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Daily Newsletter, Monday, 06/02/2003

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The Option Investor Newsletter                   Monday 06-02-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: ISM Rally Fades
Futures Wrap: DOH! Gee
Index Trader Wrap: See Note
Weekly Fund Wrap: Tech-Led Rally Revs Up
Traders Corner: Back To The Future(s)


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
06-02-2003                  High    Low     Volume Advance/Decl
DJIA     8897.81 + 47.55  9003.27 8851.45   2066 mln  1867/1018
NASDAQ   1590.75 -  5.15  1620.79 1586.48   2455 mln  1673/1501
S&P 100   485.36 +  2.16   491.75  484.33   totals    3540/2519
S&P 500   967.00 +  3.41   979.11  963.59
RUS 2000  442.63 +  1.63   447.47  441.00
DJ TRANS 2512.33 + 25.98  2526.68 2487.19
VIX        22.23 +  0.53    22.74   20.97
VIXN       33.63 +  1.97    34.23   30.58
Put/Call Ratio 0.67
*******************************************************************

ISM Rally Fades
by James Brown

Wall Street bulls have finally run out of breath despite more
good news in this morning's ISM report.  At their peak for the
day, the Industrials were up 153 points, the NASDAQ Composite was
up 25 and the S&P 500 was up 16.  Unfortunately, the afternoon
brought out the sellers after the DJIA traded above the 9000
mark.  The sell-off was pretty steep with the NASDAQ and other
tech related indices losing ground with the rest of the market
well of its highs.

On the other hand global markets were buoyed by the U.S. indices
strong close on Friday and the early rally on Monday.  Asian
exchanges were very strong with the Hong Kong Hang Seng up 150
points or 1.58% to 9637.  The Japanese NIKKEI closed up 122
points or 1.46% to 8547.  Europe exchanges also closed higher.
The French CAC 40 gained 1.89% to 3048, closing over the 3000
mark.  The British FTSE 100 jumped 2% to 4129.  The German DAX
vaulted some 2.75% to close at 3064, another breakout over the
3000 level.

U.S. market internals remained positive but were also off their
best levels of the day.  Advancing issues out paced decliners 18
to 10 on the NYSE and they just barely squeaked by on the NASDAQ
at 16 to 15.  New highs to new lows remain incredibly bullish
with 543 new highs to just 18 new lows.  Up volume on the NYSE
was 1300 million compared to 694 million in down volume.  The
NASDAQ's reflected the close race in the advance-decline numbers
with just 1.3 billion in up volume over 1.1 billion in down.
Overall volume was very strong with 2.0 billion on the NYSE and
more than 2.45 billion on the NASDAQ, it's highest volume day of
the year.

ISM Report

All of Wall Street was waiting for the ISM report today and they
were not disappointed.  April's numbers were a disappointing 45.4
and consensus estimates for May were 48.5.  Fortunately, the
economy is improving better than expected as this morning's
report revealed a reading of 49.4.  This was the fifth largest
one-month rebound in the ISM index in over a decade.

Numbers under 50 represent a contracting economy but traders were
willing to look at the 49.4 result as a sign that the slow down
in manufacturing is at least improving.  What really gave bulls
something to snort about were improvements in the new orders
index (51.9 vs. 45.2), the production index (51.5 vs. 47), and
the drop in prices paid index (51.5 down from 63.5).  I thought
it was interesting to note that this marks the third straight
month under 50 for the ISM index.  The same three months that the
markets have been advancing (on expectations of an improving
economy).  The strong ISM report was more than enough to push a
negative business construction spending report out of the
spotlight.  Today's news also marked a third straight month of
declines for business construction outlays with April's slipping
0.3% and a seasonally adjusted rate of $862.6 billion a year.

Now that the business media has declared an end to the bear
market the noise from the bullish camps is getting louder.  One
Merrill Lynch analyst was cheering the market's progress with a
research note stating stocks have plenty more upside through the
end of this year and into the next.  Merrill's chief market
analyst also claimed that over 80% of NYSE-listed equities are
now trading above their 200-dma compared to less than 20% during
the lows of 2002.  This characteristic is said to belong to a
true bull market and not bear market rallies.

Doing its part to lift the markets early on was the biotech
sector.  Over the weekend the annual meeting of the American
Society of Clinical Oncology brought some positive news to light
for ImClone and Genentech.  Genentech (NASDAQ:DNA) gapped up
again and traded above $70.00 before finally closing at $66.73,
+6.58% on the session.  Investors were reacting to more good news
that DNA's Avastin drug boosted the survival rate for colon
cancer patients by 50%.

