Group

Yield  iMoneyNet Money Market Indices
0.70%  iMoneyNet All Taxable Money Market Fund Average (

The iMoneyNet.com website was not available at the time of this
writing.  The average simple 7-day yield hasn't changed much in
recent weeks, so the 0.70% yield shown above from two weeks ago
most likely hasn't changed much at all.

Fidelity Cash Reserves Fund, the largest retail money fund with
$57.3 billion in net assets, has a current 7-day yield of 0.98%.
The $48.6 billion Vanguard Prime Money Market Fund currently is
at 0.91%.  Both funds benefit from their lower relative expense
ratios and massive purchasing power (they see the best paper at
the highest yields as a result).

Fund News, Etc.

One of our readers wrote last week, expressing interest in "no-
load" funds and asking which online brokerage networks have the
most no-load funds to choose from and which offer no-load funds
on a no-transaction fee (NTF) basis.  Charles Schwab has one of
the biggest and best no-load NTF networks today (www.schwab.com).
They receive remuneration from fund companies in their OneSource
no-load network for recordkeeping, shareholder and administrative
services provided.

Trades in over 1,200 no-load mutual funds are available through
Schwab's OneSource service without transaction fees (when placed
through schwab.com or its automated phone channels).  With this
service, Schwab account clients can see all of their mutual fund
holdings on a single statement, and they can make same-day trades
between funds in different families.  Access to nearly all 5-star
and 4-star rated no-load funds are available on schwab.com.

If you want to know which online broker networks carry a specific
mutual fund, go to morningstar.com and enter the fund symbol, and
go to the Fees & Management section of the fund report.  You will
find purchase information there on brokerage availability.  Other
online brokerage networks you may consider include Accutrade NTF,
Dreyfus LION NTF, E*Trade NTF, Fidelity FundsNetwork, Strong NTF,
TD Waterhouse NTF, and Vanguard NTF.  See their websites for more
information.

Morningstar.com's Karen Wallace reports that Fidelity Investments
is launching a new fund called Fidelity Advisor New Insights Fund
that will be managed by William Danoff, one of Fidelity's longest
tenured managers.  Danoff has managed Fidelity Contrafund for 12+
years.  The new fund will be managed similarly as the $28 billion
Contrafund except that it's geared to the advisor market channel.
So, if you prefer to work through a financial advisor, it may one
to consider for long-term goals such as investing for retirement.

That's it for this week's mutual fund wrap.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

Is It MOPO Yet?
by Mark Phillips
mphillips@OptionInvestor.com

With the lackluster action in the markets throughout last week, I
felt pretty confident that today would be a good opportunity to
continue our discussion.  But between the poor reception of
Treasury Secretary Snow's comments on the U.S. Dollar policy and
some negative developments in the Pharmaceutical sector, the
markets saw their best trending session in over a week, and it was
to the downside.  Needless to say, I had to re-think my writing
plans this afternoon.  You see, I've recently been writing on
another topic, that of MOPO and I got more than a few emails today
asking me quite simply, "Is it here?"  So let's start today's
rambling discussion on that topic.

I know there will be a few late-comers that aren't up to speed on
this discussion, so for their benefit, let's do a quick recap.
We're looking for the S&P 500 to top out in the 950-960 area and
for the DOW to top out in the 8800-8900 area to set the stage for
the next trending move down the charts.  But remember, we've got
some other parameters that must be satisfied as well.  We want to
see the VIX fall into the 19-21 area, and we need to see a
meaningful reversal in the Bullish Percent readings from
overbought territory.

If you want to review the details of the setup I've described in
the past, here's the links to the archived articles on the Option
Investor website.

MOPO - Remember That Term?
http://www.OptionInvestor.com/traderscorner/tc_042803_1.asp

Setting Up For MOPO
http://members.OptionInvestor.com/options101/opt_043003_1.asp

Further Reflections on MOPO
http://members.OptionInvestor.com/options101/opt_050703_1.asp

It seems like we've already beaten the subject to death, but where
there are questions, I'll always attempt to provide answers, at
least to the best of my ability.  So with that in mind, let's take
a brief look at the parameters we're looking for and see if we're
there, close, or still have some ground to cover.