Outpacing even DNA's gains were shares of ImClone (NASDAQ:IMCLE).
IMCLE's European partner, Merck K GaA, revealed at the Oncology
meeting that mid-stage testing for IMCLE's anti-cancer drug
Erbitux were very encouraging.  Shares of ImClone gapped higher
and traded to $38.00 before closing at $33.50, up 17.5%.  Many
believe that IMCLE will resubmit Erbitux to the FDA for approval
based on these new results.  The FDA shot down the drug in
December 2001 citing a need for more evidence.

What's a Monday without another merger?  This time software
rivals PeopleSoft (PSFT) and J.D.Edwards & Co. (JDEC) are merging
in a deal worth $1.7 billion.  As usual, shares of the purchaser,
in this case PSFT, slipped on the news (-9%) while shares of JDEC
popped higher (+7%).  One share of JDEC will be worth 0.86 shares
of PSFT and JDEC shareholders will control 25% of the combined
company, soon to be the second largest software applications firm
in the market.

Monday also produced a widely discussed FCC vote on media-
ownership.  In what is sure to be a strongly contested outcome
the five-member commission voted 3-2 in favor of easing ownership
rules.  This lifted the national broadcast cap from 35% to 45%
that now allows for any one company to own stations that can
reach nearly half the country.  The vote was split among party
lines with the two Democrats Michael Copps and Jonathan Adelstein
against the move.

Tomorrow's Trading

The ISM report is a huge win for the bulls.  Yes, it states that
the manufacturing sector of the economy is still contracting but
at a much slower rate.  If you put on those rose-colored, the
glass is half full, maybe-a-second-half-recovery-is-really-in-
the-cards-this-time glasses then the ISM report was almost
positive (over 50).  The FOMC had been waiting for some "clean"
economic data (a.k.a. data not tainted by the conflict in Iraq)
and this May ISM report fits the bill.  Combine this "positive"
ISM report with last week's PMI numbers and signs of a slowly
improving economy are indeed trickling in.  This might have
Greenspan & Co. holding off on another rate cut at their upcoming
June meeting.  Bulls like to have their cake and eat it too.
Just because the economy might be improving, even at a glacial
pace, they still want another rate cut.  If suddenly they're
concerned that Alan won't comply it could negatively affect the
markets.

Another factor greasing the floor for a big slide is the jump in
crude oil prices.  Iraqi oil could be a long way off from
affecting the global oil supply and is not an immediate threat to
OPEC.  Rumor has it that OPEC might vote to cut output at their
June 11th meeting to keep prices higher in time for the prime
summer driving season in the U.S.  Light crude prices for July
delivery jumped $1.15 to $30.71 today and marks the first close
over the $30 a barrel level in six weeks.  Natural gas prices are
also rising and higher energy costs would slow any economic
rebound already underway.

Chart of the Dow Jones Industrials:




Chart of the NASDAQ Composite:




Rumors that Intel might warn or offer some negative comments
later this week kept a tight lid on the SOX.  The chip sector did
not enjoy the early morning strength with the rest of the markets
and when the afternoon sell-off hit the SOX led the way down.  We
noted that all of the main technology sectors were lower today
(DDX disk drive index, GHA hardware index, GSO software index,
INX Internet index and the SOX semiconductor index).

Chart of the Semiconductor Index (SOX):




Caution

Traders need to be careful here.  Most of the major indices are
all screaming "TOP".  The failed rally today combined with big
volume is NOT a bullish sign to go long equities.  Profit taking
is part of the normal course of business as the markets ebb and
flow.  Currently, we are way overdue for some profit taking and
all signs are pointing that our next short-term pull back will be
this week.  Just look at the DJIA, the SPX, the Wilshire 5000 -
all of them are very extended and showing the same failed rally
today.  Check out the Russell 2000.  It's up eight days in a row.
You'd have to go back to late 1999 to find that kind of strength
in the RUT.  Don't get me wrong.  The trend is our friend and the
trend is currently up but that doesn't mean we should buy stocks
(or call options) tomorrow.

Bullish investors need to be patient.  Wait for the pull back.
Look for your stocks to reach significant support and begin to
bounce before evaluating any new positions.  When we get an
opportunity to buy near the bottom of a rising channel we can
usually do so with a tighter than normal stop reducing our risk
even more.

Let's be careful out there!


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

DOH! Gee
Jonathan Levinson

A true doji involves a complete 180 reversal from an overbought
or oversold extreme.  I’ve heard that witnessing a doji moment on
the floor of an exchange is an awesome experience-  think of
Winthorpe and Billy Ray Valentine’s FCOJ play in Trading
Places’.  We saw that today, with equities gapping above
resistance and pushing higher until mid-afternoon, when a short
selloff exceeded fib support to the downside, tried to bounce but
failed at former support, and then plunged to new lows, closing
at their lows of the day.  An SEC accounting probe of Big Blue
was announced after the close.


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

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
ES03M      985    975    970    961    956
YM03M     9039   8961   8918   8840   8797
NQ03M     1229   1206   1193   1171   1158


The President had bullish statements about how his administration
sees a stronger US dollar through economic recovery, and supports
a strong US dollar.  This, of course, flies in the face of John
Snow’s silly comments about how he too supports a strong dollar,
because of the high regard in which the US Dollar is held and its
resistance to counterfeiting.  Ben Bernanke’s turbo-charged
printing press and Al Green’s promise to fight dis-inflation’
don’t seem to fit either.  Nevertheless, the statement was enough
to gap up the US Dollar Index overnight, but it failed to hold
for long.  I’ll permit myself to editorialize for a brief moment,
and wonder about the hubris of politicians who somehow presume to
know better than the market.  The consistent failures to
intervene successfully in markets throughout history should be
sufficient to dissuade politicians from meddling in that which
is, by its very nature, beyond them.  As Chancy Gardener put it
in Being There’, if the roots are strong, the garden will bloom
in spring and mature in summer, fade in autumn and freeze in
winter, and then spring begins again.  Alas, it appears that
winter has fallen out of favor in the US and Japan.


10 minute chart of the US Dollar Index





Last night’s gap was filled, and the index closed at 93.42.


Daily chart of June gold




Gold continues to surprise to the upside, as the 61.8% support
level wasn’t even challenged in today’s session.  The oscillators
are in downphases, yet price has yet to follow along.  A shallow
pullback within a downphase is quite bullish, as equities have
been teaching us for the past few months, and gold is no
exception.  This continues to look like a bullish cup and handle
to me, and a break above 375 on a closing basis will be the first
sign of breakout.

NDX cash (log scale)




This 5 year chart is dated, as 1200 was violated to the upside,
but still serves for added context.

Daily NQ3M candles




Today’s doji print started on a gap above 1200 resistance, but
closed back below it.  As the reversal occurred late in the
session, it was insufficient to do more than turn the %K
stochastic back from its upphase.  The slower MacD has yet to
confirm.  The price uptrend is really not in jeopardy until a
break of 1140, which remains far below.  Nevertheless, the
blowoff candle is as good a topping pattern as any, although
we’ve seen many since April.  Still, bears survived another
session in nosebleed territory, and the news of the SEC probe of
IBM should help their cause.

30 minute 20 day chart of the NQ3M




The technical damage done by today’s reversal is depicted in the
30 minute chart.  A failure to regain the 1200 level would be
very bearish indeed.  The oscillators got drilled into sharp
downphases, and a lower open seems pretty close to a certainty
from here.  Again, this could be the beginning of something
bigger, or just a routine back and fill’ within an uptrend.
Linda and I had a brief discussion in the market monitor about
bear wedges, and their relatively high reliability in fulfilling
their downside objectives.  For that reason, we can expect a
deeper pullback, but until the daily uptrend is broken, prudence
dictates that we respect the danger of a solid bounce from
support.

SPX cash (log scale)





This chart too is dated, as 960 has been violated on a closing
basis, but for I like it for context.


Daily ES3M candles




I’ve applied multiple ascending trendlines, but the closing doji
body beneath both resistance lines is the main point.  Again, we
see the same cyclic picture on the oscillators.  This pullback
barely registered on the stochastics or the trending MacD, but
the breakout failure above trendline resistance was a big deal
intraday.  Where this takes us tomorrow will be very important,
and a continuation of this afternoon’s selling could well turn
those oscillators south.


20 day 30 minute chart of the ES3M




The 30 minute candles put the decline into context- it’s
unreasonable to paint the drop as anything more than a pullback.
A break below 960 is the first step in building a case for a
deeper selloff.

Daily YM3M candles





Nothing to add on the YM contract. The 9000 level was never
tested, with a day high of 8996.


20 day 30 minute chart of the YM





Today’s reversal occurred on what appears to have been the
highest volume day of the year.  It printed a shooting star doji
on an attempted breakout above the daily bearish ascending
wedges.  While it did little technical damage on all but the
shorter timeframes, it at least deferred the decapitation that
most bears were expecting.  Tomorrow’s session should see opening
weakness based on the 30 minute cycle downtrends that kicked off
on the afternoon plunge.  Where price will go once they turn back
is the big question from here.


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

Check the Site Later Tonight For Jeff's Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/iw_060203_1.asp


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

Tech-Led Rally Revs Up

The average tech fund roared ahead 6.2% last week and is now up
21.6% in the first five months of 2003, using Lipper's averages
through May 30.  Investors continued to buy on confidence of an
economic rebound in the second half of year.  For the week, the
S&P 500 index of U.S. large company stocks advanced 3.3%, while
the MSCI EAFE index of developed foreign stocks climbed 1.7% in
dollar-equivalent terms.  The dollar rebounded along with stock
prices in the U.S., so foreign equity funds generally didn't do
as well as their U.S. equity counterparts.