First up is price action.  I'll use the SPX as our proxy for the
market, but my comments could just as easily be applied to the OEX
or the DOW.

Daily Chart of the S&P 500




Here we can see a textbook breakdown from that seemingly
interminable ascending wedge -- Finally!  That breakdown was
preceded by solid bearish Stochastics divergence from that pattern
of lower Stochastics highs and higher price highs for the past few
weeks.  So is that it?  Nope, we need to look at the weekly chart
(not shown) and we can see that Stochastics there are turning
down, but still within overbought territory.  While it looks early
bearish, we've seen a similar picture on the weekly chart on three
other occasions in the past month -- in my mind the oscillator
picture is still unconfirmed and we must look elsewhere for that
confirmation.  By the way, take note of the the "?" symbols on the
chart above.  We'll come back to that.

The next piece of the puzzle is the VIX.  We're looking for it to
fall into the 19-21 area to give that clear long-term bearish
entry point.  I know what you're thinking..."Last Friday we had
the VIX dip all the way to 20.57 and then it popped up today above
23 for a more than 10% intraday move.  Doesn't that count?"
Maybe, but somehow I don't think so.  You see for those really
good setups via the VIX being at extreme lows, you really can't
tap that zone and shoot off to the sky.  It doesn't work that way.
Sure we get those one day spikes with the VIX north of 50 and then
a market reversal.  But low VIX readings don't turn on a dime like
that.  Look at the chart of the VIX from last spring, where the
first intraday reading below 21 came on March 15th, but it took
until late April before the VIX gained any traction to the upside.
That isn't to say that traders that bought September puts on the
DOW or SPX on Friday or this morning won't be successful.  It's
just that we don't need to be so overly concerned about the timing
of our entry with this trade setup.  MOPO is not an event, it is a
process.

Next up are the bullish percents, the status of which I reviewed
in my weekend LEAPS commentary.  While not all the indices are in
overbought, those that haven't made it yet are awfully close.
That clearly says the bulls are carrying the bulk of the risk in
this market, but not all of it.  Recall that my metric for saying
the bullish percents have reversed is where I look at the
SharpChart on StockCharts.com and look for the crossover of the
10-dma of the Bullish Percent.  It's not just that that crossover
has yet to occur -- we haven't even begun to see a weakening of
the Bullish Percent charts.  Head on over to the StockCharts site
and plug in the Bullish percent symbols for the major indices, and
I think you'll see what I mean.  It's still early to be getting
aggressively bearish.

Here are the symbols for those of you that are new to the world of
Bullish Percents.

DOW Industrials - $BPINDU
S&P 500 - $BPSPX
S&P 100 - $BPOEX
NASDAQ-100 - $BPNDX
NASDAQ Composite - $BPCOMPQ

I know you're thinking "what if I'm wrong and the market just
falls away without me being on board.  Well, that's certainly
possible.  But if that occurs, understand that it WAS NOT a MOPO
setup.  These setups don't come along often (maybe a couple times
a year) and there are a lot of little pieces that have to fall
into place to complete the picture.  But when they do fall into
place, it can be very profitable.  That's why I've spent so much
time on the concept, trying to very clearly describe the scenario
we're looking for.

Let me take just a couple minutes to lay out my view of what comes
next.  Assuming that we are going to get the MOPO setup, we've
first got to drop back to support and take another run at that
formidable resistance that provided a firm lid all during last
week.  The SPX came to rest right at 920 tonight and that could be
a good bounce point.  But I think more realistically we'll go back
and test the 900 level before we get that sustained rebound.  Why?
Because the breakdown below 920 will serve to suck in a bunch of
over-eager bears who will then get shaken up when the market ramps
back up in a week or so.  Hey I could be wrong, but let's see how
it might play out with respect to the different indicators we've
been talking about.