With investors turning to stocks, bonds and bond funds finished
the week slightly lower, except for high-yield funds which were
higher along with the equity market.  The average intermediate-
term, investment grade bond fund was unchanged last week, equal
to the zero return of the LB Aggregate Bond Index.  The average
high yield fund, on the hand, picked up 0.6% over the week, per
Lipper.  Global/international fixed income funds lost from 0.5%
to 0.7% on average, with bond prices lower and dollar higher on
the week.

According to iMoneyNet.com, the average 7-day (simple) yield of
all taxable money market funds stood at 0.69% last week.  Money
market funds providing tax-free income are yielding 0.68% today
on average.  The key Fed Funds rate remains near the 1.25% mark.


Equity Fund Group


 Week    YTD    Selected Lipper Equity Indices (May-30)
+2.1%   +8.1%   Balanced Fund Average
+2.8%   +8.4%   Equity Income Fund Average
+2.0%   +6.7%   International Fund Average
+2.9%   +9.1%   U.S. Large-Cap (Core) Fund Average
+4.1%  +12.1%   U.S. Mid-Cap (Core) Fund Average
+4.7%  +11.8%   U.S. Small-Cap (Core) Fund Average
+3.3%  +11.5%   U.S. Multi-Cap (Core) Fund Average
+6.2%  +21.6%   Science & Technology Fund Average


You know it was a good week for the equity fund group when more
conservative fund objectives such as balanced funds and equity-
income funds average over 2.0% for the weekly period.  Such was
the case last week.  Soaring above the mixed equity competition
last week was Oppenheimer Global Growth & Income Fund, a global
flexible portfolio with exposure to technology stocks.  It rose
8.5% for the week.  The Fidelity Equity Income II Fund and the
Vantagepoint Equity Income Fund each gained more than 4.0% over
the 5-day period.

In terms of market cap, mid-cap and small-cap U.S. equity funds
performed significantly better than large-cap funds.  According
to Lipper, mid-cap funds averaged between 3.9% and 4.6% for the
week depending on their investment style, while small-cap funds
averaged between 4.7% and 5.0%.  Most funds investing in midcap
and smallcap stocks are now well into "double-digit" percentage
territory for the year-to-date period through May 30, 2003.

In terms of style, pro-growth funds outpaced value-driven funds.
Franklin Small Cap Growth Fund II was among the best performers
last week, posting a 6.8% weekly return.  Oak Associates' White
Oak Growth Stock Fund rose 6.5%, while Turner Midcap Growth was
6.2% higher.  Baron Asset Fund gained 6.1% for the 5-day period.
Those are just a few of the growth-oriented funds returning over
5.0% last week.

In terms of currency, U.S. equity funds beat foreign stock funds
with the dollar recovering versus other major foreign currencies
last week.  The European stock index gained 2.4% in dollar terms,
so things weren't so bad for international stock funds investing
primarily in Europe.  Funds focused on the Pacific region didn't
fare quite as well, with the Pacific stock index 0.2% in the red
for the 5-day period.  Bernstein Emerging Markets Value Fund had
a weekly total return of 4.2%, one of the better performances in
the global/international stock fund group.


Fixed Income Fund Group


 Week    YTD    Selected Lipper Fixed Income Indices (May-30)
-0.0%   +4.9%   Corporate A-Rated Debt Fund Average
+0.0%   +1.1%   GNMA Fund Average
-0.5%   +9.0%   Global Income Fund Average
+0.6%  +12.7%   High Yield Fund Average
-0.7%  +10.1%   International Income Fund Average
+0.0%   +4.9%   Intermediate Investment Grade Fund Average
-0.1%   +3.0%   U.S. Government Bond Fund Average


You can see it was a pretty mediocre week for most fixed income
funds, with the exception of high-yield bond funds which gained
0.6% on average, per Lipper.   High-yield bonds and funds often
move directionally with stocks because they benefit from strong
economic conditions like stocks do.  As the economy improves so
does the outlook for the credit market, bringing investors back
into lower-quality, higher-yielding securities.

In the general fixed income fund sector, the Pioneer High Yield
Fund was one of the week's top performers.  It generated a 1.8%
total return for the 5-day period, followed by Fidelity Advisor
High-Yield Fund, up 1.2%.  Franklin's AGE High Income Fund rose
1.1% over the 5-day period.  Government debt funds were flat to
slightly lower in a pretty quiet week for that sector.

Global and international fixed income funds posted 5-day losses
of between 0.5% and 0.7% on average, per Lipper, with stocks up
along with the dollar last week.