The dip down to 900 would likely be enough to cause a 3-box
reversal in the bullish percents, but not necessarily a sustained
downward move.  That would just give the markets a little bit of
room to run, both in terms of price and bullish percent.  At the
same time, the VIX might rise as high as the mid-20s in the
process, but I think that's about it.  When it becomes clear that
the bulls are still going to buy the dips, the VIX will fall back
and this time actually spend some time dwelling in the sub-21
area, maybe a couple of weeks if we're really lucky.  So what
would we likely see on the SPX price chart if those two planets
aligned in the manner in which I've described?

First off, we would see price rise back to the site of last week's
highs and we should at least see an honest test of the 950 level.
And to be entirely forthright, I expect at least a one-day probe
above the 950 level.  If it is going to play out the way I've
described, then I see this scenario playing out over the next 2-3
weeks before we reach that honest-to-goodness tip over.  Remember
the 3 "?" symbols on the chart above?  I know this is all just
blind speculation, but if it does play out according to my fantasy
scenario, it could be quite profitable for all involved.

So work with me here.  The drop from last week's highs pulls in a
bunch of over-eager bears, who short for the big move down.
Unfortunately, this isn't it.  They get stuck in positions that
start going against them, but they use last week's highs as the
line in the sand, "knowing" that the top is in and those highs
won't be broken.  With market participants still feeling pretty
bullish (despite today's setback, which could very well continue
through the week), I could very well see a persistent rise to and
just above last week's highs.  That is likely the "uncle" point
for those "early" bears and they capitulate at SPX 950.  That
gives us a short-covering pop through resistance, the VIX drops
even further and then we get a sharp reversal from the top of that
channel.  Note that in a few weeks' time, that descending channel
line will coincide with the bottom of the broken bearish wedge.

Could it get any better than that?  I don't see how.  A bearish
breakdown of a reliable chart pattern and then a retest of that
pattern as resistance, right at the top of a multi-year descending
channel, combined with the VIX in "MOPO Territory" is good enough.
But if at the same time we are getting bearish crossovers of the
bullish percents over their 10-dmas, and the weekly Stochastics on
the SPX/OEX/DOW are crossing down out of overbought territory,
then that's an opportunity I intend to grab with both hands.

My apologies for not addressing the recent series on putting
together a futures trading plan.  I just felt that the MOPO topic
was a bit more urgent to address this week.  I've had a lot of
comments and suggestions from many of you indicating where there
are flaws in what I'm proposing or suggesting that my goals are
unachievable.  First off, I want to say I truly appreciate all
that input.  I'll be the first to admit it's entirely possible.
But there's no way I'm going to deviate from the course I'm on
until I've proven to myself that it is an unworkable plan.  If you
know any engineers (remember I used to be one), then you know that
the surest way to get them to do something is to tell them it
can't be done.  I think I'm on the right track, but time will
tell.  At a bare minimum, I think the process could be quite
educational for me as well as many of you.  But you're the
audience.  Tell me what you think?  Are you interested in the
series?  Am I giving enough detail?  Too much?  What types of
questions do you have regarding the issue of futures trading.  I
can't promise to address everything that comes into my inbox, but
I'll certainly try.  The other added benefit of your input is that
it just might help me to tailor the series of articles to better
address your needs.  Let me know.

Until next week, trade safely!

Mark


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The Option Investor Newsletter                   Monday 05-19-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

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


Updated on the site tonight:
Market Posture: Gold and Drugs
Market Posture: Nibble Nibble


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

None


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

Intl Bus. Machines - IBM - close: 86.45 change: -2.54 stop: 86.89

And the walls came tumbling down!  The weakness that should have
manifested itself last week with the severe weakness in the dollar
and strong buying in bonds made its appearance on Monday, knocking
our IBM play out of contention for a breakout over the $90 level.
A gap down the $88 level was just the beginning, as the stock then
proceeded to fall throughout the day, slicing through the 20-dma
and then closing at its low with a 2.85% loss.  Not only that, but
our stop was also penetrated, confirming that we overstayed our
welcome on this play.  Trader not stopped out today should use a
rebound in the morning to gain a better exit point.