Money Market Fund Group


Yield   Selected iMoneyNet Money Market Indices
0.69%   All Taxable MMF Average
0.68%   All Tax-Free MMF Average

According to iMoneyNet (www.imoneynet.com), there are less than
10 prime retail money market funds today with more than a 1.00%
current 7-day simple yield.  The highest yielding "prime retail"
fund remains PayPal Money Market Fund (1.20%).  Phoenix-Goodwin
Money Market Series Fund A currently offers a 7-day simple yield
of 1.18%.

America's largest prime retail money market fund, Fidelity Cash
Reserves Fund, sits at 0.95%, per iMoneyNet.  Another mega fund,
Vanguard Prime MMF/Retail, offers a current 7-day yield of 0.89%.


Fund News, Etc.


If you were too nervous about investing in the stock market this
year, and had your money parked in money market funds, there's a
good chance you are regretting that decision now.  As we've seen
last week and over the past several weeks, stock prices can move
higher quickly and without notice.  That's why many experts tell
you to stay "in" the market or to continue to invest when stocks
are down, so that you can be among those to "participate" in the
market rebound.  For instance, if you waited until now to invest
in stocks/stock funds, you missed out on the 38.5% YTD return on
the Legg Mason Opportunity Trust, an excellent mid-cap fund that
buys undervalued stocks (including techs) and is now reaping the
rewards of its labor.  There are at least 25 mutual funds (above
$500 million in assets) that have returned more than 20% in 2003.

Those of you that have stayed the course in your 401k plans, you
may hopefully start to reap the rewards of "accumulating" shares
at lower prices through the market correction.  All those shares
accumulated through the downswing have lowered your average cost
basis; in turn, increasing your appreciation potential.  If this
stealth rally extends into June, 401k investors could be looking
at one of their best quarterly statements in a long time come Q2.
Perhaps, I shouldn't refer to it as a "stealth" rally any longer.

That's it for this week's mutual fund wrap.  Questions, comments
and suggestions are always welcome.



Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

Back To The Future(s)
by Mark Phillips
mphillips@OptionInvestor.com

It seems like months since we left off on our conversation about
putting together a plan for trading index futures.  First, I got
derailed by another topic and then the Memorial Day holiday caused
another week to slip by.  But I'm back and ready to dive right in.
I hope you are too!  For those of you just tuning in, you'll want
to take the time to catch up with our discussion at the following
links from the archives.

The Case For Futures
http://www.OptionInvestor.com/traderscorner/tc_050503_1.asp

Planning For The Future(s)
http://www.OptionInvestor.com/traderscorner/tc_051203_1.asp

I really want to dive right in and dissect today's trading action
in the ES and particularly the NQ contract today, expounding on
what makes futures trading so compelling and exciting.  But that
would put the cart several miles ahead of the horse, as we've got
a bunch of basic information to cover before delving into that fun
stuff.  One of the keys that I'm hoping to convey in this series
of articles is the importance (actually criticality) of discipline
in this endeavor, so I'm going to exercise some of that discipline
and handle first things first.

We've already defined the basic parameters of the type of trade
that I want to target in my futures trading activity, but there
are a host of issues that must be dealt with before we can even
consider placing a trade.  First off, we need to establish an
account with a broker that will allow us to trade futures, fund
that account and then decide what types of orders we will use.  I
know it may sound trivial to many of you, but these are critical
decisions and then must be dealt with up front.

Broker Selection:
Due to contractual constraints, I can't mention or advocate
specific brokers, so please don't ask for my recommendation.  I
think our discussion here will address the important issues.  A
quick internet search for "Futures Broker" will give you a
comprehensive list of those firms that operate in this arena.  The
real work in figuring out who to use involves determining what is
important.  Here's a quick punch list of what I consider to be the
critical issues to consider.

1. Customer Service - What we really want to know is if there is a
trade-related issue, how quickly can we get a qualified broker on
the phone that can help us resolve the issue.  That's hard to
determine before opening an account, I know.  But calling the
account services department at a prospective broker will provide a
very good indication of what to expect when actual trade issues
have to be dealt with.  Don't be afraid to have the customer
service person transfer you to the trade desk to ask any question
that might have already occurred to you.  In my experience, the
brokers that deserve and want your business will go the extra mile
to answer any questions you might have.

2. Trading Platform - Because of its fast-paced nature, I don't
think dealing with anything other than a direct-access platform
makes sense for futures trading.  The nice thing is that most
brokers provide a free download of their trading software, many of
which provide a live demo.  Of course, you can't actually place
trades unless the broker in question has a trading simulator
available, but in my experience, it is sufficient to give a very
good representation of what to expect when actually placing
trades.

Those of you familiar with Direct Access brokers know what to
xpect -- a user-friendly application with lightning-quick
executions.  Many of these trading platforms provide real-time (of
course) access to order or market depth, giving a dynamic view of
the bids and offers for the chosen trading vehicle.  I view this
as a very useful feature, giving a Level II-ish type of feel to
the market view.  Then of course, there are the standard access to
charts, news, etc., but as a rule I don't find these features
particularly useful in the futures arena.  I continue to do all of
my charting in Qcharts and get my breaking news from various news-
centric sites on the Internet.