Picked on May 4th at    $87.57
Change since picked:     -1.12
Earnings Date         07/14/03 (confirmed)
Average Daily Volume = 8.10 mil


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

None


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

Goldman Sachs - GS - close: 74.35 change: -2.35 stop: 77.50

Company Description:
The Goldman Sachs Group is a global investment banking and
securities firm that provides a wide range of services worldwide
to a substantial and diversified client base that includes
corporations, financial institutions, governments and high net-
worth individuals. The company provides investment banking, which
includes financial advisory and underwriting, and trading and
principal investments, which includes fixed income, currency and
commodities, equities and principal investments.  GS recently
completed the acquisition of Spear, Leeds & Kellog, which is
engaged in securities clearing, execution and market making, both
floor-based and off-floor.

Why we like it:
If there's a way in which we would like our GS play to behave,
this isn't it.  Actually that's not entirely true, but we
certainly would feel better about the play if the bears had been
able to crack the $74 support level before this latest bounce.  At
any rate, it looks like we're going to get a resistance test at
the short-term descending trendline and the bottom of the broken
channel near $77, possibly as early as Monday.  Given the
significantly improved picture on the Broker/Dealer index (XBD.X)
we aren't as excited about entering near that level as we were
this time last week.  The XBD plowed right through the $465
resistance level on Thursday and held onto the bulk of those gains
on Friday, raising the concern that GS might follow suit, only
just a bit later.  But that resistance looks too strong for us to
just abandon the play this weekend.  A sharp reversal from the $77
level can be used for aggressive entries, but we'll feel a lot
better about taking entries once GS is back under $75, preferably
with a breakdown under $74.  Due to our heightened concern, we're
lowering the stop tonight to $77.50, which is just above both the
short-term descending trendline, as well as the trendline that
began in January of last year.

Why This is our Play of the Day
This play has certainly put our nerves to the test, especially
with what appeared to be a strong breakout in the Broker/Dealer
index (XBD.X) last week.  At the same time, GS pushed up near its
descending trendline at $77.  But aggressive traders that entered
up there, smiled all day today as the stock plunged more than 3%,
while the XBD reversed its breakout, falling back under $460 and
ending right on the bottom of the channel that has supported its
upward climb for the past 6 weeks.  But judging by the bearish
action with which the markets kicked off the week, we sense that
GS is going to finally give us that breakdown entry below $74 that
we've been waiting for.  Such a move in GS should be accompanied
by the XBD index breaking down out of its channel with a trade
below $450, and will have the 200-dma for GS at $71.88 squarely in
the bears' sights.  Momentum entries can be taken on the break
below $74, while those with a slightly more cautious approach may
want to wait for a subsequent rebound to fail below $75,
confirming that GS is finding resistance at a lower level.

Suggested Options:
Short-term traders will want to focus on the June 75 Put, as it
will provide the best return for a short-term play.  Those looking
for a larger move down towards the early April gap will want to
utilize the July strikes, which provide greater insulation from
the spectre of time decay.

BUY PUT JUN-75 GS-RO OI=3615 at $2.60 SL=1.25
BUY PUT JUL-75 GS-SO OI=5765 at $3.60 SL=1.75
BUY PUT JUL-70 GS-SN OI=4385 at $1.80 SL=1.00

Annotated Chart of GS:



Picked on May 8th at    $74.06
Change since picked:     +0.29
Earnings Date         06/19/03 (unconfirmed)
Average Daily Volume = 4.37 mln


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

"7 Steps to Success – Trading Options Online".

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

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


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

Gold and Drugs


Check the site later tonight for this article of the Market Watch
http://www.OptionInvestor.com/indexes/watchlist.asp


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

Nibble Nibble

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/mp_051903.asp


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