I would strongly recommend playing around with the trading
platforms from several different brokers.  Get a feel for how
orders are entered, modified and cancelled.  The process should be
very easy and quick, as order entry minutia should not get in the
way of actual trading decisions during the heat of battle.  The
trading platform should be a reliable tool, not one more
distraction.  I know I'm a bit of a nut when it comes to the
details, but before I even opened my first futures account, I had
figured out every nuance of the software platform I was going to
use.  That gave me a high degree of confidence that my trading
would proceed smoothly (at least the mechanics of it) once I
opened the account and was ready to place real live trades.

3. Commissions - This may seem a bit too basic to some of you, but
those that are contemplating a move from the stocks/options world
may run into some terminology relating to commissions that seems a
bit foreign.  Frequently commissions will be quoted "per round
turn" or "per side".  Don't let that confuse you.  A round turn
commission refers to the total commission for both ends of the
transaction - both the buy and the sell.  On the other hand, a
commission quoted as per side is specifying the charge on the
entry (Buy) and the exit (Sell).  So a $10 per round turn
commission would be the same as $5 per side.  That's all there is
to it.

One additional note is that commissions are quoted per contract.
Some options brokers will allow you to trade multiple contracts
for the same commission.  In the futures world, you pay the
commission on each individual contract traded.  There may be
exceptions that can be negotiated for those of you with larger
accounts, but I believe this structure is representative of what
we should all expect as we transition into this new world.  In
your research, you'll find commissions ranging from less than $5
per round turn to as high as $25-30 per round turn.

These are transaction costs and must be factored into the business
plan.  For instance, if you plan on scalp trading 8-10 times per
day, then obviously you will want to gravitate towards the
cheapest commissions you can get.  A $25 transaction cost where
the goal of any given trade is only 1-3 points is going to
represent a large amount of overhead.

4. Reporting - After using numerous online brokerages over the
years, I have really come to appreciate a well-organized brokerage
statement.  Most online brokers provide clean and easy to read
account statements at the end of each trading day, along with
monthly summary reports.  This feature really proves its merits
come tax time, and active traders know what I'm talking about.
Trust me, you'll want to investigate both the end-of-day
reporting, as well as the real-time reporting of active positions.
Most of the direct access platforms I have looked at will give
real-time reporting not only of open positions, but convert
gain/loss into real $$.  Remember, you have to select the features
that are most useful to you, not what I tell you is useful.

5. Margin Requirements - Alan Hewko has pointed out the
variability in margin requirements that can be had at different
futures brokers.  Size does matter in this department, as initial
margin requirements can indeed vary from well below $1000 to as
much as $1800 for a single contract.  It pays to shop around,
especially if you're looking to maximize your leverage.

Order Specifics:
In the futures world, we have Buy and Sell orders, just like in
options and stocks.  A buy may be a buy to open, or it may be a
buy to close.  Similarly, sell orders can be used to either open a
new position or close an existing one.  If you think about trading
futures in much the same way as trading stock, I think it will
make sense.  You can short to open and then buy to cover.  Or you
can buy to open and short to cover.  The order of operations makes
no difference -- it just determines which direction you are
betting on the market.

Invariably, you'll be confronted by the question of what types of
orders to use.  Market or limit is one of the most basic questions
in this realm and I must say they both have their place.  What you
may not be aware of is the fact that a stop order can be used to
either enter or exit a position.  Let's look at a couple examples,
which I think will help to illustrate the point.

Let's take the example of today's price action.  After the early
surge higher, the ES settled into a range between 974.50-979.50
and by 2pm ET it was looking like a setup for another rangebound
close.  But let's say that you wanted to short the market on
either another failure to break the day's highs or on a breakdown
below intraday support.  Here are the two orders that would
accomplish that task.

Limit Order: Sell Limit ES at 979.00

Stop Order: Sell Stop ES at 974.00

In the event of another (post 2pm) trade at 979, the Limit Sell
would have been triggered and we would be short (at the market) at
979.  On the other hand if (as actually happened), ES broke below
974, at that point, the Sell Stop order would have been triggered,
and we would be short ES from that level.  The mechanics here are
the same as with Limit and Stop orders with stocks or options.  As
soon as the limit (or stop) price is reached, the order becomes
active as a market order at the prevailing price.  Sells will
likely go at the bid and Buys will go at the ask.  Recall the big
difference here is that the spread on the ES is always (except in
extreme circumstances) confined to only 0.25 points.

Alright, so now that we're short the ES from 974, what do we do
next?  For me, the first order of business is to get a protective
stop in place.  Actually, I enter my stop order before I actually
enter the position, so as soon as I am filled, I already have that
protective stop in place.  Here's what it looks like for the trade
where I sold the ES at 974.

Buy Stop at 977 (as I want to use a 3-point stop on the trade)

If ES trades 977 after I sold short at 974, then I will be stopped
out at a 3-point loss.  But as I've mentioned before, risk control
is paramount and I have effectively limited my risk to only $150
per contract.  But I'm approaching this trade the way I do every
one -- with the belief that it is going to be a winner.  So now I
need to key in an order to Buy the ES back at a profit.  Where and
what does it look like?

Well, as I've stated before, I want to target moves of 8-10 points
in the ES, risking a maximum of 3-4 points initially.  I've
accomplished the risk control aspect already and I now just need
to set the profit order.  I've noticed that the ES of late has
been particularly reticent to make 10 point moves in my favor on
the downside, owing to the strong bullish bias.  Not only that,
but I remember from Friday that the 965 area was significant, and
I expect it to be again.  So I decide to err on the side of
caution and place an order to buy my short ES contract back at
966.  Here's what it looks like.

Buy Limit at 966

That's all there is to it.  In hindsight, it would have been
difficult to pick a better level to buy back my short, but sadly
it doesn't always work out so well.  One other note about the
trade I've described is that as the ES is falling, I am tightening
my stop to never have more than 4 points (preferably 3 and then
closer to 2 as my profit target gets closer) of risk between my
stop and the lowest point for the ES on this move.

If you pull up an intraday (5-minute) chart of the ES, you can see
that I would have filled at 974 on the entry Sell and bought back
the short at 966 for a gain of 8 points.  The entire duration of
the trade was less than 40 minutes for a gain of $400 per
contract.  This is the power of trading index futures, in that
trades can be quick and profitable on fairly pedestrian moves in
the broad market.

Once again, I'm out of space and time, as this article is already
about double the length I had intended.  I know that for many of
you this was a very dry and uninteresting discussion.  But it is
necessary to help lay the groundwork for the interesting stuff
which is coming in the near future.  We have to eat our brussell
sprouts first, and cake and ice cream will follow.  I hope this
has been useful and I promise to try and be less wordy with our
discussion next week.  Next up, we're going to recap some account
management parameters and then we'll start talking about the fun
stuff -- what do we look at (charts, indicators, timeframes, etc.)
to get us into and out of a trade.

See you next week!

Mark


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The Option Investor Newsletter                   Monday 06-02-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: BBY, SPW
Dropped Calls: None
Dropped Puts: ACS
Play of the Day: Put - LLL
Watch List: A Few More Breakouts

Updated on the site tonight:
Market Posture: Top of the channel



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

BBY - call
Adjust from $35.75 up to $37.00

SPW - call
Adjust from $36.25 up to $36.50


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

None


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

Affiliated Computer - ACS - close: 48.45 change: +2.11 stop: 47.25

Sure enough, investors seem to have shaken off the financial
shenanigans of ACS' founder and chairman and they eagerly bought
shares of this beaten down stock at the open on Monday.  Taking
out $47 resistance and the 200-dma in the early going spelled doom
for our play and despite the pullback at the end of the day, ACS
ended well above our stop.  While there was the opportunity for
profit on the play on its first day after inception, this isn't
what we had in mind and are moving to the sidelines tonight.  Any
open positions should have been stopped out on the early strength
this morning, but if you're still holding bearish positions after
such a bullish day, then we'd recommend using any weakness in the
morning to navigate a more graceful exit.

Picked on May 27th at    $46.50
Change since picked:     +1.95
Earnings Date         07/22/03 (confirmed)
Average Daily Volume = 1.95 mln


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

L-3 Communications -LLL - close: 43.16 change: -0.19 stop: 45.00

Company Description:
As a leading supplier of sophisticated secure communication
systems and specialized communication products, LLL provides
critical elements of virtually all major communication, command
and control, intelligence gathering and space systems.  The
company's high data rate communication, avionics, telemetry and
instrumentation systems and components are used to connect a
variety of airborne, space, ground-based and sea-based
communication systems.

Why we like it:
It was not a pleasant week for bearish traders in shares of LLL,
as the rebound that began at the 50-dma continued its relentless,
albeit slow rise.  If not for the intraday reversal from the $44
level, we would have been tempted to just pull the plug this
weekend.  There's no question, LLL is severely lagging the broad
market and the trading pattern over the past week looks an awful
lot like a bearish flag pattern.  The question that must be
answered though is whether the stock is going to break down from
that pattern (as we suspect) or defy logic and push up through
resistance.  We've been targeting failed rallies near the $43.50
level for new entries, and that still looks like a viable
strategy.  However, more conservative traders may want to wait for
a confirmed break below the bottom of the flag pattern with a
trade below $43 before playing.  The $43.50-44.00 turned out to be
solid resistance on Friday (backed up by the 20-dma at $43.88) and
we're looking for that level to hold back the bulls next week.  If
the expected breakdown does occur, keep a sharp eye on the 50-dma
($41.87).  This average provided support for the current bounce to
commence and we must consider the possibility that it could do so
again.  Just in case resistance fails to hold back the stock,
maintain stops at $45, which is just above the 200-dma at $44.70.

Why This is our Play of the Day
The first day of June started off with a bang, just like so many
recent days, with the broad market once again charging higher,
seemingly without a care.  LLL went along for the ride like it has
been doing for the past couple weeks, but then a funny thing
happened in the final 90 minutes.  After topping out just below
the $44 level again, LLL succumbed to the broad market selling and
broke under the $43.50 level.  While lately the stock has been
trading around that level, today's break under that level was
significant because it also constituted a break down out of the
bear flag pattern that has been forming for the past couple weeks.
Whether this breakdown is significant or not will depend on future
price action, but LLL once again proved that the $44 level is
stiff resistance.  We'll need to see the selling continue tomorrow
to pressure the stock back under $43 for confirmation, but for
now, selling into rallies near resistance seems to be doing the
trick.  With a firm rejection at resistance and daily Stochastics
now rolling bearish, LLL looks like it is finally going to start
going our way.  Take note of the bearish Stochastics divergence
shown on the hourly chart below, with higher highs in price in
contrast with the lower highs in Stochastics.

Suggested Options:
Short-term traders will want to focus on the June 45 Put, as it
will provide the best return for a short-term play.  Those looking
for a larger move down towards the $40 level (or below) will want
to utilize the July 40 Put, which provides greater insulation from
the spectre of time decay.

BUY PUT JUN-45 LLL-RI OI= 448 at $2.50 SL=1.25
BUY PUT JUN-40 LLL-RH OI=1014 at $0.35 SL=0.00
BUY PUT JUL-40 LLL-SH OI= 643 at $0.95 SL=0.50

Annotated Chart of LLL:




Picked on May 20th at   $41.94
Change since picked:     +1.22
Earnings Date         07/22/03 (unconfirmed)
Average Daily Volume = 1.37 mln


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

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

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**********
WATCH LIST
**********

A Few More Breakouts

Verizon Communications - VZ - close: 38.51 change: +0.66

WHAT TO WATCH: Shares of VZ are trying to breakout above
resistance at $38.50.  The stock is also dealing with overhead
resistance on its point-and-figure (PnF) chart.  Volume was
decent today but we would look for additional confirmation.

Chart=


---

Sears Roebuck - S - close: 31.98 change: +2.00

WHAT TO WATCH: Shares of beleaguered department store Sears rose
by more than 6.6% today.  The stock jumped on speculation that
Sears might sell its credit card division.  In March the company
said it was looking for $6 to $7 billion from the sale of its
credit card operations but some analysts estimate they're being
too optimistic.  Volume was very strong at 16.5 million shares.

Chart=


---

Jones Apparel - JNY - close: 30.80 change: +1.44

WHAT TO WATCH: Shares of JNY also jumped higher today breaking
above heavy resistance at $30.00 and doing it on strong volume.
There was no specific news to fuel the move but the rally put JNY
into its $2.00 gap from February.  Scalpers can try and aim for
the top of the gap at $32.00 and its 200-dma.  Longer-term
players willing to let JNY churn through more overhead resistance
might be able to see shares run to $35.00 (based on the weekly
chart).

Chart=


---

Rent-A-Center - RCII - close: 68.49 change: +2.21

WHAT TO WATCH: Shares of this rental and leasing company are
breaking out to (what looks like) new all-time highs.  Volume was
stronger than normal and the stock's MACD is about to turn
bullish again.  Caution, options are rather lightly traded.

Chart=


---


Nextel Communications - NXTL - close: 14.41 change: -0.54

WHAT TO WATCH: There appear to be a few negative development
working against NXTL.  Not only will it be seeing increased
competition for its walkie-talkie style features but the FCC may
not adopt some of NXTL's latest technological advances.  The
stock has painted a bearish engulfing candlestick at the top of
its short-term rising trend.  This looks like a reversal.

Chart=



====================================
RADAR SCREEN - more stocks to watch
====================================

ARM $18.56 - The rally today produced a major breakout above
$18.00 for ARM.  Caution, options are very lightly traded.

BER $49.84 - This insurance stock is about to break over the $50.
Volume has been strong the last two sessions.

RML $20.51 - Here's another apparel company breaking out today.
The move comes on very strong volume.  A pull back towards $20.00
might be a tempting entry point for any rally towards $25.00.
Use a tight stop.


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

Top of the channel


To Read The Rest of The OptionInvestor.com Market Posture Click Here
http://www.OptionInvestor.com/marketposture/mp_060203.asp


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